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 OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR
o 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.
109,527,181 Common Shares as of December 31, 2008
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act Yes  o No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports

pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.

Yes o No x

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

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o Accelerated filer o Non-accelerated filer x

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

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

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 x

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

Yes o No x

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NORTHCORE TECHNOLOGIES INC.

Annual Report on Form 20-F for the Fiscal Year

Ended December 31, 2008

FORWARD LOOKING STATEMENTS

From time to time, we make oral and written statements that may be considered "forward looking statements" (rather than historical facts).  We are taking advantage of the "safe-harbour" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements we may make from time to time, including the forward-looking statements in this Annual Report.

You can identify these statements when you see words such as "may", "expect", "anticipate", "estimate", "believe", "intend", and other similar expressions.  These forward-looking statements relate, among other items, to:

• our future capital needs;

• future expectations as to profitability and operating results;

• our ability to further develop business relationships and revenues;

• our expectations about the markets for our products and services;

• acceptance of our products and services;

• competitive factors;

• our ability to repay debt;

• our ability to maintain operating expenses;

• our ability to attract and retain employees;

• new products and technological changes;

• our ability to develop appropriate strategic alliances;

• protection of our proprietary technology;

• our ability to acquire complementary products or businesses and integrate them into our business;

• our ability to increase revenue from existing products and services;

• our ability to expand the scope of our product offering; and

• geographic expansion of our business.

We have based these forward-looking statements largely on our current plans and expectations.  Forward-looking statements are subject to risks and uncertainties, some of which are beyond our control.  Our actual results could differ materially from those described in our forward-looking statements as a result of the factors described in the “Risk Factors” included elsewhere in this Annual Report, including, among others:

• the timing of our future capital needs and our ability to raise additional capital when needed;

• our ability to repay our debt to lenders;

• increasingly longer sales cycles;

• potential fluctuations in our financial results and our difficulties in forecasting;

• volatility of the stock markets and fluctuations in the market price of our stock;

• the ability to buy and sell our shares on the Over the Counter Bulletin Board;

• our ability to compete with other companies in our industry;

• our dependence upon a limited number of customers;

• our ability to retain and attract key personnel;

• risk of significant delays in product development;

• failure to timely develop or license new technologies;

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• risks relating to any requirement to correct or delay the release of products due to software bugs or errors;

• risk of system failure or interruption;

• risks associated with any further dramatic expansions and retractions in the future;

• risks associated with international operations;

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

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

• fluctuations in currency exchanges;

• risks to holders of our common shares following any issuance of our preferred shares; and

• the ability to enforce legal claims against us or our officers or directors.

We do not have, and do not undertake, any obligation to publicly update or revise any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise.  Because of these risks and uncertainties, the forward-looking statements and circumstances discussed in this Annual Report might not transpire.

Trademarks or trade names which we own and are used in this Annual Report include: DYN@MIC BUYER™ and DYN@MIC SELLER™. Each trademark, trade name, or service mark of any other company appearing in this Annual Report belongs to its holder.

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TABLE OF CONTENTS

				Page
PART I				7
	ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS			7
	ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE			7
	ITEM 3 - KEY INFORMATION			7
		A.	Selected Financial Data	7
		B.	Capitalization and Indebtedness	9
		C.	Reasons For The Offer And Use Of Proceeds	9
		D.	Risk Factors	9
	ITEM 4 - INFORMATION ON THE COMPANY			17
		A.	History and Development of the Company	17
		B.	Business Overview	21
		C.	Organizational Structure	32
		D.	Property, Plant and Equipment	32
	ITEM 4A - UNRESOLVED STAFF COMMENTS			32
	ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS
				33
		A.	Operating Results	34
		B.	Liquidity and Capital Resources	42
		C.	Research and Development, Patents, and Licenses, Etc.	46
		D.	Trend Information	46
		E.	Off-Balance Sheet Arrangements	47
		F.	Tabular Disclosure of Contractual Obligations	47
	ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			48
		A.	Directors And Senior Management	48
		B.	Compensation	50
		C.	Board Practices	51
			C.1. Audit Committee Information	52
		D.	Employees	53
		E.	Share Ownership	55
	ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			55
		A.	Major Shareholders	55
		B.	Related Party Transactions	56
	ITEM 8 - FINANCIAL INFORMATION			57
	ITEM 9 - THE OFFER AND LISTING			57

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	ITEM 10 - ADDITIONAL INFORMATION			60
		A.	Share Capital	60
		B.	Memorandum and Articles of Association	60
		C.	Material Contracts	63
		D.	Exchange Controls	65
		E.	Taxation	65
		F.	Dividends and Paying Agents	71
		G.	Statements by Experts	71
		H.	Documents on Display	71
		I.	Subsidiary Information	72
	ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			72
	ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			72
PART II				72
	ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			72
	ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			72
	ITEM 15 - CONTROLS AND PROCEDURES			73
	ITEM 16 [RESERVED]			73
	ITEM 16			73
		A.	Audit Committee Financial Expert	73
		B.	Code of Ethics	73
		C.	Principal Accountant Fees and Services	74
		D.	Exemptions from the Listing Standards For Audit Committees	74
		E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	74
PART III				74
	ITEM 17- FINANCIAL STATEMENTS			74
	ITEM 18 - FINANCIAL STATEMENTS			74
	ITEM 19 – EXHIBITS			74

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Unless otherwise indicated, all references in this Annual Report to “dollars” or “$” are references to Canadian dollars.  Our financial statements are expressed in Canadian dollars.  Except as otherwise noted, certain financial information presented in this Annual Report has been translated from Canadian dollars to U.S. dollars at an exchange rate of Cdn$1.224 to US$1.00 (or US$0.776 to Cdn 1.00), the noon buying rate in New York City on December 31, 2008 for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York.  These translations are not intended to suggest that Canadian dollars have been or could be converted into U.S. dollars at that or any other rate.

PART I

ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3 - KEY INFORMATION

A. SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and the related notes, and the section "Operating and Financial Review and Prospects" included elsewhere in this Annual Report.  The consolidated statement of operations data for the years ended December 31, 2008, 2007, and 2006 and consolidated balance sheet data as of December 31, 2008 and 2007, as set forth below, are derived from our audited consolidated financial statements and the related notes included elsewhere in this Annual Report. The consolidated statement of operations data for the years ended December 31, 2005 and 2004 and the consolidated balance sheet data as at December 31, 2006, 2005, and 2004 have been derived from our audited consolidated financial statements for those years, as adjusted for discontinued operations related to the disposition of the Company’s Norwegian subsidiary ADB Systemer AS in June 2006, which are not included in this Annual Report but have previously been filed with the Commission.

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in Canada, which differ in certain respects from accounting principles generally accepted in the United States.  However, as applied to us, for all fiscal periods for which financial data is presented in this Annual Report, Canadian GAAP and U.S. GAAP were substantially identical in all material respects, except as disclosed in Note 21 of our consolidated financial statements.

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

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	Year Ended December 31,(3)
Statement of Operations Data:	2008 (Cdn$)			2007 (Cdn$)			2006 (Cdn$)			2005 (Cdn$)			2004 (Cdn$)
	(in thousands except for per share data)
Revenue		741			1,166			1,073			1,285			1,478
Operating expenses:
General and administrative		1,485			1,703			1,790			2,559			3,043
Customer service and technology		689			762			664			839			854
Sales and marketing		117			276			377			505			561
Employee stock options		43			94			137			105			27
Depreciation and amortization		33			39			92			95			149
Interest expense		729			604			783			717			443
Total expenses		3,096			3,478			3,843			4,778			5,077
Loss from continuing operations		(2,355	)		(2,312	)		(2,770	)		(3,493	)		(3,599	)
Loss		(2,355	)		(2,312	)		(648	)		(3,501	)		(5,104	)
Loss per common share (1)		(0.02	)		(0.02	)		(0.01	)		(0.05	)		(0.08	)
Weighted average number of common shares		108,861			93,094			79,933			72,904			61,938

	As at December 31,
Balance Sheet Data: (2)	2008 (Cdn$)			2007 (Cdn$)			2006 (Cdn$)			2005 (Cdn$)			2004 (Cdn$)
	(in thousands)
Working capital (deficit)		(1,692	)		(372	)		(2,132	)		(1,164	)		381
Total assets		812			687			813			1,843			2,493
Shareholders’ deficiency		(2,403	)		(1,600	)		(2,255	)		(2,710	)		(1,009	)

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

(2) The Company has not paid dividends since its formation.

(3) The statement of operations data for the years ended December 31, 2005 and 2004 have been restated to reflect the impact of the classification of the Company’s Norwegian subsidiary, ADB Systemer AS, as discontinued operations as a result of the disposition in June 2006.

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EXCHANGE RATES

The following tables set forth, for the periods indicated, certain exchange rates based on the noon buying rate in New York City for cable transfers in Canadian dollars, as certified for customs purposes by the Federal Reserve Bank of New York.  Such rates are the number of U.S. dollars per one Canadian dollar and are the inverse of the rates quoted by the Federal Reserve Board of New York for Canadian Dollars per U.S. $1.00.  On March 27, 2009, the exchange rate was US$1.00 = Cdn$1.2392.

	Year Ended December 31,
Rate	2008		2007		2006		2005		2004
Average during year (1)		1.06677		0.9419		0.8844		0.8254		0.7702
(1) The average rate is the average of the exchange rates on the last day of each month during the year.

Month	High during month	Low during month
September 2008	1.0797	1.0338
October 2008	1.2942	1.0607
November 2008	1.2849	1.1502
December 2008	1.2971	1.1962
January 2009	1.2749	1.1822
February 2009	1.2710	1.2190

B. CAPITALIZATION AND INDEBTEDNESS

Not applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS.

Not applicable.

D. RISK FACTORS

The following is a summary of certain risks and uncertainties, which we face in our business.  This summary is not meant to be exhaustive.  These Risk Factors should be read in conjunction with other cautionary statements, which we make in this Annual Report and in our other public reports, registration statements and public announcements.

WE WILL NEED ADDITIONAL CAPITAL AND IF WE ARE UNABLE TO SECURE ADDITIONAL FINANCING WHEN WE NEED IT, WE MAY BE REQUIRED TO SIGNIFICANTLY CURTAIL OR CEASE OUR OPERATIONS

We have not yet realized profitable operations and have relied on non-operational sources of financing to fund our operations.  Since we began our operations, we have been funded primarily through the sale of securities to investors in a series of private placements, convertible debt instruments, sales of equity to, and investments from, strategic partners, gains from investments, option exercises, a rights offering and, to a limited extent, through cash flow from operations.  While our Company’s financial statements for the year-ended December 31, 2008, have been prepared on the basis of accounting principles applicable to a going concern, certain adverse conditions and events cast substantial doubt upon the validity of this assumption. We have not yet realized profitable operations and have relied on non-operational sources of financing to fund operations.  Our ability to continue as a going concern will be dependent on management’s ability to successfully execute its business plan including a substantial increase in revenue as well as maintaining operating expenses at or near the same level as 2008.  We cannot provide assurance that we will be able to execute on our business plan or assure that efforts to raise additional financings would be successful.

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Management believes that continued existence beyond 2008 is dependent on its ability to increase revenue from existing products, and to expand the scope of its product offering which entails a combination of internally developed software and partnerships with third parties.  As of December 31, 2008, we had cash on hand and cash equivalents of approximately $460,000.

We do not have any committed sources of additional financing at this time and we are uncertain whether additional funding will be available when we need it on terms that will be acceptable to us or at all. If we are not able to obtain financing when we need it, we would be unable to carry out our business plan and would have to significantly curtail or cease our operations. We have included in Note 2 to our financial statements for the year ended December 31, 2008, a discussion about our ability to continue as a going concern. Potential sources of financing include strategic relationships, public or private sales of our shares, debt, convertible securities or other arrangements. If we raise funds by selling additional shares, including common shares or other securities convertible into common shares, the ownership interests of our existing shareholders will be diluted.  If we raise funds by selling preferred shares, such shares may carry more voting rights, higher dividend payments or more favorable rights upon distribution than those for the common shares.  If we incur debt, the holders of such debt may be granted security interests in our assets.  Because of our potential long-term capital requirements, we may seek to access the public or private equity or debt markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. The auditors’ report on our 2008 consolidated financial statements includes additional comments that refer to this uncertainty with respect to our ability to continue as a going concern. If we fail to obtain financing when we need it, it would have a material adverse effect on our business, financial condition, cash flows and results of operations.

WE ARE NOT PROFITABLE AND WE MAY NEVER BECOME PROFITABLE

We have accumulated losses of approximately $113.61 million as of December 31, 2008.  For the year ended December 31, 2008 our loss was $2.35 million. We have never been profitable and expect to continue to incur losses for the foreseeable future.  We cannot assure you that we will earn profits or generate positive cash flows from operations in the future.

OUR ABILITY TO REPAY OUR DEBT TO LENDERS

We have not yet realized profitable operations and have relied on non-operational sources of financing to fund our operations. We have been funded primarily through the sale of securities to investors in a series of private placements, which have included a series of convertible debt instruments. As these debt instruments become due we cannot provide assurance that we will have the funds on hand to repay lenders. We may need to renegotiate or restructure certain debt arrangements, as they become due in order to maintain operations.

THE LIMITED OPERATING HISTORY OF OUR JOINT VENTURE WITH GE COMMERCIAL FINANCE HAS MADE US DEPENDENT UPON A SMALLER CUSTOMER BASE OF LARGER CLIENTS

In December 2003 we formed the joint venture, GE Asset Manager, LLC with the General Electric Capital Corporation, through its business division GE Commercial Finance, Capital Solutions (“GE” or “GE Commercial Finance”). Growing this business venture has required us to shift focus from a broad spectrum of customers to focusing on a small number of large clients.  By further investing in our relationship with GE Commercial Finance, we are increasing our business risk by becoming substantially dependent on the business generated by the joint venture.

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WE ARE A GROWTH STAGE COMPANY AND ARE SUBJECT TO THE RISKS INHERENT IN A NEW BUSINESS

Our business and prospects must be considered in light of the risks, uncertainties and expenses frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets.  Our business strategy may not be successful and we may not successfully address those risks.

WE MAY EXPERIENCE INCREASINGLY LONGER SALES CYCLES

A significant portion of our revenue in any quarter is derived from a relatively small number of contracts.  We often experience sales cycles of six (6) to eighteen (18) months.  If the length of our sales cycles increases, our revenues may decrease and our quarterly results would be adversely affected.  In addition, our current and future expense levels are based largely on our investment plans and estimates of future revenues and are, to a large extent, fixed.  We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Any significant shortfall in revenues relative to our planned expenditures would have a material adverse effect on our business, financial condition, cash flows and results of operations.

POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE FINANCIAL FORECASTING DIFFICULT

Our operating results have varied on a quarterly basis in the past and may fluctuate significantly as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly operating results include:

• General economic conditions as well as economic conditions specific to our industry;

• Long sales cycles, which characterize our industry;

• Implementation delays, which can affect payment and recognition of revenue;

• Any decision by us to reduce prices for our solutions in response to price reductions by competitors;

• The amount and timing of operating costs and capital expenditures relating to monitoring or expanding our business, operations and infrastructure; and

• The timing of, and our ability to integrate, any future acquisition, technologies or products or any strategic investments or relationships into which we may enter.

Due to these factors, our quarterly revenues and operating results are difficult to forecast.  We believe that period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance. In addition, it is likely that in one or more future quarters, our operating results will fall below the expectations of securities analysts and investors.  In such event, the trading price of our common shares would almost certainly be materially adversely affected.

OUR SHARE PRICE HAS FLUCTUATED SUBSTANTIALLY AND MAY CONTINUE TO DO SO

The trading price of our common shares on The Toronto Stock Exchange and on the Nasdaq Over the Counter Bulletin Board (“OTCBB”) has fluctuated significantly in the past and could be subject to wide fluctuations in the future. The market prices for securities of technology companies have been highly volatile. These companies have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to their operating performance.  Broad market and industry factors may materially and adversely affect the market price of our common shares, regardless of our operating performance. In addition, fluctuations in our operating results and concerns regarding our competitive position can have an adverse and unpredictable effect on the market price of our shares.

In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, results of operations, cash flow, financial condition and prospects. If we do not prevail in any such action, which may be brought, we could be forced to pay damages.

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

Our common shares trade on the OTCBB.  The OTCBB is generally considered to be a less efficient market than the Nasdaq National Market or the Nasdaq SmallCap Market on which our shares previously traded.  As a result, the ability to buy or sell our common shares on the OTCBB may be limited.  In addition, since our shares are no longer listed on the Nasdaq National Market or Nasdaq SmallCap Market, our shares may be subject to the “penny stock” regulations described below.  De-listing from the Nasdaq National Market and the Nasdaq SmallCap Market does not affect the listing of our common shares on The Toronto Stock Exchange.

OUR COMMON SHARES ARE SUBJECT TO “PENNY STOCK” REGULATIONS WHICH MAY AFFECT YOUR ABILITY TO BUY OR SELL OUR COMMON SHARES

Our shares are characterized as “penny stocks” which may severely affect market liquidity.  The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock.

Securities and Exchange Commission regulations generally define a penny stock to be an equity security that has a market price of less than US$5.00 per share, subject to certain exceptions.  The regulations require, prior to any transaction involving a penny stock, delivery of a disclosure schedule explaining the penny stock market and the risks associated therewith.  The penny stock regulations may adversely affect the market liquidity of our common shares by limiting the ability of broker/dealers to trade the shares and the ability of purchasers of our common shares to sell in the secondary market.  Certain institutions and investors will not invest in penny stocks.

THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE

The market for asset lifecycle management solutions is rapidly evolving and intensely competitive. We face significant competition in each segment of our business (asset sourcing, procurement, asset management and asset disposition).  We expect that competition will further intensify as larger existing companies expand their product lines and industry consolidation accelerates.

Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we. We cannot be certain that we will be able to compete with them effectively. If we fail to do so, it would have a material adverse effect on our business, financial condition, cash flows and results of operations.

IMPACT OF CURRENT GLOBAL ECONOMIC CONDITIONS

Recently, global financial markets and economic conditions have been, and may continue to be, disrupted and volatile. As a result of concerns about the stability of financial markets generally and the solvency of creditors specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt on terms similar to current debt and in some cases, ceased to provide funding to borrowers. Concerns about the current economic situation may also have the effect of tightening the equity markets making any equity based financing which we may desire to undertake difficult to obtain, or obtainable only on terms and conditions which we may find burdensome or unacceptable.  These issues, along with the current weak economic conditions have made, and may continue to make, it more difficult for us to obtain necessary funding on reasonable and competitive terms, and as a result, our ability to continue our businesses, pursue improvements, and continue future growth may be limited or curtailed.  In addition, current weak economic conditions may negatively impact our customers’ ability to obtain financing and fund their businesses.  As a result, we may incur decreases in sales, which will negatively impact our revenue.

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WE DEPEND HEAVILY ON A SMALL NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF THEM OR THEY REDUCE THEIR BUSINESS WITH US, WE WOULD LOSE A SUBSTANTIAL PORTION OF OUR REVENUES

In 2008, two customers accounted for 61 percent and 13 percent, respectively, (2007-two customers accounted for 69 percent, and 10 percent, respectively) of total revenues from continuing operations.  If our relationships with any of these customers is severed or meaningfully altered, we would experience a significant decline in our performance, particularly through reduced revenues, which would have a material adverse effect on our business, financial condition, cash flows and results of operations.

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

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

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

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

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

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

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

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

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

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

• License leading technologies.

We may be required to make substantial expenditures to accomplish the foregoing or to modify or adapt our services or infrastructure. If we are unable to do so, it would have a material adverse effect on our business, financial condition, cash flows and results of operations.

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OUR BUSINESS COULD BE SUBSTANTIALLY HARMED IF WE HAVE TO CORRECT OR DELAY THE RELEASE OF PRODUCTS DUE TO SOFTWARE BUGS OR ERRORS

We sell complex software applications and services.  Our applications may contain undetected errors or bugs when first introduced or as new versions are released.  Our software products may also contain undetected viruses.  Further, software we license from third parties and incorporate into our products may contain errors, bugs or viruses.  Errors, bugs and viruses may result in any of the following:

•      Adverse customer reactions;

•      Negative publicity regarding our business and our products;

•      Harm to our reputation;

•      Loss of or delay in market acceptance;

•      Loss of revenue or required product changes;

•      Diversion of development resources and increased development expenses;

•      Increased service and warranty costs;

•      Legal action by our customers; and

•      Increased insurance costs.

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

We host certain websites and applications for our customers.  Our systems are vulnerable to a number of factors that may cause interruptions in our ability to enable or host solutions for third parties, including, among others:

• Damage from human error, tampering and vandalism;

• Breaches of security;

• Fire and power losses;

• Telecommunications failures and capacity limitations; and

• Software or hardware defects.

Despite the precautions we have taken and plan to take, the occurrence of any of these events or other unanticipated problems could result in service interruptions, which could damage our reputation, and subject us to loss of business and significant repair costs.  Certain of our contracts require that we pay penalties or permit a customer to terminate the contract if we are unable to maintain minimum performance levels. Although we continue to take steps to enhance the security of our systems and ensure that appropriate back-up systems are in place, our systems are not now, nor will they ever be, fully secure.

OUR BUSINESS HAS UNDERGONE DRAMATIC EXPANSION AND RETRACTION PHASES SINCE OUR FORMATION.  WE MAY NOT BE ABLE TO MANAGE FURTHER DRAMATIC EXPANSIONS AND RETRACTIONS IN THE FUTURE

Our business has undergone dramatic expansion and retraction since our formation, which has placed significant strain on our management resources.  If we should grow or retract dramatically in the future, there may be further significant demands on our management, administrative, operating and financial resources.  In order to manage these demands effectively, we will need to expand and improve our operational, financial and management information systems and motivate, manage and retain employees.  We cannot assure you that we will be able to do so, that our management, personnel or systems will be adequate, or that we will be able to achieve levels of revenue commensurate with the resulting levels of operating expenses.

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SALES TO CUSTOMERS OUTSIDE CANADA ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUE, WHICH EXPOSES US TO CERTAIN RISKS

While we currently operate out of Canada, many of our customers are based outside of Canada. There are risks inherent in doing business outside Canada, including:

• Differing laws and regulatory requirements;

• Political and economic risks;

• Currency and foreign exchange fluctuations and controls;

• Tariffs, customs, duties and other trade barriers;

• Longer payment cycles and problems in collecting accounts receivable;

• Potentially adverse tax consequences; and

• Any of these risks could adversely affect the success of our business;

PART IACQUISITIONS 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.

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We also rely on a variety of technology that we license from third parties, including our database and Internet server software, which is used to perform key functions.  These third-party technology licenses may not continue to be available to us on commercially reasonable terms, or at all. If we are unable to maintain these licenses or obtain upgrades to these licenses, we could be delayed in completing or prevented from offering some products or services.

OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY RESULT IN COSTLY AND TIME-CONSUMING LITIGATION

Our success will also depend partly on our ability to operate without infringing upon the proprietary rights of others, as well as our ability to prevent others from infringing on our proprietary rights.  We may be required at times to take legal action in order to protect our proprietary rights.  Also, from time to time, we may receive notice from third parties claiming that we infringe their patent or other proprietary rights. In the past, a certain third party claimed that certain of our technology infringed their intellectual property rights.    The claim with the particular third party has been resolved in a prior period through a licensing arrangement.  There can be no assurances that other third parties will not make similar claims in the future.

We believe that infringement claims will increase in the technology sector as competition intensifies.  Despite our best efforts, we may be sued for infringing on the patent or other proprietary rights of others.  Such litigation is costly, and even if we prevail, the cost of such litigation could harm us.  If we do not prevail or cannot fund a complete defense, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license.  We cannot be certain that any required license would be available to us on acceptable terms, or at all.  If we fail to obtain a license, or if the terms of a license are burdensome to us, this could have a material adverse effect on our business, financial condition, cash flows and results of operations.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH EXCHANGE RATE FLUCTUATIONS

The Company’s revenue from software licensing and related services and application hosting and development enabling agreements is transacted in various currencies including the Canadian dollar, U.S. dollar and U.K. pound. Correspondingly, operating expenses related to these activities are transacted in the above-denoted currencies. The Company does not use derivative instruments to manage exposure to foreign exchange fluctuations. Fluctuations in the exchange rates of these currencies or the exchange rate of other currencies against the Canadian dollar could have a material adverse effect on our business, financial condition, cash flows and results of operations.

OUR PREFERRED SHARES COULD PREVENT OR DELAY A TAKEOVER THAT SOME OR A MAJORITY OF SHAREHOLDERS CONSIDER FAVORABLE

Our Board of Directors, without any further vote of our shareholders, may issue preferred shares and determine the price, preferences, rights and restrictions of those shares.  The rights of the holders of common shares will be subject to, and may be adversely affected by, the rights of the holders of any series of preferred shares that may be issued in the future.  That means, for example, that we can issue preferred shares with more voting rights, higher dividend payments or more favorable rights upon distribution than those for our common shares.  If we issue certain types of preferred shares in the future, it may also be more difficult for a third party to acquire a majority of our outstanding voting shares and such issuance may, in certain circumstances, deter or delay mergers, tender offers or other possible transactions that may be favored by some or a majority of our shareholders.

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IT MAY BE DIFFICULT FOR YOU TO ENFORCE LEGAL CLAIMS AGAINST US OR OUR OFFICERS OR DIRECTORS

We are incorporated under the laws of the Province of Ontario, Canada.  Certain of our directors and officers are residents of Canada and substantially all of our assets and the assets of such persons are located outside the United States.  As a result, it may be difficult for holders of common shares to effect service of legal process within the United States upon those directors and officers who are not residents of the United States.  It may also be difficult to realize in the United States upon judgments of courts of the United States without enforcing such judgments in our home jurisdiction or the jurisdiction of residence of the director or officer concerned.

ITEM 4 - INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

Our name is Northcore Technologies Inc. (“Northcore, or the “Company”). The Company was formed pursuant to the Business Corporations Act (Ontario). The business began as Internet Liquidators Inc. (“IL Inc.”), a business corporation formed under the laws of Ontario, Canada, in September 1995 and after a series of corporate reorganizations, as described below, developed into the present Company.

In May 1996, Internet Liquidators International Inc. (“ILI Inc.”), also an Ontario company, acquired all of the shares of IL Inc. The two companies, IL Inc. and ILI Inc., were amalgamated on January 9, 1997.  By articles of amendment dated June 25 1998, the name of ILI Inc. was changed to Bid.Com International Inc.

On October 11, 2001, Bid.Com acquired substantially all of the shares of ADB Systemer ASA, a public limited liability company organized under the laws of the Kingdom of Norway. As part of the acquisition of ADB Systemer, Bid.Com completed a two for one share consolidation and changed its name to ADB Systems International Inc. (“ADB Inc.”) by articles of amendment dated October 11, 2001.

During 2002, ADB Inc. entered into a series of agreements with the Brick Warehouse Corporation (“The Brick”) whereby the parties agreed to cooperate in online retail operations that utilized the retail technology that the Company had developed and operated under the name “Bid.Com International Inc.” in the online sale of consumer products to be supplied by The Brick. In connection with these transactions The Brick granted to the Company a secured loan and the Company completed a corporate reorganization by plan of arrangement, as described below.

 On August 20, 2002, a new Ontario company was formed called ADB Systems International Ltd. (“ADB Ltd.”), which was incorporated by certificate and Articles of Incorporation. Pursuant to a plan of arrangement approved by the shareholders of ADB Inc. on October 22, 2002 and by the Ontario Superior Court of Justice on October 24, 2002 (the “Arrangement”) the shareholders of ADB Inc. exchanged their shares of ADB Inc. for shares of ADB Ltd., as the Company was then known, on a one-for-one basis on October 31, 2002. As a result of the Arrangement, the business of ADB Inc., including all assets and liabilities of ADB Inc. (other than those related to retail activities, which remained with ADB Inc.), was transferred to the Company in the form of a return of capital. The name of ADB Inc. was subsequently changed to Bid.Com International Ltd. and on June 30, 2003, the Company exercised its option to transfer to The Brick all of the issued shares of Bid.Com International Ltd. (formerly ADB Inc.) in satisfaction of the outstanding principal amount and accrued interest on the loan then owing to The Brick.

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

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

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MAJOR DEVELOPMENTS

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

FISCAL 2008

Northcore completed a number of customer and operational activities throughout the course of 2008.  These activities were designed to accelerate revenue opportunities, solidify our financial position, and strengthen our abilities to work with our customers and partners.

OPERATIONS

Of note, Northcore:

• Enhanced the organization’s technology infrastructure to allow the Company to accommodate greater numbers of clients and attendant users;

• Completed a series of private placements securing gross proceeds of $1,803,000 through the issuances of Series L, M and N secured subordinated notes;

• Entered into an agreement with the remaining Series G debt holders to repay the accrued interest of $113,000 and the principal of $240,000 over a two year term at an interest rate of 12 percent, in blended interest and principal quarterly payments of $40,000; and

• Increased the size of the applications development team during the fourth quarter to more effectively service new and existing clients as well as evolve the current technology base;

CUSTOMER ACTIVITIES

During 2008 Northcore focused on expanding the breadth of existing customer relationships and extending the product line in order to open up new opportunities. Results of this strategy include:

• Significant enhancements to the core Asset Tracking system, performed in partnership with Kraft Foods, enabling anticipatory asset sourcing;

• Creation of the first generation of a mobile Asset Tracking platform, extending product reach into a customer base that requires a portable, rugged-ized, execution environment; and

• Completed the delivery of a large scale mission critical application to a Fortune 500 company that was put into global use;

JOINT VENTURE WITH GE COMMERCIAL FINANCE

Throughout 2008, Northcore continued to support GE Asset Manager, LLC, our joint venture with GE Commercial Finance. The provision of Asset Disposition services to a number of key clients, such as Western Express, Kitty Hawk, and the Hyster and Yale corporations, are examples of this focus.

Working closely with GE, we have also augmented the core GE Asset Manager product suite, with enhancements to Asset Appraiser and tighter integration of the Asset Tracking technology to the Asset Sales platform. We expect this to have broad customer appeal.

We also supported a significant international expansion in the use of Asset Tracker by Kraft Foods.

We believe that the combination of these activities will open up significant opportunities for the coming year.

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FISCAL 2007

Northcore completed a number of customer and operational activities throughout the course of 2007.  These activities were designed to accelerate revenue opportunities, solidify our financial position, and strengthen our abilities to work with our customers and partners.

OPERATIONS

Of note, Northcore:

• Announced a management change, naming Duncan Copeland as Chief Executive Officer and Jim Moskos as Chief Operating Officer effective July 12, 2007;

• Generated gross proceeds of $1.65 million through a rights offering to eligible shareholders;

• Completed a private placement, issuing a new Series K subordinated notes with a face amount of $1.36 million to existing holders of our Series G Notes.   In addition, Northcore completed a private placement issuance of 2.99 million common shares in consideration of the $449,000 Series G accrued interest debt; and

• Refinanced the Series H subordinated notes with a principal balance of $170,000 and accrued interest of $60,000.  The Company entered into an agreement with debt holders in December 2007 to repay the accrued interest of $60,000 in cash in January 2008 and the principal of $170,000 over a two year term at an interest rate of 11 percent, in blended interest and principal quarterly payments of $24,000;

CUSTOMER ACTIVITIES

Northcore devoted considerable effort in 2007 to growing our customer base and building long-term relationships with existing clients.  Our customers take advantage of Northcore’s suite of asset management software solutions and custom applications to introduce process improvements and reduce operational costs.  Through these efforts, Northcore:

• Renewed a three-year application hosting agreement with GE Commercial Finance to provide web-based capabilities for asset disposition, asset tracking and asset appraisal;

• Extended the terms of its technology and services agreements with the School Board of Broward County, the State of Tennessee Department of General Services, and Newfoundland and Labrador Housing Corporation. The customers use Northcore’s technology and services to manage their maintenance activities;

• A key thrust of our activities in 2007 focused on increasing our revenue stream from the provision of technology-based services to our customers, such as The Brick.  These services allow Northcore to extend our relationships and provide a point of differentiation for the Company. In particular, these services center on the development of applications customized specifically for the needs of our customers; and

• The most prominent achievement related to our services delivery strategy was the signing of a master professional services agreement with a leading Fortune 500 customer.  This agreement, which already has  resulted in a number of revenue-generating projects, is designed to streamline the process by which Northcore delivers future technology and application development services to all of the customer’s businesses;

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JOINT VENTURE WITH GE COMMERCIAL FINANCE

• Throughout 2007, Northcore devoted considerable effort in support of GE Asset Manager, LLC, our joint venture with GE Commercial Finance.  In particular, we launched a web-based sales platform to remarket off-lease and pre-owned equipment for the Toro Company. This private-branded sales platform, accessible via www.toroused.com, takes advantage of Northcore’s asset disposition and technology hosting capabilities.

• Working with GE, we also delivered asset disposition capabilities to a number of organizations looking to maximize the yield for their surplus assets.  These customer organizations, such as the Fastenal Company and Arthur Machinery, represent several industry verticals including transportation, construction materials and manufacturing equipment.

• Throughout the year, we also continued to support a number of existing joint venture customers, such as Kraft Foods and GE Infrastructure.  Both organizations expanded their use of Asset Tracker, our web-based application for asset management.

FISCAL 2006

• Northcore successfully completed a number of operational and customer activities in 2006.  The most significant of which included the sale of our Norway business unit and renaming the Company to Northcore Technologies Inc., both of which received shareholder approval, and concentrating our sales and marketing efforts in North America.  These developments underscore our strategic direction for 2008 and beyond.

• Effective July 18, 2006 our stock symbol on the TSX was changed to NTI and our symbol on the OTCBB was changed to NTLNF.

• In addition to our operational activities, Northcore devoted considerable effort in 2006 to adding new customers and building long-term relationships with existing clients, such as GE Commercial Finance, Paramount Resources and Trilogy Energy Trust.  These customers, who take advantage of Northcore’s suite of asset management software solutions, are also now able to leverage our technology-based services.

• Northcore increased its market offerings by introducing application development, software customization and systems integration capabilities.  These technology-based services allow Northcore to extend our relationships with customers and provide a point of differentiation for the Company.

JOINT VENTURE WITH GE COMMERCIAL FINANCE

• In 2006, Northcore continued to devote significant attention to the rollout of GE Asset Manager, LLC, and our joint venture effort with GE Commercial Finance, Capital Solutions (“GE” or “GE Commercial Finance”). Northcore’s joint venture efforts have generated a number of positive results to date.  Through the joint venture, Northcore has strengthened its relationship with GE, delivered new web-based asset management capabilities, expanded new relationships with customers such as Kraft Foods Inc., the Toro Company and Fastenal Company. These activities provide a basis for continued growth in the near and long-term.

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COMPANY’S JOINT VENTURE WITH GE COMMERCIAL FINANCE

On December 31, 2003 ADB Systems USA, Inc. (“ADB USA”), a wholly owned subsidiary of the Company, entered into an Amended and Restated Operating Agreement (the “Operating Agreement”) with General Electric Capital Corporation through its business division GE Commercial Finance. This agreement was entered into in connection with the establishment of GE Asset Manager, LLC, a joint business venture in which both GE Commercial Finance and ADB USA hold a 50 percent interest.  Pursuant to this business venture, GE Commercial Finance and ADB USA also entered into the following agreements that are included as exhibits to the Operating Agreement:  ADB License Agreement, ADB Services Agreement, GE License Agreement and GE Service Agreement. GE Asset Manager, LLC, which carries on business under the name GE Commercial Finance Asset Manager (“GE Asset Manager”), is an integrated, web-based business enabling mid- and large-size organizations to reduce operating costs by simplifying and consolidating their asset management programs. GE Asset Manager features all-in-one capabilities designed for sourcing of new equipment, tracking and reallocation of existing assets, automated appraisal management and disposition of surplus equipment.

PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES

For a description of principal capital expenditures and divestitures, see ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   As of March 30, 2009 we do not have any significant current capital divestitures or any current capital expenditures.

B. BUSINESS OVERVIEW

The Company develops and sells software products and services that allow our customers to source, buy, track, manage and sell assets, primarily in asset-intensive industries.  We refer to our product and services suite as asset lifecycle management solutions.  Our solutions can reduce sourcing and procurement costs, improve tracking and monitoring of asset performance and reduce operational downtime.

Designed to help our customers get full value from their capital assets, we believe the Company’s integrated asset management solutions:

• Streamline sourcing/procurement activities while reducing purchasing costs;

• Schedule preventative and corrective maintenance activities, eliminating unnecessary operational downtimes and reducing maintenance costs;

• Manage inventory of materials more effectively, resulting in reduced purchase costs, improved access to supplies, and easier tracking of assets regardless of their location; and

• Generate higher yield for surplus assets that are disposed or sold on-line.

Our current customers include GE Commercial Finance, Newfoundland and Labrador Housing Corporation, Paramount Resources, Trilogy Energy Trust, The School Board of Broward County and The State of Tennessee Department of General Services.

Through our wholly owned subsidiary, ADB Systems USA, Inc., Northcore owns a 50 percent interest in GE Asset Manager, LLC a joint business venture launched with GE Commercial Finance which operates under the name GE Commercial Finance Asset Manager  (see Part I - Item 4.A - “Joint Venture with GE Commercial Finance”). GE Asset Manageroffers a suite of integrated, web-based solutions that are designed to help organizations gain greater control of their capital assets and implement new process efficiencies to their operational activities which we believe enables our customers to:

• Automate sourcing and tendering processes;

• Track and re-deploy assets more effectively;

• Automate equipment appraisals; and

• Efficiently market and sell surplus equipment.

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We believe however, that the current economic turmoil paradoxically bodes well for Northcore. In times where access to new capital is reduced, or rendered more difficult, companies are motivated to “stretch” existing capital investments by redeploying idle and surplus assets back into productive use. In addition, assets that are ultimately unneeded represent a “harvest” opportunity, if they can be liquidated efficiently. The product suite offered by Northcore and by extension our joint venture (GE Asset Manager, LLC) provides an efficient, cost effective solution to help organizations achieve these goals.

INDUSTRY BACKGROUND AND OVERVIEW

Asset management applications have existed for more than thirty years, initially through computerized maintenance management systems (CMMS), and more recently including more comprehensive and robust enterprise asset management (EAM) and enterprise resource planning (ERP) solutions.  These early systems automated daily management of assets, while more recent ERP solutions consolidated basic asset information with financial information at the corporate level. Asset Management applications, as provided by Northcore, encompass elements of both approaches, and are increasingly delivered via web-based or hosted systems.

Current asset management systems provide a number of capabilities including maintenance scheduling, materials management, electronic procurement, and asset tracking. In essence, asset management activities have evolved to integrate all aspects of an asset’s lifecycle.

There are a number of industry trends driving the demand for asset management capabilities, including the need to:

• Improve the utilization of assets;

• Comply with industry standards and requirement such as, Sarbanes-Oxley financial requirements;

• Reduce operating expenses and improve bottom-line performance; and

• Introduce new operational efficiencies.

PRODUCTS AND SERVICES

The Company offers solutions to manage all aspects of the asset lifecycle - sourcing/procurement, maintenance, materials management and disposition.  Below is a detailed description of our offerings:

Dyn@mic Buyer (TM)

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

Key features include:

• The ability for buyers to create tenders using automated tools that accelerate the purchasing process and reduce procurement costs.

• Capabilities for buyers to post and distribute their tenders on-line to qualified suppliers.

• The ability for buyers to assign values to criteria involved in the purchase decision, such as price, product availability, post-sales support and certification standards.  Buyers then weigh suppliers’ responses to tender questions for evaluation.

• Functionality that allows for the posting of detailed technical information, question and answer forums, and automatic e-mail notification of amended or new buyer-posted documents.

• Capabilities to allow for the use of sealed bid-sourcing formats enabling users to post their product or service requirements to selected vendors.  The sealed bid system differs from the request for quotation in that the vendors only have one opportunity to supply a bid.  Only after the close of the auction is the user able to view the vendor bids.

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Dyn@mic Buyer is delivered to our customers via a hosted model. Fees for Dyn@mic Buyer are determined on an annual basis, depending on the number of sourcing events identified by customers. Service fees are charged separately for implementation, systems integration, training and other consulting activities. Dyn@mic Buyer can be bundled with our procurement solutions or used separately depending on customer requirements.  Current users of Dyn@mic Buyer include the National Health Service (U.K.) and Vesta Insurance.

ProcureMate(TM)

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

Key features of ProcureMate include:

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

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

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

• Functionality for facilitating direct payment and electronic funds transfer; and

• The ability to integrate user workflow and approvals into the procurement process;

ProcureMate is licensed to customers and license fees for ProcureMate are based on the number of users named by the customer.  Service fees are charged separately for implementation, systems integration, training and other consulting activities.  ProcureMate can be bundled with our other on-line purchasing solutions or used separately depending on customer requirements.  Existing ProcureMate users include National Health Service (U.K.), Vesta Insurance, Vinmonopolet, Norway’s government-run retailer of wine and spirits, and Hordaland HFK County, a large local government entity in Norway.

WorkMate(TM)

A comprehensive asset management solution, WorkMate provides integrated capabilities for asset maintenance, asset tracking, materials management and procurement functionality. In connection with the sale of our Norwegian subsidiary in June 2006, the Company entered into a value added reseller agreement with ADB Systemer AS to continue to bring WorkMate to market.

WorkMate is designed for use by customers in asset intensive industries - typically those where maintenance, repair and operations purchases outnumber raw material purchases by more than ten to one on a transaction volume basis.  Examples of asset intensive industries are oil and gas, process industries (such as mining) and the utilities sector.

The three main modules (procurement, materials management and maintenance functionality) may be licensed independently or together as a fully integrated system:

• Procurement Module - for sophisticated domestic and international purchasing operations.  Key capabilities include: order requisitioning, quotations, purchase orders, contracts, cost controls and vendor catalogues.  The procurement module also monitors supplier performance in terms of accuracy, punctuality and cost.

• Materials Management Module - for managing inventory and logistics operations.  Key features include: inventory status, goods receipt, stock issue, reordering, packing/unpacking, transportation, and goods return and equipment rentals.  This Module will log all movements of an item and generates the necessary financial transactions.

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• Maintenance Module - for all types of maintenance, including corrective, preventive or condition-based activities. Customers can automate manual routines and track maintenance costs and equipment history.

Each WorkMate module also includes workflow and reporting tools.

WorkMate is a licensed client-server application and pricing is based on the number of users named by the customer.  Service fees are charged separately for implementation, systems integration, training and other consulting activities.  WorkMate users include some of the largest global players in the oil and gas sector, such as: BP (Norway), Halliburton Productos, Prosafe, Talisman Energy, Paramount Resources and Mesta AS.

Dyn@mic Seller(TM)

An on-line sales solution designed to help our customers with the disposition of surplus assets and equipment.  Dyn@mic Seller integrates multiple pricing methods, such as fixed priced, top bid (auction), Dutch (declining price) and hybrids, through private-labeled websites. Dyn@mic Seller is delivered through a hosted model.

Key capabilities of the product include:

• Traditional rising price auctions, where the highest bids win the items being sold. The rising price auction allows participants to competitively bid on available products by incrementally adjusting their bid amounts.  Our user interface allows users to easily identify current leading bidders, minimum new bids and initial bid pricing.  Participants are informed of their bid status, and advised whether they have won, been outbid, approved or declined via electronic mail.

• A patented Dutch (declining) auction format, in which a starting price is set and a limited time period is allocated for a fixed quantity of the product to be sold.  As time advances, the price drops in small increments until the asset is sold.  The declining bid auction allows participants to bid in a real-time format utilizing on-screen data which provides the time and quantity remaining as well as the falling price of the items for sale.

• Hybrid auction formats that blend multiple pricing formats to meet a customer’s particular needs.

• Fixed price sales where assets are sold in a catalogue or directory format.  The purchaser cannot bid on the price, but merely elects whether or not to purchase the good or service.

Our customers pay monthly hosting fees for use of Dyn@mic Seller and typically also enter into a revenue sharing arrangement with us.  Service fees for implementation, systems integration, training and other consulting activities are charged separately.  Current customers of Dyn@mic Seller include GE Commercial Finance.

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RELATED SERVICES

In connection with our software offerings, we provide the following services to our customers:

CONSULTING

A significant number of our customers request our advice regarding their business and technical processes, often in conjunction with a scoping exercise conducted both before and after the execution of a contract.  This advice can relate to development or optimization of assorted business processes, such as sourcing or procurement activities, assisting in the development of technical specifications, and recommendations regarding internal workflow activities.

CUSTOMIZATION AND IMPLEMENTATION

 Based generally upon the up-front scoping activities, we are able to customize our solutions as required to meet the customer's particular needs.  This process can vary in length depending on the degree of customization, the resources applied by the customer and the customer's business requirements.  We work closely with our customers to ensure that new features and functionality meet their expectations.  We also provide the professional services work required for the implementation of our customer solutions, including loading of data, identification of business processes, and integration to other systems applications.

APPLICATION DEVELOPMENT

A growing number of our customers have engaged us to develop web-based applications that support their unique asset management requirements. Typically, these application development projects become the proprietary technology of our customers and are not resold by us. We charge customers based on hourly service rates or through a fixed price format.

TRAINING

Upon completion of implementation (and often during implementation), we train customer personnel to utilize our solutions.   Training can be conducted in one-on-one or group situations. We also conduct “train the trainer” sessions.

MAINTENANCE AND SUPPORT

We provide regular software upgrades and ongoing support to our customers. Northcore provides these services for a yearly maintenance fee of 18 percent of the license fee for client/server environment or as part of its monthly hosting fees.

HOSTING

We also provide technology-hosting services to our customers. Through these services, customers gain access to Northcore's applications via the Internet through dedicated, secure websites.  Our hosting services enable customers to accelerate the deployment of technology initiatives while limiting investments in systems configuration and new hardware infrastructure.

GE ASSET MANAGER

GE Asset Manager is a joint venture between GE Commercial Finance and Northcore Technologies Inc. that combines GE’s equipment financing and asset management expertise together with our experience in providing mission critical technology solutions for asset lifecycle management.

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With organizations needing to generate improved bottom-line results and comply with new financial regulatory requirements, GE Asset Manager has introduced a new suite of integrated, web-based solutions that are designed to help organizations gain greater control of their capital assets and implement new process efficiencies to their operational activities.

Our industry-proven solutions enable our customers to:

• Track and re-deploy assets more effectively;

• Automate equipment appraisals;

• Efficiently market and sell surplus equipment; and

• Automate sourcing and tendering processes.

The four key components to Asset Manager’s offerings are as follows:

Asset Buyer

Asset Buyer is a web-based solution designed for automating sourcing activities and improving purchasing decisions.  Using Asset Buyer, purchasers can determine the factors that are the most important to their procurement decisions and identify suppliers that deliver the greatest value - from the lowest price to the ability to match exact specification requirements.

Asset Buyer also streamlines the procurement process, making it easier to create and distribute tenders, select vendors and negotiate with suppliers.

With Asset Buyer, organizations can:

• Generate cost savings on sourcing activities;

• Reduce purchasing cycle times;

• Take advantage of multiple sourcing formats including request for proposals, reverse auction, and sealed bid; and

• Rank suppliers based on their ability to match buying criteria improve relations with suppliers through on-line collaborations.

Asset Tracker

Designed to allow organizations to more effectively utilize their assets, Asset Tracker is a web-based solution for keeping track of the location, details and status of capital equipment - regardless of where the equipment is being deployed.

Using a dedicated tracking site that is password protected, Asset Tracker provides users the ability to search and locate capital assets throughout their organization. Users can search for equipment in a number of ways.  Assets can be searched by business unit, function, or by specific piece of equipment category.

Once an asset is located, users can determine its status and take appropriate action.  Idle or under-utilized assets, for example, can be re-deployed, helping to increase their value to the organization and reducing capital spending on new equipment.

Assets no longer required or deemed surplus can be earmarked for disposition through traditional or on-line sales methods, such as Asset Seller (described below).

With Asset Tracker, users can:

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• Search and request for capital equipment within their organization, across multiple locations or facilities;

• Review asset details, such as equipment description, image, financial information, and contact information;

• Add new asset details by uploading data from spreadsheet applications;

• Extract asset details and generate asset management reports;

• Instantly determine the status of capital equipment;

• Transfer and re-deploy idle assets; and

• Dispose of unnecessary or surplus equipment.

Asset Appraiser

Asset Appraiser is a web-based solution that allows organizations to more effectively manage the capital equipment appraisal process. With Asset Appraiser users can create an appraisal scope, confirm appraisal data, distribute documents and data collection tools, compile appraisal results and access stored appraisals on-line in a protected environment.

Asset Appraiser allows users to:

• Automate and accelerate the appraisal process using web-based tools;

• Gain instant access to ongoing project details from anywhere in the world;

• Store asset data in a secure repository for future reference, retrieval and analysis;

• Access appraisals in a 24 x 7 environment;

• Store and review appraisals in a secure environment;

• Download spreadsheet templates into reports;

• Add attachments, such as image, text or movie files, to reports; and

• Assist with compliance with the Uniform Standards of Professional Appraisal Practice.

Asset Seller

Asset Seller facilitates instant and global access to a buying community by presenting surplus equipment or inventory on geasset.com, GE's equipment re-marketing website. Asset Seller is a proven take-to-market solution that will connect a company's equipment to a global community of qualified organizational buyers using multiple sales platforms, all developed to help maximize asset recovery value and improve cycle time.

Asset Seller brings together multiple sales platforms into one integrated on-line environment, providing flexibility, while maximizing the yield for your surplus equipment.

Asset Seller's direct sale platform features equipment showcases that are designed to promote private treaty sales. Other sales platforms available through Asset Seller include ranked sealed bid and top bid sale events that enable you to market equipment in an auction-like environment.

Utilizing GE's patent pending ranked sealed bid method, Asset Seller encourages multiple bids and retains buyer anonymity, creating competitive sales environments that generate a higher recovery for asset investment.

Asset Seller also enables organizations to feature equipment specifications, photos, videos and contact information, and allows them to coordinate off-line sales activities such as equipment inspections. Current customers of Asset Seller, through our joint venture, include The Toro Company.

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THIRD PARTY BUSINESS RELATIONSHIPS

Designed to extend the value of the solutions we deliver to our customers, Northcore has fostered relationships with a number of leading technology and professional service organizations. These relationships allow Northcore to develop world-class offerings that leverage the leading-edge technologies, proven methodologies and subject matter expertise of our business partners.

Northcore’s existing business relationships include:

ADB SYSTEMER AS

Based in Stavanger, Norway ADB Systemer AS provides enterprise asset management technology for oil and gas companies and public sector organizations. Upon the share sale of ADB Systemer AS, effective June 30, 2006, the Company entered into a value added reseller agreement with ADB Systemer AS to continue to bring WorkMate and ProcureMate to market.

DONNA CONA

Donna Cona is Canada's largest Aboriginal Information and Communications Technology company. The company was incorporated in 1996, and has successfully been providing information technology and management consulting services to public sector organizations.

GE COMMERCIAL FINANCE

Backed by more than 65 years of operating experience, a strong credit rating, and the vast resources of its parent, General Electric Company, GE Capital offers a wide range of value-added financial products and services through a network of 28 specialized businesses in five core niches: Equipment Management, Customer Services, Specialized Financing, Mid-Market Financing and Specialty Insurance.

BUSINESS CYCLES

As many of the customers of the Company and GE Asset Manager are large, multinational organizations or quasi-governmental entities, we may experience increasingly longer sales and collection cycles. Additional information on business cycle risks are set out in Item 3.D. of this Annual Report under the heading Risk Factors.

For additional information regarding business cycles, see Part I - Item 5 under the heading “OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.

STRATEGY

Our business strategy is to expand our customer base, particularly in the financial services, manufacturing, public, and oil and gas sectors, through superior software functionality and through the industry expertise of our employees.  In particular, our strategy is comprised of the following key components:

EXPAND JOINT VENTURE WITH GE AND INCREASE OUR CUSTOMER BASE

Since the launch of GE Asset Manager, we have focused our efforts on increasing the number of joint venture customers and enhancing our portfolio of asset management technology. This focus will be a cornerstone of our efforts in 2009.

STRENGTHEN OUR POSITION AS AN ASSET MANAGEMENT SOLUTION PROVIDER AND IMPROVE OUR VISIBILITY AMONG TARGET SECTOR

While we have expanded our customer base and increased the number of users of our technology, Northcore is committed to solidifying our position as a provider of asset management solutions particularly among our target markets.

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MAINTAIN AND ENHANCE OUR TECHNOLOGY

Based on the relative pricing and functionality of our products as compared with those of our competitors, we consider our proprietary software offerings to be competitive, however it is critical that we continue to maintain and enhance our technology.

 SEEKING ACQUISITIONS AND STRATEGIC INVESTMENTS

We plan to seek to expand by seeking technologies, products, and services that complement our existing business.  If appropriate opportunities are available, we may acquire businesses, technologies or products or enter into strategic relationships that may further diversify revenue sources and product offerings, expand our customer base or enhance our technology platform.

CUSTOMERS

We provide our solutions to customers in a variety of industries, including: financial services, manufacturing, government and oil and gas.

The revenue structures and particular services provided vary depending upon the needs of the customer and the solution concerned.  For licensed offerings we generally collect a license fee based on number of users, service fees for implementation and training, and support and maintenance fees that are collected on a recurring annual basis.  For hosted offerings, we generally collect an up-front implementation fee, monthly hosting fee, and a share of revenue or transaction volumes.

The following is a representative list of some of the customers for whom we have implemented or are implementing our solutions:

Customer	Solution(s)	Industry Segment	Geographic Location
GE Capital Solutions	Dyn@mic Seller	Financial Services	US
Paramount	WorkMate	Oil and Gas	Canada
Trilogy Energy Trust	WorkMate	Oil and Gas	Canada
The Brick	WorkMate	Consumer Products Retailer	Canada
Customers serviced by our joint venture, Asset Manager
Kraft Foods Global, Inc.	Asset Tracker	Manufacturing	US
GE Infrastructure	Asset Tracker	Manufacturing	US
The Toro Company	Asset Tracker	Manufacturing	US
Global Electronics Services-GE Capital Solutions	Asset Tracker	Financial Services	US

SALES AND MARKETING

We market our solutions primarily through our direct sales force. Our sales organization is regional with personnel located in our principal offices in Toronto (Canada).

Our marketing efforts are focused on targeted marketing campaigns, rather than broad-based "awareness" campaigns. Potential customers are identified through direct contact, responses to requests for information, attendance at trade shows and through industry contacts.

The GE sales force takes the lead in the sales and marketing efforts of the Asset Manager joint venture.

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We use reference customers to assist us in our marketing efforts, both through direct contact with potential customers and through site branding and case studies.  We also rely on our co-marketing partners to assist in our marketing efforts.

TECHNOLOGY PLATFORM

Northcore has devoted significant resources to developing its proprietary software technology. The technology platform is constructed using distributed software technologies which allow for rapid development and deployment of new software technology in order to take advantage of emerging business opportunities.

Our company's core technology platform is based on Microsoft applications, including the Windows NT operating system and a SQL server relational database, all residing on scaleable hardware. The software is constructed using an advanced proprietary XML framework and resides on an N-tier architecture. The support of open systems allows integration with a large variety of existing commercial, proprietary and legacy applications.  Other applications, which are also operational in a Microsoft NT environment, have been developed using Power Builder and are dependent on an Oracle relational database.

CUSTOMER SERVICE AND TECHNOLOGY

Based on the relative pricing and functionality of our products as compared with those of competitors, we believe that our proprietary software provides a competitive advantage, and that our future success depends, in part, on our ability to continue developing and enhancing that software.  Therefore, we have focused our customer service and technology efforts on the continued development of our proprietary software offerings.

Our ongoing software development and technology efforts are aimed at the continued “productization” of specific elements of our software, enhancing the features and functionality of our existing software components, the development of new software components, and the integration of superior third party technology into our environment.  Productization involves the development of reusable applications to reduce programming time and costs for customer implementations.

Our software development and technology expenditures were approximately $689,000, $762,000 and $664,000 for the year ended December 31, 2008, 2007 and 2006, respectively, including salaries and related expenses of our personnel engaged in research and development.

Our software development and technology activities in 2008 included the ongoing development of new applications framework implemented in Microsoft.Net. The new framework will be used as the foundation of all future Web based products. There was also a substantial amount of time devoted to the extension of our integration tool set, which allows us to connect our core product suite to pre-existing customer owned third party applications.

CUSTOMER CONCENTRATION

The majority of our revenue is generated by a small number of customers as discussed above in Item 3-D Risk Factors - WE DEPEND HEAVILY ON A LIMITED NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF THEM OR THEY REDUCE THEIR BUSINESS WITH US, WE WOULD LOSE A SUBSTANTIAL PORTION OF OUR REVENUES. See also Item 5-D under the heading Credit Risk.

INTELLECTUAL PROPERTY

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and technical measures, to establish and protect our proprietary rights.

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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: Northcore™, DYN@MIC SELLER™, DYN@MIC BUYER™ and POWERED BY Northcore™. We also claim rights in other unregistered trademarks.

Our competitive position is also dependent upon our unpatented trade secrets.  In an effort to protect our trade secrets, and as part of our confidentiality procedures, we generally enter into confidentiality and non-disclosure agreements with our employees and consultants and generally limit access to and distribution of our software, documentation and other proprietary information.  Additionally, we limit physical access to our premises, software and hardware and employ security measures to protect against damage or theft.

The Company entered into a Patent License Agreement with NCR Corporation on April 17, 2002.  The agreement provides the Company with access to specific technology patents over a seven-year period for US $100,000 annually.

COMPETITION

The market for each solution comprising our asset lifecycle management suite is intensely competitive.  Many of the companies we compete with have much greater financial, technical, research and development resources than we do.

To remain and become more competitive, we will need to make continued investments in product development and improve our market visibility and financial situation.

 Although we offer a broad range of asset lifecycle management solutions, we face significant competition in each of the component product areas from the following companies:

• Sourcing - Ariba, Inc., Emptoris, Inc., Moai, and SAP AG;

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

• Asset Management- Indus International Inc., Infor, IBM, Mincom Ltd., and broader ERP solution providers such as Oracle and SAP AG; and

• Sales solutions - eBay Inc.

In addition, many organizations use in-house developers to develop solutions for certain elements of the asset lifecycle.

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C. ORGANIZATIONAL STRUCTURE

The Company has the following organizational structure, which includes the subsidiaries as set out below:

CORPORATE ORGANIZATIONAL STRUCTURE

AS OF MARCH 30, 2009

D. PROPERTY, PLANT AND EQUIPMENT

The table below lists the location of our facilities, which is held by us pursuant to a lease agreement, and summarizes certain information about the location.

Location	Use	Square Feet (Approximate)	Term of Lease
302 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.

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ITEM 5 -OPERATING AND FINANCIAL REVIEW AND PROSPECTS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH "ITEM 3.A-SELECTED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT.  IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS.  SEE "FORWARD-LOOKING STATEMENTS".

Overview

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

The Company operates in a single reportable operating segment, that is, the design and delivery of software solutions for use by its customers. The single reportable operating segment derives its revenues from the sale of software licenses and related services.

Our company is headquartered in Toronto (Canada).

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

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SELECTED ANNUAL INFORMATION

(in thousands of Canadian dollars)

Year ended December 31,	2008			2007			2006
	(in thousands, except per share amounts)
Revenues	$	741		$	1,166		$	1,073
Operating expenses:
General and administrative		1,485			1,703			1,790
Customer service and technology		689			762			664
Sales and marketing		117			276			377
Employee stock options		43			94			137
Depreciation and amortization		33			39			92
Total operating expenses		2,367			2,874			3,060
Loss from continuing operations before the under-noted		(1,626	)		(1,708	)		(1,987	)
Interest expense:
Cash interest expense		335			272			345
Accretion of secured subordinated notes		394			333			454
Interest income		-			(1	)		(16	)
		729			604			783
Loss from continuing operations		(2,355	)		(2,312	)		(2,770	)
Income from discontinued operations		-			-			2,122
LOSS FOR THE YEAR	$	(2,355	)	$	(2,312	)	$	(648	)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment		-			-			(90	)
COMPREHENSIVE LOSS	$	(2,355	)	$	(2,312	)	$	(738	)
LOSS PER SHARE:
From continuing operations, basic and diluted	$	(0.02	)	$	(0.02	)	$	(0.03	)
Loss per share, basic and diluted	$	(0.02	)	$	(0.02	)	$	(0.01	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED (000’s)		108,861			93,094			79,933

A. OPERATING RESULTS

DISCONTINUED OPERATIONS

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

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

Income Statement	2008		2007		2006
	(in thousands, except per share amounts)
Revenue	$	-	$	-	$	2,399
Income from operations		-		-		331
Gain from disposition of discontinued operations		-		-		1,791
Income from discontinued operations	$	-	$	-	$	2,122
Income per share from discontinued operations, basic and diluted	$	-	$	-	$	0.02

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

RESULTS OF OPERATIONS

COMPARISON OF YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007

LOSS

Our loss for the year ended December 31, 2008 was $2.355 million, an increase of $43,000 or two percent from the loss of $2.312 million reported for the year ended December 31, 2007. The increase in loss was attributable in the reduction in revenue and the increase in interest expense, partially offset by the decrease in operating expenses.

REVENUES

Revenues are comprised of services (application development activities, software implementation and license fees, training and consulting, product maintenance and customer support), application hosting and royalty fees.

Revenues decreased to $741,000 for the year ended December 31, 2008 from $1.166 million for the year ended December 31, 2007, representing a decrease of $425,000 or 36 percent.  The most significant decrease was in the area of services, where revenues decreased to $454,000, from $794,000 in 2007, a decline of $340,000 or 43 percent.  A smaller workforce, the decline in legacy applications (WorkMate and COMPASS) users and the depreciation in the U.S. dollars were the main reasons for the decline in services revenues.  Royalty fees also decreased to $38,000, from $116,000 in 2007, a decline of $78,000 or 67 percent.  Hosting fees declined to $249,000, from $256,000 in 2007, a slight decline of $7,000 or three percent.  The depreciation in the U.S. dollars was the main reason for this decrease in hosting fees during 2008.

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GENERAL AND ADMINISTRATIVE

General and administrative expenses include, primarily: all salaries and related expenses (including benefits and payroll taxes) other than technology staff compensation (which is included in customer service and technology expenses), and sales and marketing staff compensation (which is included in sales and marketing expenses), occupancy costs, foreign exchange gains or losses, professional fees, insurance, investor relations, regulatory filing fees, and travel and related costs.

General and administrative expenses decreased by $218,000 or 13 percent, to $1.485 million for the year ended December 31, 2008, as compared to $1.703 million for the year ended December 31, 2007.  Continued cost-containment efforts resulted in year-over-year savings in the following areas; salaries and benefits due to a smaller administrative workforce; investor relations and insurance premiums due to lower premiums; and rent and occupancy costs due to rent rebates pertaining to the prior years received during the current year.  These savings were partially offset by the increase in professional fees due to higher legal and consulting fees and additional financing cost relating to the issuances of the secured subordinated notes during the year.

CUSTOMER SERVICE AND TECHNOLOGY

Customer service and technology expenses consist of costs associated with acquired and internally developed software, and research and development expenses, including fees to independent contractors and salaries and related expenses of personnel engaged in these activities.

Customer service and technology expenses decreased by $73,000 to $689,000 for the year ended December 31, 2008, as compared to $762,000 for the year ended December 31, 2007, representing an decrease of 10 percent.  The decrease in expenses was due primarily to the decrease in staffing levels compared to last year.

SALES AND MARKETING

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

Sales and marketing costs for the year ended December 31, 2008 amounted to $117,000, compared to $276,000 for 2007, representing a decrease of $159,000 or 58 percent.  This decline was a result of a reduction in staffing levels in North America and the Company opting out the renewal of the sales and marketing contract with Sandstorm Technologies, which expired during the fourth quarter of 2007.

EMPLOYEE STOCK OPTIONS

For the year ended December 31, 2008, employee stock option expense amounted to $43,000, as compared to $94,000 for the year ended December 31, 2007, a decrease $51,000 or 54 percent.  The decrease was due to only 480,000 stock options granted in the current year as compared to 1,350,000 options granted in 2007.

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DEPRECIATION

Depreciation expense for the year ended December 31, 2008 was $33,000, relatively consistent with $39,000 recorded for the year ended December 31, 2007.

INTEREST EXPENSE

Interest expense reflects interest incurred from debt instruments and loans.  Interest expense for the year ended December 31, 2008 was $729,000 compared to $605,000 for December 31, 2007, representing an increase of $124,000 or 20 percent.  During 2008, cash interest expense of $335,000 and non-cash interest expense of $394,000 were incurred related to secured subordinated notes and notes payable.  Comparatively, cash interest expense of $272,000 and non-cash interest expense of $333,000 were recorded in 2007.  The increase in interest expense was due to the new Series L, M and N subordinated notes issued during 2008

INTEREST INCOME

There was no interest income for the year ended December 31, 2008, as compared to $1,000 for the year ended December 31, 2007.

COMPARISON OF YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006

LOSS

Our loss for the year ended December 31, 2007 was $2.312 million, an increase of 257 percent from the loss of $648,000 reported for the year ended December 31, 2006.   In 2006, the Company recorded earnings from discontinued operations of $2.122 million, including a gain of $1.791 million realized on the sale of the Norway business unit, thus reducing the loss.  Loss from continuing operations for the year ended December 31, 2007 was $2.312 million, an improvement of 17 percent from a loss from continuing operations of $2.770 million reported for the year ended December 31, 2006.   The improvement in loss from operations was attributable to an increase in revenue, combined with a reduction in operating and interest expenses.

REVENUES

Revenues are comprised of services (application development activities, software implementation and license fees, training and consulting, product maintenance and customer support), application hosting and royalty fees.

Revenue increased to $1.166 million for the year ended December 31, 2007 from $1.073 million for the year ended December 31, 2006, representing an increase of $93,000 or nine percent.  The increase in North America's revenue of $389,000 or 59 percent was partially offset by the decrease in Ireland/U.K.'s revenue of $296,000 or 72 percent.  The growth in North America's revenue was attributed to the 119 percent increase in revenues related to the Company’s strategic partner, while the decline in Ireland/U.K.'s revenue was due to current year's revenue which consisted of the 10 percent royalty, whereas 2006's revenue included our full share of earnings for the first half of the year and the 10 percent royalty subsequent to the sale of ADB Systemer.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include, primarily: all salaries and related expenses (including benefits and payroll taxes) other than technology staff compensation (which is included in customer service and technology expenses), and sales and marketing staff compensation (which is included in sales and marketing expenses), occupancy costs, foreign exchange gains or losses, professional fees, insurance, investor relations, regulatory filing fees, and travel and related costs.

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General and administrative expenses decreased by $87,000 or five percent, to $1.703 million for the year ended December 31, 2007, as compared to $1.790 million for the year ended December 31, 2006.

Year-over-year savings in the amount of $89,000 resulted from salary expense reductions arising from a smaller administrative workforce and favorable Canadian dollar exchange rates pertaining to US dollar-denominated salaries.  Continued cost-containment efforts resulted in $76,000 savings in investor relations, $65,000 in lower insurance premiums, and $34,000 savings in travel expenses.  These savings were partially offset by the increase in professional fees of $51,000 due to higher accounting and consulting fees and an increase in rent and occupancy costs of $63,000 due to rent rebates recorded in the prior year.

CUSTOMER SERVICE AND TECHNOLOGY

 Customer service and technology expenses consist of costs associated with acquired and internally developed software, and research and development expenses, including fees to independent contractors and salaries and related expenses of personnel engaged in these activities.

Customer service and technology expenses increased by $98,000 to $762,000 for the year ended December 31, 2007, as compared to $664,000 for the year ended December 31, 2006, representing an increase of 15 percent.  The increase in expenses was due primarily to the increase in professional fees and staffing costs.

SALES AND MARKETING

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

Sales and marketing costs for the year ended December 31, 2007 amounted to $276,000, as compared to $377,000 for 2006, representing a decrease of $101,000 or 27 percent.  This decrease was attributable to lower staffing levels in the sales department, partially offset by the appointment of Sandstorm Technology Inc. as an independent sales agent to actively market and sell products and services offered by Northcore.  The contract with Sandstorm Technology Inc. expired during the fourth quarter of 2007.

EMPLOYEE STOCK OPTIONS

The 2007 employee stock option expense represents the fair value of the stock options vesting from the July 11, 2007, August 4, 2006 and June 21, 2006 grants of 1,350,000, 500,000 and 50,000 stock options respectively.  For the year ended December 31, 2007, employee stock option expense amounted to $94,000, as compared to $137,000 for the year ended December 31, 2006, a decrease of 31 percent.  This decrease was due to the vesting of prior period grants and the related expense.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $39,000 for the year ended December 31, 2007, as compared to $92,000 for the year ended December 31, 2006, representing a decrease of 58 percent.  The decrease was due to the adoption of the new accounting policies for financial instruments, whereby the Company wrote off the balance of deferred charges through the opening deficit as of January 1, 2007.

INTEREST EXPENSE

Interest expense reflects interest incurred from debt instruments and loans.  Interest expense for the year ended December 31, 2007 was $605,000 compared to $799,000 for December 31, 2006, representing a decrease of 24 percent.  During 2007, cash interest expense of $272,000 and non-cash interest expense of $333,000 was incurred related to secured subordinated notes.  Comparatively, cash interest expense of $345,000 and non-cash interest expense of $454,000 were recorded in 2006.  The decrease in interest expense was due to the maturity of Series G and H subordinated notes; partially offset by the issuance of the Series K subordinated notes in 2007.

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INTEREST INCOME

Interest income reflects interest from investments in cash and marketable securities.  Interest income was $1,000 for the year ended December 31, 2007, as compared to $16,000 for the year ended December 31, 2006.  Interest income in 2006 was realized from investing the proceeds from the sale of ADB Systemer.

GOING CONCERN

The Company has incurred negative annual cash flows from operations since inception and expects to continue to expend substantial funds to continue to develop technology, build an infrastructure to support business development efforts and expand other areas of business including the acquisition of, or strategic investments in, complementary products, businesses or technologies.  The Company’s ability to continue as a going concern will be dependent on management’s ability to successfully execute its business plan including a substantial increase in revenue as well as maintaining operating expenses at or near the same level as 2008.  The Company cannot provide assurance that it will be able to execute on its business plan or assure that efforts to raise additional financings would be successful.

The consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern.  If the going concern assumption were not appropriate, adjustments would be necessary in the carrying value of assets and liabilities, the reported losses and the balance sheet classification used.

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

CRITICAL ACCOUNTING ESTIMATES

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

CRITICAL ACCOUNTING POLICIES

We periodically review our financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. As part of this process, we have reviewed our selection, application and communication of critical accounting policies and financial disclosures. We have determined that the critical accounting policies related to our core ongoing business activities are primarily those that relate to revenue recognition.  Other significant accounting policies are described in Note 3 to our audited annual consolidated financial statements for the year ended December 31, 2008.

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REVENUE RECOGNITION

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

HOSTING FEES

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

APPLICATION DEVELOPMENT FEES

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

SOFTWARE LICENSE REVENUE

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

•         Persuasive evidence of an arrangement exists;

•         Delivery has occurred;

•         Fee is fixed or determinable; and

•         Collectibility is probable.

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

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

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IMPLEMENTATION, TRAINING AND CONSULTING SERVICE FEES

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

PRODUCT MAINTENANCE AND CUSTOMER SUPPORT FEES

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

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

ADOPTION OF NEW ACCOUNTING POLICIES

CAPITAL DISCLOSURES

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

FINANCIAL INSTRUMENTS

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

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

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UNADOPTED NEW ACCOUNTING PRONOUNCEMENTS

GOODWILL AND INTANGIBLE ASSETS

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

BUSINESS COMBINATIONS

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

INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)

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

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

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

B.  LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

The Company has been funded to date primarily through a series of private placements of equity and convertible debentures, sales of equity to and investments from strategic partners, gains from investments and option exercises.  Since inception, the Company has received aggregate net proceeds of $93.5 million from debt and equity financing and has realized net proceeds of $26.4 million from disposal of investments. The Company has not earned profits to date and, at December 31, 2008, has an accumulated deficit of $113.6 million.  The Company expects to incur losses into 2009 and there can be no assurance that it will ever achieve profitability.  Operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of the Company’s control.

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The Company has incurred negative annual cash flows from operations since inception and expects to continue to expend substantial funds to continue to develop technology, build an infrastructure to support business development efforts and expand other areas of business including the acquisition of, or strategic investments in, complementary products, businesses or technologies.  The Company has historically relied on non-operational sources of financing to fund its operations.  The Company’s ability to continue as a going concern is dependent on management’s ability to successfully execute its business plan and to successfully repay or refinance obligations as they come due.  Management believes that it has the ability to raise additional financing.  The Company cannot provide assurance that it will be able to execute on its business plan or assure that efforts to raise additional financings would be successful.

Cash and cash equivalents decreased by $18,000 to $460,000 as at December 31, 2008 from $478,000 as at December 31, 2007.

Current assets of $793,000 were exceeded by current liabilities (excluding deferred revenue) of $2.455 million in the current fiscal year by $1.662 million.  Current assets of $635,000 were exceeded by current liabilities (excluding deferred revenue) of $955,000 by $320,000 in the prior year.  Deferred revenue has been excluded from current liabilities as it is expected to be settled by existing resources other than cash.

a) OPERATING

Cash outflows from operating activities improved to $1.491 million in the current fiscal year compared to cash outflows from operating activities of $1.571 million in the prior year.   The improvement was due to an increase in non-cash working capital as per below.

Non-cash working capital resulted in inflows of $394,000 in fiscal 2008 compared to inflows of $275,000 in fiscal 2007, an increase of $119,000, as summarized in the following table:

	2008			2007			Change
	(in thousands on Canadian dollars)
Accounts receivable	$	(186	)	$	35		$	(221	)
Deposits and prepaid expenses		11			25			(14	)
Accounts payable		249			(26	)		275
Accrued liabilities		342			257			85
Deferred revenue		(22	)		(16	)		(6	)
	$	394		$	275		$	119

b) INVESTING

There were no capital assets additions during 2008, compared to $11,000 in 2007.

c) FINANCING

Financing activities generated net inflows of $1.473 million in fiscal 2008, as compared to $1.585 million in fiscal 2007.  Cash inflows in the current year were a result of the issuance of Series L, M and N notes, which raised total proceeds of $1.803 million, partially offset by the repayment of notes payable of $329,000.  In 2007, the Company raised net proceeds of $1.245 million through a rights offering to existing shareholders during the third quarter of 2007, as well as the repayment of demand loans of $340,000 to private investors as part of the rights offering.

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d) CONTRACTUAL OBLIGATIONS

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

	Total		2009		2010		2011		2012		2013
	(in thousands of Canadian dollars)
Operating leases	$	128	$	128	$	-	$	-	$	-	$	-
License agreements		30		30		-		-		-		-
Notes payable		382		382		-		-		-		-
Secured subordinated notes -principal repayment(i)		3,638		1,310		300		825		-		1,203
Secured subordinated notes - interest payment (i)		1,085		185		244		159		-		497
	$	5,263	$	2,035	$	544	$	984	$	-	$	1,700

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

FUNDING

OVERVIEW

The Company has been funded to date primarily through a series of private placements of equity and convertible debentures, sales of equity to and investments from strategic partners, gains from investments and option exercises.  Since inception, the Company has received aggregate net proceeds of $93.5 million from debt and equity financing and has realized net proceeds of $26.4 million from disposal of investments.

FUNDING - 2008

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

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

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Subsequent to the year ended December 31 2008, the Company announced the conversion of secured subordinated notes and the additional proceeds secured from the exercise of warrants.  Series M note holders have converted $660,000 out of a total of $678,000 debentures and exercised a total of 13,200,000 common share-purchase warrants out of a possible 13,560,000 warrants, for total proceeds of $1,320,000.  As per the terms of the debenture, the remaining warrant options have expired.

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

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

FUNDING - 2007

The Series G secured subordinated notes with a face amount of $1,600,000 matured on June 15, 2007. In connection with the refinancing of the Series G notes, the Company completed a private placement issuance of the new Series K secured subordinated notes with a face amount of $1,360,000, to existing holders of $1,360,000 of the Series G secured subordinated notes.

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

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

Subsequent to the year ended December 31, 2007, the Company entered into an agreement with the remaining Series G debt holders to repay the accrued interest of $113,000 and the principal of $240,000 in cash over a two year term at 12 percent in blended interest and principal quarterly payments of $40,000.  The total refinanced amount was $353,000 ($233,000 representing current portion of notes payable and $120,000 representing long term portion of notes payable).  The notes payable mature on December 31, 2009 and are secured as per the Series G security terms.

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

During the quarter ended June 30, 2007, the Company received operating loans from a private investor in the amount of $280,000.  During the quarter ended September 30, 2007, the Company received an additional $60,000 of operating loans from this investor.  The loans bore interest at 8 percent, were due on demand and were secured by a general security agreement on the assets of the Company.  The loans were settled during the quarter ended September 30, 2007 through the issuance of common shares as part of the rights offering.

FUNDING - 2006

On February 8, 2006, the Company completed a transaction resulting in the issuance of Series J secured subordinated notes with a face value of $755,000 for net proceeds of $750,000.  The Series J notes were issued to private investors including an amount totaling $105,000 issued to three directors/officers of the Company. The Series J notes mature February 8, 2011, have an annual interest rate of 11 percent and are convertible into equity units at a price of $0.15 per unit.  Interest for the first year is payable in shares of the Company with interest payable for the remaining term of the notes payable in cash upon the earlier of maturity and conversion.   Each equity unit consists of one common share and one share-purchase warrant with an exercise price of $0.20.  The warrants expire on the earlier of (i) February 8, 2009 and (ii) the date which is sixty days following the issuance of a notice by the Company to holders confirming that the closing price of the Company’s common shares, on the Toronto Stock Exchange, was greater than or equal to $0.35 for any 10 consecutive trading days.  The afore-mentioned conversion provisions are subject to a four month and one day hold period.  The Series J notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

C.  RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

Not applicable.

D.  TREND INFORMATION

FOREIGN EXCHANGE RISK

The Company’s revenue from software licensing and related services and e-commerce enabling agreements is transacted in various currencies including the Canadian dollar, U.S. dollar and U.K. pound.  As the majority of our revenues are realized in U.S dollar and our expenses are transacted in Canadian dollar, the appreciation of the U.S dollar against the Canadian dollar may have a favorable impact on our results.  The Company does not use derivative instruments to manage exposure to foreign exchange fluctuations.

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INTEREST RATE RISK

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

CREDIT RISK

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

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

At December 31, 2008, three customers accounted for 66 percent, 13 percent and 12 percent, respectively, (2007 - three customers accounted for 52 percent, 24 percent and 11 percent, respectively) of total accounts receivable.

E.  OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet special purpose entities or other off-balance sheet arrangements.

F.  TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

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

	Total		2009		2010		2011		2012		2013
	(in thousands of Canadian dollars)
Operating leases	$	128	$	128	$	-	$	-	$	-	$	-
License agreements		30		30		-		-		-		-
Notes payable		382		382		-		-		-		-
Secured subordinated notes -principal repayment(i)		3,638		1,310		300		825		-		1,203
Secured subordinated notes - interest payment (i)		1,085		185		244		159		-		497
	$	5,263	$	2,035	$	544	$	984	$	-	$	1,700

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

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ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.  DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth the name, age and position of each of the individuals who served as a director and/or an executive officer during the past year. This list includes the dates of resignation and appointment, as applicable, of individuals who resigned or were appointed directors or officers during the past year. This information is supplied based on our records and information furnished by our executive officers and directors.

Name, Age and Municipality of Residence	Director Since	Position with the Company
DUNCAN G. COPELAND, 52 Potomac, MD, USA	June 23, 2004	Director and Chief Executive Officer, since July 11, 2007
JIM MOSKOS, 46, Toronto, Ontario	June 7, 1999	Director and Chief Operating Officer, since July 11, 2007 President, Technology Group from October 19, 1999 to July 11, 2007
T. CHRISTOPHER BULGER, (1)(2)(3) 51, Toronto, Ontario	May 28, 1996	Director and non-executive Chairman of the Board since  October 14, 2005
DARROCH ROBERTSON (1)(3), 57, Port Stanley, Ontario	June 25, 2003	Director
________________________ (1) Member of the Management Resources and Compensation Committee (2) Member of the Corporate Governance Committee (3) Member of the Audit Committee

The business experience of each of our current directors and executive officers for at least the last five years is as follows:

Directors

DUNCAN COPELAND, Potomac, Maryland

Director since June 23, 2004

Chief Executive Officer

Mr. Copeland has been our Chief Executive Officer since July 11, 2007. He has been a Director of the Company since its inception, except for the period from 2001-2004. Mr. Copeland has been a member of the faculties of the Richard Ivey School of Business, The University of Western Ontario and the Robert Emmett McDonough School of Business, Georgetown University. He is a trustee of the Charles Babbage Foundation. Mr. Copeland holds a doctorate from the Harvard Business School.

JIM MOSKOS, Toronto, Ontario

Director since June 7, 1999

Chief Operating Officer

Mr. Moskoshas been Chief Operating Officer of the Company since July 11, 2007. Mr. Moskos served as President of the Technology Group since from October 19, 1999 to July 11, 2007 and Vice President - Technology from September 1997 to October 19, 1999.  From September 1994 to August 1997, Mr. Moskos was Senior Technology Manager for the Canadian Department of Indian Affairs and Northern Development responsible for setting the technical direction for all aspects of application development.

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T. CHRISTOPHER BULGER, Toronto, Ontario

Director since May 28, 1996

Non-executive Chairman of the Board of Directors, Chairman of the Management Resources and Compensation Committee and member of the Corporate Governance and Audit Committees

Mr. Bulger has been the non-executive Chairman of the Board since October 14, 2005 and a director of the Company since May 28, 1996. Mr. Bulger has been Chief Financial Officer of Zeno Global Limited since December 2007, a new out-of-home advertising technology that provides moving ads to moving people. Mr. Bulger was Chairman and CEO of Megawheels Technologies Inc., (“Megawheels”) from Jan 01, 2001 to April 30, 2007, a software and solutions provider to the online classified advertising industry. From December 1999 to December 2001, Mr. Bulger was President and Chief Executive Officer of eLab Technology Ventures Inc. Mr. Bulger served as Executive Vice President of our Company from September 1998 to December 1999 and Chief Financial Officer of the Company from April 1996 to September 1998. Mr. Bulger is a CFA, holds an MBA from  INSEAD, France and an HBA from The Richard Ivey School of Business, Canada.

DARROCH (RICK) ROBERTSON, Port Stanley, Ontario

Director since June 25, 2003

Chairman of the Audit Committee and member of the Management Resources and Compensation Committee

Mr. Robertson has been an Associate Professor of Business at the Richard Ivey School of Business, The University of Western Ontario, for the past eleven years.  He has served as both the Director of the MBA program and the Director of the undergraduate HBA program at the Ivey School.  Mr. Robertson was also a director and chair of the audit committee of Stackpole Limited, a TSX listed company.  Mr. Robertson has also served as an elected member of council for the Institute of Chartered Accountants of Ontario, where he was chair on the audit committee and by-laws committee. Mr. Robertson is a CA and holds an MBA and PhD (Business) from the University of Western Ontario.

Director’s relationship to Megawheels Technologies Inc. subject to Cease Trade Order

Chris Bulger, the non-executive Chairman and a director of the Company, is also the acting Chief Executive Officer and formerly the Chairman and a director of Megawheels which was listed on the TSX Venture exchange under the symbol "MWT", and which was issued a cease trade order on January 9, 2007 by the Ontario Securities Commission under paragraph 2 and paragraph 2.1 of subsection 127(1) and subsection 127(5) because Megawheels failed to provide continuous disclosure material of audited annual financial statements for the year ended August 31, 2006. Megawheels is undergoing an orderly wind-up of operations.

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B.           COMPENSATION

Summary Compensation Table

The following table provides a summary of compensation earned during the most recently completed fiscal year by the Company’s Named Executive Officers (“NEOs”). The Company’s NEOs, as at the end of 2008, were our Chief Executive Officer, Duncan Copeland, and our Chief Operating Officer, Jim Moskos.  The table also discloses the executive compensation for Mr. Tam Nguyen, the Company’s Corporate Controller, who is responsible for the Company’s day-to-day financial activities and who provides the CFO certifications required under Multilateral Instrument 52-109.

					Awards		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	($)	($)	($)(1)	(#)	($)	($)	($)
Duncan Copeland	2008	45,000	Nil	Nil	Nil	Nil	Nil	Nil
CEO	2007	30,000	Nil	Nil	250,000	Nil	Nil	Nil
Jim Moskos	2008	200,000	Nil	12,000	Nil	Nil	Nil	Nil
COO	2007	200,000	Nil	12,000	500,000	Nil	Nil	Nil
	2006	200,000	Nil	12,000	20,000	Nil	Nil	Nil
Tam Nguyen	2008	95,000	Nil	10,000	100,000	Nil	Nil	Nil
Corporate Controller	2007	90,000	Nil	6,500	40,000	Nil	Nil	Nil
	2006	90,000	Nil	Nil	100,000	Nil	Nil	Nil

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

Our company has a stock option plan (the “Plan”) which was originally adopted on May 15, 1996, and as amended most recently by shareholder approval on September 12, 2001, and currently provides that options may not be granted to purchase more than 5,350,000 common shares. The Plan provides for the issuance of stock options to directors, officers and full time employees of the Company and it subsidiaries or any other person engage to provide ongoing services to the Company, which may expire as much as 10 years from the date of grant, at prices not less than the fair market value of the common shares on the date of grant. The Management Resources and Compensation Committee of the Board of Directors, whom administer the Plan, reserves the right to attach vesting periods to stock options granted.  For options granted to senior management during the fiscal year ended December 31, 2008 see Summary Compensation Table above.

Subsequent to the year ended December 31, 2008, the Management Resources and Compensation Committee has also granted options to insider directors as tabulated below;

Stock Option Grants to Insider Directors subsequent to the fiscal year ended December 31, 2008
Name:	# Options Granted	Price CDN$	Date of Grant	Expiry Date of Option
Duncan Copeland	80,000	0.20	March 11, 2009	March 11, 2014
Jim Moskos	120,000	0.20	March 11, 2009	March 11, 2014

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For option grants to outside directors subsequent to the fiscal year ended December 31, 2008, not included in the above mentioned compensation table, see the table below under the heading Compensation of Directors.

During 2008, we did not provide any pension, retirement or similar benefits to our directors and officers as a group.

Compensation of Directors

       For the 2008 financial year, directors received no cash payment as fees for meetings of the Board or Committees of the Board, which they attend, and no cash payments as fee for the signing of any resolution of directors or documents on behalf of the Company.  All directors are reimbursed for reasonable out-of-pocket travel and other expenses incurred by them in attending meetings of the Board or Committee meetings.

The Management Resources and Compensation Committee is responsible for recommendations to the Board regarding the granting of incentive stock options to  directors to encourage their serving on the Board and Committees, to afford them the opportunity to be compensated properly, and to provide them with an equity stake in the Company.

The following table provides a summary of the option grants to outside directors subsequent to the fiscal year ended December 31, 2008, which were not included in the summary compensation table above.

Stock Option Grants to Outside Directors subsequent to the fiscal year ended December 31, 2008
Name:	# Options Granted	Price CDN$	Date of Grant	Expiry Date of Option
Chris Bulger	80,000	0.20	March 11, 2009	March 11, 2014
Darroch Robertson	80,000	0.20	March 11, 2009	March 11, 2014

During the 2008 financial year, Christopher Bulger, Chairman of the Board, received $45,000 compensation for acting as Chair of the Board.

C.           BOARD PRACTICES

Our articles of incorporation currently provide for a Board of Directors consisting of not less than 3 and not more than 15 directors, to be elected annually. The Business Corporations Act (Ontario) provides that, where a minimum and maximum number of directors is provided for in the articles of a company, the directors of that company may, if empowered by special resolution of the shareholders, by a resolution determine the number of directors to be elected at each annual meeting of the shareholders.

Our Board of Directors presently consists of four directors. Under Canadian law, a majority of our Board of directors and of each of our Board Committees must be residents of Canada, subject to certain exceptions.  Each of our directors holds office until the next annual meeting of shareholders, until his successor has been elected and qualified, or his earlier resignation or removal.  Our executive officers are appointed by our Board of directors and serve at the discretion of our Board of Directors.

None of the directors have any contract or arrangement entitling them to benefits upon termination of their directorship.

The three committees of the Board are the Audit Committee, Management Resources and Compensation Committee, and the Corporate Governance Committee.

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The Audit Committee, all of whose members are unrelated as defined by the TSX Corporate Governance Guidelines and Independent as defined by Nasdaq listing standards, meets with our management and our auditors on a periodic basis, before the release of quarterly results and before submission of our annual financial statements to the Board. The committee is responsible for the review and assessment of our audit practices, financial reporting and internal controls, inquiry of the auditors as to cooperation in access and disclosure by our management and the ultimate approval of our annual financial statements for submission to the Board and to the shareholders. The committee is also responsible for the appointment, compensation and oversight of the work of our auditors (including resolution of disagreements between management and our auditors regarding financial reporting).  Our Audit Committee consists of Darroch Robertson (Chairman) and Chris Bulger. The Company is in the process of filling in the position of third member of the Committee.

The Management Resources and Compensation Committee, all of whose members are unrelated as defined by the TSX Corporate Governance Guidelines and Independent as defined by Nasdaq listing standards, is responsible for recommendations to the Board regarding the appointment or removal of executive officers, reviewing the performance of the executive officers and fixing their compensation. The committee is also responsible for administering our stock option plan and ensuring that salary and benefit programs are continuously suitable for attracting, retaining and encouraging the development of knowledgeable, experienced and capable management and employees. The Management Resources and Compensation Committee of our Company consists of Christopher Bulger (Chairman) and Darroch Robertson both of whom are directors of our Company.

The Corporate Governance Committee, all of whose members are unrelated as defined by the TSX Corporate Governance Guidelines and Independent as defined by Nasdaq listing standards, oversees the implementation of our governance practices.  The committee also oversees the process for nominations to the Board and assesses the overall effectiveness of the Board. The Corporate Governance Committee consists of Chris Bulger (Chairman); he is a director of our Company. The Company is in the process of filling in the position of second member of the Committee.

C. 1.  AUDIT COMMITTEE INFORMATION

As a reporting issuer in jurisdictions that have adoptedMultilateral Instrument 52-110 Audit Committees (“MI 52-110”) the Company is required to provide disclosure with respect to its Audit Committee including the text of the Audit Committee’s Charter, composition of the Committee, and the fees paid to the external auditor.

1. The Audit Committee’s Charter

A Copy of the Audit Committee Charter adopted by the Board of Directors on June 03, 2008 is attached to this Annual Report as Exhibit 4.26.

2. Composition of the Audit Committee

Name	Relevant Education and Experience
Darroch Robertson*‡	Mr. Robertson has been an Associate Professor of Business at the Richard Ivey School of Business, The University of Western Ontario, for the past eleven years.  He has served as both the Director of MBA program and the Director of the undergraduate HBA program at the Ivey School.  Mr. Robertson was also a director and chair of the audit committee of Stackpole Limited, a TSX listed company.  Mr. Robertson has also served as an elected member of council for the Institute of Chartered Accountants of Ontario, where he was chair on the audit committee and by-laws committee. Mr. Robertson is a CA and holds an MBA and PhD (Business) from the University of Western Ontario.
Christopher Bulger*‡	Mr. Bulger has been the non-executive Chairman of the Board since October 14, 2005 and a director of the Company since May 28, 1996. Mr. Bulger has been Chief Financial Officer of Zeno Global Limited since November, 2007, a new out-of-home advertising technology that provides moving ads to moving people. Mr. Bulger is also acting Chief Executive Officer and formerly Chairman of Megawheels Inc., a software and solutions provider to the online classified advertising industry. From December 1999 to December 2001, Mr. Bulger was President and Chief Executive Officer of eLab Technology Ventures Inc. Mr. Bulger served as Executive Vice President of our Company from September 1998 to December 1999 and Chief Financial Officer of the Company from April 1996 to September 1998. Mr. Bulger is a CFA, holds an MBA from  INSEAD, France and an HBA from The Richard Ivey School of Business, Canada.

(*) independent as such term is defined in MI 52-110

(‡) financially literate as such term is defined in MI 52-110

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3. Reliance on Certain Exemptions

At no time since the commencement of the Company’s most recently completed financial year has the Company relied on the exemption in Section 2.4 of MI 52-110 (De Minimis Non-audit Services), Section 3.3(2) (Controlled Companies), Section 3.6 (Temporary Exemption for Limited and Exceptional Circumstances), or an exemption from MI 52-110, in whole or in part granted under Part 8 of MI 52-110, nor has the Company relied on Section 3.8 (Acquisition of Financial Literacy) of MI 52-110.

4. Audit Committee Oversight

Directly responsible for overseeing the work of the external auditor engaged for the purpose of preparing or issuing an auditor's report or performing other audit, review or attest services for the issuer, including the resolution of disagreements between management and the external auditor regarding financial reporting.  The Committee also recommends fees of the external auditors to the Board of Directors.

5. Pre-Approval Policies

Pursuant to the Audit Committee Charter Adopted by the Board of Directors on June 03, 2008, the Audit Committee is responsible for the pre-approval of all non-audit services to be provided to the Company or its subsidiary entities by the independent auditor.

6. External Auditor Service Fees (By Category)

Year	Audit Fees(1)	Tax Fees(2)
2007	$178,000	$3,000
2008	$174,500	$3,000

(1) Audit Fees represent costs associated with the audit of the Company’s annual consolidated financial statements including review of securities filings and review of the Company’s interim consolidated Financial Statements.

(2) Tax Fees represent costs associated with the preparation of the Company’s annual tax filings, tax planning and advice.

D. EMPLOYEES

As of March 30, 2009 we employed a total of 15 full-time employees as follows:

	North America
Sales and Marketing	1
Technical Services	9
Finance Legal Affairs and Admin	3
Executive	2
TOTAL	15

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The number of our employees as of March 30, 2009 is decreased by one employee from Sales and Marketing department as compared to the number of our employees as of March 1, 2008.

As of March 1, 2008 we employed a total of 16 full-time employees as follows:

	North America
Sales and Marketing	2
Technical Services	9
Finance Legal Affairs and Admin	3
Executive	2
TOTAL	16

The number of our employees as of March 1, 2008 is consistent with the number of our employees as of May 31, 2007.

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

	North America
Sales and Marketing	2
Technical Services	9
Finance Legal Affairs and Admin	3
Executive	2
TOTAL	16

The number of our employees as of May 31, 2007 represents a 65 percent decrease in our workforce as compared with the number of our employees as of May 31, 2006 due to the sale of our Norwegian business unit effective June 30, 2006.

As of May 31, 2006 we employed a total of 46 full-time employees and one part-time employee as follows:

	North America	Ireland and U.K.	Norway
Sales and Marketing	4	1	2
Technical Services	4	0	12
Product Group	3	0	12
Finance and Admin	3	0	2
Executive	2	0	1
TOTAL	16	1	29

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

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E.    SHARE OWNERSHIP

The following table sets forth information concerning share and option ownership of each of our current directors and officers as of March 30, 2009:

Name	Number of Common Shares Owned (1)	Number of Common Underlying Options (2)	Range of Exercise Prices of Options	Range of Expiration Dates of Options	Percentage of Common Shares Beneficially Owned (3)
T. Christopher Bulger	330,313	845,000	$0.12 - $0.22	1/25/10 - 03/11/14	*
Jim Moskos	153,703	1,232,500	$0.12 - $0.22	1/25/10 - 03/11/14	*
Darroch Robertson	5,000	287,500	$0.12 - $0.22	1/25/10 - 03/11/14	*
Duncan Copeland	169,550	445,000	$0.12- $0.22	11/15/08 - 03/11/14	*
Tam Nguyen	-	245,000	$0.10- $0.22	1/25/10 - 12/23/13	-

* Represents less than 1 percent.

(1) Represents shares owned beneficially by the named individual other than those shares which may be acquired under our Company's option plans.  Unless otherwise noted, all persons referred to above have sole voting and sole investment power.

(2) Includes all shares which the named individual has the right to acquire under all vested and unvested options and warrants granted to such individual under the Company's option plan.

(3) This information is based on 137,437,541 common shares outstanding as of March 30, 2009.  Common shares subject to options exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person.

ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS

Kris Sammy, a registered individual portfolio manager with Dundee Securities Corporation, beneficially owns and/or exercises control or direction over 17,299,310 common shares and convertible debentures with warrants, representing a total of 11.60 percent of the outstanding common shares of Northcore Technologies Inc. assuming full exercise of his convertible securities.

This information is based on our records, information provided to us by directors and executive officers and a review of information, including press releases filed by our shareholders with the Ontario Securities Commission prior to March 30, 2009, and insider reports filed with the Ontario Securities Commission.  The Company’s major shareholders do not have any voting rights that differ from the rights of our other shareholders.

As at March 30, 2009 the shareholders of record held 137,437,541 common shares.

WE ARE NOT AWARE OF ANY OTHER CORPORATION, FOREIGN GOVERNMENT, OR OTHER PERSON OR ENTITY THAT DIRECTLY OR INDIRECTLY OWNS OR CONTROLS OUR COMPANY, SEVERALLY OR JOINTLY. WE ARE NOT AWARE OF ANY ARRANGEMENTS, WHICH MAY AT A LATER DATE RESULT IN A CHANGE IN CONTROL OF OUR COMPANY.

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B.           RELATED PARTY TRANSACTIONS

The following officers and directors purchased Series K notes:  Jim Moskos, Chief Operating Officer and a director of the Company, purchased $10,000 of Series K notes that have not yet been converted.

In connection with the refinancing of the Series G notes, on June 15, 2007 the Company completed a private placement issuance of 2,992,000 common shares, at $0.15 per common share, to holders of $1,360,000 of the Series G secured subordinate notes, in payment of the related $449,000 accrued interest.  The following officers and directors participated in the equity offering and received shares in payment of the interest accrued on their Series G notes:  Jim Moskos, Chief Operating Officer and a director of the Company, was issued 22,000 shares.

The following officers and directors purchased Series J notes:  Jim Moskos, Chief Operating Officer and a director of the Company, purchased $13,000 of Series J notes that have not yet been converted and Chris Bulger, Chairman of the Board, purchased $56,000 of Series J notes that have not yet been converted.

The following officers and directors purchased Series I notes:  Jim Moskos, Chief Operating Officer and a director of the Company, purchased $10,000 of Series I notes that have not yet been converted; Chris Bulger, Chairman of the Board, purchased $20,000 of Series I notes that have not yet been converted and Duncan Copeland, CEO of the Company and a director of the Company, purchased $60,000 of Series I notes that have not yet been converted.

The Series H secured subordinated notes with a principal balance of $170,000 matured on October 21, 2007. The Company entered into an agreement with the remaining debt holders to repay the accrued interest of $60,000 and the principal of $170,000 repaid over a two year term at 11 percent in blended interest and principal quarterly payments of $24,000. The notes payable were issued to private investors including an amount totaling $20,000 to Jim Moskos.  The notes payable mature on December 31, 2009 and are secured as per the Series H security terms.

As at December 31, 2008, accrued interest included $50,000 (2007 - $28,000) in interest payable relating to the aforementioned secured subordinated notes due to related parties

During the year ended December 31, 2008, interest payments relating to the secured subordinated notes totaling $9,000 (2007 - $60,000) were made to related parties.

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

During 2008, interest expense on advances from related parties was $1,000 (2007 - $1,000, 2006 - $4,000).

Kris Sammy, a registered individual portfolio manager with Dundee Securities Corporation, beneficially owns and/or exercises control or direction over 17,299,310 common shares and convertible debentures with warrants, representing a total of 11.60 percent of the outstanding common shares of Northcore Technologies Inc. assuming full exercise of his convertible securities.

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ITEM 8 - FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS

See “Item 18 - Financial Statements” and the Consolidated Financial Statements and notes thereto accompanying this Annual Report beginning on page F-1. All contingencies and commitments set out in the Financial Statements have been reviewed and updated as at the date of filing this Annual Report.

LEGAL PROCEEDINGS

Neither we, nor any of our subsidiaries, is a party to, or the subject of, any material legal proceedings.

DIVIDEND POLICY

We have not declared or paid any cash dividends on our common shares.  We currently intend to retain any future earnings for use in the operation and expansion of our business.  We do not anticipate paying any cash dividends on our common shares in the foreseeable future.

We have not issued any preferred shares.  The dividend entitlement of any preferred shares issued will be determined by our Board of Directors.

SIGNIFICANT CHANGES

Except as otherwise disclosed in this report, there has been no significant change in our financial position since December 31, 2008.

ITEM 9 - THE OFFER AND LISTING

Our common shares are listed on The Toronto Stock Exchange and are quoted for trading on the OTCBB.  The Company’s stock symbols are NTI on the TSX and NTLNF on the OTCBB.

For additional information about the trading of our common shares, see Item 3-D - Risk Factors - YOUR ABILITY TO BUY OR SELL OUR COMMON SHARES ON THE OTCBB MAY BE LIMITED.

The following tables set forth the range of high and low sales prices (rounded to the nearest hundredth) as reported by The Toronto Stock Exchange and the OTCBB during the calendar years and quarters indicated.

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THE TORONTO STOCK EXCHANGE

	High	Low
	(Cdn $)	(Cdn $)
ANNUAL MARKET PRICES
2004 Calendar Year	0.52	0.16
2005 Calendar Year	0.36	0.14
2006 Calendar Year	0.25	0.13
2007 Calendar Year	0.20	0.07
2008 Calendar Year	0.15	0.04
QUARTERLY MARKET PRICES
2007 CALENDAR YEAR
First Quarter	0.20	0.13
Second Quarter	0.18	0.12
Third Quarter	0.15	0.08
Fourth Quarter	0.15	0.07
2008 CALENDAR YEAR
First Quarter	0.11	0.06
Second Quarter	0.11	0.04
Third Quarter	0.13	0.05
Fourth Quarter	0.15	0.09
MONTHLY MARKET PRICES
September 2008	0.13	0.10
October 2008	0.13	0.10
November 2008	0.14	0.11
December 2008	0.15	0.09
January 2009	0.21	0.13
February 2009	0.26	0.16

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NASDAQ AND OTCBB

	High	Low
	(U.S. $)	(U.S. $)
ANNUAL MARKET PRICES
2004 Calendar Year	0.41	0.12
2005 Calendar Year	0.29	0.11
2006 Calendar Year	0.27	0.10
2007 Calendar Year	0.20	0.06
2008 Calendar Year	0.15	0.03
QUARTERLY MARKET PRICES
2007 CALENDAR YEAR
First Quarter	0.20	0.10
Second Quarter	0.19	0.10
Third Quarter	0.19	0.07
Fourth Quarter	0.15	0.06
2008 CALENDAR YEAR
First Quarter	0.11	0.03
Second Quarter	0.11	0.03
Third Quarter	0.15	0.03
Fourth Quarter	0.13	0.03
MONTHLY MARKET PRICES
September 2008	0.15	0.06
October 2008	0.10	0.03
November 2008	0.13	0.05
December 2008	0.11	0.08
January 2009	0.17	0.05
February 2009	0.18	0.05

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ITEM 10 - ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

The Articles of Arrangement for the Company are on file with the Ministry of Consumer and Commercial Relations for the Province of Ontario under Ontario Corporation Number 1539169.  Our articles do not include a stated purpose.

Directors

Directors of our Company need not be shareholders.  In accordance with our by-laws and the Business Corporations Act (Ontario), a majority of our directors must be residents of Canada, subject to certain exceptions.  In addition, directors must be at least 18 years of age, of sound mind, and not bankrupt.  Neither our articles or by-laws, nor the Business Corporations Act (Ontario), impose any mandatory retirement age for directors.

A director who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or transaction or proposed material contract or transaction with our Company shall disclose to our Company the nature and extent of his interest at the time and in the manner provided by the Business Corporations Act (Ontario). The Business Corporations Act (Ontario) prohibits such a director from voting on any resolution to approve the contract or transaction unless the contract or transaction:

• Is an arrangement by way of security for money lent to or obligations undertaken by the director for the benefit of our Company or an affiliate;

• Relates primarily to his or her remuneration as a director, officer, employee or agent of our Company or an affiliate;

• Is for indemnity or insurance; or

• Is with an affiliate.

Our Board of Directors may, on behalf of our Company and without authorization of our shareholders:

• Borrow money upon the credit of our Company;

• Issue, reissue, sell or pledge bonds, debentures, notes or other evidences or indebtedness or guarantees of our Company, either secured or unsecured;

• Subject to certain disclosure requirements of the Business Corporations Act (Ontario), give, directly or indirectly, financial assistance to any person by means of a loan, a guarantee or otherwise on behalf of our Company to secure performance or any present or future indebtedness, liability or obligation of any person; and

• Mortgage, hypothecate, pledge or otherwise create a security interest in all or any currently owned or subsequently acquired real or personal property of our Company, movable or immovable, including without limitation book debts, rights, powers, franchises and undertakings, to secure any bonds, debentures, notes or other evidences of indebtedness or guarantee or any other obligation of our Company.

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Common Shares

Our articles authorize the issuance of an unlimited number of common shares. The holders of the common shares of our Company are entitled to receive notice of and to attend all meetings of the shareholders of our Company and have one vote for each common share held at all meetings of the shareholders of our Company, except for meetings at which only holders of another specified class or series of shares of our Company are entitled to vote separately as a class or series. Subject to the prior rights of the holders of preferred shares of our Company and to any other shares ranking senior to the common shares with respect to priority in the payment of dividends, the holders of common shares are entitled to receive dividends and our Company will pay dividends, as and when declared by our Board of Directors, out of moneys properly applicable to the payment of dividends, in such amount and in such form as our Board of Directors may from time to time determine, and all dividends which our Board of Directors may declare on the common shares shall be declared and paid in equal amounts per share on all common shares at the time outstanding. In the event of the dissolution, liquidation or winding-up of our Company, whether voluntary or involuntary, or any other distribution of assets of our Company among its shareholders for the purpose of winding up its affairs, subject to the prior rights of the holders of preferred shares and to any other shares ranking senior to the common shares with respect to priority in the distribution of assets upon dissolution, liquidation or winding-up, the holders of the common shares will be entitled to receive the remaining property and assets of our Company.   There are no redemption or sinking-fund provisions that attach to the common shares, nor are there any provisions that discriminate against existing or prospective holders of common shares as a result of owning a substantial number of shares.  The holders of our common shares are not liable to further capital calls by our Company.

Preferred Shares

Our articles of incorporation authorize the issuance of an unlimited number of preferred shares, in one or more series. The Ontario Business Corporations Act does not impose restrictions upon our Board of Directors issuing preferred shares of the type authorized by our articles of incorporation. Our Board of Directors may fix, before issuing, the number of preferred shares of each series, the designation, rights, privileges, restrictions and conditions attaching to the preferred shares of each series, including any voting rights, any right to receive dividends (which may be cumulative or non-cumulative and variable or fixed) or the means of determining the dividends, the dates of payment, any terms and conditions of redemption or purchase, any conversion rights, and any rights on the liquidation, dissolution or winding-up of our Company, any sinking fund or other provisions, the whole to be subject to the issue of a Certificate of Amendment setting forth the designation, rights, privileges, restrictions and conditions attaching to the preferred shares of the series. Our articles of incorporation require that preferred shares of each series must, with respect to the payment of dividends and the distribution of assets or the return of capital in the event of the liquidation, dissolution or winding-up of our Company, whether voluntary or involuntary, rank on a parity with the preferred shares of every other series and be entitled to preference over the common shares and over any other shares ranking junior to the preferred shares. The preferred shares of one series shall participate ratably with the preferred shares of every other series in respect of all dividends and similar amounts.  The holders of our preferred shares are not liable to further capital calls by our Company.  None of our preferred shares are currently issued or outstanding.

Action Necessary to Change the Rights of Shareholders

In order to change the rights of our shareholders, we would need to amend our articles of incorporation to effect the change.  Such an amendment would require the approval of holders of two-thirds of the shares cast at a duly called special meeting. If we wish to amend the rights of holders of a specific class of shares, such approval would also be required from the holders of that class. A shareholder is entitled to dissent in respect of such a resolution and, if the resolution is adopted and our Company implements such changes, demand payment of the fair value of its shares.

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Meetings of Shareholders

An annual meeting of shareholders is held each year for the purpose of considering the financial statements and reports, electing directors, appointing auditors and for the transaction of other business as may be brought before the meeting. The President, the Chairman of the Board or the Board of Directors has the power to call a special meeting of shareholders at any time. Notice of the time and place of each meeting of shareholders must be given not less than 21 days, nor more than 50 days, before the date of each meeting to each director, to the auditor and to each shareholder who at the close of business on the record date for notice is entered in the securities register as the holder of one or more shares carrying the right to vote at the meeting. Notice of a meeting of shareholders called for any other purpose other than consideration of financial statements and auditors’ report, election of directors and reappointment of the incumbent auditor, must state the nature of the business in sufficient detail to permit the shareholder to form a reasoned judgment on, and must state the text of, any special resolution or by-law to be submitted to the meeting. The only persons entitled to be present at a meeting of shareholders are those entitled to vote thereat, the directors of our Company, the auditor of our Company and others who although not entitled to vote are entitled or required to be present at the meeting. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. If a corporation is winding-up, the Business Corporations Act (Ontario) permits a liquidator appointed by the shareholders, during the continuance of a voluntary winding-up, to call and attend meetings of the shareholders. In circumstances where a court orders a meeting of shareholders, the court may direct how the meeting may be held, including the parties entitled, or required, to attend the meeting.

Limitations on Rights to Own Securities

There is no limitation imposed by Canadian law or by the articles or other charter documents on the right of a non-resident to hold or vote common shares or preferred shares with voting rights, other than as provided in the Investment Canada Act, as amended by the World Trade Organization Agreement Implementation Act.  The Investment Canada Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Canada Act (a “non-Canadian”), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be a net benefit to Canada.

An investment in our voting shares by a non-Canadian (other than a “World Trade Organization Investor,” as defined below) would be reviewable under the Investment Canada Act if it were an investment to acquire direct control of our Company, and the value of our assets were $5.0 million or more.  An investment in our voting shares by a World Trade Organization Investor would be reviewable under the Investment Canada Act if it were an investment to acquire direct control of our Company, and the value of our assets equaled or exceeded $209 million.  A non-Canadian, whether a World Trade Organization Investor or otherwise, would acquire control of us for purposes of the Investment Canada Act if he or she acquired a majority of our voting shares.  The acquisition of less than a majority, but at least one-third of our voting shares, would be presumed to be an acquisition of control of our Company, unless it could be established that we were not controlled in fact by the acquirer through the ownership of voting shares.  In general, an individual is a World Trade Organization Investor if he or she is a “national” of a country (other than Canada) that is a member of the World Trade Organization (“World Trade Organization Member”) or has a right of permanent residence in a World Trade Organization Member.  A corporation or other entity will be a World Trade Organization investor if it is a “World Trade Organization investor-controlled entity” pursuant to detailed rules set out in the Investment Canada Act.  The United States is a World Trade Organization Member.

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Certain transactions involving our voting shares would be exempt from the Investment Canada Act, including:  (a) an acquisition of our voting shares if the acquisition were made in connection with the person’s business as a trader or dealer in securities; (b) an acquisition of control of our Company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Canada Act; and (c) an acquisition of control of our Company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of our Company, through the ownership of voting interests, remains unchanged.

Change of Control

Our authorized capital consists of an unlimited number of common shares and an unlimited number of preferred shares. The Board of Directors, without any further vote by the common shareholders, has the authority to issue preferred shares and to determine the price, preferences, rights and restrictions, including voting and dividend rights, of these shares. The rights of the holders of common shares are subject to the rights of holders of any preferred shares that the Board of Directors may issue in the future. That means, for example, that we can issue preferred shares with more voting rights, higher dividend payments or more favorable rights upon dissolution, than the common shares. If we issued certain types of preferred shares in the future, it may also be more difficult for a third-party to acquire a majority of our outstanding voting shares.

Our articles do not contain any provisions that govern the ownership threshold above which shareholder ownership must be disclosed.

C.    Material Contracts

The following is a summary of our Company’s material contracts entered into within the last three years.

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

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

Subsequent to the year ended December 31 2008, the Company announced the conversion of secured subordinated notes and the additional proceeds secured from the exercise of warrants.  Series M note holders have converted $660,000 out of a total of $678,000 debentures and exercised a total of 13,200,000 common share-purchase warrants out of a possible 13,560,000 warrants, for total proceeds of $1,320,000.  As per the terms of the debenture, the remaining warrant options have expired.

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

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

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

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

5.           EQUITY PRIVATE PLACEMENT: On June 15, 2007 the Company completed a private placement issuance of 2,992,000 common shares, at $0.15 per share common share, to holders of $1,360,000 of the Series G secured subordinated notes, in payment of the related accrued interest on $1,360,000 of the Series G secured subordinated notes of $449,000.

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

7.           SHARE PURCHASE AGREEMENT: On May 18, 2006, the Company entered into a share purchase agreement with ADB Systemer Holdings Inc. to sell 100 percent of its shares in its Norwegian subsidiary ADB Systemer AS, (“ADB Systemer”) for NOK 15,000,000, orapproximately Canadian $2,687,000 in cash (the “Share Sale”).

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8.           SERIES J NOTES: On February 8, 2006, the Company completed a transaction resulting in the issuance of Series J secured subordinated notes with a face value of $755,000.  The Series J notes were issued to private investors including an amount totaling $105,000 issued to three directors/officers of the Company. The Series J notes mature February 8, 2011, have an annual interest rate of 11 percent and are convertible into equity units at a price of $0.15 per unit.  Interest for the first year is payable in shares of the Company with interest payable for the remaining term of the notes payable in cash upon the earlier of maturity and conversion.   Each equity unit consists of one common share and one share-purchase warrant with an exercise price of $0.20. The warrants expired on February 8, 2009. The afore-mentioned conversion provisions are subject to a four month and one day hold period.  The Series J notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

D.           Exchange Controls

As of the date hereof, we are not aware of any law, government decree or regulation in Canada restricting the export or import of capital or affecting the remittance of dividends, interest or other payments to a non-resident holder of our common shares, other than withholding tax requirements.

E.           Taxation

The following summary describes material Canadian federal income tax consequences generally applicable to a holder of our common shares who is not a resident of Canada, and who, for purposes of the Income Tax Act (Canada), (i) holds such shares as capital property and (ii) deals at arm’s length with us.  Generally, common shares will be considered capital property to a holder provided that such holder does not hold such securities in the course of carrying on a business and has not acquired such securities in a transaction or transactions considered to be a concern in the nature of trade which includes a transaction or transactions of the same kind and carried on in the same manner as a transaction or transactions of an ordinary trader or dealer in property of the same kind.

This summary is based upon the current provisions of the Income Tax Act and the regulations thereunder and on an understanding of the published administrative practices of the Canadian Customs and Revenue Agency. This summary does not take into account or anticipate any possible changes in law, or the administration thereof, whether by legislative, governmental or judicial action, except proposals for specific amendment thereto which have been publicly announced by the Canadian Minister of Finance prior to the date hereof.

This summary does not address all aspects of Canadian federal income tax law that may be relevant to shareholders based upon their particular circumstances, and does not deal with provincial, territorial or foreign income tax consequences, which might differ significantly from the consequences under Canadian federal income tax law.

Shareholders are advised to consult their tax advisors regarding the application of the Canadian federal income tax law to their particular circumstances, as well as any Canadian provincial, territorial or other tax consequences or any U.S. federal, state or local tax consequences or other foreign income tax consequences of the acquisition, ownership and disposition of our common shares.

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Taxation of Dividends

A holder of a common share who is not resident in Canada for purposes of the Income Tax Act will be subject to Canadian withholding tax on dividends paid or credited, or deemed under the Income Tax Act to be paid or credited, to the holder of the common share. The rate of withholding tax under the Income Tax Act on dividends is 25 percent of the amount of the dividend. Such rate may be reduced under the provisions of an applicable international tax treaty to which Canada is a party. Under the tax treaty that Canada has entered into with the United States, the rate of Canadian withholding tax applicable in respect of dividends paid or credited by a Canadian corporation to a shareholder resident in the United States, is generally reduced to 15 percent, or 5 percent in the case of a corporate holder which owns 10 percent or more of the voting shares. A foreign tax credit for the tax withheld may be available under applicable US tax law to a US holder against U.S. federal income tax liability.  Moreover, pursuant to Article XXI of the Canada-U.S. Treaty, an exemption from Canadian withholding tax generally is available in respect of dividends received by certain trusts, companies and other organizations whose income is exempt from tax under the laws of the United States.

Disposition of Common Shares

A non-resident holder of a common share will not be subject to tax under the Income Tax Act in respect of a capital gain realized on the disposition of a common share unless the common share constitutes or is deemed to constitute “taxable Canadian property” as defined in the Income Tax Act. Shares of a corporation that are listed on a prescribed stock exchange (which includes shares traded on certain U.S. stock exchanges, including the Nasdaq National Market), are generally not considered to be taxable Canadian property. However, such shares are considered taxable Canadian property in the hands of a non-resident holder if, at any time during the 60-month period immediately preceding disposition by the holder, 25 percent or more of our issued shares of any class were owned by the non-resident holder together with persons with whom the non-resident did not deal at arm’s length.

An interest in or option in respect of common shares or other securities convertible into or exchangeable for common shares could constitute taxable Canadian property if the common shares that could be acquired upon the exercise of the option, the conversion or exchange rights or in which there is such interest are themselves taxable Canadian property.  Taxable Canadian property also includes any common share held by a non-resident if the non-resident used the common share in carrying on a business (other than an insurance business) in Canada, or, if the non-resident is a non-resident insurer, any common share that is its “designated insurance property” for the year. A non-resident whose common shares constitute or are deemed to constitute taxable Canadian property will realize upon the disposition or deemed disposition of a common share, a capital gain (or a capital loss) to the extent that the proceeds of disposition are greater than (or less than) the aggregate of the adjusted cost base to the holder of a common share and any reasonable costs of disposition.

One-half of any capital gain realized by a holder (a taxable capital gain) will be included in computing the holder’s income. One-half of any capital loss realized by a holder may, subject to certain restrictions applicable to holders that are corporations, normally be deducted from the holder’s taxable capital gains realized in the year of disposition, the three preceding taxation years or any subsequent taxation years, subject to detailed rules contained in the Income Tax Act.

A purchase by us of our common shares (other than a purchase of our common shares on the open market in a manner in which shares would normally be purchased by any member of the public in the open market) will give rise to a deemed dividend under the Income Tax Act equal to the difference between the amount we paid on the purchase and the paid-up capital of such shares determined in accordance with the Income Tax Act. The paid-up capital of such shares may be less than the cost of such shares to the holder. Any such dividend deemed to have been received by a non-resident holder will be subject to non-resident withholding tax as described above. The amount of any such deemed dividend will reduce the proceeds of disposition of the common share to the non-resident holder for the purpose of computing the amount of the non-resident holder’s capital gain or loss under the Income Tax Act.

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Even if the common shares constitute taxable Canadian property to a non-resident holder and their disposition would give rise to a capital gain, an exemption from tax under the Income Tax Act may be available under the terms of an applicable international tax treaty to which Canada is a party. A holder resident in the United States for purposes of the Canada-U.S. Treaty will generally be exempt from Canadian tax in respect of a gain on the disposition of common shares provided that the value of the common shares is not derived principally from real property situated in Canada. Our common shares would qualify for this exemption, however Article XIII paragraph 5 of the Canada-U.S. Treaty provides that the treaty exemption does not apply where the U.S. resident holder was an individual who was a Canadian resident for 120 months during any period of 20 consecutive years preceding the time of the sale and was resident in Canada at any time during the ten years immediately preceding the sale and owned the shares at the time he/she ceased to be resident in Canada. If the exemption from such Canadian tax in respect of such gain is not available under the Canada-U.S. Treaty, a foreign tax credit may be available under applicable US tax law for U.S. federal income tax purposes. Non-residents are advised to consult their tax advisers with regard to the availability of a treaty exemption.

U.S. Federal Income Tax Considerations

The following summary describes certain material United States federal income tax consequences arising to U.S. Holders (as defined below) from the purchase, ownership and sale of common shares. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, final, temporary and proposed United States Treasury Regulations, revenue rulings and administrative pronouncements of the Internal Revenue Service, and court decisions, all as in effect as of the date of this Annual Report and all of which are subject to change, possibly on a retroactive basis.

This summary does not address the considerations that may be applicable to any particular U.S. Holder based on such U.S. Holder's particular circumstances nor to particular classes of shareholders (including but not limited to financial institutions, broker-dealers, insurance companies, real estate investment trusts, regulated investment companies, persons who have elected mark-to-market accounting, tax-exempt organizations, persons who hold ordinary shares as part of a straddle, "hedge" or "conversion transaction" with other investments, persons who own (directly, indirectly or through attribution) 10 percent or more of our Company's outstanding voting shares, persons whose functional currency is not the U.S. dollar, persons who are not citizens or residents of the United States, foreign corporations, foreign partnerships or foreign estates or trusts, or persons who acquired their common shares pursuant to the exercise of employee stock options or rights or otherwise as compensation). Additionally, the discussion does not consider the tax treatment of persons who hold common shares through a partnership or other pass-through entity.  The summary does not discuss United States federal alternative minimum tax; foreign, state, or local taxes; nor the possible application of United States federal non-income taxes (e.g., gift or estate tax).  This summary considers only U.S. Holders that will own their common shares as capital assets.

This summary is addressed only to a holder of common shares who is (i) a citizen or resident of the United States, as defined under United States tax laws, (ii) the trust was in existence on August 20, 1996 and a corporation organized in the United States or under the laws of the United States or any state thereof, (iii) an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of source, or (iv) a trust, if (1) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) the trust has a valid election in effect under applicable United States Treasury Regulations to be treated as a U.S. person (each, a "U.S. Holder"). This summary is for general information purposes only and does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase common shares.

Each shareholder should consult with such shareholder's own tax advisor as to the particular tax consequences to such shareholder of the purchase, ownership and sale of their common shares, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.

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Circular 230 Disclosure

Any tax statement made herein regarding any U.S. federal tax is not intended or written to be used, and cannot be used, by any taxpayer for purposes of avoiding any penalties.  Any such statement herein is written in connection with the marketing or promotion of the transaction to which the statement relates.  Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Treatment of Dividend Distributions

Subject to the discussion below under "Tax Status Of The Company”, a distribution by our Company to a U.S. Holder in respect of the common shares (including the amount of any Canadian taxes withheld thereon) will generally be treated for United States federal income tax purposes as a dividend to the extent of our Company's current and accumulated earnings and profits, as determined under United States federal income tax principles. To the extent, if any, that the amount of any such distribution exceeds our Company's current and accumulated earnings and profits, as so computed, it will first reduce the U.S. Holder's tax basis in the common shares owned by him, and to the extent it exceeds such tax basis, it will be treated as capital gain from the sale of common shares.

While it is not anticipated that our Company will pay dividends in the foreseeable future, the gross amount of any distribution from our Company received by a U.S. Holder which is treated as a dividend for United States federal income tax purposes (before reduction for any Canadian tax withheld at source) will be included in such U.S. Holder's gross income as ordinary income and generally will not qualify for the dividends received deduction applicable in certain cases to United States corporations. If you are an individual, dividends that we pay you through 2010 will be subject to tax at long-term capital gain rates, provided certain holding period and other requirements are satisfied and provided that in the year such dividends are paid, or any preceding taxable year, we are not a  controlled foreign corporation or a passive foreign investment company (as discussed below).

For United States federal income tax purposes, the amount of any dividend paid in Canadian dollars by our Company to a U.S. Holder will equal the U.S. dollar value of the amount of the dividend paid in Canadian dollars, at the exchange rate in effect on the date of the distribution, regardless of whether the Canadian dollars are actually converted into U.S. dollars at that time. Canadian dollars received by a U.S. Holder will have a tax basis equal to the U.S. dollar value thereof determined at the exchange rate on the date of the distribution. Currency exchange gain or loss, if any, recognized by a U.S. Holder on the conversion of Canadian dollars into U.S. dollars will generally be treated as U.S. source ordinary income or loss to such holder. U.S. Holders should consult their own tax advisors concerning the treatment of foreign currency gain or loss, if any, on any Canadian dollars received as a distribution.

A U.S. Holder generally will be entitled to deduct any Canadian taxes withheld from dividends in computing United States taxable income, or to credit such withheld taxes against the United States federal income tax imposed on such U.S. Holder's dividend income. No deduction for Canadian taxes may be claimed, however, by an individual (noncorporate) U.S. Holder that does not itemize deductions. The amount of foreign taxes for which a U.S. Holder may claim a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis. Distributions with respect to common shares that are taxable as dividends will generally constitute foreign source income for purposes of the foreign tax credit limitation. The total amount of allowable foreign tax credits in any year generally cannot exceed regular U.S. tax liability for the year attributable to foreign source taxable income. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by our Company with respect to the common shares will generally constitute "passive income." Foreign income taxes exceeding a shareholder's credit limitation for the year of payment or accrual of such tax can be carried back for one taxable year and forward for ten taxable years, subject to the credit limitation applicable in each of such years.

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Sale or Exchange of a Common Share

Subject to the discussion below under "Tax Status Of The Company", the sale or exchange by a U.S. Holder of a common share generally will result in the recognition of gain or loss by the U.S. Holder in an amount equal to the difference between the amount realized and the U.S. Holder's basis in the common share sold. Such gain or loss will be capital gain or loss provided that the common share is a capital asset in the hands of the holder. The gain or loss realized by an individual (noncorporate) U.S. Holder on the sale or exchange of a common share will be long-term capital gain or loss subject to a preferential rate of tax if the common share had been held for more than one year.  If the common share had been held by such individual U.S. Holder for not more than one year, such gain will be short-term capital gain. The deductibility of a capital loss recognized on the sale, exchange or other disposition of common shares is subject to limitations. A U.S. Holder that receives foreign currency upon disposition of common shares and subsequently converts the foreign currency into U.S. dollars generally will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar. U.S. Holders should consult their own tax advisors regarding treatment of any foreign currency gain or loss on any Canadian dollars received in respect of the sale, exchange or other disposition of common shares.

Tax Status of the Company

Controlled Foreign Corporations.  A non-US company generally will be a “controlled foreign corporation” under Section 957 of the Internal Revenue Code (a “CFC”) if more than 50 percent of its total voting power or the total value of its outstanding shares is owned, directly or indirectly, by citizens or residents of the U.S., domestic partnerships, domestic corporations, domestic estates, or domestic trusts (each as defined in Section 7701(a)(30) of the Internal Revenue Code), each of which own, directly or indirectly, 10 percent or more of the total voting power of the outstanding shares of the company (a “10 percent Shareholder”).

If our Company is a CFC, a 10 percent Shareholder generally will be subject to current U.S. federal income tax with respect to (a) such 10 percent Shareholder’s pro rata share of the “subpart F income” (as defined in Section 952 of the Internal Revenue Code) of our Company and (b) such 10 percent Shareholder’s pro rata share of the earnings of our Company invested in “United States property” (as defined in Section 956 of the Internal Revenue Code).  In addition, under Section 1248 of the Internal Revenue Code, any gain recognized on the sale or other taxable disposition of the common shares by a U.S. Holder that was a 10 percent Shareholder at any time during the five-year period ending with such sale or other taxable disposition generally will be treated as a dividend to the extent of the “earnings and profits” of our Company that are attributable to such common shares.

The Company does not believe that it currently is a CFC.  However, there can be no assurances that our Company will not be a CFC for the current or any future taxable year.

Passive Foreign Investment Companies.  A non-U.S. company will be a passive foreign investment company if 75 percent or more of its gross income (including the pro rata share of the gross income of any company (United States or foreign) in which the company is considered to own 25 percent or more of the shares (determined by market value)) in a taxable year is passive income. Alternatively, the company will be considered to be a passive foreign investment company if at least 50 percent of the value of the company's assets (averaged over the year) (including the pro rata share of the value of the assets of any company in which the company is considered to own 25 percent or more of the shares (determined by market value)) in a taxable year are held for the production of, or produce, passive income. Passive income generally includes, among others, interest, dividends, royalties, rents and annuities.

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If our Company is a passive foreign investment company for any taxable year, a U.S. Holder, in the absence of an election by such U.S. Holder to treat our Company as a "qualified electing fund" (a "QEF election"), as discussed below, would, upon certain distributions by our Company and upon disposition of the common shares at a gain, be liable to pay tax at the highest tax rate on ordinary income in effect for each period to which the income is allocated, plus interest on the tax, as if the distribution or gain had been recognized ratably over the days in the U.S. Holder's holding period for the common shares during which our Company was a passive foreign investment company. Additionally, if our Company is a passive foreign investment company, U.S. Holders who acquire shares from U.S. decedents would be denied the normally available step-up of the income tax basis for such common shares to fair market value at the date of death and instead would have a tax basis equal to the U.S. decedent's basis, if lower.

If our Company is treated as a passive foreign investment company for any taxable year, U.S. Holders should consider whether to make a QEF election for United States federal income tax purposes. If a U.S. Holder has a QEF election in effect for all taxable years that such U.S. Holder has held the common shares and our Company was a passive foreign investment company, distributions and gain will not be recognized ratably over the U.S. Holder's holding period or subject to an interest charge, gain on the sale of common shares will be characterized as capital gain and the denial of basis step-up at death described above would not apply. Instead, each such U.S. Holder is required for each taxable year that our Company is a qualified electing fund to include in income a pro rata share of the ordinary earnings of our Company as ordinary income and a pro rata share of the net capital gain of our Company as capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. In order to comply with the requirements of a QEF election, a U.S. Holder must receive from our Company certain information. We intend to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF election in the event our Company is classified as a passive foreign investment company. The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the Internal Revenue Service.  A shareholder makes a QEF election by attaching a completed IRS Form 8621 (including the passive foreign investment company annual information statement) to a timely filed United States federal income tax return or, if not required to file United States Federal income tax return, by filing such form with the IRS Service Center listed on IRS Form 8621. Even if a QEF election is not made, a shareholder in a passive foreign investment company who is a U.S. Holder must file a completed IRS Form 8621 every year.

As an alternative to making a QEF election, a U.S. Holder may elect to make a mark-to-market election with respect to the common shares owned by him if such stock qualifies as “marketable stock.” To qualify as “marketable stock,” the stock must be regularly traded on a qualified exchange.  Under applicable Treasury regulations, a “qualified exchange” includes a national securities exchange that is registered with the SEC or the national market system established under the Securities Exchange Act of 1934 and certain foreign securities exchanges.  Under applicable Treasury Regulations, PFIC stock traded on a qualified exchange is regularly traded on such exchange for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.  We cannot assure U.S. Holders that our common shares will be treated as regularly traded stock on a qualified exchange. If the mark-to-market election were made, then the rules set forth above would not apply for periods covered by the election. Under such election, a U.S. Holder includes in income each year an amount equal to fair market value of the common shares owned by such U.S. Holder as of the close of the taxable year over the U.S. Holder's adjusted basis in such shares. The U.S. Holder would be entitled to a deduction for the excess, if any, of such U.S. Holder's adjusted basis in his common shares over the fair market value of such shares as of the close of the taxable year; provided, however, that such deduction would be limited to the extent of any net mark-to-market gains with respect to the common shares included by the U.S. Holder under the election for prior taxable years. The U.S. Holder's basis in his common shares is adjusted to reflect the amounts included or deducted pursuant to this election. Amounts included in income pursuant to the mark-to-market election, as well as gain on the sale or exchange of the common shares, will be treated as ordinary income. Ordinary loss treatment applies to the deductible portion of any mark-to-market loss, as well as to any loss realized on the actual sale or exchange of the common shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such common shares. The mark-to-market election applies to the tax year for which the election is made and all later tax years, unless the common shares cease to be marketable or the IRS consents to the revocation of the election.

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We have not determined whether our Company may have been a passive foreign investment company during 2008. There can be no assurance that our Company will not be classified as a passive foreign investment company in 2008, or thereafter, because the tests for determining passive foreign investment company status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to this determination. U.S. Holders who hold common shares during a period when our Company is a passive foreign investment company will be subject to the foregoing rules, even if our Company ceases to be a passive foreign investment company, subject to certain exceptions for U.S. Holders who made a QEF election or mark-to-market election. U.S. Holders are urged to consult with their own tax advisors about making a QEF election or mark-to-market election and other aspects of the passive foreign investment company rules.

Back-Up Withholding and Information Reporting

U.S. Holders generally are subject to information reporting requirements and back-up withholding with respect to dividends paid on common shares, or proceeds paid from the disposition of common shares, unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption.

The amount of any back-up withholding will be allowed as a credit against a U.S. Holder’s federal income tax liability and may entitle such holder to a refund, provided that certain required information is furnished to the IRS.

F.           Dividends and Paying Agents

Not applicable.

G. Statements by Experts

Not applicable.

H. Documents on Display

We have filed this Annual Report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Statements made in this Annual Report as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to this Annual Report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.

We are subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission.  Reports and other information which we file with the Securities and Exchange Commission, including this Annual Report on Form 20-F, may be inspected and copied at the public reference facilities of the Securities and Exchange Commission at:

100F Street, N.E

Washington D.C.  20549

You can also obtain copies of this material by mail from the Public Reference Section of the Securities and Exchange Commission, 100F Street, N.E., Washington, D.C. 20549, at prescribed rates.  Additionally, copies of this material may also be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov.  The Commission’s telephone number is 1-800-SEC-0330.

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I. Subsidiary Information

Not applicable.

ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.

ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13 - DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

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

Not applicable.

ITEM 15 - CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2008.  Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Corporate Controller, concluded that, as of that date, the Company’s disclosure controls and procedures were effective to give reasonable assurance that the information required to be disclosed by the Company in our corporate filings is recorded, processed, summarized and reported within the required time periods.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.

The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the Chief Executive Officer and Corporate Controller, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of managementand directors of the registrant; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the design and operating effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.  In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, management believes that, as of December 31, 2008, the Company’s internal control over financial reporting was effective.

Management is aware that there is a lack of segregation of duties due to the small number of employees dealing with general, administrative and financial matters.  However, management has decided that considering the employees involved and the compensating control procedures in place, including substantive periodic review of financial statements by the Audit Committee to ensure that internal controls over financial reporting and disclosure controls and procedures are effective, the risks associated with segregation are insignificant and the potential benefits of adding employees to more clearly segregate duties do not justify the expenses associated with such increase.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There has been no changes in the Company's internal controls over financial reporting during the year ended December 31, 2008, that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

ITEM 16 - [RESERVED]

ITEM 16A - AUDIT COMMITTEE FINANCIAL EXPERT

The Company’s Board of Directors has determined that it has at least one audit committee financial expert serving on its audit committee.  The Board of Directors has determined that Darroch Robertson is an audit committee financial expert.

ITEM 16B - CODE OF ETHICS

The Company has adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees. The Code of Business Conduct and Ethics is attached as an exhibit to this report. We did not amend, modify or grant any waiver from any provision of our Code of Business Conduct and Ethics during the last fiscal year.

ITEM 16C - PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees billed for each of the last two fiscal years for professional services rendered by our auditors for the audit of our annual financial statements and other services.

73

FEES OF AUDITORS

Year	Audit Fees(1)	Tax Fees(2)
2007	$178,000	$3,000
2008	$174,500	$3,000

(1) Audit Fees represent costs associated with the audit of the Company’s annual consolidated financial statements including review of securities filings and review of the Company’s interim consolidated Financial Statements.

(2) Tax Fees represent costs associated with the preparation of the Company’s annual tax filings, tax planning and advice.

Before the Company’s auditor is engaged by the Company to render audit or non-audit services, the engagement is approved by the Audit Committee.  100 percent of the audit and non-audit services provided by the Company’s auditor were pre-approved by the Audit Committee pursuant to the Audit Committee’s pre-approval policy.

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

Not applicable.

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

During the last fiscal year, there were no purchases by or on behalf of the Company or any affiliated purchaser of any class of the Company’s equity securities registered under Section 12 of the Securities Exchange Act.

PART III

ITEM 17- FINANCIAL STATEMENTS

Not applicable.

ITEM 18 - FINANCIAL STATEMENTS

See the Index to Consolidated Financial Statements accompanying this report on page F-1.

ITEM 19 - EXHIBITS

Exhibits filed as part of this Annual Report.

1.1	Articles of Arrangement of the Company filed with the Ontario Ministry of Consumer and Business Services on October 31, 2002.(1)
1.2	By-laws of the Company.(2)
2.1	Form of Convertible Secured Note.(6)
2.2	Registration Rights Agreement, dated as of June 16, 2000, between Bid.Com International and Acqua Wellington Value Fund Ltd.(4)
2.3	Form of Warrant issued or issuable upon exercise of Convertible Secured Notes.(6)

74

4.1	Salary Protection Letter, dated February 12, 1997, between the Company and Jeffrey Lymburner.(3)
4.2	Option Agreement dated February 19, 2001 between Bid.Com International Inc. and Wendell Willick.(5)
4.3	Amendment to Option Agreement dated May 2, 2001 between Bid.Com International Inc. and Wendell Willick.(5)
4.4	Board Support Agreement, dated as of September 7, 2001 between Bid.Com International Inc. and ADB Systemer ASA.(5)
4.5	Board Representation Agreement, dated as of September 7, 2001 between Bid.Com International Inc. and LimeRock Partners LLC, Jan Pedersen, Sandnes Investering, Rogaland Investering, AIG Private Bank Ltd. and Karstein Gjersvik.(5)
4.6	Employment Agreement, dated as of September 18, 2001 between Bid.Com International Inc. and Jan Pedersen.(5)
4.7	Subscription Agreement, dated as of April 25, 2002, between ADB Systems International Inc. and Stonestreet Limited Partnership.(5)
4.8	Arrangement Agreement, dated as of August 23, 2002, between ADB Systems International Inc. and ADB Systems International Ltd.(1)
4.9	General Conveyance and Assumption Agreement, dated August 23, 2002, between ADB Systems International Inc. and ADB Systems International Ltd.(2)
4.10	Loan Agreement, dated August 23, 2002, and Loan Agreement Amending Agreement entered into as of August 30, 2002 among The Brick Warehouse Corporation, ADB Systems International Inc. and ADB Systems International Ltd.(6)
4.11	Form of Supply Services and Licensing Agreement, dated August 23, 2002, among The Brick Warehouse Corporation, ADB Systems International Inc., and ADB Systems International Ltd.(6)
4.12	Form of General Security Agreement, dated as of April 30, 2002, between ADB Systems International Inc. and each of Stonestreet Limited Partnership and Greenwich Growth Fund Ltd.(6)
4.13	Form of Subscription Agreement, dated August 30, 2002, between ADB Systems International Inc. and Stonestreet Limited Partnership.(6)
4.14	Form of Subscription Agreement, dated August 30, 2002, between ADB Systems International Inc. and Greenwich Growth Fund Ltd.(6)
4.15	Co-operation Agreement made as of August 23, 2002 between ADB Systems International Inc., ADB Systems International Ltd. and The Brick Warehouse Corporation.(6)
4.16	Agency Agreement dated June 15, 2004 between ADB Systems International Ltd. and First Associates Investments Inc.(7)
4.17	General Security Agreement dated as of May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership.(7)
4.18	Form of Subscription Agreement between ADB Systems International Ltd. and First Associates Investments Inc.(7)
4.19	Subscription Agreement dated May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership.(7)
4.20	Formof Subscription Agreement for Equity Private Placements(8)

75

4.21	Form of Subscription Agreement for Series I Convertible Secured Debenture. (11)
4.22	Form of Series I Convertible Secured Debenture.(11)
4.23	Form of Subscription Agreement for Series J Convertible Secured Debenture. (11)
4.24	Form of Series J Convertible Secured Debenture. (11)
4.25	Share Purchase Agreement between ADB Systems International Ltd. and ADB Systemer Holding as, dated May 18, 2006. (9)
4.26	The Audit Committee’s Charter*
4.27	Form of Subscription Agreement for June 15, 2007 Equity Private Placement
4.28	Form of Subscription Agreement for Series K Convertible Secured Debenture
4.29	Form of Series K Convertible Secured Debenture
4.30	Form of Subscription Agreement for Series L Convertible Secured Debenture*
4.31	Form of Subscription Agreement for Series M Convertible Secured Debenture*
4.32	Form of Subscription Agreement for Series N Convertible Secured Debenture*
8.1	List of Subsidiaries*
11.1	Code of Business Conduct and Ethics of Northcore Technologies Inc.(10)
12. 1	CEO Certification.*
12. 2	Corporate Controller Certification.*
13.1	Certification pursuant to 18 U.S.C. Section 1350.*
13.2	Certification pursuant to 18 U.S.C. Section 1350.*
14.1	Report of Independent Registered Public Accounting Firm*
14.2	Schedule of Valuation And Qualifying Accounts*

*	Filed herewith
(1)	Incorporated by reference from Exhibit 1 to the Company’s Current Report on Form 6-K, Filing No. 1 for the Month of November 2002, filed with the Securities and Exchange Commission on November 5, 2002.
(2)	Incorporated by reference from Exhibit 1.2 of Amendment No. 1 to the Company’s Registration Statement on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on March 30, 1999.
(3)	Incorporated by reference from Exhibit 3.27 of Amendment No. 1 to the Company’s Registration Statement on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on March 30, 1999.
(4)	Incorporated by reference from the Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on May 23, 2001.
(5)	Incorporated by reference from the Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on May 17, 2002.

76

(6)	Incorporated by reference from Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on May 20, 2003.
(7)	Incorporated by reference from Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on June 30, 2004.
(8)	Incorporated by reference from Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on June 30, 2005.
(9)	Incorporated by reference from Exhibit 99.6 to the Company’s Filing No. 1 for the Month of May on Form 6-K, File No. 001-14835 filed with the Securities and Exchange Commission on May 31, 2006.
(10)	Incorporated by reference from Exhibit 99.6 to the Company’s Filing No. 1 for the Month of March on Form 6-K, File No. 001-14835 filed with the Securities and Exchange Commission on March 30, 2007.
(11)	Incorporated by reference from Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835,  filed with the Securities and Exchange Commission on June 25, 2007.

77

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

	NORTHCORE TECHNOLOGIES INC.
	By:	-sd/- Duncan Copeland
		Name:	Duncan Copeland
		Title:	Chief Executive Officer
	By:	-sd/- Tam Nguyen
		Name:	Tam Nguyen
		Title:	Corporate Controller
Dated: March 30, 2009

78

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Consolidated Financial Statements for the years ended December 31, 2008, 2007, 2006,

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

MANAGEMENT’S REPORT

March 30, 2009

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

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

Duncan Copeland CEO	Tam Nguyen Controller

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of

Northcore Technologies Inc.

We have audited the accompanying consolidated balance sheets of Northcore Technologies Inc. (the "Company") and subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations and comprehensive income, deficit and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2008 and 2007 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with Canadian generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

On January 1, 2008, the Company adopted the new recommendations of The Canadian Institute of Chartered Accountants' Handbook Section 1535, Capital Disclosures, Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation.  The effect of those changes is discussed in note 3 to the consolidated financial statements.

Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 21 to the consolidated financial statements.

/s/  KPMG LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Canada

March 30, 2009

                                          

Northcore Technologies Inc. F-2

CONSOLIDATED BALANCE SHEETS December 31, 2008 and 2007 (in thousands of Canadian dollars)
	2008			2007
ASSETS
CURRENT
Cash	$	460		$	478
Accounts receivable		305			119
Deposits and prepaid expenses		28			38
		793			635
CAPITAL ASSETS (Note 5)		19			52
	$	812		$	687
LIABILITIES
CURRENT
Accounts payable	$	570		$	321
Accrued liabilities		378			256
Deferred revenue		30			52
Current portion of notes payable (Note 7)		382			378
Current portion of secured subordinated notes (Note 8)		1,125			-
		2,485			1,007
NOTES PAYABLE (Note 7)		-			205
SECURED SUBORDINATED NOTES (Note 8)		730			1,075
		3,215			2,287
SHAREHOLDERS’ DEFICIENCY
Share capital (Note 10)		104,676			104,495
Contributed surplus (Note 11)		2,161			2,099
Warrants (Note 12)		510			533
Stock options (Note 13)		1,389			1,346
Other options (Note 14)		193			193
Conversion feature on secured subordinated notes (Note 8)		2,280			991
Deficit		(113,612	)		(111,257	)
		(2,403	)		(1,600	)
	$	812		$	687

Going concern (Note 2)

Commitments and contingencies (Note 18)

Canadian and United States accounting policy differences (Note 21)

Subsequent event (Note 22)

On behalf of the Board:

Duncan Copeland CEO	Christopher Bulger Director

See accompanying notes to consolidated financial statements.

Northcore Technologies Inc. F-3

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Years ended December 31, 2008, 2007 and 2006

(in thousands of Canadian dollars, except per share amounts)

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

See accompanying notes to consolidated financial statements.

Northcore Technologies Inc. F-4

CONSOLIDATED STATEMENTS OF DEFICIT

Years ended December 31, 2008, 2007 and 2006

(in thousands of Canadian dollars)

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

See accompanying notes to consolidated financial statements.

Northcore Technologies Inc. F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2008, 2007 and 2006

(in thousands of Canadian dollars)

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

SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS

Interest paid $ 250 $ 16 $ 45

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

See accompanying notes to consolidated financial statements.

Northcore Technologies Inc. F-6

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

1.    DESCRIPTION OF BUSINESS

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

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

2.    GOING CONCERN

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

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

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

3.    SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation

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

Investment in Jointly Controlled Company

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

Northcore Technologies Inc. F-7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

Capital Assets and Amortization

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

Computer hardware	3 years
Computer software	1 year or life of the license
Furniture and fixtures	5 years
Leasehold improvements	shorter of useful life or life of the lease

Software Development Costs

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

Translation of Foreign Currencies

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

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

Loss Per Share

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

Revenue Recognition

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

Northcore Technologies Inc. F-8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

 Hosting Fees

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

Application Development Fees

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

Software License Revenue

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

• Persuasive evidence of an arrangement exists;

• Delivery has occurred;

• Fee is fixed or determinable; and

• Collectibility is probable.

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

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

Implementation, Training and Consulting Service Fees

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

Product Maintenance and Customer Support Fees

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

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

Deferred Revenue

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

Northcore Technologies Inc. F-9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

Deferred Charges

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

Secured Subordinated Notes

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

Financial Instruments

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

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

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

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

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

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

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

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

Northcore Technologies Inc. F-10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

Capital Disclosures

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

Stock-Based Compensation

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

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

Income Taxes

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

Use of Significant Accounting Estimates

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

UNADOPTED NEW ACCOUNTING PRONOUNCEMENTS

Goodwill and intangible assets:

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

Northcore Technologies Inc. F-11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

Business combinations:

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

International Financial Reporting Standards (“IFRS”)

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

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

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

4. DISCONTINUED OPERATIONS

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

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

Income Statement	2008		2007		2006
	(in thousands, except per share amounts)
Revenue	$	-	$	-	$	2,399
Income from operations		-		-		331
Gain from disposition of discontinued operations		-		-		1,791
Income from discontinued operations	$	-	$	-	$	2,122
Income per share from discontinued operations, basic and diluted	$	-	$	-	$	0.02

Northcore Technologies Inc. F-12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

5.    CAPITAL ASSETS

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

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

6.     TRANSACTIONS WITH RELATED PARTIES

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

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

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

7.     NOTES PAYABLE AND DEMAND LOAN

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

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

Northcore Technologies Inc. F-13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

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

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

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

8.   SECURED SUBORDINATED NOTES

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

Northcore Technologies Inc. F-14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

Northcore Technologies Inc. F-15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

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

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

Northcore Technologies Inc. F-16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

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

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

Northcore Technologies Inc. F-17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

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

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

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

Northcore Technologies Inc. F-18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

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

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

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

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

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

Northcore Technologies Inc. F-19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

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

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

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

Northcore Technologies Inc. F-20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

9.      INCOME TAXES

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

	2008			2007
	(in thousands)
FUTURE TAX ASSET
Tax losses carried forward	$	6,582		$	6,800
Difference in tax and accounting valuations
for capital assets and investments		69			89
		6,651			6,889
Valuation allowance		(6,651	)		(6,889	)
Future tax asset	$	-		$	-
PROVISION FOR INCOME TAXES
Income taxes at statutory rate	$	(789	)	$	(786	)
Foreign income affected at higher rates		-			(21	)
Change in enacted rates		106			1,241
Non-taxable income on inter-company debt forgiveness		-			(2,385	)
Non-deductible portion of capital loss		-			1,024
Non-deductible interest on subordinated notes		114			97
Expiry of losses in subsidiaries		790			-
Stock-based compensation not deductible for tax		12			28
Other, net		5			(64	)
		238			(866	)
Change to valuation allowance		(238	)		866
Provision for income taxes	$	-		$	-

Northcore Technologies Inc. F-21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

	Year	Amount
		(in thousands)
2009		$	1,408
2010			3,782
2014			3,047
2015			3,351
2026			2,588
2027			2,050
2028 Tax loss carry-forwards that do not expire			1,988 9,587
		$	27,801

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

10.           SHARE CAPITAL

a) Authorized

Unlimited number of common shares

Unlimited number of preference shares - issuable in series

b)  Outstanding Common Shares

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

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

c) Payment of Interest

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

Northcore Technologies Inc. F-22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

d) Rights Offering

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

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

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

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

e) Loss Per Share

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

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

Northcore Technologies Inc. F-23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

11.           CONTRIBUTED SURPLUS

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

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

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

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

12. WARRANTS

a) The following table summarizes the transactions within warrants.

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

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

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

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

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

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

Northcore Technologies Inc. F-24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

13. STOCK OPTIONS

a) Stock options are comprised of the following components:

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

b) Employee Stock Options

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

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

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

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

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

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

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

Northcore Technologies Inc. F-25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

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

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

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

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

14. OTHER OPTIONS

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

15. REVENUES

Revenues are comprised of the following:

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

Northcore Technologies Inc. F-26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

16. FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS

a) Financial Instruments

The Company has classified its financial instruments as follows:

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

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

b) Financial Risk Factors

Foreign Exchange Risk

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

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

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

Interest Rate Risk

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

Credit Risk

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

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

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

Northcore Technologies Inc. F-27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

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

Fair Value

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

Liquidity Risk

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

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

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

17.   CAPITAL DISCLOSURES

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

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

Northcore Technologies Inc. F-28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

18.   COMMITMENTS AND CONTINGENCIES

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

Year	Amount (in thousands)
2009	128

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

19.   SUPPLEMENTAL CASH FLOWS INFORMATION

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

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

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

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

20.   INVESTMENT IN JOINTLY CONTROLLED COMPANY

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

Northcore Technologies Inc. F-29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

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

21.   CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES

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

(a) Consolidated Financial Statements

Consolidated Balance Sheets

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

Northcore Technologies Inc. F-30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

   Consolidated Statements of Operations

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

(b)  Financial Instruments with Liability and Equity Elements

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

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

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

Northcore Technologies Inc. F-31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

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

(c)  Investment in Jointly Controlled Company

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

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

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

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

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

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

(e)  Impact of New Accounting Pronouncements

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

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

Northcore Technologies Inc. F-32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008, 2007 and 2006

(in Canadian dollars)

22.   SUBSEQUENT EVENT

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

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

Northcore Technologies Inc. F-33