UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


Form
10-K







(Mark
One)


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




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from 
to


Commission
File Number 000-24911


BRAINTECH,
INC.


(Name
of small business issuer in its charter)







Nevada
            98-0168932(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)




1750
Tysons Boulevard, Suite 350


McLean,
Virginia 22102


(Address
of principal executive offices) (Zip code)




(703)
637-9754


(Issuer’s
telephone number)





Securities
registered under Section 12(b) of the Exchange Act:


None


(Title
of class)




Securities
registered under Section 12(g) of the Exchange Act:


Common
Stock, $0.001 Par Value


(Title
of class)







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


Yes.    ̈No.   x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.


Yes.    ̈No.   x




Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes.   xNo.    ̈









Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part iii of this Form 10-K
or any amendment to this 10-K.  ̈









Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.






Large
      accelerated filer  ̈
                                
                                Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
                                
                                Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes.    ̈No.   x




The
aggregate market value of the registrant’s common stock, $0.001 par value per
share, held by non-affiliates of the registrant on June 30, 2008, the last
business day of the registrant’s most recently completed second fiscal quarter,
was $8,649,608 (computed by reference to the price at which the common equity
sold, or the average bid and asked price of such common equity, on that
date).  Shares of the registrant’s common stock held by each officer
and director and each person known to the registrant to own 10% or more of the
outstanding voting power of the registrant have been excluded in that such
persons may be deemed to be affiliates.  This determination of
affiliate status is not determined for other purposes.




As March
26, 2009, there were 58,662,245 shares of the registrant’s common stock, par
value $0.001 per share, were outstanding.






DOCUMENTS
INCORPORATED BY REFERENCE


No
documents required pursuant to Part III of this report are incorporated by
reference.







BRAINTECH,
INC.




ANNUAL
REPORT ON FORM 10-K




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008




TABLE
OF CONTENTS




PART
      I
                  PageItem 1.
                  Business
                  1Item 1A.
                  Risk Factors
                  6Item 2.
                  Properties
                  11Item 3.
                  Legal Proceedings
                  11Item 4.
                  Submission of Matters to a vote of Security
      Holders
                  11PART
      IIItem 5.
                  Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                  12Item 6.
                  Selected Financial Data
                  12Item 7.
                  Management’s Discussion and Analysis of Financial
      Condition and results of Operations
                  13Item 7A.
                  Quantitative and Qualitative Disclosures About market
      Risk
                  20Item 8.
                  Financial statements and Supplementary
      Data
                  20Item 9.
                  Changes in and Disagreements With Accountants on
      Accounting and Financial Disclosure
                  20Item 9A.
                  Controls and Procedures
                  20Item 9A(T).
                  Controls and Procedures
                  21Item 9B.
                  Other Information
                  21PART
      IIIItem 10.
                  Directors, Executive Officers and Corporate
      Governance
                  22Item 11.
                  Executive Compensation
                  24Item 12.
                  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                  27Item 13.
                  Certain Relationships and Related Transactions, and
      Director Independence
                  29Item 14.
                  Principal Accounting Fees and Services
                  31PART
      IVItem 15.
                  Exhibits, Financial Statement Schedules
                  32





SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS




This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. Forward-looking statements deal with our current plans,
intentions, beliefs and expectations and relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as “may”, “will”, “should”, “intends”, “expects”,
“plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or
“continue” or the negative of these terms or other comparable
terminology.




Forward-looking
statements are only predictions and involve known and unknown risks,
uncertainties and other factors that may cause our actual results in future
periods to differ materially from what is currently anticipated. We make
cautionary statements throughout this report and the documents we have
incorporated by reference, including those stated under the heading “Risk
Factors”. You should read these cautionary statements as being applicable to all
related forward-looking statements wherever they appear in this report, the
materials referred to in this report, and the materials incorporated by
reference into this report.




We cannot
guarantee our future results, levels of activity, performance or achievements.
Neither we nor any other person assumes responsibility for the accuracy and
completeness of these statements. We are under no duty to update any of the
forward-looking statements after the date of this report.




Except
where specified otherwise, our financial statements are stated in United States
Dollars (US$) and are prepared in accordance with United States Generally
Accepted Accounting Principles. We have a presence in Canada, and as a result,
certain of our transactions (including payment of salaries to our Canadian
employees) are completed in Canadian dollars (“Cdn$”). For purposes of this
Annual Report on Form 10-K, Canadian dollar amounts have been converted to
United States dollars at an exchange rate of Cdn$1.00 = US$0.94, being the
average exchange rate during the year ended December 31, 2008.










PART
I.







ITEM 1.
            DESCRIPTION
      OF BUSINESS






Overview




We were
incorporated in Nevada on March 4, 1987, and since January 3, 1994 our
corporate name has been Braintech, Inc. Our principal executive offices are
located at 1750 Tysons Boulevard, Suite 350, McLean Virginia, USA
22102.  Our telephone number is (703) 637-9780 and our Internet
address is www.braintech.com.




When used
in this Annual Report on Form 10-K, except as specifically noted otherwise, the
term “Braintech” refers to Braintech, Inc. only, and the terms “Company,” “we,”
“our,” “ours” and “us” refer to Braintech, Inc. and its wholly-owned
subsidiaries.




Business
of Issuer




Our
business consists of the research and development, supply, commercialization,
training, maintenance and support of machine vision and vision guidance
technologies, products and services for industrial robots and other types of
machines and material handling in the industrial, and government markets. The
field of machine vision and vision guided robotics requires our vision software
systems to incorporate advanced robotic engineering and programming technology
for optimal integration with manufacturing automation systems.




New
Beginnings and Direction: the Transition





Since his
appointment as our Chief Executive Officer in November 2007, Mr. Weidinger has
developed and implemented a new business plan that redefines the Company’s
markets, in order to better utilize its technology and to create operating
leverage. His management has refocused the Company’s efforts from a pure
research and development company in Vancouver, British Columbia with one
customer in one niche market to an operating company driven by marketing,
sales and business development in several vertical markets with a focus on the
commercialization of our technology among a broad spectrum of machine vision
potential customers including the United States Government. Our new mission is
to “touch the customer” by establishing relationships with potential customers
in order to better understand their problems and solve them more efficiently. To
that end, the Company opened new offices near Washington, DC and Detroit,
Michigan to focus on developing new business in the government and industrial
markets.  The Company is also considering the transition to a
recurring revenue license model and is seeking a robotics-oriented integrator or
“OEM” for such purpose.  There is no certainty as to the sales cycle
of developing, proposing and executing sales contracts with these new customers
in these new markets, or as to the sales cycle in our traditional automotive
market.  Additionally, we have designed, created and launched a new
web site based upon interactive content. The goal of the new web site is to
increase our brand awareness and awareness of our technology.




Principal
Products and Services




Our
software technologies, products and services are suitable for both product
inspection and location analysis applications, and the projects we have
completed have involved both applications. The vision guided robotic systems we
have sold to date are used mainly in the manufacture and assembly of automobiles
and automotive parts, but we believe our technologies are capable of developing
systems that can be applied in a large number of industrial and government
sectors.  We are currently researching the alternative markets of
solar, fuel cell and battery, wind turbine and hybrid and electric for the sale
of our software products.




We develop
machine vision and vision guided robotic software systems based on our
customers’ particular needs. Solutions that we have delivered range from single
and multi-camera 2D systems to single and multi-camera 3D systems.




eVisionFactory




eVisionFactory
(eVF) is our proprietary software platform which is intended to provide a
comprehensive software environment for the design, development, operation, and
support of vision guided robotic (VGR) systems.




Our target
customers in the industrial arena, primarily industrial system integrators, use
eVF to develop custom vision guided robotic systems all based on a common
software platform. We have developed comprehensive training procedures that
allow other users, such as integrators and channel partners, to develop
customized vision guided robotic systems. We include a version of eVF in all of
the vision guidance systems that we deliver.




The eVF
software environment is designed to facilitate the expeditious and economical
development of custom VGR systems. eVF stores and manipulates libraries of
routines to perform the various functions that can be included within a vision
guided robotic system. eVF includes standardized interfaces to which all of the
routines are adapted, so that the routines can be combined easily and
efficiently into an integrated system. eVF permits the operator to “drag and
drop” individual routines from particular libraries to a window opened for the
system under development. Once added to the system window, the routines are
automatically linked together through the standardized eVF interface. eVF thus
eliminates the need to write specialized computer code to link individual
routines making it substantially easier for engineers and technicians to develop
and deploy VGR solutions.




1




eVF is
installed on a user’s computer system or controller as part of a completed
vision guided robotic system. After installation, the system can be modified or
upgraded, by altering or adding to the software components of the system, or by
augmenting the data used by the system. eVF will permit users to make minor
modifications directly. We plan to supply major modifications or upgrades at an
extra charge.




eVF also
includes maintenance and support features which monitor the performance of a
vision guidance system to detect errors, and to notify the operator when an
error has been detected.




The
majority of software algorithms within eVF, which are aimed at location various
objects and subsequently guiding robots to perform various operations, have been
developed by and are proprietary to us. eVF also uses a number of basic image
processing and feature finding routines which are sourced from and are
proprietary to a number of vision library vendors or are available as open
source libraries in the public domain.




A more
detailed description of our unique eVF software technology follows:




Single Camera 3D (SC3D) (Patent
Protected): SC3D is one of our principal vision guidance technologies. We
developed our SC3D technology in response to a major automaker’s request for a
robust 3D robot guidance system for automotive part handling applications.
Typically, a CCD camera is integrated into the robot gripper. The robot moves to
position the camera near the part to be handled by the robot. A single image of
the part is captured and the SC3D technology performs its analysis and
determines the position of the part in 3D space, for example, its position on
the on x, y, z axis and its orientation (roll, pitch, and yaw angles). These
values are transmitted to the robot controller and this information is used to
adjust the position of its gripper to match the 3D coordinates of the part and
proceeds to intercept, grasp and manipulate the part as required by the
particular task at hand. The complete process takes less than one second. In
extreme cases, where the part is heavily tilted to one side, the vision guidance
system can perform two measurements (coarse and then fine) to achieve higher
accuracy and reliability. The vision guidance system makes this decision
automatically. The SC3D technology can also be used with a stationary camera
configuration. The SC3D vision system can keep track of multiple part models and
multiple part features so that the user can re-configure the vision system for
use with different parts. Applications for SC3D include robot-handling
applications involving precisely manufactured parts such as engine heads and
manifolds. The system provides the necessary accuracy for robots transferring
parts to conveyors or placing parts precisely in a fixture. The system is not
suitable for flexible parts where dimensions vary significantly such as plastic
blow-molded products.




AutoCal-3D: AutoCal-3D is a
fully automated process for 3D calibration of a stationary or robot-mounted
camera. Calibration refers to the process whereby the mathematical relationship
between pixel coordinates of objects in digital images and real-world
coordinates such as inches and millimeters is calculated. In contrast to the
manual calibration process, AutoCal-3D eliminates all steps involving operator
input thereby increasing both efficiency and accuracy.




AutoTrain-3D: AutoTrain-3D is
a fully automated process that facilitates the introduction or “training” of new
parts into a given eVF-based system running the SC3D technology.




AccuTest:AccuTest allows
operators to rapidly and accurately validate the robustness and reliability of a
vision guided robotic system before and during field deployment.




Xi2D (Single/Multi-Camera
2D): Xi2D consists of a single or multi-camera arrangement that views
various features of interest.




DD3D (Direct Depth 3D): DD3D
uses stereo vision for direct measurement and consists of a binocular camera
arrangement to view a part or feature.




SR3D (Surround Vision 3D) (Patent
Protected): SR3D is similar to SC3D but involves multiple cameras
configured to view different areas of the same part.




IDM 2.5D (Inferential Depth
Measurement) (Patent Pending) : IDM 2.5D is targeted for processes that
do not require or allow for complete 3D part location variance, but that are
more complex than basic 2D tasks. IDM 2.5D exploits visual cues such as size and
shape variations among parts to compute not only the planar x, y and rotation of
a given part but also its height, or z coordinate, relative to the robot’s
coordinate system.




RTPT (Real Time Part Tracking)
(Patent Pending): RTPT uses one or more cameras to image a given part in
real time and provides an industrial robot with a continuous stream of data
about where the part is, how fast and in what direction it is moving. RTPT makes
it possible for robots to work on parts while in motion, significantly improving
production throughput. Other applications of the technology include dynamic
materials handling, assembly or measurement where the objects of interest are in
motion during the robotic process.




2


SL3D (Structured Light 3D) (Patent
Pending): SL3D uses Structured Light (i.e. laser) patterns to calculate
the position and orientation of smooth, sparsely featured objects (e.g.,
automotive body components and panels). A structured light pattern is projected
onto the surface of an object and the reflection of this pattern is captured and
analyzed to determine surface topology, object position and
orientation.




RBP (Random Bin Picking) (Patents
Pending). RBP is an advanced eVF Vision Guided Robotic technology
solution for unstructured random bin picking. To the best of our knowledge, we
are the first company to develop unstructured random bin picking. RBP uses
advanced geometric pattern matching for robust part candidate recognition, fast
range data analysis for efficient and accurate location of parts in 3D, dynamic
candidate scoring for finding the best part candidate to grasp, and dynamic
interference detection to prevent collisions and provide optimal grasping. Our
2008 “agitation” patent application further enhances our RBP
technology.




In
addition to developing components to enhance the functionality of eVF as
described above, and in addition to our existing interface with ABB, we have
completed or are in the process of interfacing eVF with the other major
industrial robot manufacturers Fanuc, Kawasaki, Kuka, Motoman and
Nachi.  This will allow us to expand our customer base
significantly.  We also continue to improve the vision guidance
science for random bin picking applications and have added new functionality
such as generic collision avoidance, bin shaking or agitation, teach pendant,
and robot motion planning.  These new functionalities will allow us to
install the random bin picking application with all major industrial robot
manufacturers.




eVisionEngine




eVisionEngine
(eVE) is a technology library that offers all of the scientific benefits of the
eVF platform and facilitates the development of custom applications by robot
OEM’s, vision software providers, and vision integrators.  eVE
provides a comprehensive set of robust vision science algorithms for 2D, 2.5D
and 3D pose calculations packaged with automatic calibration, automatic
training, automatic testing and automatic model calculation.  eVE
allows robot manufacturers, vision system providers, smart camera manufactures
and system integrators to add VGR functionality to their products and solutions
through application programming interfaces (API’s).  eVE benefits the
user by providing access to Braintech’s core VGR technology and allowing for
faster development time when bringing new products to market. eVE is also
available in modules to enable specific functionality.




Industry
Background




The growth
of the machine vision industry is dictated, on the one hand, by the technical
difficulty of achieving accurate “computerized vision”, and on the other hand,
by the vast theoretical scope of the potential applications. The principal
technical difficulties include the problems of compensating for background noise
that masks or distorts objects, separating objects from their placements,
determining how much “similarity” must exist before two visual patterns are
considered to represent the same object and comparing physical objects which are
only approximately “similar” in the first place.




As the
technical difficulties are solved, the potential benefits and applications of
computerized vision are large. In industrial quality control, computerized
vision can replace and perform inspections more accurately than human
inspectors. In industrial automation, computerized vision can be used to control
industrial machines or robots. In security systems, computerized vision can be
used to detect human visitors or intruders in video camera images. In military
applications, computerized vision can be used in automated targeting systems. In
medical applications, it can be used to improve diagnostic
reliability.




Our
research indicates that there are approximately ten times as many random bin
picking opportunities for any type of material movement application than current
automation practices allow. It is our intent to target these opportunities in
not only our present automotive-industrial space but also the
government/military space and general industry.  We are in the process
of forming an internal task force led by our CEO with the objective of
demonstrating the capabilities of our unique random bin picking technology
integrated with different robot manufacturers with the goal of commercialization
and sale of the technology.  The Company believes it has a clear
competitive advantage in the area of random bin picking robotic vision
guidance.




Competitive
Position -Vision Guided Robotic Systems




Machine
vision and vision guided robotics is an emerging industry and as such, no
statistics are available to determine the size or composition of the overall
market. As a result, the composition of our competitors varies. Our primary
competitors consist of a fragment of vision providers, which generally consist
of industrial vision guided robotics, such as Fanuc Robotics, ISRA, Kuka, and
Motoman, vision providers, such as MVTec, ISRA and Radix Controls, and
integrators using Cognex cameras and software to create vision guided robotics
solutions.




Many of
our potential competitors are substantially larger than we are and earn
substantially greater revenue. We believe that a many of companies operating in
the machine vision market have the capability to develop the kind of vision
guidance systems we develop. However, we also believe that:




•
            eVisionFactory
      will enable us to develop vision guided robotic systems quickly and
      efficiently;




3




•
            through
      our prior agreement with ABB, we demonstrated an ability to complete
      projects for major industrial clients;
and




•
            our
      Intellectual Property Protection Strategy, including a growing list of
      patents and patents pending as well as a host of techniques and
      methodologies we maintain as trade secrets will provide us with a
      sustainable competitive advantage.




We,
however, do not have an established track record of sales or profits to provide
any reliable indication of our ability to attract significant market share or to
operate profitably.




Research
and Development




During our
fiscal year 2008, we incurred research and development expense of $722,259 (2007
- $931,569).  These expenditures were off set by a Precarn (Canadian
Government) research and development grant of $231,136 (2007 - $170,297).
Substantially all of our research and development expenses consisted of internal
personnel costs allocated to research and development.




Software
Installations




Currently,
we have over 170 product installations in more than 40 unique locations with
over 20 different end-users. Additionally, we have sold approximately 15
development licenses to date. In 2008, we relied upon ABB, Inc. for
approximately 99% of our revenues (2007 – 99%).




Effective
February 1, 2004, we entered into an Exclusive Channel Partner Agreement
with ABB for the licensing of our vision guided robotics technologies and
software products to develop and market vision guided robotic systems to ABB’s
North American automotive customers. Early successes as a result of the Channel
Partner Agreement convinced ABB to create a marketing strategy centered on a
co-brand called TrueViewTM.
TrueViewTM Vision
Guided Robotics, or VGR, systems fully integrate SC3D vision guidance technology
and the eVF software platform.




As a
result of achieving market acceptance for TrueViewTM through
2004, ABB initiated a sales program that started in January 2005. In January
2005, our agreement with ABB was amended to allow ABB to market TrueViewTM,
exclusively powered by our technology, to the countries of the European Economic
Union and sub-license TrueViewTM to their
business partners on a worldwide basis.




On May 5,
2006 we entered into a new Exclusive Global Channel Partner Agreement with ABB
for the licensing of our vision guided robotics technologies and software
products. The stated purpose of the agreement was to allow ABB to establish a
leadership position in the global automobile and general manufacturing vision
guided robotics markets by strategically marketing and selling the TrueView
family of vision guided robotic systems as their global standard. As part of the
new Exclusive Global Channel Partner Agreement, ABB agreed to guarantee a
minimum purchase of our eVF runtime licenses totaling $10,500,000 for the period
ending December 31, 2008. The minimum guarantees were allocated on an annual
basis as follows: 2006—$1,500,000; 2007—$3,500,000;
2008—$5,500,000.  In addition to the purchase commitments, ABB
provided $300,000 for research and development of a random bin picking
technology in 2006 and 2007.  ABB required a reduction of $250,000 in
the minimum purchase guarantee for the quarter ending December 31, 2008 as a
result of the late delivery of a commercially viable random bin picking product
that was due on December 31, 2007, and the minimum purchase guarantee for the
year ending December 31, 2008 was reduced from $5,500,000 to
$5,250,000.  In exchange for ABB entering into this agreement, we
granted ABB an exclusive global channel partner license during the term for the
use and distribution of our software products in the automotive market and in
specified general industry markets.  During the term of the agreement,
ABB accumulated approximately $8 million of unsold inventory of vision
licenses which we have agreed they may continue selling after the agreement’s
expiration on December 31, 2008.  We will receive no further revenue
under this agreement.




Under the
prior ABB agreement, in addition to supplying vision guided robotic systems to
ABB, we also provided them with eVF upgrades for previously installed systems,
we held training seminars for their technical staff and we provided engineering
services to assist them in design of vision guided robotic systems.




Intellectual
Property




During our
development process, we generate intellectual property (IP) that we consider to
be novel or at least innovative and some times strategic to our competitiveness.
We have developed an Intellectual Property Protection Strategy that includes
protecting our trade secrets, seeking patent protection and
publishing.




The
software and technical data over which we assert intellectual property rights
include principally the following:




•
            software
      we have written in developing our single camera 3D robot guidance
      system;




•
            software
      we have written and incorporated in eVisionFactory, including the software
      by which eVisionFactory links the various subroutines within its
      libraries;




•
            software
      we have written in developing the components of eVisionFactory including
      AutoCal-3D, AutoTrain-3D, AccuTest, Xi2D (Single/Multi-Camera 2D), DD3D
      (Direct Depth 3D), IDM 2.5D (Inferential Depth Measurement), SR3D
      (Surround Vision 3D), SCTrac (Single Camera Tracking), and SL3D
      (Structured Light 3D), RBP (Random Bin
Picking);




4




•
            software
      routines we have written from time to time in developing machine vision
      systems;




•
            software
      routines we have written from time to time in developing vision guided
      robotic systems;




•
            software
      we have written and incorporated in VOLTS-IQ, our intelligent vision
      platform for the consumer and service robotics market;
  and




•
            hardware
      designs we’ve developed and software we have written and incorporated into
      compact imaging devises for various consumer and potentially military
      applications.




We have
registered the trademarks “Braintech”, “eVF”, “eVisionFactory”, ”eVE”and“eVisionEngine” with the U.S. Patent and Trademark office. We have also
applied for registration of the trademark “SC3D”, “RBP” and “Random Bin Picking” with the
U.S. Patent and Trademark Office. In the Canadian Trademarks Office we have
registered the trademarks “Braintech”, “SC3D”, “eVF”, and “eVisionFactory”.




On November 9, 2004, the U.S. Patent and
Trademark Office issued U.S. Patent No. 6,816,755 regarding theMethod And Apparatus
For Single Camera 3D Vision Guided Robotics which addresses a method of
three-dimensional handling of an object by a robot that uses a tool and one
camera mounted on the robot.  At least six target features which are
normal features of the object are selected on the object. The features are used
to train the robot in the frame of reference of the object so that when the same
object is subsequently located, the robot's path of operation can be quickly
transformed into the frame of reference of the object.




On
February 26, 2008, the U.S. Patent and Trademark Office issued U.S. Patent No.
7,336,814 regarding the Method
and Apparatus for Machine Visionwhich addresses a system
and method that facilitate machine-vision, for example three-dimensional pose
estimation for target objects, using one or more images sensors to acquire
images of the target object at one or more positions, and to identify features
of the target object in the resulting images. A set of equations is set up
exploiting invariant physical relationships between features such as constancy
of distances, angles, and areas or volumes enclosed by or between features. The
set of equations may be solved to estimate a 3D pose. The number of positions
may be determined based on the number of image sensors, number of features
identified, and/or number of known physical relationships between less than all
features. Knowledge of physical relationships between image sensors and/or
between features and image sensors may be employed. A robot path may be
transformed, based on the pose, to align the path with the target
object.




We have
the following nine applications pending with the U.S. Patent and Trademark
Office.  Where we believe it is appropriate and cost-effective, we
also apply for foreign patent protection in the applicable
jurisdictions.




Method and Apparatus For Single
Image 3d Vision Guided Robotics (SC3D Variant):  A method of
three-dimensional object location and guidance to allow robotic manipulation of
an object with variable position and orientation using a sensor array which is a
collection of one or more sensors capable of forming a single
image.




System And Method Of Visual Tracking
System And Method Of Robotically Engaging An Object (SC3D
Variant):  One embodiment produces signals that emulate the
output of an encoder, based on captured images of an object, which may be in
motion. One embodiment provides digital data directly to a robot controller
without the use of an intermediary transceiver such as an encoder interface
card. One embodiment predicts or determines the occurrence of an occlusion and
moves at least one of a camera and/or the object accordingly.




System And Method Of Determining
Object Pose (SL3D):  Briefly described, one embodiment
determines pose of an object of interest at a run time by capturing a first
image of a first structured light pattern projected onto a first local surface
of the object of interest; determining a first run-time data set from the
captured first image, wherein the first run-time data set corresponds to
information determined from the first structured light pattern projected onto
the first local surface; comparing the determined first run-time data set and a
corresponding first reference data set, the first reference data set
corresponding to an ideal pose of the first local surface on an ideally posed
reference object; and determining at least one first degree of constraint that
defines a first partial pose of the first local surface, the at least one first
degree of constraint based upon the comparison of the first run-time data set
with the corresponding first reference data set.




System And Method Of Aerial
Surveillance:Briefly described, one embodiment comprises a
lighter-than-air aerial platform, at least one image capture device carried by
the lighter-than-air aerial platform and operable to sequentially capture a
plurality of images, and at least one control surface physically coupled to the
lighter-than-air aerial platform and operable to control direction of movement
of the lighter-than-air aerial platform along a surveillance path in response to
a guidance control signal determined in part upon the sequentially captured
plurality of images.




System And Method Of Identifying
Objects (RBP):Briefly described, one embodiment is a method
that captures a first image of at least one object with an image capture device
that is moveable with respect to the object, processes the first captured image
to determine a first pose of at least one feature the object, determines a first
hypothesis that predicts a predicted pose of the identified feature based upon
the determined first pose, moves the image capture device, captures a second
image of the object, processes the captured second image to identify a second
pose of the feature, and compares the second pose of the object with the
predicted pose of the object.




5




System And Method Of Robotically
Engaging An Object:Briefly described, one embodiment is a
method for imprecisely engaging an object or tool, the method comprising
capturing an image of an imprecisely-engaged object with an image capture
device, processing the captured image to identify a pose of the
imprecisely-engaged object, and determining a pose deviation based upon the pose
of the imprecisely-engaged object and the pose of a corresponding
ideally-engaged object.




System And Method Of
Three-Dimensional Pose Estimation (RBP):Briefly described,
one embodiment is a method that captures a first image of at least one object
with an image capture device, processes the first captured image to find an
object region based on a reference two-dimensional model and determines a
three-dimensional pose estimation based on a reference three-dimensional model
that corresponds to the reference two-dimensional model.  Thus,
two-dimensional information or data is used to segment an image and
three-dimensional information or data used to perform three-dimensional pose
estimation on a segment of the image.




Robotic Systems With User Operable
Robot Control Terminals (Teach-Pendant):In 2008 we filed a
patent application addressing robotic systems and methods that employ at least
some communications between peripheral controllers, for example the vision
controller, conveyor controller, camera controller and/or inspection controller,
that is independent of a robot controller or robot motion controller. This may
include a parallel communications path.




Methods And Apparatus To Facilitate
Operations In Image Based Systems (Agitation or
Bin-Shaking):  Another 2008 patent application is related to
vision based systems that select actions based on analysis of images to
redistribute objects. Actions may include action type, action axis and/or action
direction. Analysis may determine whether an object is accessible by a robot,
whether an upper surface of a collection of objects meet defined criteria,
and/or whether clusters of objects preclude access.




Our
ability to compete successfully will depend in part on our ability to protect
our proprietary technology and information. Although we attempt to prevent
improper disclosure of our proprietary technology, we cannot assure that the
measures we take will be adequate, or that competitors will not be able to
develop similar technology independently. Further, we can not assure that claims
allowed on any patent we obtain will be broad enough to protect our technology,
that any patent applications will ultimately be successful, or that foreign
intellectual property laws will protect our intellectual property. We may have
to resort to litigation to enforce or determine the validity and scope of our
proprietary rights. Litigation of this nature would likely be expensive, and its
outcome uncertain.




We have no
pending claims against us for infringement of any patents or other intellectual
property rights of others. We have no reason to believe that we infringe any
intellectual property rights of others, although we do not conduct systematic
patent searches to determine whether any of our products infringe existing
patent rights. Whether or not we are actually infringing the rights of third
parties, claims of infringement may be advanced against us, forcing us either to
defend costly litigation or to purchase license rights from third parties. If we
are forced to purchase license rights from third parties, we can not assure that
we will be able to do so on commercially reasonable terms, or at
all.




Employees




As of
March 26, 2009, we have 24 employees. We are not subject to any collective
bargaining agreements and we consider relations with our employees to be
good.  Since November 2008, we have hired eleven employees in our
Michigan office and two employees and three consultants (Human Resources,
Special Counsel and Government Vision Scientist) in our Virginia
office.




ITEM 1A.
            RISK
      FACTORS




We operate
in a rapidly changing environment that involves a number of risks and
uncertainties, some of which are beyond our control. Before deciding to
purchase, hold or sell our common stock, you should carefully consider the risks
described below in addition to the other cautionary statements and risks
described elsewhere and the other information contained in this Annual Report on
Form 10-K and our other filings with the SEC, including our subsequent reports
on Forms 10-Q and 8-K. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial or which are similar to those faced by
other companies in our industry or business in general may also affect our
business operations.  If any of these known or unknown risks or
uncertainties actually occurs with material adverse effects on us, our business,
financial condition, results of operations and/or liquidity could be seriously
harmed. In that event, the market price for our common stock will likely decline
and you may lose all or part of your investment.




There
is substantial doubt about our ability to continue as a going
concern.




Our
independent registered public accounting firm has issued an opinion on our
consolidated financial statements that states that the consolidated financial
statements were prepared assuming we will continue as a going concern and
further states that our recurring losses from operations raise substantial doubt
about our ability to continue as a going concern.  Our plans
concerning these matters are addressed in Note 1 to the accompanying audited
consolidated financial statements.  Our future is dependent on our
ability to address these matters.  If we fail to do so for any reason,
we may not be able to continue as a going concern, our business may fail and
investors may lose their entire investment.




6




We
may not be able to renew our Bank Loan with the Royal Bank of Canada
(“RBC”).  Our inability to renew our loan with RBC or someone else may
trigger a default under the RBC Loan Agreement.




As of
December 31, 2008 the Company had a balance of $2,104,376 outstanding on a bank
loan of $2,473,000 dated July 29, 2008 and maturing July 11, 2009 from RBC (the
“RBC Loan”).  A general security agreement covering all of the
Company’s personal and intangible property, including intellectual property, has
been pledged as collateral. Standby letters of credit securing the full amount
of the RBC Loan provided by certain accredited investors (the “LC Providers”)
were required by the bank in order to enable the RBC Loan.  If we are
unable to renew the RBC Loan or refinance the loan with another institution, we
may lose all of our assets which are pledged as collateral and investors may
lose their entire investment.




If
we are not able to renew the RBC Loan or refinance it elsewhere, RBC may call on
certain standby letters of credit securing the loan triggering a default under
the LC Providers’ general security agreement with the Company which could result
in investors losing their entire investment in the Company.




A general
security agreement, which is subordinate to the general security agreement of
RBC, covering all of the Company’s personal and intangible property, including
intellectual property was pledged as security to the LC Providers in December
2006 and in September 2008.  In the event the Company defaults on the
RBC Loan and the standby letters of credit are called by the Royal Bank of
Canada, the Company will immediately appoint the Managing Member of the LC
Provider group as the manager of the Company’s assets with full power under the
LC Providers’ General Security Agreement with the Company to take such action as
is necessary to recover the amounts due to the LC Providers and manage the
business and affairs of the Company, in the best overall interests of the LC
Providers.  Our CEO is the provider of the largest letter of credit
and is the Managing Member of the LC Providers.  His interests and the
interests of the other LC Providers (two of whom are directors and three of whom
are employees) may conflict with the interests of the other holders of
Braintech’s common stock. Investors may lose their entire investment if RBC
draws on the standby letters of credit.




We
have almost exclusively relied on a single channel partner, ABB, to distribute
and generate sales of our products.  Our agreement with ABB expired on
December 31, 2008. If we are unable to enter into relationships with new
customers or new channel partners, our business may fail and investors may lose
their entire investment.




We
historically relied almost exclusively on the Robotics Division of ABB Inc. to
purchase our products and to sell and distribute them to end users pursuant to
an Exclusive Global Channel Partner Agreement entered into in May
2006.  This Channel Partner Agreement expired in accordance with its
terms on December 31, 2008.  Under this agreement, ABB accumulated
approximately $8 million of unsold inventory of vision licenses which we
have agreed they may continue selling notwithstanding the agreement’s expiration
on December 31, 2008.  We will receive no further revenue under this
agreement.  If we are unable to enter into relationships with new
customer or new channel partners, our business may fail and investors may lose
their entire investment.




We
may require additional funds to achieve our current business strategy. Our
inability to obtain such financing will inhibit our ability to expand or even
maintain our business operations.




We may
need to raise additional funds through public or private debt or sale of equity
to achieve our current business strategy. The financing we need may not be
available when needed. Even if this financing is available, it may be on terms
that are materially adverse to your interests with respect to dilution of book
value, dividend preferences, liquidation preferences, or other terms. Our
inability to obtain financing will inhibit our ability to implement our business
strategy, and as a result, could require us to diminish or suspend our business
strategy and possibly cease our operations. If we are unable to obtain financing
on reasonable terms, we could be forced to delay, scale back or cease our
operations, which could put your investment dollars at significant
risk.




We
have a history of losses and have a significant deficit, which raises
substantial doubt about our ability to continue as a going concern.




We have
generated only approximately $12.5 million in revenues since the inception of
our current operations January 3, 1994 and we expect to incur operating losses
in the future. Our net loss from inception of our current operations in 1994 to
December 31, 2008 was approximately $37.4 million. We had cash in the amount of
$2,446,538 as of December 31, 2008. We estimate our average monthly operating
expenses including debt service to be approximately $450,000 each month
throughout 2009. We estimate that without further funding or new revenue, we
will deplete our cash resources in approximately July 2009. We cannot provide
assurances that we will be able to successfully develop our business. These
circumstances raise substantial doubt about our ability to continue as a going
concern as described in an explanatory paragraph to our independent auditors’
report on our audited financial statements, dated March 26, 2009.  If
we are unable to continue as a going concern, investors may lose all of their
investments in our Company.




A
portion of our assets, one of our directors and one of our officers are located
outside the United States, which may make it difficult for investors to enforce
any judgments obtained against us or any of our directors or officers in the
United States.




A portion
of our assets are located outside the United States. In addition, one of our
directors and one of our officers are nationals and/or residents of countries
other than the United States, and all or a substantial portion of such persons’
assets are located outside the United States. As a result, it may be difficult
for investors to enforce within the United States any judgments obtained against
the Company or our officers or directors, including judgments predicated upon
the civil liability provisions of the securities laws of the United States or
any state thereof. Consequently, you may be effectively prevented from pursuing
remedies under U.S. federal securities laws against them.




7




Because
we can issue additional common shares, purchasers of our common stock may incur
immediate dilution and may experience further dilution.




The Board
of Directors is authorized to issue up to 200,000,000 common shares, of which
58,662,245 are issued and outstanding as of March 26, 2009. Our board of
directors has the authority to cause our Company to issue additional shares of
common stock without the consent of any of our shareholders. Consequently, our
shareholders may experience significant dilution in their ownership of our
Company in the future.




We may lose our competitiveness if
we are not able to protect our proprietary technology and intellectual property
rights against infringement, and any related litigation may be time-consuming
and costly.




Our
success and ability to compete depends to a significant degree on our
proprietary technology. If any of our competitors copy or otherwise gain access
to our proprietary technology or develop similar products independently, we may
not be able to compete as effectively. The measures we have implemented to
protect our proprietary technology and other intellectual property rights are
currently based upon a combination of provisional patent applications, patents,
trademarks and trade secrets. These measures, however, may not be adequate to
prevent the unauthorized use of our proprietary technology and our other
intellectual property rights. Further, the laws of foreign countries may provide
inadequate protection of such intellectual property rights. We may need to bring
legal claims to enforce or protect such intellectual property rights. Any
litigation, whether successful or unsuccessful, may result in substantial costs
and a diversion of our Company’s resources. In addition, notwithstanding our
rights to our intellectual property, other persons may bring claims against us
alleging that we have infringed on their intellectual property rights or claims
that our intellectual property rights are not valid. Any claims against us, with
or without merit, could be time consuming and costly to defend or litigate,
divert our attention and resources, result in the loss of goodwill associated
with our business or require us to make changes to our products.




We
have revised our business strategy to include new employees, new markets, new
technologies, and new products. If we are unsuccessful in penetrating new
markets, developing new technologies and products, our business may fail and
investors may lose their entire investment.




We have no
operating history in these new markets and our new technologies and products are
in the development stage. As a result, it is difficult for us to accurately
forecast our future operating performance and the performance of our new
technologies and products and the revenues it will generate. Our prospects must
be considered in light of the risks, delays, expenses and difficulties
frequently encountered by companies embarking into new markets with new
technologies and products. Currently we are finding that it is very difficult to
introduce our products into these new sales markets and that we have a
significantly longer than normal sales cycle.  Many of these factors
are beyond our control, including unanticipated operational, research and
business development expenses, employment costs, administrative expenses, legal
expenses and technology costs. In addition, as a result of the current economic
situation, we are finding that our potential industrial assembly customers do
not have available capital budgets.  We cannot assure our investors
that our revised business strategy will materialize or prove successful.
Furthermore, we may need to raise additional funds through public or private
debt or sale of equity to execute our revised business strategy. There can be no
assurance that any additional financing will be available to us or that adequate
funds will be available when needed or on terms that are acceptable to us. The
inability to secure additional financing would prevent us from succeeding with
our new business strategy which would result in the loss of your
investment.





Acquisitions
could prove difficult to integrate, disrupt our business, dilute stockholder
value and consume resources that are necessary to sustain our
business.




In August
2008 we completed the acquisition of Shafi and we may acquire other companies in
the future. An acquisition may result in unforeseen operating difficulties and
expenditures. In particular, we may encounter difficulties assimilating or
integrating the technologies, products, personnel or operations of the acquired
organizations, particularly if the key personnel of the acquired company choose
not to work for us, and we may have difficulty retaining the customers of any
acquired business due to changes in management and ownership. Acquisitions may
also disrupt our ongoing business, divert our resources and require significant
management attention that would otherwise be available for ongoing development
of our business. We also may experience lower rates of renewal from subscription
customers obtained through acquisitions than our typical renewal rates.
Moreover, we cannot provide assurance that the anticipated benefits of any
acquisition, investment or business relationship would be realized or that we
would not be exposed to unknown liabilities. In connection with one or more of
these transactions, we may:





·
              issue
      additional equity securities that would dilute the ownership of our
      stockholders;


8
  ·
              use
      cash that we may need in the future to operate our
    business;


·
              incur
      or assume debt on terms unfavorable to us or that we are unable to
      repay;


·
              incur
      large charges or substantial
liabilities;


·
              encounter
      difficulties retaining key employees of an acquired company or integrating
      diverse business cultures;
and


·
              become
      subject to adverse tax consequences, substantial depreciation or deferred
      compensation charges.




For
example, in our acquisition of Shafi, the consideration we paid consisted of
shares of our common stock, which diluted the ownership of our existing
stockholders.  Moreover, we are currently in litigation to rescind the
Shafi acquisition. See note 4 to our financial statements.




A decline in the price of our common
stock could affect our ability to raise further working capital and adversely
impact our ability to continue operations.




A
prolonged decline in the price of our common stock could result in a reduction
in the liquidity of our common stock and a reduction in our ability to raise
capital. Because a portion of our continued operations will be financed through
the sale of equity securities, a decline in the price of our common stock could
be especially detrimental to our liquidity and our operations. Such reductions
may force us to reallocate funds from other planned uses and may have a
significant negative effect on our business plan and operations, including our
ability to develop new products and continue our current operations. If our
stock price declines, we can offer no assurance that we will be able to raise
additional capital or generate funds from operations sufficient to meet our
obligations. If we are unable to raise sufficient capital in the future, we may
not be able to have the resources to continue our normal
operations.




The market
price for our common stock may also be affected by our ability to meet or exceed
expectations of analysts or investors. Any failure to meet these expectations,
even if minor, may have a material adverse effect on the market price of our
common stock.




Our common stock is illiquid and the
price of our common stock may be negatively impacted by factors which are
unrelated to our operations.




Our common
stock currently trades on a limited basis on the OTC Bulletin Board. Trading of
our stock through the OTC Bulletin Board is frequently thin and highly volatile.
There is no assurance that a sufficient market will develop in our stock, in
which case it could be difficult for shareholders to sell their stock. The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of our competitors, trading volume in our
common stock, changes in general conditions in the economy and the financial
markets or other developments affecting our competitors or us. In addition, the
stock market is subject to extreme price and volume fluctuations. This
volatility has had a significant effect on the market price of securities issued
by many companies for reasons unrelated to their operating performance and could
have the same effect on our common stock.




We
operate in a highly competitive industry. Many of our competitors have greater
financial, technical, sales and marketing resources, better name recognition and
a larger customer base than ours. Our failure to compete effectively in the
areas of hiring qualified personnel, product line and price may adversely affect
our ability to generate revenue.




The market
for vision guided robotics is subject to frequent product introductions with
improved price and/or performance characteristics. Even if we are able to
introduce products which meet customer requirements in a timely manner, there
can be no assurance that our existing and new products will gain enough market
acceptance to allow us to execute a timely sales contract with one or more new
customers. Many of our competitors have greater financial, technical, sales and
marketing resources, better name recognition and a larger customer base than
ours. They may be better able to attract qualified personnel than we will. In
addition, many of our large competitors may offer customers a broader product
line, which may provide a more comprehensive solution than our current
solutions. Competitors’ products may add features, increase performance or sell
at lower prices. We cannot predict whether our products will compete
successfully with such new or existing competing products. Increased competition
in the industry could result in significant price competition, reduced profit
margins or loss of market share, any of which could have a material adverse
effect on our ability to generate revenues and successfully operate our
business. If we go out of business, investors will lose their entire
investment.




The
sale of a substantial number of shares of our common stock into the public
market may result in significant downward pressure on the price of our common
stock and could affect the ability of our stockholders to realize the current
trading price of our common stock.




The sale
of a substantial number of shares of our common stock in the public market could
cause a reduction in the market price of our common stock. We had 58,662,245
shares of common stock issued and outstanding as of March 26, 2009. On
April 20, 2007 we filed a registration statement under the Securities Act
of 1933. This registration statement, declared effective on May 11, 2007,
relates to the resale by certain selling stockholders of up to 13,977,494 shares
of common stock and 23,694,259 shares of common stock issuable to security
holders upon exercise of share purchase warrants. The 13,977,494 shares
registered by this registration statement are included in the number of our
issued and outstanding common shares as of March 26, 2009, shown above. Upon the
exercise of the outstanding warrants an additional 23,694,259 shares will also
be outstanding and further dilute your interest as a shareholder. Furthermore,
in connection with the acquisition of Shafi, we issued shares of our common
stock, and agreed to register those shares for resale.  Any
significant downward pressure on the price of our common stock as the selling
stockholders under one or more registration statements sell the shares of our
common stock could encourage short sales by the selling stockholders or others.
Any such short sales could place further downward pressure on the price of our
common stock. If the price of our common stock goes down, investors could lose
most of the value of their investments.




9




Rapid
technological changes in the machine vision and vision guided robotics industry
could render our products non-competitive or obsolete and consequently affect
our ability to generate revenues, causing us to go out of business and investors
to lose their entire investment.




The
machine vision and vision guided robotics industry is characterized by rapidly
changing technology and evolving industry standards. We believe that our success
will depend in part on our ability to develop our products or enhance our
current products and to introduce improved products promptly into the market. We
can make no assurance that our technology will not become obsolete due to the
introduction of alternative technologies by competitors. If we are unable to
continue to develop and introduce new products to meet technological changes and
changes in market demands, our business and operating results, including our
ability to generate revenues, could be adversely affected. If we go out of
business, investors will lose their entire investment.




We
do not intend to pay dividends and there will be less ways in which you can make
a gain on any investment in Braintech Inc.




We have
never paid any cash dividends and currently do not intend to pay any dividends
for the foreseeable future. Because we do not intend to declare dividends, any
gain on an investment in our Company will need to come through appreciation of
the price of our common stock. There can be no assurance that the price of our
common stock will increase.




Trading
of our stock may be restricted by the SEC’s penny stock regulations, which may
limit a stockholder’s ability to buy and sell our stock.




The
Securities and Exchange Commission has adopted regulations which generally
define “penny stock” to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
“accredited investors”. The term “accredited investor” refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.




NASD
sales practice requirements may also limit a stockholder’s ability to buy and
sell our stock.




In
addition to the “penny stock” rules described above, the National Association of
Securities Dealers (NASD) has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the NASD believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The NASD requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.




10




ITEM 2.
            DESCRIPTION
      OF PROPERTY




We lease
facilities in McLean, Virginia (our corporate headquarters), North Vancouver,
British Columbia (our research and development center) and Pontiac, Michigan
(our sales and technical support center). The McLean, Virginia premises consist
of approximately 3,000 square feet in 2009 and the annual rent for 2009 is
approximately $89,000 inclusive of operating costs.  The lease expires
June 30, 2010.  The North Vancouver, British Columbia premises consist
of 7,200 square feet and the annual rent for 2009 is approximately $159,000
inclusive of operating costs. The lease expires on August 31, 2013. Effective
May 1, 2009, we are entering into an additional lease in New Westminster,
British Columbia, for approximately 1,000 square feet.  The rent for
2009 (eight months) is approximately $15,000 inclusive of operating
costs.  The lease will expire on April 30, 2012.  The
Pontiac, Michigan premises consist of approximately 4,400 square feet and the
annual rent for 2009 is approximately $45,000 inclusive of operating costs. The
lease expires on May 31, 2014.






ITEM 3.
            LEGAL
      PROCEEDINGS




The
Company may, from time to time, be subject to claims and legal proceedings
brought against it in the normal course of business. Such matters are subject to
many uncertainties. Management believes that adequate provisions have been made
in the accounts where required and the ultimate resolution of such contingencies
will not have a material adverse effect on the financial position of the
Company. However, we are not able to predict the outcome of the pending legal
proceedings listed below, or other legal proceedings, to which we may become
subject in the normal course of business or estimate the amount or range of any
possible loss we might incur if we do not prevail in the final, non-appealable
determinations of such matters. Therefore, the Company has no current accruals
for these potential contingencies. The Company cannot provide assurance that the
legal proceedings listed here, or other legal proceedings not listed here, will
not have a material adverse impact on our financial condition or results of
operations.




On
February 10, 2009, Babak Habibi, formerly our Chief Technology Officer,
initiated an action in the Supreme Court of British Columbia against Braintech
Canada, Inc. and Braintech, Inc.  Mr. Habibi claimed that he had “good
reason” to resign and secured a Garnishing Order before Judgment for $334,632.73
(Canadian) claiming entitlement to that amount under his employment
agreement.  We are vigorously defending these actions and seeking the
return of the garnished funds.  On March 30, 2009 we filed an Amended
Statement of Defence in the Supreme Court of British Columbia asserting that Mr.
Habibi lacked “good reason” to resign and that no severance is
owing.  By motion we previously asserted that Mr. Habibi improperly
garnished these funds.  On March 30, 2009, we filed a lawsuit in the
Circuit Court of Fairfax County, Virginia against Mr. Habibi for, inter alia, misappropriation
of trade secrets, tortious interference with our contractual and banking
relations, and tortious interference with business expectancy relating to our
employees.  The Virginia lawsuit seeks compensatory damages of not
less than $100,000 and punitive damages of not more than $350,000.




On
February 13, 2009 two other former employees, released as part of a reduction in
force by Braintech Canada, Inc., after receiving full salary pay, statutory
severance payments, time-bank payments, accrued vacation payments and signing
full releases, instituted claims in the Provincial Court of British Columbia
(small claims court) for common law entitlement.  Each claim is for
$25,000 (Canadian).  The Company disputes the plaintiffs’ claims and
believes that it has meritorious defenses and intends to vigorously defend these
actions.




Management
believes that any potential loss associated with the above matters is neither
probable nor reasonably estimable at this time and accordingly has not accrued
any amounts for any potential loss.




On
February 6, 2009, the Company filed a lawsuit in the U.S. District Court for the
Eastern District of Michigan, Southern Division, against Adil Shafi for
rescission of the acquisition of Shafi, Inc. and Shafi Innovations,
Inc.  While the Company has initiated this action and is vigorously
pursuing it, the final outcome, which the Company believes will be
favorable, cannot now be determined.  This matter is subject to
inherent uncertainties and management’s view may change in the
future.






ITEM 4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




Not
applicable.




PART
II





11




ITEM 5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
      EQUITY SECURITIES






Our common
shares are currently trading through the OTC Bulletin Board under the symbol
“BRHI”.




The
following table shows the high and low bid information for our common shares for
the quarterly periods indicated.







Quarter
                
                High
                Low
                Close($)
                ($)
                ($)2008Fourth
      quarter
                
                0.17
                0.02
                0.07Third
      quarter
                
                0.35
                0.15
                0.16Second
      quarter
                
                0.35
                0.20
                0.33First
      quarter
                
                0..46
                0.25
                0.372007Fourth
      quarter
                
                0.51
                0.26
                0.28Third
      quarter
                
                0.70
                0.41
                0.475Second
      quarter
                
                0.82
                0.283
                0.54First
      quarter
                
                0.44
                0.25
                0.30







The market
data information was obtained from the OTC-Bulletin Board. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.




Holders




As of
March 26, 2009 we have 58,662,245 shares of common stock issued and outstanding
held by approximately 550 stockholders of record. Information regarding the
holdings of our directors, executive officers and certain other beneficial
owners can be found beginning on below.




Colonial
Stock Transfer, 66 Exchange Place, Salt Lake City, Utah 84111 (telephone;
(801) 355-5740; facsimile (801) 355-5742) is the registrar and
transfer agent for our common shares.




Dividend
Policy




We have
never paid cash dividends on our capital stock. We currently intend to retain
any profits we earn to finance the growth and development of our business. We do
not anticipate paying any cash dividends in the foreseeable future.




Recent
Sales of Unregistered Securities and Use of Proceeds from Registered
Securities




On
September 29, 2008, we issued 554,910 shares of our common stock to Owen Jones,
a director of the Company, at a fair value of $0.22 per share in exchange for
extinguishing a debt in the amount of $122,080.  The shares were not
registered in reliance on Section 4(2) of the Securities Act.




On January
26, 2009, we issued 410,000 shares of our common stock to David Baird, a
beneficial owner of 5% or more of our outstanding common stock, in connection
with the provision in 2006 of $255,000 emergency financing as described in
greater detail under Item 13.  The shares were not registered in
reliance on Section 4(2) of the Securities Act.






ITEM 6.
            SELECTED
      FINANCIAL DATA




Not
applicable.




12




ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS







The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes and other financial
information appearing elsewhere in this report.  Except for historical
information, the following discussion contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions and our current beliefs regarding revenues we might
earn if we are successful in implementing our business strategies.




Historically,
we have generated the majority of our revenues from the sale of robotic vision
software that we have developed.  Our software sales have principally
involved computerized vision systems used for the guidance of industrial robots
performing automated assembly, material handling, and part identification and
inspection functions.  Most of these revenues are as a result of our
Exclusive Global Channel Partner Agreement with ABB and, in accordance with its
terms, the agreement expired on December 31, 2008.  We have generated
total revenues, from the inception of our current operations on January 3, 1994
to December 31, 2008, in the amount of approximately $12.5
million.  For the year ended December 31, 2008, operating activities
provided cash of $1,480,968.




We have
incurred aggregate net losses of approximately $37.4 million during the period
from the inception of our current operations on January 3, 1994, to December 31,
2008.  We will likely continue to incur significant additional
operating losses as our product development, research and development, and
marketing efforts continue.  Operating losses may fluctuate from
quarter to quarter as a result of differences in the timing of expenses incurred
and revenue recognized.




Shafi
Acquisition




On August
12, 2008, in a stock for stock transaction, the Company acquired 100% of the
outstanding shares of SHAFI, Inc. and 80% of the shares of SHAFI Innovation,
Inc. (together “Shafi”) from Adil Shafi pursuant to a Share Purchase Agreement
(“Shafi Purchase Agreement”).  Total consideration for the purchase
was 3,000,000 shares of the common stock of Braintech, Inc. at a fair value of
$0.33 per share (the “Closing Purchase Shares”) issued at the closing of the
acquisition (“Shafi Closing”) and 1,000,000 shares of Braintech, Inc. common
stock to be issued quarterly over the next 12 months upon the achievement of
specified performance criteria including revenue generation (the “Contingent
Purchase Shares”).




The
primary reason for the Shafi transaction was the acquisition of key proprietary
assets from Shafi to provide the Company with existing pipeline revenue (which
never materialized) and a technological launching pad to accelerate its
expansion into a wide-range of new markets that include aerospace, food and
beverage, government, medical, pharmaceutical, plastics, and
semi-conductor.




Prior to
the completion of the purchase transaction, on June 5, 2008, the Company
advanced $100,000 to Shafi to meet its working capital needs.  This
advance was secured by all of the assets of Shafi, and was documented and
secured at the Shafi Closing by a demand promissory note bearing an annual
interest rate of 2.54%.




In order
to finance the $100,000 advance, the Company’s Chief Executive Officer and
former Chief Executive Officer each advanced to the Company $50,000 against
delivery by the Company of promissory notes.  The promissory notes
provide for interest at 6% per annum.  The promissory notes also
provide that, each of the promissory note holders will be issued 50,000 common
share purchase warrants as additional consideration.  On September 26,
2008, the promissory notes plus accrued interest were repaid in full and we
issued a total of 100,000 common share purchase warrants to our Chief Executive
Officer and former Chief Executive officer.  Each common share
purchase warrant entitles the holder to purchase one share for three years at a
price of $0.36 per share.




The
following table summarizes the estimated preliminary fair values of the assets
and the liabilities of the Shafi Inc. companies net of the debt Adil Shafi
personally assumed.




As
      of August 12, 2008Intangible
      assets, of Shafi Inc.
                            
                            $
                            1,090,000Goodwill,
      of Shafi Inc.
                            
                            
                            900,000Due
      to Braintech, Inc.
                            
                            
                            (100,000
                            )Current
      liabilities, of Shafi Inc.
                            
                            
                            (900,000
                            )Net
      assets acquired, of Shafi Inc.
                            
                            $
                            990,000Consideration:
      Common stock issued
                            
                            $
                            990,000




13




Of the
$1,090,000 of acquired intangible assets, $500,000 was assigned to branding and
the Shafi customer base and contacts and $590,000 was assigned to the purchased
technology.  The $900,000 of goodwill was assigned to the estimated
value of future net revenues promised us under the acquisition
agreement.  None of those revenues materialized.  At
December 31, 2008, management believes that sufficient uncertainty exists as to
the value of the Shafi Inc. intangible assets and goodwill, and accordingly, an
impairment charge of $1,990,000 has been recorded.




As part of
the Shafi acquisition, the parties agreed that any current liabilities of Shafi
in excess of $900,000 would be fully and finally satisfied in a timely manner by
Adil Shafi without liability to the Company or the Shafi
companies.  As of the date of closing the excess debt assumed by Adil
Shafi was approximately $172,000.  Through December 31, 2008,
Braintech, Inc. had advanced additional funds to Shafi Inc. thereby allowing
Shafi Inc. to repay $103,882 of the $900,000 in current
liabilities.




Included
in accounts payable is the amount of $796,118 of Shafi Inc. debt, which is
non-recourse to the Company.




The
Closing Purchase Shares are subject to a lock-up agreement that restricts the
sale thereof for 6 months and thereafter places volume restrictions on the
number of such shares that may be sold during any weekly period.  The
Company also agreed to register for resale the shares of Company common stock
issued to Adil Shafi and to cause the related registration statement to be
effective not later than six months after the Shafi Closing.  Mr.
Shafi’s sales of common stock under the registration statement will be subject
to compliance with his lock-up agreement.




On
February 6, 2009, the Company filed a lawsuit in the U.S. District Court for the
Eastern District of Michigan, Southern Division, against Adil Shafi for
rescission of the acquisition of Shafi, Inc. and Shafi Innovations,
Inc.  While the Company has initiated this action and is vigorously
pursuing it, the final outcome, which the Company believes will be
favorable, cannot now be determined.  This matter is subject to
inherent uncertainties and management’s view may change in the
future.







Critical
Accounting Policies and Estimates




A summary
of significant accounting policies is included in Note 2 of the audited
financial statements included in this Annual Report.  Management
believes that the application of these policies on a consistent basis enables us
to provide useful and reliable financial information about our operation results
and financial position.  Our financial statements and accompanying
notes are prepared in accordance with accounting principles generally accepted
in the United States.  Preparing financial statements requires
management to make estimates and assumptions that affect the reported of assets,
liabilities, revenue, and expenses.  These estimates and assumptions
are affected by management’s application of accounting policies.




On
December 12, 2001, the Securities and Exchange Commission issued cautionary
advice regarding the disclosure of critical accounting policies. Critical
accounting policies are those that our management believes are both most
important to the portrayal of our financial condition and results, and that
require difficult, subjective, or complex judgments, often as a result of the
need to make estimates about the effects of matters that involve
uncertainty.




We believe
the “critical” accounting policies we use in preparation of our financial
statements are as follows:




Revenue
Recognition.




We follow
the software revenue recognition rules outlined in the American Institute of
Certified Public Accountant’s Statement of Position (SOP) 97-2. We recognize
revenue when there is a persuasive evidence of a contract, delivery has
occurred, the fee is fixed or determinable, collection is reasonably assured,
and there are no substantive performance obligations remaining. Any cash
received in advance of meeting these criteria is recorded as deferred revenue on
our balance sheet. Changes in contractual arrangements or customer relationships
in the future could impact the extent or timing of revenue
recognition.




Income
Taxes.




Our
financial statements reflect a full valuation allowance against the net future
income tax assets based on our assessment that we are not more likely than not
to be able to utilize certain deductions before their expiry. Our assessment is
based on a judgment of estimated loss before such deductions. Changes in the
timing of the recognition and amount of revenues and expenses in the future may
impact our ability to utilize these deductions.




Stock
based Compensation




The
Company follows Statement of Financial Accounting Standards No. 123R, “Share
Based Payment” (“SFAS 123R”).  SFAS 123R requires companies to
estimate the fair value of share-based payment awards on the date of grant using
an option pricing model.  The value of the portion of the award that
is ultimately expected to vest is recognized as an expense over the requisite
service period in the Company’s financial statements.  Stock-based
compensation recognized during the period is based on the value of the portion
of the stock-based payment awards that are ultimately expected to vest during
the period.  The Company estimates the fair value of stock options
using the Black-Scholes valuation model, consistent with the provisions of SFAS
123R.  The Black-Scholes valuation model requires the input of highly
subjective assumptions, including the option’s expected life and the price
volatility of the underlying stock.  Changes to these assumptions can
have a significant impact on the estimate of stock based
compensation.  The expected stock price volatility assumption was
determined using historical volatility of the Company’s common
stock.




14




Effects
of Foreign Currency Exchange Rates and Inflation




While we
record our financial statements in United States dollars, many of our expenses
are incurred in Canadian dollars. As a result, fluctuations in the Canadian
dollar exchange rate can affect our expenses, and thus our profit or loss.
During the year ended December 31, 2008, we realized a foreign exchange loss of
$8,224. The foreign exchange loss resulted principally from transactions
recorded in United States dollars for reporting purposes, but actually carried
out in Canadian dollars. As at the date of this Annual Report on Form 10-K we
have not engaged in exchange rate-hedging activities. To the extent we implement
such hedging activities in the future we cannot assure that we will be
successful.




In the
years ended December 31, 2008 and December 31, 2007, inflation has had a limited
impact on our operations. However, there can be no assurance that inflation will
not have a material adverse effect on our results of operations in the
future.




Recent
Accounting Pronouncements




In July
2006, the Financial Accounting Standards Board (“FASB”) issued Financial
Interpretation No. 48 (FIN 58”) “Accounting for Uncertainty in
Income Taxes”, as an interpretation of Statement No. 109.  This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS 109
and prescribes a recognition threshold of more-likely-than-not to be sustained
upon examination.  Measurement of the tax uncertainty occurs if the
recognition threshold has been met.  This interpretation also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim period, disclosure and transition.  FIN 48 is effective for
fiscal years beginning after December 31, 2006.  Differences between
the amounts recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption should be accounted
for as a cumulative-effect adjustment recorded to the beginning balance of
retained earnings.  The adoption of FIN 48 had no impact to the
Company.





In
December 2007, the FASB issued Statement No. 141R, “Business Combinations”
(“SFAS 141R”).  This new standard requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information needed to evaluate and understand the nature and financial
effect of the business combination.  SFAS 141R is effective for fiscal
years beginning after December 15, 2008, and will be applicable to the Company
in the first quarter of fiscal 2009.  The Company does not believe
that SFAS 141R will have an impact on its financial statements.





In
December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in
Consolidated Financial statements” (“SFAS 160”).  This new standard
requires all entities to report noncontrolling (minority) interests in
subsidiaries in the same way-as equity in the consolidated financial
statements.  Moreover, SFAS 160 eliminates the diversity that
currently exists in accounting for transactions between an entity and
noncontrolling interests by requiring they be treated as equity
transactions.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be applicable to the Company in the first quarter of
fiscal 2009.  The Company does not believe that SFAS 160 will have an
impact on its financial statements.




In March
2008, FASB, issued Statement No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133,” (“SFAS
161”).  This new standard requires enhanced disclosures for derivative
instruments, including those used in hedging activities.  It is
effective for fiscal years and interim periods beginning after November 15,
2008, and will be applicable to us in the first quarter of fiscal
2009.  We are assessing the potential impact that the adoption of SFAS
161 may have on our financial statements.




In May
2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of non-governmental entities that are presented in
conformity with GAAP in the United States. It is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles”. The adoption of this statement is not expected
to have a material effect on the Company’s consolidated financial
statements.




During the
year ended December 31, 2008, we adopted the following accounting
standards:




15




In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
US, and expands disclosures about fair value measurements. SFAS 157 is effective
as of the beginning of the first fiscal year that begins after November 15, 2007
and as such, we adopted these provisions effective January 1,
2008.  SFAS 157 did not have a material impact on our financial
statements.




In
February 2007, the FASB issued Statement No.159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”), which permits entities
to elect to measure financial instruments and certain other items at fair value
that are not currently required to be measured at fair value and include
unrealized gains and losses in net income rather than equity. SFAS 159 is
effective for fiscal years beginning after November 15, 2007.  We did
not elect to apply the fair value option to any of our financial
instruments.






Results
of Operations




We believe
that our limited history of revenue generation and recent business developments
make the prediction of future results of operations difficult, and, accordingly,
our operating results should not be relied upon as an indication of future
performance.








Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007






The
following table sets forth, for the indicated periods, data as percentages of
revenue:


Year
      EndedDecember
      31
                    
                    
                    December
      312008
                    
                    
                    2007Statement
      of Operations Data:Sales
                    
                    
                    100.00
                    %
                    
                    
                    100.00
                    %Cost
      of sales
                    
                    
                    (15.77
                    )
                    
                    
                    (7.86
                    )Gross
      profit
                    
                    
                    84.23
                    
                    
                    
                    92.14Research
      and development
                    
                    
                    (10.49
                    )
                    
                    
                    (23.40
                    )Selling,
      general and administration
                    
                    
                    (118.36
                    )
                    
                    
                    (165.69
                    )Operation
      income/(loss)
                    
                    
                    (44.62
                    )
                    
                    
                    (96.95
                    )Interest
      and financing expenses
                    
                    
                    (56.26
                    )
                    
                    
                    (49.50
                    )Impairment
      charge on valuation of intangible assets and goodwill
                    
                    
                    (42.52
                    )Other
      income (expense), net
                    
                    
                    1.50
                    
                    
                    
                    0.03Income/(loss)
      for the period
                    
                    
                    (141.90
                    )
                    
                    
                    (146.42
                    )






Sales
                    
                    Year
      EndedDecember
      31
                    
                    
                    December
      31
                    
                    
                    %2008
                    
                    
                    2007
                    
                    
                    Change$
                    4,680,515
                    
                    
                    $
                    3,253,032
                    
                    
                    
                    43.88
                    %





Our
increase in sales year over year is attributable to the increase in the ABB,
Inc. minimum purchase guarantee in accordance with the terms of the Exclusive
Global Channel Partner Agreement.  During the year ended December 31,
2008, we invoiced $5,253,999 for software licenses delivered for installation in
manufacturing plants.  Of this amount, we deferred $759,646 for future
recognition in accordance with the American Institute of Certified Public
Accountant’s Statement of Position (SOP) 97-2.  We also recorded
$64,055 for engineering and other services and $122,107 of previously deferred
revenue.  During the year ended December 31, 2007, we invoiced
$3,444,977 for software licenses delivered for installation in manufacturing
plants.  Of this amount, we deferred $526,344 for future recognition
in accordance with SOP 97-2.  We also recorded $81,194 for engineering
and other services, $150,000 forresearch and
development services related to the bin picking project and $103,205 of
previously deferred revenue.





16




Research
      and Development Expenses
                  
                  Year
      EndedDecember
      31
                  
                  
                  December
      31
                  
                  
                  %2008
                  
                  
                  2007
                  
                  
                  Change$
                  491,122
                  
                  
                  $
                  761,272
                  
                  
                  
                  (35.5
                  %)





Research
and development expenditures decreased $270,150, or 35.5%, to $491,122 for the
year ended December 31, 2008, from $761,272 for the year ended December 31,
2007.  The decrease was mainly due to an increase in the Precarn
funding grant received.  During the year ended December 31, 2007 we
received a grant of $170,297 compared to a grant of $231,136 received during the
year ended December 31, 2008.  Stock option expense allocated to
research and development decreased $211,532 from $235,311 for the year ended
December 31, 2007 to $23,779 for the year ended December 31, 2008.








Selling, General and
      Administrative Expenses
                
                Year
      EndedDecember
      31
                
                
                December
      31
                
                
                %2008
                
                
                2007
                
                
                Change$
                5,540,044
                
                
                $
                5,390,038
                
                
                
                2.8
                %





Selling,
general and administration (SG&A) expenses increased $150,006, or 2.8%, to
$5,540,044 for the year ended December 31, 2008, from $5,390,038 for the year
ended December 31, 2007.  Stock based compensation increased
$1,315,000 to $1,745,000 for the year ended December 31, 2008, from $430,000 for
the year ended December 31, 2007.  Stock based compensation expense
arises from the issuance of shares of our common stock to certain key employees
and upon the achievement of certain milestones, pursuant to the terms of
employment agreements.  Stock option expense decreased $1,939,045 to
$786,244 for the year ended December 31, 2008 from $2,725,289 for the year ended
December 31, 2007.  Wages and benefits increased $476,521 from
$1,085,578 to $1,562,099 resulting from an increase in our administration staff
of three individuals.  Accounting, legal and patent expenses increased
$294,268 from $241,561 to $535,829, trade show and marketing expenses decreased
$69,491 from $375,762 from $306,271, and office and miscellaneous expenses
increased $72,753 from $531,848 to $604,601.








Financing
Expenses
                
                Year
      EndedDecember
      31
                
                
                December
      31
                
                
                %2008
                
                
                2007
                
                
                Change$
                2,633,199
                
                
                $
                1,610,117
                
                
                
                63.5
                %





Interest
and financing expenses increased $1,023,022, or 63.5%, to $2,633,199 for the
year ended December 31, 2008, from $1,610,117 for the year ended December 31,
2008.  The increase was mainly due to an increase of $1,113,464 in the
fair value of equity issued as compensation to bank loan guarantors from
$1,327,241 for the year ended December 31, 2007 to $2,440,705 for the year ended
December 31, 2008.  The interest on the bank loan decreased $78,820 to
$88,890 for the year ended December 31, 2008, from $167,710 for the year ended
December 31, 2007.  The decrease was mainly due to the reduced average
principal amount of the bank loan and due to a reduction in the interest
rate.  Bank loan guarantee expenses increased $12,903 from $25,166 to
$38,069 during the year ended December 31, 2008.  Other financing
expenses in the amount of $48,453 were incurred in the year ended December 31,
2008 for which there was no similar expense incurred in the year ended December
31, 2007.  Offsetting the increase in financing expenses was an
expense of $90,000 for the fair value of equity issued as compensation for
financing services incurred in the year ended December 31, 2007 compared to an
expense of $17,082 incurred in the year ended December 31, 2008.





Liquidity
and Capital Resources




Cash
Flows




During the
year ended December 31, 2008 we financed our research and development
activities, our selling, general and administrative activities, and our
investment in fixed assets, and the repayment of our bank loan using cash
provided by our operations.  At December 31, 2008 we had cash and cash
equivalents of $2,446,538, an increase of $1,525,171 from cash and cash
equivalents of $921,367 at December 31, 2007.




Operating
activities provided cash of $1,480,968 for the year ended December 31, 2008 and
$681,181 for the year ended December 31, 2007.  Cash provided by
operating activities during the year ended December 31, 2008 resulted from a net
loss of $6,641,784, an increase in current liabilities of $516,199, an increase
in deferred revenue of $637,539, non-cash amortization expenses of $29,562,
non-cash loss on disposition of fixed assets of $1,999, impairment of intangible
assets and goodwill expense of $1,990,000, non-cash stock option expenses of
$810,023, non-cash stock based compensation expense of $1,720,000, non-cash
equity compensation to loan guarantors of $2,440,705, and non cash equity
compensation for services rendered of $42,082 offset by an increase in current
assets of $46,552.




17




The
following unaudited, non-GAAP schedule provides a summary of operations adjusted
for amortization and equity-based compensation:






Adjusted
      Operating IncomeYears
      ended December 31,2008
                                                                          
                                                                          
                                                                          2007Sales
                                                                          
                                                                          $
                                                                          4,680,515
                                                                          
                                                                          
                                                                          $
                                                                          3,253,032Cost
      of sales
                                                                          
                                                                          
                                                                          737,929
                                                                          
                                                                          
                                                                          
                                                                          255,722Gross
      margin
                                                                          
                                                                          
                                                                          3,942,586
                                                                          
                                                                          
                                                                          
                                                                          2,997,310Operating
      expenses:Research
      and development
                                                                          
                                                                          
                                                                          491,122
                                                                          
                                                                          
                                                                          
                                                                          761,272Stock
      option expense
                                                                          
                                                                          
                                                                          (23,779
                                                                          )
                                                                          
                                                                          
                                                                          (235,311
                                                                          )Adjusted
      research and development
                                                                          
                                                                          
                                                                          488,745
                                                                          
                                                                          
                                                                          
                                                                          525,961Selling,
      general and administrative
                                                                          
                                                                          
                                                                          5,540,044
                                                                          
                                                                          
                                                                          
                                                                          5,390,038Amortization
      expense
                                                                          
                                                                          
                                                                          (29,562
                                                                          )
                                                                          
                                                                          
                                                                          (23,572
                                                                          )Stock
      option expense
                                                                          
                                                                          
                                                                          (786,244
                                                                          )
                                                                          
                                                                          
                                                                          (2,725,289
                                                                          )Stock
      based compensation
                                                                          
                                                                          
                                                                          (1,745,000
                                                                          )
                                                                          
                                                                          
                                                                          (430,000
                                                                          )Adjusted
      selling, general and administration
                                                                          
                                                                          
                                                                          2,979,238
                                                                          
                                                                          
                                                                          
                                                                          2,211,177Adjusted
      operating income
                                                                          
                                                                          $
                                                                          474,603
                                                                          
                                                                          
                                                                          $
                                                                          260,172






Investing
activities used cash of $34,836 during the year ended December 31, 2008 and
$42,248 during the year ended December 31, 2007.  Cash used for
investing activities during the year ended December 31, 2008 resulted from the
purchase of fixed assets in the amount of $39,997 offset by proceeds of
disposition of $5,161.  Cash used for investing activities during the
year ended December 31, 2007 resulted from the purchase of fixed assets in the
amount of $44,643 offset by proceeds of disposition of $2,395.




During the
year ended December 31, 2008, financing activities provided cash of $1,207,163
as a result of an advance on our bank loan and $27,500 as a result of selling
shares of our common stock, and used cash of $1,155,624 for repayment of the
bank loan.  During the year ended December 31, 2007, financing
activities provided cash of $685,484 as a result of selling shares of our common
stock and used cash of $420,000 for repayment of the bank loan.




We
estimate that, at our current level of operation, our cash expenses are
approximately $450,000 per month. We estimate that without further funding or
new revenue, we will deplete our cash resources in approximately July
2009.




Our
Exclusive Global Channel Partner Agreement dated May 5, 2006 with ABB Inc.
provided for a minimum purchase guarantee of $5,500,000 (reduced to $5,250,000
as a result of missing the RBP deadline of December 31, 2007) $5,250,000 for the
year ended December 31, 2008.  The 2008 minimum purchase guarantee
resulted in positive cash flow from operations during the year ended December
31, 2008. The ABB Agreement expired in accordance with its terms on December 31,
2008.  It is management’s intention to expand our business by
developing products and services suitable for the consumer robotics market and
the government and military markets. The full cost of expanding into these
markets has not been determined but it is expected that some form of equity
financing will be required to finance the expanded operations and to fund our
bank loan repayment.




Bank
Loan and Loan Guarantee




On October
23, 2006 the Company completed a transaction redeeming all of its previously
outstanding secured convertible debentures. To facilitate the transaction, a
bank loan of $2,473,000 amortized over 18 months commencing June 2007 was
obtained from the Royal Bank of Canada (the “2006 RBC Loan
Agreement”).  A general security agreement covering all of the
Company’s personal and intangible property, including intellectual property, has
been pledged as collateral.




As
additional security, the Royal Bank required that standby letters of credit
securing the full amount of the loan be provided. Certain accredited investors
(the “LC Providers”) agreed to provide the letters of credit as financing to the
bank in order to enable the loan and as compensation the Company agreed to issue
one Unit for each one dollar pledged as security for the bank
loan.  Each Unit consists of two shares of the common stock of the
Company, three share purchase warrants, each warrant entitling the holder to
purchase one additional share of common stock at a price of $0.30 per share for
a period of five years; and one and one-half share purchase warrants, each whole
warrant entitling the holder to purchase one additional share of common stock at
a price of $0.50 per share for a period of five years. Our CEO is the provider
of the largest letter of credit and is the Managing Member of the LC
Providers.  A general security agreement covering all of the Company’s
personal and intangible property, including intellectual property has been
pledged as security to the LC Providers.  The general security
agreement pledged to the LC Providers is subordinate to the general security
agreement pledged to the Royal Bank.  In the event the Company
defaults on the loan and the letters of credit are called by the Royal Bank, the
Company will pay 10% annual interest to the LC Providers for the balance of the
outstanding letters of credit.  In the event that the letters of
credit are drawn down by the Royal Bank or upon any other specified default by
the Company, the Company will then require and accept the resignations of the
then current directors of the Company and appoint the LC Providers as member of
a new Board of Directors.  The Board of Directors will immediately
decide upon and approve appropriate compensation for the Managing Member and
decide upon the management of the Company.  In any case where the
letters of credit are drawn by the Royal Bank to any level, the Company will
immediately appoint the Managing Member as the manager of the Company’s assets
with full power under the LC Providers’ general security agreement with the
Company to take such action as is necessary to recover the amounts due to the LC
Providers and manage the business and affairs of the Company, in the best
overall interests of the LC Providers.




18




A total of
$2,450,000 letters of credit were obtained to secure the bank loan and
accordingly the Company has issued 4,900,000 common shares, 7,350,000 warrants
exercisable at $0.30 and 3,675,000 warrants exercisable at $0.50.  As
further compensation, the exercise price of 332,500 share purchase warrants
previously held by certain LC Providers has been reduced from $1.00 to $0.30 per
share and the term of those warrants has been extended by 24 months to expire
May 2, 2010.  The Company has also agreed to reimburse the LC
Providers for all banking fees incurred in establishing and maintaining the
letters of credit.




Of the
letters of credit, $2,150,000 was received October 23, 2006 and, accordingly,
4,300,000 common shares were issued, 6,450,000 warrants were exercisable at
$0.30 and 3,225,000 warrants were exercisable at $0.50. On October 23, 2006
$1,376,000 was recorded as an expense on account of the fair value of the common
shares issuance and $2,350,617 on account of the fair value of the warrant
issuance. The fair value of the common shares was calculated using the closing
market price of the common stock on October 23, 2006 ($0.32) and the fair value
of the warrants was calculated using the Black-Scholes valuation model and the
following assumptions: dividend yield 0%, expected volatility 167%, risk-free
interest rate 4.90%, and an expected term of two years.




The
remaining $300,000 of the letters of credit was received February 5, 2007 and,
accordingly, 600,000 common shares were issued, 900,000 warrants were
exercisable at $0.30 and 450,000 warrants were exercisable at $0.50. On February
5, 2007, $180,000 was recorded as an expense on account of the fair value of the
common shares issuance and $302,835 on account of the fair value of the warrant
issuance. The fair value of the common shares was calculated using the closing
market price of the common stock on February 5, 2007 ($0.30) and the fair value
of the warrants was calculated using the Black-Scholes valuation model and the
following assumptions: dividend yield 0%, expected volatility 165%, risk-free
interest rate 4.92%, and an expected term of two years.




The
agreement governing the LC Providers and the Loan Guarantee terms required that
the Company file a Registration Statement such that the securities issued to the
LC Providers would qualify for resale pursuant to the Registration
Statement.  The Agreement contained penalty provisions if the Company
did not file a Registration Statement, and if the Registration Statement did not
become effective, within certain time provisions.  Upon review, it was
determined that the penalty provision clauses applied and, in accordance with
the terms of the penalty provisions, the Company issued one additional common
share to the LC Providers that delivered letters of credit on or before October
23, 2006.  On August 10, 2007, the Company issued 1,625,000 common
shares at a fair value of $0.48 per share.




Prior to
the receipt of the final letters of credit, cash collateral had been pledged by
accredited investors to allow the Royal Bank of Canada to fund the total amount
of the loan. The receipt of the final letters of credit allowed for the release
of the cash collateral.  As compensation for pledging the cash
collateral, on March 22, 2007 the Company issued to one of the accredited
investors 100,000 common shares and 100,000 share purchase warrants exercisable
at $0.30 for a period of three years. On March 22, 2007 the Company recorded as
an expense, $36,000 on account of the fair value of the common shares issuance
and $28,406 on account of the fair value of the warrant issuance. The fair value
of the common shares was calculated using the closing market price of the common
stock on March 22, 2007 ($0.36) and the fair value of the warrants was
calculated using the Black-Scholes valuation model and the following
assumptions: dividend yield 0%, expected volatility 165%, risk-free interest
rate 4.58%, and an expected term of two years.  As further
compensation, the exercise price of 1,008,548 share purchase warrants previously
held by the accredited investor was reduced from $0.60 to $0.30 per share and
the term of those warrants was extended by 36 months to expire January 18,
2011.




On
September 17, 2008, the Company entered into a letter agreement with the Royal
Bank of Canada dated July 29, 2008 (the “2008 RBC Loan
Agreement”).  The 2008 RBC Loan Agreement provides for a $250,000
revolving demand facility and a $2,405,000 non-revolving term loan and
supersedes and cancels the 2006 RBC Agreement.  Immediately prior to
funding under the 2008 RBC Loan Agreement, $1,197,837 remained outstanding under
the 2006 RBC Loan Agreement.  The remaining balance under the 2006 RBC
Loan Agreement was rolled into the $2,405,000 funded under the 2008 RBC Loan
Agreement.  The term loan is repayable in 24 equal installments of
$108,208 principal plus monthly accrued interest with the first payment due on
October 11, 2008.   The term loan balance as of December 31, 2008
is $2,104,376.  The maturity date for the term loan is July 11,
2009.  Interest is calculated at the floating 30 day LIBOR rate plus
1.50%.




19




The
Company’s obligations under the 2008 RBC Loan Agreement are collateralized by a
general security agreement covering all of the Company’s personal and intangible
property, including intellectual property of the Company and its subsidiary,
Braintech Canada, Inc., and the irrevocable and unconditional standby letters of
credit which were previously pledged by the LC Providers as security under the
2006 RBC Loan Agreement which were renewed and extended.  The LC
Providers’ security arrangement remains in place as described earlier in this
section.




On
September 26, 2008, as compensation for extending the letters of credit as
described above, the Company issued an aggregate of 10,375,000 common share
purchase warrants, each of which entitle the holder to purchase one share of the
Company’s common stock at $0.30 per share for a period of five years, to the LC
Providers.  Additionally, on September 29, 2008, the Company issued an
aggregate of 4,150,000 shares of the Company’s common stock to the LC
Providers.  Each LC Provider received two shares of common stock and
five share purchase warrants exercisable at $0.30 per share for each dollar of
letter of credit provided.




The
Company has recorded an expense of $1,814,055 related to the share purchase
warrants issued as compensation to the LC Providers and an expense of $626,650
related to the common shares issued to the LC Providers at $0.151 per
share.  The fair value of the common shares was calculated using the
closing market price of the common stock on September 29, 2008 ($0.151) and the
fair value of the warrants was calculated using the Black-Scholes valuation
model and the following assumptions: dividend yield 0%, expected volatility
190%, risk-free interest rate 2.11%, and an expected term of two
years.




Going
Concern Statement




Due to the
uncertainty of our ability to meet our current operating and capital expenses,
in their report on the consolidated financial statements for the year ended
December 31, 2008, our independent registered public accounting firm included an
explanatory paragraph regarding concerns about our ability to continue as a
going concern. Our audited consolidated financial statements contain additional
note disclosures describing the circumstances that lead to this disclosure by
our independent registered public accounting firm.




There is
substantial doubt about our ability to continue as a going concern as the
continuation of our business is dependent upon obtaining further financing,
successful and sufficient market acceptance of our software products, the
continuing successful development of our computerized vision systems and,
finally, achieving a profitable level of operations. The issuance of additional
equity securities by us could result in a significant dilution in the equity
interests of our current stockholders. Obtaining commercial loans, assuming
those loans would be available, will increase our liabilities and future cash
commitments.




There are
no assurances that we will be able to obtain further funds required for our
continued operations. We are pursuing various financing alternatives to meet our
immediate and long-term financial requirements. There can be no assurance that
additional financing will be available to us when needed or, if available, that
it can be obtained on commercially reasonable terms. If we are not able to
obtain the additional financing on a timely basis, we will not be able to
proceed with our expansion program and may not be able to meet our other
obligations as they become due.




Off-Balance
Sheet Arrangements




Not
Applicable.






ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS




Not
Applicable.






ITEM 8.
            FINANCIAL
      STATEMENTS





All
      financial information required by this Item is attached hereto at the end
      of this report beginning on page F-1 and is hereby incorporated by
      reference.






ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




Not
Applicable.




20




ITEM 9(A)(T).
            CONTROLS
      AND PROCEDURES






Evaluation
of Disclosure Controls and Procedures




As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end
of the period covered by the Annual Report on Form 10-K, being December 31,
2008, we have carried out an evaluation of the effectiveness of the design and
operation of our Company’s disclosure controls and procedures. This evaluation
was carried out under the supervision and with the participation of our
Company’s management, including our Company’s principal executive officer and
principal financial and accounting officer. Based upon that evaluation, our
Company’s principal executive officer and our Company’s principal financial and
accounting officer concluded that our Company’s disclosure controls and
procedures are effective as at the end of the period covered by this
report.




Disclosure
controls and procedures and other procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time period specified in the Securities and Exchange Commission’s
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 is
accumulated and communicated to management including our president and chief
executive officer as appropriate, to allow timely decisions regarding required
disclosure.




Changes
in Internal Control Over Financial Reporting




There have
been no material changes in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that have affected, or are
reasonably likely to affect our internal controls over financial
reporting.




Management’s
Report on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate control over financial
reporting for our Company. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
controls over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.




Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluations of
effectiveness to future periods are subject to the 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
(with the participation of our principal executive officer and principal
financial and accounting officer) conducted an evaluation of the effectiveness
of our Company’s internal control over financial reporting based on the
framework in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, management concluded that
our internal control over financial reporting was effective as of
December 31, 2008.




This
Annual Report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
Annual Report on Form 10-K.




There have
been no material changes in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that have affected, or are
reasonably likely to affect our internal controls over financial
reporting.








ITEM 9B.
            OTHER
      INFORMATION




Not
Applicable




21




PART
III






ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE






Directors
and Executive Officers




The
following table sets forth certain information, as of March 26, 2009, with
respect to our directors and executive officers




Name
                                  
                                  Age
                                  
                                  PositionFrederick (Rick) Weidinger
                                  
                                  50
                                  
                                  Chief
      Executive Officer and ChairmanClifford
      G. Butler
                                  
                                  55
                                  
                                  DirectorOwen
      L.J. Jones
                                  
                                  57
                                  
                                  DirectorRussell
      S. Lewis*
                                  
                                  54
                                  
                                  DirectorJames
      L. Speros
                                  
                                  50
                                  
                                  DirectorTien
      Wong*
                                  
                                  46
                                  
                                  DirectorThomas
      E. McCabe
                                  
                                  54
                                  
                                  Executive
      Vice President, President of Braintech Government & Defense
      Inc.Jerry
      Osborn
                                  
                                  47
                                  
                                  Executive
      Vice President, President of Braintech Industrial Inc.Edward
      A. White
                                  
                                  64
                                  
                                  Senior
      Vice President, Administration____________________


*
            Denotes
      member of the audit committee.




Frederick (Rick) Weidinger was
appointed as our Chief Executive Officer and as a director on October 22,
2007. Mr. Weidinger has served over the past 15 years as Chairman, Chief
Executive Officer and President of Pontio Communications, Vice president
Corporate Development for MFS Communications Company, and Chief Financial
Officer of Institutional Communications Company (ICC). Mr. Weidinger holds
both Juris Doctor and MBA degrees from Creighton University and a Bachelor of
Science degree from the University of Nebraska. He presently sits on the Board
of Directors of numerous private companies.




Clifford G. Butler was
appointed as a director on May 10, 2006. Mr. Butler is currently
President and Chief Executive Officer of the BAS Group, Inc., a privately held
automotive service center, Managing Member of 14720 Southlawn, LLC, a private
company that owns and manages commercial investments and commercial real estate,
Managing Member of 2916 Palm Blvd., LLC, a private company that owns and
operates resort investment real estate, and President and Chief Operating
Officer of Aviation Facilities Corporation, Inc., an aviation real estate
venture that owns and operates the leasehold for 60 individual aircraft
T-Hangers for the indoor storage of aircraft. Throughout the 1980’s and early
1990’s, Mr. Butler was a lessee member of Congressional Air, Ltd., an
aircraft charter operation, and he played a vital role in its success.
Mr. Butler has over 33 consecutive years of entrepreneurial experience in
the private sector.




Owen L.J. Jones has been a
Director since December 1993 and was our Chief Executive Officer from December
1993 until October 22, 2007. Until its termination as of December 31, 2008,
Mr. Jones provided consulting services pursuant to an employment agreement
dated October 22, 2007. He still remains an advisor to Mr.
Weidinger.  Prior to founding Braintech, Mr. Jones since 1981,
held senior technical and marketing management positions with several high tech
companies, regionally in British Columbia, nationally in Canada and the US.
Mr. Jones majored in Canadian economic history with a minor in computer
science from the University of British Columbia.




Russell S. Lewis was appointed
as a director on November 13, 2007.  He is currently the Senior Vice
President of Strategic Development at VeriSign Inc. (NASDAQ/VRSN), a leading
provider of infrastructure services for Internet and Telecommunications
networks. Prior to assuming this role at VeriSign, he held senior positions in
Corporate Development and as the General Manager of VeriSign’s Naming and
Directory Services Group, known for running a major portion of the Internet’s
critical addressing infrastructure that manages the authoritative directories of
all .com and .net domain names. Mr. Lewis is a Director of Delta Petroleum
(NASDAQ/DPTR) and has served on numerous private boards. Mr. Lewis is a
graduate of Deerfield Academy and holds an undergraduate degree in Economics
from Haverford College, class of 1977, and a Master of Business Administration
degree from Harvard Business School, class of 1981.




James L. Speros was appointed
a director of our Company on September 15, 1998. Mr. Speros served as
Chairman of Chalk Inc., a wholly owned subsidiary of Chalk Media Corp., a public
company trading on the TSX Venture Exchange until its sale to RIM in 2008. From
July 2005 to June 2006, Mr. Speros served as Chief Executive Officer of
Chalk Inc. Prior to his affiliation with Chalk, he was President & CEO
of Sideware Systems, Inc. a publicly-traded CRM software provider.




S. Tien Wong was appointed as
a director on November 13, 2007.  He is currently Chairman and Chief
Executive Officer of Opus8, Inc., a Chevy Chase, Md. based private investment
firm specializing in middle market buyouts, private equity and venture capital
investment. Prior to co-founding CyberRep, Inc, a private CRM outsourcing
company, he worked for 10 years in commercial real estate finance and
investments.




22




Thomas E. McCabe was appointed
as president of Braintech Government & Defense Inc. as well as General
Counsel, Executive Vice President - Corporate Development and Secretary of our
parent company Braintech, Inc. on November 5, 2008.  Prior to joining
Braintech, Mr. McCabe was Vice President and Deputy General Counsel at XM
Satellite Radio from 2005 to 2008.  Prior to XM, he was President and
CEO of COBIS Corporation from 2004 to 2005, and President and CEO of its
subsidiary MicroBanx Systems from 2001 to 2005.  From 1992 to 2000 he
served in positions of increasing responsibility at GRC International
(GRCI).  At the time of GRCI’s sale to AT&T in 2000, Mr. McCabe
was serving as Senior Vice President – Corporate Development, General Counsel
and Secretary.  He was an attorney in private practice from 1983 to
1992.  Mr. McCabe is a graduate of Notre Dame Law School and Graduate
Business School and completed his undergraduate work at Georgetown
University.




Jerry Osborn was appointed as
President of Braintech Industrial Inc. and as Executive Vice President of our
parent company Braintech, Inc.  Prior to joining Braintech, Mr. Osborn
held various management positions in customer service, engineering, project
management and manufacturing and was most recently Vice President and General
Manager of the North American Robot Automation business unit of ABB Robotics
Inc.  Mr. Osborn has a Bachelor of Science Degree in Industrial
Technology from Colorado State University and has undertaken specialized
graduate studies at Duke University, the University of Wisconsin-Milwaukee, the
University of Michigan and the ABB Academy in Switzerland.




Edward A. White has served as
our Senior Vice President, Administration since October 23,
2007.  Mr. White was previously our Director and Chief Financial
Officer from November 1, 2000 to October 23, 2007. Mr. White has
been a member of the British Columbia Institute of Chartered Accountants for 33
years and, for 23 of those years, Mr. White practiced as a self-employed
chartered accountant serving clients in both the public and private
sectors.




Our
directors will hold office until they resign, or until our next shareholders’
meeting.




Involvement
in Certain Legal Proceedings




The
Company is not aware of any legal proceedings within the last five years that
are material to an evaluation of the ability or integrity of any director or
executive officer.




Family
Relationships




There are
no family relationships among our directors or officers.




Compliance
with Section 16(a) of the Exchange Act




Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file with the Securities and Exchange Commission
initial statements of beneficial ownership and reports of changes in ownership
concerning their ownership of our common stock and other equity securities.
Executive officers, directors and greater than 10% shareholders are required by
the Securities and Exchange Commission regulations to furnish our Company with
copies of all Section 16(a) reports they file.




To the
best of our knowledge, all executive officers, directors, and greater than 10%
shareholders filed the required reports in a timely manner during fiscal 2008,
with the exception of the following:




Name
                            
                            Number
      of Late Reports
                            
                            Number
      of Transactions Not
                              Reported
      on a Timely Basis
                            
                            Failure
      to File
                              Requested
      FormsFrederick
      Weidinger
                            
                            1
      (1)
                            
                            3
                            
                            NilOwen
      Jones
                            
                            2
      (1)
                            
                            6
                            
                            NilJames
      Speros
                            
                            1
      (1)
                            
                            1
                            
                            NilClifford
      Butler
                            
                            1
      (1)
                            
                            1
                            
                            NilRussell
      Lewis
                            
                            1
      (1)
                            
                            1
                            
                            NilTien
      Wong
                            
                            1
      (1)
                            
                            1
                            
                            NilThomas
      McCabe
                            
                            1
      (1)
                            
                            1
                            
                            Nil___________________


(1)
            The named officer, director or
      greater than 10% shareholder, as applicable, filed a late Form 4, a Statement of
      Changes in Beneficial
Ownership.







Code
of Ethics




On
January 29, 2003 our Board of Directors adopted a Code of Business Conduct
and Ethics for Directors, Officers and Employees.




23




We will
provide a copy of our Code of Ethics and Business Conduct to any person without
charge, upon request. Requests can be sent to Braintech, Inc. at #102—930 West
1st
St., North Vancouver, B.C. Canada or via email to ir@braintech.com. Our code of
Business Conduct and Ethics for Directors, Officers and Employees is also
available on our website.





Corporate
Governance Committee




Mr. Jones
serves on our Corporate Governance Committee. Mr. Jones has not been
determined independent determined by the Board of Directors pursuant to the
rules of the Nasdaq Stock Market, as he was previously employed by the
Company and had a consulting arrangement with the Company through December 31,
2008.  On January 29, 2003, we adopted our Corporate Governance
Guidelines, which serves as the charter for this committee. The Corporate
Governance Committee is responsible for reviewing with the Board, on an annual
basis, the requisite skills and characteristics of new Board members as well as
the composition of the Board as a whole. This assessment will, include members’
qualification as independent, as well as consideration of diversity, age,
skills, and experience in the context of the needs of the Board. Nominees for
directorship will be selected by the Corporate Governance Committee in
accordance with the policies and principles in its charter and in accordance
with the Corporate Governance Guidelines.




The
independent directors participate in the consideration of director nominees, and
then recommends the nominees to the Board. The general criteria that the
independent director and the Board use to select nominees is: qualification as
independent, as well as consideration of diversity, age, skills, and experience
in the context of the needs of the Board. The Board of Directors will consider
candidates recommended by shareholders using the same procedures and criteria it
uses in evaluating its own candidates. The Board of Directors believes that the
independent director can recommend nominees.




Audit
Committee




Messrs.
Lewis and Wong serve on our Audit Committee. On December 18, 2002, we
adopted an Audit Committee Charter. Our Board of Directors determined that
Messrs. Lewis and Wong are independent pursuant to the rules of the Nasdaq
Stock Market.




Audit
Committee Financial Expert




Our board
of directors has not determined that Messrs. Lewis and Wong may be considered to
be financial experts as that term is defined by Item 407(d)(5)(ii) of Regulation
S-K as promulgated by the Securities and Exchange Commission.  The
board of directors is currently evaluating the qualifications required to meet
the requirement of an audit committee financial expert.






ITEM 11.
            EXECUTIVE
      COMPENSATION




COMPENSATION
TABLES




Summary
Compensation Table




The
following table contains summary information concerning the total compensation
earned during the fiscal years ended December 31, 2008 and 2007 by our principal
executive officer and the two other most highly compensated executive officers
whose total compensation exceeded $100,000 for the fiscal years ended December
31, 2008 and 2007.




Summary
Compensation Table for the Years Ended December 31, 2008 and 2007




Name
                                                                                      and
      Principal
                                                                                      Position
                                                                                    
                                                                                    Year
                                                                                    
                                                                                    Salary
                                                                                      ($)
                                                                                    
                                                                                    
                                                                                    Bonus
                                                                                      ($)
                                                                                    
                                                                                    
                                                                                    Stock
                                                                                      Awards
                                                                                      ($)
                                                                                    
                                                                                    
                                                                                    Option
                                                                                      Awards
                                                                                      ($)
                                                                                    
                                                                                    Non-
                                                                                      Equity
                                                                                      Incentive
                                                                                      Plan
                                                                                      Compensation
                                                                                      ($)
                                                                                    
                                                                                    Nonqualified
                                                                                      Deferred
                                                                                      Compensation
                                                                                      Earnings
                                                                                      ($)
                                                                                    
                                                                                    All
      Other
                                                                                      Compensation
                                                                                      ($)
                                                                                    
                                                                                    Total
                                                                                      ($)(2)
                                                                                    
                                                                                    
                                                                                    
                                                                                    (3)
                                                                                    
                                                                                    
                                                                                    
                                                                                    (4)
                                                                                    
                                                                                    
                                                                                    
                                                                                    (4)Frederick
      Weidinger,
                                                                                      President and
      Chief
                                                                                      Executive
      Officer (1)
                                                                                    
                                                                                    2008
                                                                                    
                                                                                    $
                                                                                    258,000
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,720,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    391,704
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    $
                                                                                    2,369,7042007
                                                                                    
                                                                                    
                                                                                    53,750
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    
                                                                                    430,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    783,408
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    1,267,158Babak
      Habibi, Chief Technology
                                                                                      Officer
                                                                                    
                                                                                    2008
                                                                                    
                                                                                    
                                                                                    112,800
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    
                                                                                    182,943
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    295,7432007
                                                                                    
                                                                                    
                                                                                    111,600
                                                                                    
                                                                                    
                                                                                    
                                                                                    23,506
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    
                                                                                    270,793
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    405,899Edward
      A. White, SVP
                                                                                      Administration
                                                                                    
                                                                                    2008
                                                                                    
                                                                                    
                                                                                    112,800
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    112,8002007
                                                                                    
                                                                                    
                                                                                    111,600
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    
                                                                                    380,759
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    Nil
                                                                                    
                                                                                    
                                                                                    492,359


24


(1)
            Mr. Weidinger
      was appointed as our Chief Executive Officer and as a Director on
      October 22, 2007.


(2)
            Mr. Habibi
      and Mr. White are paid in Canadian funds and those funds which have
      been converted into United States funds at the following exchange rates:
      2008 - Cdn$1.00 = US$0.94; 2007 - Cdn$1.00 =
  US$0.93.


(3)
            Amount
      accrued for performance based
bonuses.


(4)
            These
      amounts represent the dollar amount of compensation we recognized during
      the years ended December 31, 2008 and 2007 for awards granted to the
      named executive officers based on the grant date fair value of the awards
      calculated in accordance with SFAS 123(R).  The fair value of
      option grants during the years ended December 31, 2008 and December
      31, 31, 2007 to the above named executive officers was estimated using the
      Black-Scholes valuation model and the straight-line amortization approach
      with the following weighted average
assumptions:




Year
      Ended
                                        
                                        Risk Free
                                          Interest
                                          Rate
                                        
                                        Expected Life
                                        
                                        Dividend
                                          Yield
                                        
                                        Expected
                                          VolatilityDecember 31,
      2008
                                        
                                        1.78%
                                        
                                        2 years
                                        
                                        Nil
                                        
                                        193%December 31,
      2007
                                        
                                        3.96%
                                        
                                        2 years
                                        
                                        Nil
                                        
                                        171%




Discussion
of Summary Compensation Table Payments




Frederick
Weidinger




On
October 22, 2007, we entered into an employment agreement with Frederick
Weidinger pursuant to which Mr. Weidinger agreed to serve as our Chairman
and Chief Executive Officer beginning November 2007. The employment agreement
will continue indefinitely unless terminated as provided in the agreement. In
the event that Mr. Weidinger is terminated without just cause or he resigns
for good reason, he will be entitled to a severance payment equal to two times
his then current base salary. Mr. Weidinger’s base salary of US$258,000 per
year may be increased by our board of directors. The agreement granted
Mr. Weidinger stock options to purchase 3,000,000 shares of our common
stock at an exercise price of $0.42 per share. 2,000,000 of these options vested
immediately, and 1,000,000 vested upon the achievement of a certain milestone
set forth in the agreement.  In connection with the achievement of the
milestone and the vesting of the options, we recorded an expense of $391,704,
calculated in accordance with the Black-Scholes valuation
model.  Additionally, Mr. Weidinger purchased 8,000,000 shares of
our common stock at a price of $0.01, or $80,000.  Of these shares,
7,000,000 were delivered and put into escrow and will be released from escrow
and delivered to Mr. Weidinger upon the achievement of certain milestones set
forth in the employment agreement. During the year ended December 31, 2008,
certain milestones were achieved and, accordingly, 1,000,000 options vested and
4,000,000 shares were released from escrow and delivered to Mr.
Weidinger.  In accordance with the release of the shares from escrow
we recorded an expense of $1,720,000.  We continue to hold the
remaining 3,000,000 shares pending the completion of milestones.  If
Mr. Weidinger fails to achieve a milestone, we will repurchase the shares
subject to that milestone from Mr. Weidinger for the agreed purchase price
of $0.01 per share.




Edward
A. White




On
October 22, 2007, we entered into an employment agreement with Edward White
pursuant to which Mr. White agreed to serve as Senior Vice President,
Administration for our Company. Mr. White also continues to serve as our
principal financial and accounting officer. The employment agreement will
terminate in two years unless Mr. White is terminated or resigns earlier.
In the event Mr. White is terminated other than for just cause or he
resigns for good reason he is entitled to a severance payment equal to the
greater of (x) 12 months base salary or (y) the remainder of the
contract term. Mr. White’s base salary is CDN$120,000 per year.
Mr. White was also granted 750,000 stock options exercisable at a price of
$0.49 until three years after the termination of the employment agreement. Under
the agreement Mr. White is also eligible to receive cash bonuses at the
discretion of the Chief Executive Officer and our board of directors.
Additionally, pursuant to the agreement, all outstanding stock options
previously granted to Mr. White vested, and the exercise period of all such
options was extended to three years after the termination date of the employment
agreement. There was no change to the exercise price of these stock
options.




Babak
Habibi




On
June 26, 2007 we entered into an employment agreement with Babak Habibi
whereby Mr. Habibi would continue as our Chief Technology Officer. The term
of the employment agreement was three years unless he is terminated for just
cause. In the event Mr. Habibi was terminated for other than just cause he
would have been entitled to a severance payment of 24 month base salary or the
remainder of the contract term. His base salary was CDN$120,000 per year.
Commencing with the 2007 fiscal year, Mr. Habibi was eligible for a cash
performance bonus equal to 2% of our annual revenues from eVF software related
sales in excess of $2,500,000 to a maximum of $8,000,000 and thereafter 1% from
the next $12,000,000 of annual revenues from eVF software related sales. For
fiscal 2007 Mr. Habibi was awarded $23,506 from this cash performance
bonus. He did not earn a cash bonus for fiscal 2008.  Commencing with
the 2007 fiscal year, Mr. Habibi was eligible to receive an annual
performance stock bonus of 10,000 shares of our common stock for the first
$1,000,000 of non-eVF software annual revenues and thereafter 2,000 shares of
our common stock for each $1,000,000 of non-eVF software annual revenues up to a
maximum sales amount of $10,000,000. None of this materialized.  On
June 26, 2007, Mr. Habibi was granted 750,000 stock options exercisable at
a price of $0.62 until June 26, 2012. As further consideration, the
exercise period of all outstanding stock options previously granted to
Mr. Habibi was extended to the expiration date of the employment agreement
inclusive of all extensions thereof. There was no change to the exercise price
of these stock options.  Mr. Habibi resigned from the Company
effective February 3, 2009.




25




Outstanding
Equity Awards




The
following table sets forth certain information concerning unexercised options,
stock that has not vested and equity incentive plan awards for each named
executive officer outstanding as at December 31, 2008.




Outstanding
Equity Awards as at December 31, 2008


Options
      Awards
                                                                          
                                                                          Stock
      AwardsName
                                                                          
                                                                          Number of
                                                                            Securities
                                                                            Underlying
                                                                            Unexercised
                                                                            Options (#)
                                                                            Exercisable
                                                                          
                                                                          Number of
                                                                            Securities
                                                                            Underlying
                                                                            Unexercised
                                                                            Options (#)
                                                                            Unexercisable
                                                                          
                                                                          Equity Incentive
                                                                            Plan
      Awards:
                                                                            Number of
                                                                            Securities
                                                                            Underlying
                                                                            Unexercised
                                                                            Unearned
                                                                            Options (#)
                                                                          
                                                                          Option
                                                                            Exercise
                                                                            Price ($)
                                                                          
                                                                          Option
                                                                            Expiration
                                                                            Date
                                                                          
                                                                          Number of
                                                                            Shares or
                                                                            Units of
                                                                            Stock That
                                                                            Have Not
                                                                            Vested (#)
                                                                          
                                                                          Market
                                                                            Value
      of
                                                                            Shares
      or
                                                                            Units
      of
                                                                            Stock
      That
                                                                            Have
      Not
                                                                            Vested ($)
                                                                          
                                                                          Equity Incentive
                                                                            Plan
      Awards:
                                                                            Number of
                                                                            Unearned
                                                                            Shares,
      Units
                                                                            or
      Other
                                                                            Rights
      That
                                                                            Have
      Not
                                                                            Vested (#)
                                                                          
                                                                          Equity Incentive
                                                                            Plan
      Awards:
                                                                            Market
      or
                                                                            Payout
      Value
                                                                            of
      Unearned
                                                                            Shares,
      Units
                                                                            or
      Other
                                                                            Rights
      That
                                                                            Have
      Not
                                                                            Vested
      ($)Frederick
      Weidinger,
                                                                            President and
      Chief
                                                                            Executive
      Officer
                                                                          
                                                                          
                                                                          3,000,000
                                                                          
                                                                          Nil
                                                                          
                                                                          Nil
                                                                          
                                                                          
                                                                          0.42
                                                                          
                                                                          22/10/12
                                                                          
                                                                          
                                                                          3,000,000
                                                                          
                                                                          
                                                                          210,000Babak
      Habibi, Chief
                                                                            Technology
      Officer
                                                                          
                                                                          
                                                                          150,000
                                                                            500,000
                                                                            100,000
                                                                            750,000
                                                                            250,000
                                                                          
                                                                          Nil
                                                                            Nil
                                                                            Nil
                                                                            Nil
                                                                            Nil
                                                                          
                                                                          Nil
                                                                            Nil
                                                                            Nil
                                                                            Nil
                                                                            Nil
                                                                          
                                                                          
                                                                          0.20
                                                                            0.60
                                                                            0.40
                                                                            0.62
                                                                            0.45
                                                                          
                                                                          26/06/12
                                                                            26/06/12
                                                                            26/06/12
                                                                            26/06/12
                                                                            11/12/12
                                                                          
                                                                          Nil
                                                                          
                                                                          Nil
                                                                          
                                                                          Nil
                                                                          
                                                                          NilEdward
      A. White, SVP Administration
                                                                          
                                                                          
                                                                          150,000
                                                                            250,000
                                                                            100,000
                                                                            750,000
                                                                            250,000
                                                                          
                                                                          Nil
                                                                            Nil
                                                                            Nil
                                                                            Nil
                                                                            Nil
                                                                          
                                                                          Nil
                                                                            Nil
                                                                            Nil
                                                                            Nil
                                                                            Nil
                                                                          
                                                                          
                                                                          0.20
                                                                            0.65
                                                                            0.40
                                                                            0.49
                                                                            0.45
                                                                          
                                                                          22/10/12
                                                                            22/10/12
                                                                            22/10/12
                                                                            22/10/12
                                                                            11/12/12
                                                                          
                                                                          Nil
                                                                          
                                                                          Nil
                                                                          
                                                                          Nil
                                                                          
                                                                          Nil


Compensation
of Directors




All
compensation paid to our directors is limited to our non-employee directors. We
use a combination of cash and stock-based incentive compensation to attract and
retain qualified individuals to serve on the Board. Directors who are employees
of our Company do not receive additional compensation for serving as directors.
Each director who is not an employee of our Company receives an annual fee of
$10,000, a fee of $750 for each Board meeting and Audit Committee meeting
attended in person, $500 for each Compensation Committee meeting and Governance
Committee meeting attended in person.  Each director who is not an
employee receives a fee of $250 for attending a Board meeting, Compensation
Committee meeting or Governance Committee meeting by telephone conference
call.  Directors who attend an Audit Committee meeting by telephone
conference call receive a fee of $500 per meeting.  Board member who
are also members of the executive committee receive a monthly fee of
$750.  All of our directors are reimbursed for out-of-pocket expenses
occurred in attending meetings of the Board or committees thereof, and for any
other expenses incurred in their capacity as directors of our Company. Under our
incentive stock option plan each non-employee director is eligible to receive
options to purchase shares of our common stock. Each award is determined on an
individual basis by our Chief Executive Officer in consultation with the
Board.




To date we
have accrued all of these director fees for future payment. As at December 31,
2008, we have accrued a total of $131,178 for future payment.




The
following table sets forth a summary of compensation for the year ended December
31, 2008 that we paid or accrued to each director. We do not sponsor a pension
benefits plan, a nonqualified deferred compensation plan or a non-equity
incentive plan for our directors; therefore, these columns have been omitted
from the following table. Except for reimbursement of travel expense to attend
board and committee meetings, no other or additional compensation for services
were paid to any of the directors.




26




Director
Compensation Table


for
the Year Ended December 31, 2008




Name
                                      
                                      Fees Earned or
                                        Paid
      in Cash
                                        ($)
                                      
                                      
                                      Stock Awards
                                        ($)
                                      
                                      
                                      Option Awards
                                        ($)
                                      
                                      All
                                        Other Compensation
                                        ($)
                                      
                                      Total
                                        ($)(1)
                                      
                                      
                                      (1)James
      Speros
                                      
                                      
                                      11,550
                                      
                                      
                                      Nil
                                      
                                      
                                      
                                      4,530
                                      
                                      Nil
                                      
                                      
                                      15,780Clifford
      Butler
                                      
                                      
                                      12,250
                                      
                                      
                                      Nil
                                      
                                      
                                      
                                      10,737
                                      
                                      Nil
                                      
                                      
                                      22,487Russell
      Lewis
                                      
                                      
                                      20,210
                                      
                                      
                                      Nil
                                      
                                      
                                      
                                      22,652
                                      
                                      Nil
                                      
                                      
                                      42,862S.
      Tien Wong
                                      
                                      
                                      20,210
                                      
                                      
                                      Nil
                                      
                                      
                                      
                                      22,652
                                      
                                      Nil
                                      
                                      
                                      42,862________


(1)
            These
      amounts represent the dollar amount of compensation we recognized during
      the year ended December 31, 2008 for awards granted to the named executive
      officers based on the grant date fair value of the awards calculated in
      accordance with SFAS 123(R). The fair value of option grants during the
      year ended December 31, 2008 to the above named non-employee directors was
      estimated using the Black-Scholes valuation model and the straight-line
      amortization approach with the following weighted average
      assumptions:




Year
      Ended
                                              
                                              Risk Free Interest
                                                Rate
                                              
                                              
                                              Expected Life
                                              
                                              Dividend Yield
                                              
                                              Expected VolatilityDecember
      31, 2008
                                              
                                              
                                              2.11
                                              %
                                              
                                              2 years
                                              
                                              Nil
                                              
                                              
                                              190
                                              %









ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS






Securities
Authorized for Issuance Under Equity Compensation plans




Equity
Compensation Plan Information




The
following table sets forth information as of December 31, 2008 with respect to
shares of our common stock that may be issued under our equity compensation
plans.




Plan
      category
                          
                          Number of securities to be issued
                            upon
      exercise of outstanding
                            options, warrants and
      rights
                          
                          
                          Weighted-average exercise
                            price of outstanding options,
                            warrants and
      rights
                          
                          
                          Number of securities
                            remaining
      available
                            for future
      issuance(a)
                          
                          
                          (b)
                          
                          
                          (c)Equity
      compensation plans approved
                            by
      security holders
                          
                          
                          8,942,000
                          
                          
                          $
                          0.37
                          
                          
                          
                          5,132,000Equity
      compensation plans not approved
                            by
      security holders
                          
                          
                          30,331,250
                          
                          
                          $
                          0.33
                          
                          
                          
                          4,675,000Total
                          
                          
                          39,273,250
                          
                          
                          $
                          0.35
                          
                          
                          
                          9,807,000




Equity
Compensation Plans Adopted With Security Holder Approval




The
Company has reserved 1,500,000 common shares pursuant to the 2000 Stock Option
Plan, 2,500,000 common shares pursuant to the 2003 Stock Option Plan, and
10,000,000 common shares pursuant to the 2007 Stock Option Plan.  Up
to December 31, 2008, 594,000 stock options are unallocated and remain available
pursuant the 2000 Stock Option Plan, 598,000 stock options are unallocated and
remain available pursuant to the 2003 Stock option Plan, and 3,940,000 stock
options are unallocated and remain available pursuant the 2007 Stock Option
Plan.  Subject to the requirements of any stock exchange on which the
Company’s shares are listed, the Company’s Board of Directors has discretion to
set the price, term, vesting schedules, and other terms and conditions for
options granted under the 2000 plan and the Company’s Compensation Committee has
discretion to set the price, terms, vesting schedules, and other terms and
conditions for options granted under the 2003 and 2007 plans.  The
Company’s board of directors has granted the Company’s Chief Executive Officer
authority to grant awards pursuant to the 2000 Stock Option Plan, 2003 Stock
Option Plan and 2007 Stock Option Plan.




27




Equity
Compensation Plans Adopted Without Security Holder Approval




In order
to attract senior level executives, in October 2007 we adopted the Bonus Stock
and Bonus Stock Option Incentive Plan, which we refer to as the Bonus Plan. The
Bonus Plan provides for the issuance of up to 30,000,000 shares of our common
stock. The aggregate amount of stock to be issued as bonus stock under the Bonus
Plan may not to exceed 20,000,000 shares and the aggregate number of shares to
be issued pursuant to the exercise of bonus stock options may not to exceed
10,000,000 shares. The awards under the Bonus Plan may be subject to certain
milestones and in the event that the securities are granted prior to the
achievement of those specified milestones, such securities will be subject to
escrow restrictions. Up to December 31, 2008, we had issued 11,750,000 shares of
bonus stock and 5,325,000 bonus stock options under the Bonus Plan. The shares
of bonus stock issued are fully paid, non-assessable and have full voting
rights.  The Company’s board of directors has granted the Company’s
Chief Executive officer authority to grant awards pursuant to the Bonus
Plan.




Up to
December 31, 2008, we had issued 25,006,250 share purchase warrants as
settlement compensation to debenture holders, as compensation to bank loan
guarantors, as compensation for finders’ fees and as compensation for other
services.









Security
Ownership of Certain Beneficial Owners




The
following table sets forth certain information regarding our common stock
beneficially owned on March 26, 2009 for (i) each shareholder we know to be
the beneficial owner of 5% or more of our outstanding common stock,
(ii) each of our named executive officers, (iii) each of our
directors, and (iv) all executive officers and directors as a group. In
general, a person is deemed to be a “beneficial owner” of a security if that
person has or shares the power to vote or direct the voting of such security, or
the power to dispose or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which the person has
the right to acquire beneficial ownership within 60 days of March 26, 2009. As
of March 26, 2009, we had 58,662,245 shares of common stock issued and
outstanding.




Unless
indicated below, each shareholder’s address is 1750 Tysons Blvd., Suite 350,
McLean, Virginia 22102.




Name
      and Address of Beneficial Owner
                            
                            Amount and Nature of
                              Beneficial
      Ownership
                            
                            
                            Percentage
                              of
      Class(1)Frederick
      W. Weidinger*
                            
                            
                            22,483,750
                            (2)
                            
                            
                            32.55
                            %Clifford
      G. Butler*
                            
                            
                            4,085,238
                            (3)
                            
                            
                            6.73
                            %Owen
      L.J. Jones* (#102 – 930 West 1st
      Street, North Vancouver, BC, Canada, V7P 3N4)
                            
                            
                            16,475,849
                            (4)
                            
                            
                            24.31
                            %Russell
      Lewis*
                            
                            
                            750,000
                            (6)
                            
                            
                            1.26
                            %James
      L. Speros*
                            
                            
                            2,209,084
                            (6)
                            
                            
                            3.66
                            %Tien
      Wong*
                            
                            
                            750,000
                            (7)
                            
                            
                            1.26
                            %Babak
      Habibi (#102 – 930 West 1st
      Street, North Vancouver, BC, Canada, V7P 3N4)
                            
                            
                            1,883,334
                            (8)
                            
                            
                            3.12
                            %Edward
      A. White  (#102 – 930 West 1st
      Street, North Vancouver, BC, Canada, V7P 3N4)
                            
                            
                            1,633,334
                            (9)
                            
                            
                            2.71
                            %David
      Baird (1302-1081 Ambleside Drive Ottawa, ON K2B 8C8)
                            
                            
                            6,152,096
                            (10)
                            
                            
                            9.92
                            %All
      directors and executive officers as a group (10 Persons)
                            
                            
                            53,770,589
                            (11)
                            
                            
                            62.07
                            %_____________________


*
            Denotes
      a Director of the Company


(1)
            Based
      on 58,662,245 shares of common stock issued and outstanding as of March
      26, 2009. Beneficial ownership is determined in accordance with the rules
      of the SEC and generally includes voting or investment power with respect
      to securities. Except as otherwise indicated, we believe that the
      beneficial owners of the common stock listed above, based on information
      furnished by such owners, have sole investment and voting power with
      respect to such shares, subject to community property laws where
      applicable.


(2)
            Includes
      3,000,000 shares issuable pursuant to stock options and 7,411,250 shares
      issuable pursuant to share purchase warrants exercisable within 60 days of
      March 26, 2009.


(3)
            Includes
      500,000 shares issuable pursuant to stock options and 1,577,619 shares
      issuable pursuant to share purchase warrants exercisable within 60 days of
      March 26, 2009.


(4)
            Includes
      1,100,000 shares issuable pursuant to stock options and 8,011,324 shares
      issuable pursuant to share purchase warrants exercisable within 60 days of
      March 26, 2009. Figures stated for Mr. Jones exclude 321,934
      shares owned by Judy Jones, of which Mr. Jones disclaims beneficial
      ownership.


(5)
            Includes
      750,000 shares issuable pursuant to stock options exercisable within 60
      days of March 26, 2009.


(6)
            Includes
      947,000 shares issuable pursuant to stock options and 673,750 shares
      issuable pursuant to share purchase warrants exercisable within 60 days of
      March 26, 2009.


(7)
            Includes
      750,000 shares issuable pursuant to stock options exercisable within 60
      days of March 26, 2009.


(8)
            Includes
      1,750,000 shares issuable pursuant to stock options exercisable within 60
      days of March 26, 2009.


(9)
            Includes
      1,500,000 shares issuable pursuant to stock options exercisable within 60
      days of March 26, 2009.


(10)
            Includes
      3,383,548 shares issuable pursuant to shares purchase warrants exercisable
      within 60 days of March 26,
2009.


(11)
            Includes
      10,497,000 shares issuable pursuant to stock options and 17,673,943 shares
      issuable pursuant to share purchase warrants exercisable within 60 days of
      March 26, 2009.




28




Arrangements
Which Could Result in a Change in Control




Bank
Loan and Loan Guarantee




As
described in greater detail in Item 7 above and in Note 9 to the Company’s
audited financial statements, the Company has a loan with the Royal Bank of
Canada (the “RBC Loan”).  Under the RBC Loan, a general security
agreement covering all of the Company’s personal and intangible property,
including intellectual property, has been pledged as collateral.  As
additional security, the Royal Bank required that standby letters of credit
(LCs) securing the full amount of the loan be provided. Certain accredited
investors (the “LC Providers”) agreed to provide the LCs as financing to the
bank in order to enable the RBC Loan. Our CEO is the provider of the largest LC
and is the Managing Member of the LC Providers.  Owen Jones, a
director, is the provider of the second largest letter of credit. A general
security agreement covering all of the Company’s personal and intangible
property, including intellectual property has been pledged as security to the LC
Providers.  The general security agreement pledged to the LC Providers
is subordinate to the general security agreement pledged to the Royal
Bank.  In the event the Company defaults on the RBC Loan and the LCs
are called by the Royal Bank, the Company will pay 10% annual interest to the LC
Providers for the balance of the outstanding LCs.  In the event that
the LCs are drawn down by the Royal Bank or upon any other specified default by
the Company, the Company will then require and accept the resignations of the
then current directors of the Company and appoint the LC Providers as member of
a new Board of Directors.  The Board of Directors will immediately
decide upon and approve appropriate compensation for the Managing Member and
decide upon the management of the Company.  In any case where the LCs
are drawn by the Royal Bank to any level, the Company will immediately appoint
the Managing Member as the manager of the Company’s assets with full power under
the LC Providers’ general security agreement with the Company to take such
action as is necessary to recover the amounts due to the LC Providers and manage
the business and affairs of the Company, in the best overall interests of the LC
Providers.




If the
Company were to default on the RBC Loan, the Royal Bank of Canada could (i)
acquire ownership of any or all of the Company’s assets, or (ii) draw on the LCs
triggering the LC Providers’ rights as described above.









ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE






Transactions
with Related Persons, Promoters and Certain Control Persons




In
addition to transactions described elsewhere herein, the following are
transactions since January 1, 2008 through March 26, 2009 in which, our
directors, our executive officers, and beneficial owners of 5% or more of our
outstanding common stock, have an interest.




Frederick Weidinger, Chief
Executive Officer and Director:




In
November 2006, Mr. Weidinger provided a $750,000 standby letter of credit as
partial security for the Royal Bank loan. As compensation for agreeing to renew
and extend the letter of credit, on September 29, 2008 he received 1,500,000
common shares our common stock and 3,750,000 share purchase warrants exercisable
at $0.30 per share for a period of five years.  The fair value of the
common shares ($226,500) and the fair value of the warrants ($655,679) were
recorded as stock based compensation in noncash financing
expenses.  Mr. Weidinger is the provider of the largest letter of
credit for the Royal Bank loan and he is the Managing Member of the group
providing the letters of credit.  As described elsewhere herein and in
Note 9 to the Company’s audited financial statements, the LC Providers have a
second security interest in all of the Company’s assets.




On October
22, 2007, Mr. Weidinger was issued 8,000,000 shares of Bonus Stock of which
7,000,000 were subject to certain milestones and as such are being held in
escrow pending completion of the milestones. In accordance with the terms of the
Bonus Plan and the Employment Agreement, Mr. Weidinger purchased the 8,000,000
shares of Bonus Stock for $80,000 ($0.01 per share).  During fiscal
2008, Mr. Weidinger achieved four of the milestones and accordingly 1,000,000
options vested and 4,000,000 of the escrowed shares were released from escrow
and delivered to Mr. Weidinger.  In conjunction with the escrow
release, we recorded a noncash financing expense of $1,720,000.  In
the event that an individual milestone is not achieved, we will repurchase the
related shares from Mr. Weidinger for the purchase price of $0.01 per
share.




On
September 26, 2008, as partial compensation for advancing $50,000 cash in return
for promissory notes, Mr. Weidinger was issued 50,000 share purchase warrants
exercisable at $0.36 per share for a period of five years.  The fair
value of the warrants ($8,540) was recorded as stock based compensation in
noncash financing expenses.




29




Owen L.J. Jones, former Chief
Executive Officer and Director:




On
October 22, 2007, we entered into an employment agreement with Owen Jones
pursuant to which Mr. Jones agreed to serve as a senior executive of our
Company with the title of Founder. The employment agreement will terminate in
four years unless Mr. Jones is terminated or resigns earlier. In the event
Mr. Jones is terminated other than for just cause or he resigns for good
reason, he is entitled to a severance payment equal to the greater of
(x) 24 months base salary or (y) the remainder of the contract term.
His base salary is CDN $150,000 per year and this salary will decline over the
term of the agreement to correspond with his reduced activity requirement.
Mr. Jones was also granted 750,000 stock options exercisable at a price of
$0.49 until three years after the termination of the employment agreement. Under
the agreement, Mr. Jones is also eligible to receive cash bonuses at the
discretion of the Chief Executive Officer. Additionally, pursuant to the
agreement, all outstanding stock options and share purchase warrants previously
granted to Mr. Jones vested, and the exercise period of all such options
and warrants was extended to three years after the termination date of the
employment agreement. There was no change to the exercise price of these stock
options or share purchase warrants.  In March 2009, this employment
agreement was amended to terminate effective December 31, 2008.




In
November 2006, Mr. Jones provided a $400,000 standby letter of credit as partial
security for the Royal Bank loan. As compensation for agreeing to renew and
extend the letter of credit, on September 29, 2008 he received 800,000 common
shares our common stock and 2,000,000 share purchase warrants exercisable at
$0.30 per share for a period of five years.  The fair value of the
common shares ($120,800) and the fair value of the warrants ($349,695) were
recorded as stock based compensation in noncash financing expenses. Mr. Jones is
the provider of the second largest letter of credit for the Royal Bank
loan.




On
September 26, 2008, as partial compensation for advancing $50,000 cash in return
for promissory notes, Mr. Jones was issued 50,000 share purchase warrants
exercisable at $0.36 per share for a period of five years.  The fair
value of the warrants ($8,540) was recorded as stock based compensation in
noncash financing expenses.




On
September 29, 2008, Mr. Jones was issued 554,910 shares of common stock at a
fair value of $0.22 per share in exchange extinguishing a debt in the amount of
$122,080.




James
Speros, Director:




In
November 2006, Mr. Speros provided a $125,000 standby letter of credit as
partial security for the Royal Bank loan. He elected not to renew and extend his
letter of credit in 2008, and the Compnay is working with RBC to release his
letter of credit.




Thomas E. McCabe, President -
Braintech Government & Defense, Inc.; General Counsel, Secretary & EVP
of Corporate Development - Braintech, Inc.:




On
November 5, 2008, we entered into an employment agreement with Thomas McCabe
pursuant to which Mr. McCabe agreed to serve as president of Braintech
Government & Defense Inc. as well as General Counsel, Executive Vice
President - Corporate Development and Secretary of our parent company Braintech,
Inc. The employment agreement will continue indefinitely unless terminated as
provided in the agreement.  In the event that Mr. McCabe is terminated
without just cause or he resigns for good reason, he will be entitled to a
severance payment equal to two times his then current annual base
salary.  Mr. McCabe’s base salary is US$207,880 per
year.  The annual base salary shall be increased by 10% on April 1,
2009 and such adjusted salary shall be further increased by 10% on each of April
1, 2010 and April 1, 2011.  Mr. McCabe received a cash signing bonus
of $17,500 and will also receive a guaranteed cash bonus of $76,395 on September
30, 2009.  The agreement grants Mr. McCabe stock options to purchase
250,000 shares of our common stock at an exercise price of $0.10 per
share.  The options will vest upon the achievement of a certain
milestone set forth in the agreement.  In connection with the
achievement of the milestone and the vesting of the options, we will record an
expense of $21,322, calculated in accordance with the Black-Scholes valuation
model.  Additionally, Mr. McCabe purchased 1,750,000 shares of our
common stock at a price of $0.01, or $17,500.  These shares were
delivered and put into escrow and will be released from escrow and delivered to
Mr. McCabe upon the achievement of certain milestones set forth in the
employment agreement.  If Mr. McCabe fails to achieve a milestone, we
will repurchase the shares subject to that milestone from Mr. McCabe for the
agreed purchase price of $0.01 per share.




Jerry Osborn, President -
Braintech Industrial, Inc.; Executive Vice President - Braintech,
Inc.:




On January
28, 2009, we entered into an employment agreement with Jerry Osborn pursuant to
which Mr. Osborn agreed to serve as President of Braintech Industrial Inc. and
as Executive Vice President of our parent company Braintech, Inc.  The
employment agreement is for a term of three years, unless terminated in
accordance with the terms of the agreement.  In the event that Mr.
Osborn is terminated without just cause or he resigns for good reason, he will
be entitled to a severance payment equal to two times his then current annual
base salary.  Mr. Osborn’s base salary is US$175,000 per
year.  Mr. Osborn received a cash signing bonus of
$17,500.  The agreement grants Mr. Osborn stock options to purchase
500,000 shares of our common stock at an exercise price of $0.10 per
share.  The options will vest upon the achievement of a certain
milestones set forth in the agreement.  In connection with the
achievement of the milestones and the vesting of the options, we will record an
expense of $46,090, calculated in accordance with the Black-Scholes valuation
model.  Additionally, Mr. Osborn purchased 1,750,000 shares of our
common stock at a price of $0.01, or $17,500.  These shares were
delivered and put into escrow and will be released from escrow and delivered to
Mr. Osborn upon the achievement of certain milestones set forth in the
employment agreement.  If Mr. Osborn fails to achieve a milestone, we
will repurchase the shares subject to that milestone from Mr. Osborn for the
agreed purchase price of $0.01 per share.




David Baird, a beneficial
owner of 5% or more of our outstanding common stock:




In
November 2006, Mr. Baird provided a $250,000 standby letter of credit as partial
security for the Royal Bank loan. As compensation for agreeing to extend the
letter of credit, on September 29, 2008 he received 500,000 common shares our
common stock and 1,250,000 share purchase warrants exercisable at $0.30 per
share for a period of five years.  The fair value of the common shares
($75,500) and the fair value of the warrants ($218,560) were recorded as stock
based compensation in noncash financing expenses.  On January 26,
2009, as final compensation for advancing $255,000 in emergency financing in
2006, Mr. Baird was issued 410,000 shares of common stock at a fair value of
$0.10 per share in addition to 100,000 shares previously issued.  In
conjunction with this compensation settlement, Mr. Baird returned for
cancellation, a share purchase warrant which had entitled him to purchase
100,000 shares of common stock exercisable at $0.30 per share.




30




We do not
have established policies about entering into future transactions with
affiliates. Our Board of Directors addresses individual transactions on their
individual merits.




Corporate
Governance




Our board
has considered the independence of its members in light of the independence
criteria defined by the applicable NASDAQ Stock Market, Inc. Marketplace Rules
(the “NASDAQ Rules”). Only those directors who do not have any of the
categorical relationships that preclude them from being independent within the
meaning of applicable NASDAQ Rules and who the board of directors affirmatively
determines have no relationships that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director, are
considered to be independent directors. In connection with its independence
considerations, the board has reviewed Braintech’s relationships with
organizations with which our directors are affiliated, and has determined that
such relationships were generally established in the ordinary course of business
and are not material to us, any of the organizations involved, or our
directors.




To be
considered independent under these standards, the board must determine that a
director does not have a relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. A
director will be not considered independent if he or she, or an immediate family
member, has been within the last three years:




•
            an
      executive officer of Braintech;




•
            a
      current partner of Braintech’s independent registered public accounting
      firm or a partner or employee of Braintech’s independent registered public
      accounting firm who personally worked on the Braintech
    audit;




•
            an
      executive officer of a public company that has on the compensation
      committee of its board an executive officer of
  Braintech;




•
            a
      paid advisor or consultant to Braintech receiving in excess of $60,000 per
      year in direct compensation from Braintech (other than fees for service as
      a director); and




•
            an
      employee (or in the case of an immediate family member, an executive
      officer) of a company that does business with Braintech and the annual
      payments to or from Braintech exceeded the greater of $200,000 or 5% of
      the other company’s annual gross
revenues.




Based on
the foregoing, the board has determined that Messrs. Lewis and Wong satisfy the
criteria for independence and that Frederick Weidinger, our Chief Executive
Officer and Chairman, and Owen Jones, our former Chief Executive Officer, and
Messrs. Speros and Butler are not independent.




We have a
standing audit committee, corporate governance committee and compensation
committee. All members of each committee meet the definitions of independence as
set forth above. The members of each committee are as follows:




Audit
      Committee
                            
                            Corporate Governance Committee
                            
                            Compensation CommitteeRusty
      Lewis
                            
                            Owen
      Jones
                            
                            Cliff
      ButlerS.
      Tien Wong
                            
                            
                            
                            Jim
      Speros








ITEM 14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.






Audit
Fees




Fees for
audit services totaled $54,990 for the fiscal year ended December 31, 2008 and
$40,330 for the fiscal year ended December 31, 2007, including fees associated
with the audit of the annual financial statements and review of financial
statements included in quarterly filings.




31




Audit-Related
Fees




Fees for
audit-related services totaled $2,250 for the fiscal year ended December 31,
2007. These services related to the consent and filing of Form SB-2 Registration
Statement under the Securities Act of 1933. There were no audit-related services
for the fiscal year ended December 31, 2008.




Tax
Fees




Fees for
tax services totaled $3,122 for the fiscal year ended December 31, 2008,
regarding the preparation of and filing of the Canadian and United States
corporate income tax return for the 2007 fiscal year. Fees for tax services
totaled $8,500 for the fiscal year ended December 31, 2007 regarding preparation
and filing of Canadian and United States corporate income tax returns for the
2006 fiscal year.




All
Other Fees




Fees for
all other services totaled $6,862 for the fiscal year ended December 3,
2008.  These fees related to accounting advice regarding the Shafi
acquisition.  No fees were billed for professional services during the
fiscal years ended December 31, 2007.




The Audit
Committee pre-approves audit engagement terms and fees prior to the commencement
of any audit work, other than that which may be necessary for the independent
auditor to prepare the proposed audit approach, and scope and fee estimates. The
independent auditor submits a written proposal that details audit and
audit-related services.




There were
no fees in 2008 that were not pre-approved by the Audit Committee. All services
described above under the captions “Audit Fees”, “Audit-Related Fees” and “Tax
Fees” were approved by the Audit Committee pursuant to SEC Regulation S-X, Rule
2-01(c)(7)(i).






PART
IV





ITEM 15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES




The
financial statements are presented beginning on page F-1. Each of the following
items is contained in our consolidated financial statements.




•
            Report
      of Independent Registered Public Accounting
  Firm;




•
            Consolidated
      Balance Sheets as of December 31, 2008 and
2007;




•
            Consolidated
      Statements of Operations for each of the years in the two year period
      ended December 31, 2008;




•
            Consolidated
      Statements of Stockholders’ Deficit for the two year period ended December
      31, 2008;




•
            Consolidated
      Statements of Cash Flows for each of the years in the two year period
      ended December 31, 2008; and




•
            Notes
      to Consolidated Financial
Statements.


32




The
following is an index of the exhibits included in this report or incorporated
herein by reference.




Exhibits


Number
                      
                      Exhibit3.1(4)
                      
                      Restated
      Articles of Incorporation of the Company dated June 1,
  20003.2(1)
                      
                      By-Laws
      of the Company3.3(6)
                      
                      Amendment
      to By-Laws of the Company4.1(1)
                      
                      Specimen
      Stock Certificate4.2(2)
                      
                      Stock
      Option Plan of the Company, dated as of February 11,
  20004.3(3)
                      
                      2000
      Stock Option Plan of the Company, dated as of February 11, 2000, as
      amended on November 1, 20004.4(8)
                      
                      2003
      Stock Option Plan of the Company, dated as of April 16,
    20034.5(13)
                      
                      2007
      Stock Option Plan of the Company, dated as of March 22,
    20074.6(12)
                      
                      Bonus
      Stock and Bonus Stock Option Incentive Plan of the Company, dated as of
      October 22, 200710.1(3)
                      
                      Agreement
      for Escrow of Share Certificates and Promissory Note, dated as of February
      27, 2001, by and among Edward White, the Company and Grant
      Sutherland10.2(5)
                      
                      Agreement
      for Escrow of Share Certificates and Promissory Note, dated as of June 26,
      2001, by and among Babak Habibi, the Company and Grant
      Sutherland10.4(8)
                      
                      Loan
      Agreement, dated as of April 16, 2003, by and among the Company, Owen
      Jones and Braintech Canada, Inc.10.5(8)
                      
                      General
      Security Agreement, dated as of April 16, 2003, by and among the Company,
      Owen Jones and Braintech Canada, Inc.10.6(9)
                      
                      Lease,
      dated as of July 30, 2003, by and between Hoopp Realty Inc. and Braintech
      Canada, Inc.10.7(10)
                      
                      Exclusive
      Global Channel Partner Agreement for the Licensing of the Company’s Vision
      Guided Robotics Technologies and Software Products, dated as of April 11,
      2006, by and between Braintech Canada, Inc. and Robotics Division of ABB
      Inc.10.8(11)
                      
                      Form
      of Loan Guarantee and Subscription Agreement10.9(11)
                      
                      Form
      of Warrant Certificate for Purchase of Common Stock10.9(11)
                      
                      General
      Security Agreement, dated as of October 18, 2006, by and among the
      Company, Frederick W. Weidinger, Lawson, Long and Evans LLP, Owen Jones,
      Speros Ventures LLP, Kenneth Brooks and David Baird10.10(12)
                      
                      Employment
      Contract, dated as of October 22, 2007, by and among Braintech Canada,
      Inc., the Company and Edward White10.11(12)
                      
                      Employment
      Contract, dated as of October 22, 2007, by and among Braintech Canada,
      Inc., the Company and Owen Jones10.12(12)
                      
                      Executive
      Employment Agreement with Stock Purchase and Stock Option Provisions,
      dated as of October 22, 2007, by and between the Company and Frederick
      (Rick) Weidinger10.13(14)
                      
                      Share
      Purchase Agreement, dated August 12, 2008, by and between Braintech, Inc.,
      Shafi, Inc., Shafi Innovation, Inc. and Adil Shafi10.14(14)
                      
                      Employment
      Agreement, dated August 12, 2008, by and between Braintech, Inc. and Adil
      Shafi10.15(14)
                      
                      Non-Competition
      Agreement, dated August 12, 2008, of Adil Shafi10.16(14)
                      
                      Lock-Up
      Agreement, dated August 12, 2008, of Adil Shafi10.17(15)
                      
                      Letter
      Agreement, dated July 29, 2008, between the Royal Bank of Canada and the
      Company10.18(16)
                      
                      Form
      of Warrant issued to the Company’s Chief Executive Officer and former
      Chief executive officer on September 26, 200810.19(16)
                      
                      Form
      of Warrant issued to LC Providers on  September 26,
      200810.20(17)
                      
                      Executive
      Employment Agreement with Stock Purchase and Stock Option Provisions,
      dated as of November 4, 2008, by and between the Company and Thomas
      McCabe10.21(18)
                      
                      Executive
      Employment Agreement with Stock Purchase and Stock Option Provisions,
      dated as of January 28, 2009, by and between the Company and Jerry
      Osborn10.22*
                      
                      Amendment
      to Employment Contract effective as of December 31, 2008 by and between
      the Company and Owen Jones14.1(7)
                      
                      Code
      of Business Conduct and Ethics for Directors, Officers and Employees,
      dated as of January 29, 200321.1*
                      
                      Subsidiaries
      of the Company23.1*
                      
                      Consent
      Letter from Auditor dated March 26, 200831.1*
                      
                      Certificate
      of the Principal Executive Officer pursuant to Sec 302 of the
      Sarbanes-Oxley Act of 200231.2*
                      
                      Certificate
      of Principal Financial and Accounting Officer pursuant to Sec 302 of the
      Sarbanes-Oxley Act of 200232.1*
                      
                      Certificate
      of Principal Executive Officer pursuant to Sec 906 of the Sarbanes-Oxley
      Act of 200232.2*
                      
                      Certificate
      of Principal Financial and Accounting Officer pursuant to Sec 906 of the
      Sarbanes-Oxley Act of
2002




Exhibits
filed herewith are designated with an asterisk (*)




(1)
                Exhibit
      incorporated by reference to Form 10-SB filed on September 25,
      1998.(2)
                Exhibit
      incorporated by reference to Form 10-KSB for the year ended
      December 31, 1999 filed on March 9,
  2000.
 (3)
                Exhibit
      incorporated by reference to Form 10-KSB for the year ended
      December 31, 2000 filed on March 29, 2001.(4)
                Exhibit
      incorporated by reference to Form S-1 filed on May 2,
      2001.
 (5)
                Exhibit
      incorporated by reference to Form S-1/A filed on July 5,
      2001.(6)
                Exhibit
      incorporated by reference to Form 10-KSB for the year ended
      December 31, 2001 filed on March 29,
  2002.
 (7)
                Exhibit
      incorporated by reference to Form 10-KSB for the year ended
      December 31, 2002 filed on March 31, 2003.(8)
                Exhibit
      incorporated by reference to Form 10-QSB for the quarter ended
      March 31, 2003 filed on May 14,
2003.
 (9)
                Exhibit
      incorporated by reference to Form 10-QSB for the quarter ended
      September 30, 2003 filed on November 14,
2003.(10)
                Exhibit
      incorporated by reference to Form 10-QSB for the quarter ended
      March 31, 2006 filed on May 15, 2006. The Company
                  has
      applied for, and the Securities Exchange Commission has granted,
      confidential treatment to certain portions of the
      exhibit.
                  Those
      portions of the exhibit have been redacted, and the redacted portions have
      been separately filed with the Securities
                  Exchange
      Commission.
 (11)
                Exhibit
      incorporated by reference to Form 8-K filed on October 26,
      2006.(12)
                Exhibit
      incorporated by reference to Form 8-K filed on October 31,
      2007.
 (13)
                Exhibit
      incorporated by reference to Form S-8 filed on March 4,
      2008.(14)
                Exhibit
      incorporated by reference to Form 8-K filed on August 18,
      2008.
 (15)
                Exhibit
      incorporated by reference to Form 8-K filed on September 23,
      2008.(16)
                Exhibit
      incorporated by reference to Form 10-Q for the quarter ended September 30,
      2008 filed on November 14,
2008.
 (17)
                Exhibit
      incorporated by reference to Form 8-K filed on November 12,
      2008.(18)
                Exhibit
      incorporated by reference to Form 8-K filed on February 4,
      2009.




33




SIGNATURES




In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




BRAINTECH, INC. (the
      Registrant)Signature
            
            Title
            
            Date/s/
      Frederick Weidinger
            
            Chief
      Executive Officer,
            
            March
      26, 2009Frederick
      Weidinger
            
            (Principal
      Executive Officer)




Pursuant
to the requirements of the Exchange Act, as amended, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
indicated.




Signature
                                              
                                              Title
                                              
                                              Date/s/
      Frederick Weidinger
                                              
                                              Chief
      Executive Officer,
                                              
                                              March
      26, 2009Frederick
      Weidinger
                                              
                                              Director/s/
      Edward A. White
                                              
                                              Vice
      President Administration,
                                              
                                              March
      26, 2009Edward
      A. White
                                              
                                              (Principal
      Financial and Accounting
                                                Officer)/s/
      Owen Jones
                                              
                                              Director
                                              
                                              March
      26, 2009Owen
      Jones/s/
      James Speros
                                              
                                              Director
                                              
                                              March
      26, 2009James
      Speros/s/
      Clifford Butler
                                              
                                              Director
                                              
                                              March
      26, 2009Clifford
      Butler/s/
      Russell Lewis
                                              
                                              Director
                                              
                                              March
      26, 2009Russell
      Lewis/s/
      Tien Wong
                                              
                                              Director
                                              
                                              March
      26, 2009Tien
      Wong





34




Consolidated
      Financial Statements
                (Expressed
      in United States dollars)
                BRAINTECH,
      INC.
                Years
      ended December 31, 2008 and
2007





F-1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the
Directors and Stockholders of
 Braintech,
Inc.
  We have
audited the consolidated balance sheets of Braintech, Inc. as of December 31,
2008 and 2007 and the consolidated statements of operations, stockholders’
deficiency and cash flows for the years ended December 31, 2008 and
2007.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America).  Those
standards require that we plan and perform an 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 Braintech, Inc. as of
December 31, 2008 and 2007 and the results of its operations and its cash flows
for the years ended December 31, 2008 and 2007, in conformity with accounting
principles generally accepted in the United States of America.
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in note 1 to the
financial statements a contract with the Company’s main customer has expired at
December 31, 2008 and the Company has incurred recurring losses from operations,
both of which 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 1.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
    Chartered
Accountants
  Vancouver,
Canada
 March 31,
2009




F-2




BRAINTECH,
      INC.Consolidated
      Balance Sheets(Expressed
      in United States dollars)December
      312008
                                                                            
                                                                            
                                                                            2007Assets
      (note
    9)Current
      assets:Cash
      and cash equivalents
                                                                            
                                                                            $
                                                                            2,446,538
                                                                            
                                                                            
                                                                            $
                                                                            921,367Accounts
      receivable
                                                                            
                                                                            
                                                                            1,317,798
                                                                            
                                                                            
                                                                            
                                                                            1,239,106Inventory
                                                                            
                                                                            
                                                                            13,705
                                                                            
                                                                            
                                                                            
                                                                            8,680Prepaid
      expenses
                                                                            
                                                                            
                                                                            23,556
                                                                            
                                                                            
                                                                            
                                                                            60,7213,801,597
                                                                            
                                                                            
                                                                            
                                                                            2,229,874Intangible
      assets and goodwill (note 4)
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -Fixed
      assets (note 6)
                                                                            
                                                                            
                                                                            50,743
                                                                            
                                                                            
                                                                            
                                                                            47,468$
                                                                            3,852,340
                                                                            
                                                                            
                                                                            $
                                                                            2,277,342Liabilities
      and Stockholders’ DeficiencyCurrent
      liabilities:Accounts
      payable (note 4)
                                                                            
                                                                            $
                                                                            1,048,205
                                                                            
                                                                            
                                                                            $
                                                                            106,588Accrued
      liabilities
                                                                            
                                                                            
                                                                            1,184,583
                                                                            
                                                                            
                                                                            
                                                                            610,001Deferred
      leasehold inducements (note 7)
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            14,327Deferred
      revenue (note 8)
                                                                            
                                                                            
                                                                            1,260,510
                                                                            
                                                                            
                                                                            
                                                                            622,971Due
      to related party (note 5)
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            126,558Bank
      loan (note 9)
                                                                            
                                                                            
                                                                            2,104,376
                                                                            
                                                                            
                                                                            
                                                                            2,052,8375,597,674
                                                                            
                                                                            
                                                                            
                                                                            3,533,282Stockholders’
      deficiency:Common
      stock (note 10):Authorized:
      200,000,000 shares, with $0.001 par valueIssued:
      56,502,245 shares (2007 – 45,797,335)
                                                                            
                                                                            
                                                                            56,502
                                                                            
                                                                            
                                                                            
                                                                            45,797Additional
      paid-in capital
                                                                            
                                                                            
                                                                            35,627,161
                                                                            
                                                                            
                                                                            
                                                                            29,485,476Accumulated
      deficit
                                                                            
                                                                            
                                                                            (37,428,997
                                                                            )
                                                                            
                                                                            
                                                                            (30,787,213
                                                                            )(1,745,334
                                                                            )
                                                                            
                                                                            
                                                                            (1,255,940
                                                                            )$
                                                                            3,852,340
                                                                            
                                                                            
                                                                            $
                                                                            2,277,342





Description
of Business and Basis of Presentation (note 1)


Commitments
(note 14)








See
accompanying notes to consolidated financial statements.





F-3





BRAINTECH,
      INC.Consolidated
      Statements of Operations(Expressed
      in United States dollars)Years
      ended December 31,2008
                                                                                          
                                                                                          
                                                                                          2007Sales
      (note 1)
                                                                                          
                                                                                          $
                                                                                          4,680,515
                                                                                          
                                                                                          
                                                                                          $
                                                                                          3,253,032Cost
      of sales
                                                                                          
                                                                                          
                                                                                          737,929
                                                                                          
                                                                                          
                                                                                          
                                                                                          255,722Gross
      margin
                                                                                          
                                                                                          
                                                                                          3,942,586
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,997,310Operating
      expenses:Research
      and development (note 2(c))
                                                                                          
                                                                                          
                                                                                          491,122
                                                                                          
                                                                                          
                                                                                          
                                                                                          761,272Selling,
      general and administrative (note 16)
                                                                                          
                                                                                          
                                                                                          5,540,044
                                                                                          
                                                                                          
                                                                                          
                                                                                          5,390,0386,031,166
                                                                                          
                                                                                          
                                                                                          
                                                                                          6,151,310Operating
      loss before the following
                                                                                          
                                                                                          
                                                                                          (2,088,580
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (3,154,000
                                                                                          )Interest
      income
                                                                                          
                                                                                          
                                                                                          622
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,652Interest
      expense – other
                                                                                          
                                                                                          
                                                                                          (4,378
                                                                                          )
                                                                                          
                                                                                          
                                                                                          -Gain
      on settlement of debt (note 18)
                                                                                          
                                                                                          
                                                                                          75,750
                                                                                          
                                                                                          
                                                                                          
                                                                                          -Loss
      on disposition of fixed assets
                                                                                          
                                                                                          
                                                                                          (1,999
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (581
                                                                                          )Impairment
      of intangible assets and goodwill (note 4)
                                                                                          
                                                                                          
                                                                                          (1,990,000
                                                                                          )
                                                                                          
                                                                                          
                                                                                          -Financing
      expensesInterest
      on bank loan (note 9)
                                                                                          
                                                                                          
                                                                                          (88,890
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (167,710
                                                                                          )Fair
      value of equity issued as compensationfor
      bank loan guarantee (note 9)
                                                                                          
                                                                                          
                                                                                          (2,440,705
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (1,327,241
                                                                                          )Bank
      loan guarantee expenses
                                                                                          
                                                                                          
                                                                                          (38,069
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (25,166
                                                                                          )Other
      financing expenses
                                                                                          
                                                                                          
                                                                                          (48,453
                                                                                          )
                                                                                          
                                                                                          
                                                                                          -Fair
      value of equity issued as compensationfor
      financing services and financing expenses
                                                                                          
                                                                                          
                                                                                          (17,082
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (90,000
                                                                                          )(4,553,204
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (1,609,046
                                                                                          )Net
      loss and comprehensive loss for the year
                                                                                          
                                                                                          $
                                                                                          (6,641,784
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (4,763,046
                                                                                          )Loss
      per share information:Basic
      and diluted
                                                                                          
                                                                                          $
                                                                                          (0.16
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (0.14
                                                                                          )Weighted
      average number of commonshares
      outstanding
                                                                                          
                                                                                          
                                                                                          42,699,544
                                                                                          
                                                                                          
                                                                                          
                                                                                          35,116,193


See
accompanying notes to consolidated financial statements.




F-4




BRAINTECH,
      INC.Consolidated
      Statements of Stockholders’ Deficiency(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 2007Common
      stock
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        TotalNumber
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        Additional
                                                                                                                        
                                                                                                                        
                                                                                                                        Accumulated
                                                                                                                        
                                                                                                                        
                                                                                                                        stockholders’of
      shares
                                                                                                                        
                                                                                                                        
                                                                                                                        Amount
                                                                                                                        
                                                                                                                        
                                                                                                                        paid-in
      capital
                                                                                                                        
                                                                                                                        
                                                                                                                        deficit
                                                                                                                        
                                                                                                                        
                                                                                                                        deficiencyBalance,
      December 31, 2006
                                                                                                                        
                                                                                                                        
                                                                                                                        30,732,433
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        30,732
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        23,930,944
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (26,024,167
                                                                                                                        )
                                                                                                                        
                                                                                                                        $
                                                                                                                        (2,062,491
                                                                                                                        )Common
      stock transactions(net
      of share issue costs)Shares
      issued for cash(net
      of subscriptions received in 2006)
                                                                                                                        
                                                                                                                        
                                                                                                                        3,664,902
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        3,665
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        598,339
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        602,004Shares
      issued for services rendered
                                                                                                                        
                                                                                                                        
                                                                                                                        295,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        295
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        108,605
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        108,900Shares
      issued to bank loan guarantors
                                                                                                                        
                                                                                                                        
                                                                                                                        2,325,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,325
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        993,675
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        996,000Shares
      issued for finders’ fees
                                                                                                                        
                                                                                                                        
                                                                                                                        30,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        30
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (30
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -Shares
      issued at $0.01 pursuant tothe
      Bonus Stock Plan
                                                                                                                        
                                                                                                                        
                                                                                                                        8,750,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        8,750
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        78,750
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        87,500Fair
      value of shares earned pursuant to theBonus
      Stock Plan
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        430,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        430,000Cash
      paid for finders’ fees
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (4,020
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (4,020
                                                                                                                        )Fair
      value of warrants issued to bank loan guarantors
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        331,241
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        331,241Fair
      value of warrants issued for services rendered
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        57,372
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        57,372Fair
      value of stock options expensed
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,960,600
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,960,600Loss
      for the year
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (4,763,046
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (4,763,046
                                                                                                                        )Balance,
      December 31, 2007
                                                                                                                        
                                                                                                                        
                                                                                                                        45,797,335
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        45,797
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        29,485,476
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (30,787,213
                                                                                                                        )
                                                                                                                        
                                                                                                                        $
                                                                                                                        (1,255,940
                                                                                                                        )Common
      stock transactions(net
      of share issue costs)Shares
      issued at $0.01 pursuant toBonus
      Stock Plan
                                                                                                                        
                                                                                                                        
                                                                                                                        2,750,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,750
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        24,750
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        27,500Shares
      issued pursuant to Shafi Acquisition
                                                                                                                        
                                                                                                                        
                                                                                                                        3,000,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        3,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        987,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        990,000Shares
      issued to bank loan guarantors
                                                                                                                        
                                                                                                                        
                                                                                                                        4,150,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        4,150
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        622,500
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        626,650Shares
      issued for debt
                                                                                                                        
                                                                                                                        
                                                                                                                        554,910
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        555
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        121,525
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        122,080Shares
      issued for services rendered
                                                                                                                        
                                                                                                                        
                                                                                                                        250,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        250
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        24,750
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        25,000Fair
      value of shares earned pursuant to theBonus
      Stock Plan
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,720,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,720,000Fair
      value of warrants issued to bank loan guarantors
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,814,055
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,814,055Fair
      value of warrants issued for services rendered
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        17,082
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        17,082Fair
      value of stock options expensed
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        810,023
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        810,023Loss
      for the year
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (6,641,784
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (6,641,784
                                                                                                                        )Balance,
      December 31, 2008
                                                                                                                        
                                                                                                                        
                                                                                                                        56,502,245
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        56,502
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        35,627,161
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (37,428,997
                                                                                                                        )
                                                                                                                        
                                                                                                                        $
                                                                                                                        (1,745,334
                                                                                                                        )




See
accompanying notes to consolidated financial statements.





F-5




BRAINTECH,
      INC.Consolidated
      Statements of Cash Flows(Expressed
      in United States dollars)Years
      ended December 31,2008
                                                                                  
                                                                                  
                                                                                  2007Cash
      flows from operations:Loss
      for the year
                                                                                  
                                                                                  $
                                                                                  (6,641,784
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (4,763,046
                                                                                  )Items
      not involving cash:Amortization
      of fixed assets
                                                                                  
                                                                                  
                                                                                  29,562
                                                                                  
                                                                                  
                                                                                  
                                                                                  23,572Loss
      on disposition of fixed assets
                                                                                  
                                                                                  
                                                                                  1,999
                                                                                  
                                                                                  
                                                                                  
                                                                                  581Impairment
      of intangible assets and goodwill
                                                                                  
                                                                                  
                                                                                  1,990,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Fair
      value of warrants issued for service rendered
                                                                                  
                                                                                  
                                                                                  17,082
                                                                                  
                                                                                  
                                                                                  
                                                                                  57,372Fair
      value of shares issued for services rendered
                                                                                  
                                                                                  
                                                                                  25,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  108,900Fair
      value of stock options expensed
                                                                                  
                                                                                  
                                                                                  810,023
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,960,600Fair
      value of shares earned pursuant to the bonus stock plan
                                                                                  
                                                                                  
                                                                                  1,720,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  430,000Fair
      value of warrants and common shares issued ascompensation
      for bank loan guarantee
                                                                                  
                                                                                  
                                                                                  2,440,705
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,327,241Changes
      in non-cash operating working capital:Accounts
      receivable
                                                                                  
                                                                                  
                                                                                  (78,692
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (15,096
                                                                                  )Inventory
                                                                                  
                                                                                  
                                                                                  (5,025
                                                                                  )
                                                                                  
                                                                                  
                                                                                  1,617Prepaid
      expenses
                                                                                  
                                                                                  
                                                                                  37,165
                                                                                  
                                                                                  
                                                                                  
                                                                                  (12,791
                                                                                  )Accounts
      payable and accrued liabilities
                                                                                  
                                                                                  
                                                                                  516,199
                                                                                  
                                                                                  
                                                                                  
                                                                                  138,787Due
      to related party
                                                                                  
                                                                                  
                                                                                  (4,478
                                                                                  )
                                                                                  
                                                                                  
                                                                                  13,684Deferred
      leasehold inducements
                                                                                  
                                                                                  
                                                                                  (14,327
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (15,828
                                                                                  )Deferred
      revenue
                                                                                  
                                                                                  
                                                                                  637,539
                                                                                  
                                                                                  
                                                                                  
                                                                                  425,588Net
      cash provided by operations
                                                                                  
                                                                                  
                                                                                  1,480,968
                                                                                  
                                                                                  
                                                                                  
                                                                                  681,181Cash
      flows from investments:Proceeds
      from disposition of fixed assets
                                                                                  
                                                                                  
                                                                                  5,161
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,395Purchase
      of fixed assets
                                                                                  
                                                                                  
                                                                                  (39,997
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (44,643
                                                                                  )Net
      cash used in investments
                                                                                  
                                                                                  
                                                                                  (34,836
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (42,248
                                                                                  )Cash
      flows from financing:Common
      shares issued, net of issue costs
                                                                                  
                                                                                  
                                                                                  27,500
                                                                                  
                                                                                  
                                                                                  
                                                                                  685,484Bank
      loan advance
                                                                                  
                                                                                  
                                                                                  1,207,163
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Repayment
      of bank loan
                                                                                  
                                                                                  
                                                                                  (1,155,624
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (420,000
                                                                                  )Net
      cash provided by financing
                                                                                  
                                                                                  
                                                                                  79,039
                                                                                  
                                                                                  
                                                                                  
                                                                                  265,484Increase
      in cash and cash equivalents
                                                                                  
                                                                                  
                                                                                  1,525,171
                                                                                  
                                                                                  
                                                                                  
                                                                                  904,417Cash
      and cash equivalents, beginning of year
                                                                                  
                                                                                  
                                                                                  921,367
                                                                                  
                                                                                  
                                                                                  
                                                                                  16,950Cash
      and cash equivalents, end of year
                                                                                  
                                                                                  $
                                                                                  2,446,538
                                                                                  
                                                                                  
                                                                                  $
                                                                                  921,367Supplemental
      information:Non-cash
      financing activities:Shares
      issued for debt
                                                                                  
                                                                                  $
                                                                                  122,080
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Shares
      issued for Shafi Inc.
                                                                                  
                                                                                  $
                                                                                  990,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Cash
      interest paid
                                                                                  
                                                                                  $
                                                                                  92,819
                                                                                  
                                                                                  
                                                                                  $
                                                                                  165,526Fair
      value of Shafi Inc. liabilities
                                                                                  
                                                                                  $
                                                                                  1,000,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -





See
accompanying notes to consolidated financial statements.




F-6




BRAINTECH,
INC.
 
 Notes to
Consolidated Financial Statements
 (Expressed
in United States dollars)
 
 Years
ended December 31, 2008 and 2007
 
  1.         Description
of business and basis of presentation:
  Braintech,
Inc. (the “Company”) was incorporated on March 4, 1987 under the laws of the
State of Nevada as Tome Capital, Inc.  The Company initially was in
the business of real estate development.  On January 3, 1994, the
Company changed its name to Braintech, Inc. and began operations as a high tech
development company, developing advanced software for the vision guidance of
robotic systems.  All sales of its products and services are made in
this industry segment.  In the year ended December 31, 2008, 99% of
sales revenue (2007 – 99%) was generated from a single customer, ABB Inc.
(“ABB”).
  These
consolidated financial statements have been prepared on the going concern basis
under which an entity is considered to be able to realize its assets and satisfy
its liabilities in the ordinary course of business.  The Company’s
operations have resulted in losses of $6,641,784 in 2008 and $4,763,046 in 2007,
an accumulated deficit of $37,428,997 at December 31, 2008 ($30,787,213 at
December 31, 2007), and a working capital deficiency of $1,796,077 at December
31, 2008 ($1,303,408 at December 31, 2007).  The Company has generated
only small amounts of revenues and is continuing to develop its
business.  Operations to date have been primarily financed by sales to
our major customer and equity and debt transactions.  The Company has
generated nearly all of its revenues from ABB pursuant to its Exclusive Global
Channel Partner Agreement which expired in accordance with its terms on December
31, 2008, and equity and debt transactions.  No new revenue sources
have been generated by the Company since December 31, 2008.  The
Company estimates that without further funding or new revenue, it will deplete
its cash resources in approximately July 2009.  These factors raise
substantial doubt about the Company’s ability to continue as a going
concern.
  The
Company’s future operations and its continuation as a going concern are
dependent upon its ability to raise additional capital and to sell its products
and services to new customers, generate positive cash flows from operations and
ultimately attain profitability.
  Financing
transactions may include the issuance of equity securities, obtaining additional
credit facilities, or other financing mechanisms.  However, the
trading price of the Company’s common stock and the downturn in the U.S. stock
markets could make it more difficult to obtain financing through the issuance of
equity securities.
  The
Company is currently in negotiations with loan providers and is actively
pursuing new sales contracts, however, there can be no assurances that
appropriate financings having favourable economic terms will be available as
required or that the Company will be able to sell its products and services to
new customers on terms satisfactory to the Company.
  If none of
these events occur, there is a risk that the business will fail.  The
consolidated financial statements do not include any adjustments relating to the
recoverability of assets and classification of assets and liabilities that might
be necessary should the Company be unable to continue as a going
concern.
  F-7
  BRAINTECH,
INC.


Notes to
Consolidated Financial Statements
 (Expressed
in United States dollars)
 
 Years
ended December 31, 2008 and 2007
 
  2.         Significant
accounting policies:
  (a)         Basis
of presentation:
  These
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and present the
financial position, results of operations and cash flows of the Company and its
wholly-owned subsidiaries, Braintech Canada, Inc., Braintech Government &
Defense, Inc., Braintech Consumer & Service, Inc., Braintech Industrial,
Inc. and Shafi Inc.  All material intercompany balances and
transactions have been eliminated.
  (b)         Cash
and equivalents:
  Cash and
cash equivalents include highly liquid investments that are readily convertible
to contracted amounts of cash.
  (c)         Research
and development costs:
  Research
and development costs are expensed as incurred and include salaries, benefits
and directly related overhead costs.  Research and development grants
received are offset against the related expenditure.
  (d)         Inventory:
  Inventory
is valued at the lower of cost and net realizable value with cost being
determined on a first-in, first-out basis.  Cost includes laid-down
cost, which is the cost of materials and other applicable direct
costs.
  (e)         Revenue
recognition:
  The
Company recognizes revenue when there is persuasive evidence of an arrangement,
delivery has occurred, the fee is fixed or determinable, collectibility is
reasonably assured, and there are no substantive performance obligations
remaining.  The Company’s revenue recognition policies are in
conformity with the American Institute of Certified Public Accountants Statement
of Position No. 97-2 (“SOP 97-2”), “Software Revenue Recognition”.
  Cash
received or accounts receivable recorded in advance of meeting the revenue
recognition criteria are recorded as deferred revenue and the costs related to
that revenue are recorded as deferred costs.
  (f)         Warranty
costs:
  The
Company accrues warranty costs based on management’s best estimate.
 F-8
  BRAINTECH,
INC.
 
 Notes to
Consolidated Financial Statements
 (Expressed
in United States dollars)
 
 Years
ended December 31, 2008 and 2007
 
  2.         Significant
accounting policies (continued):
  Fixed
assets:
  Fixed
assets are carried at cost less accumulated amortization.  Cost
includes shipping and installation cost of a purchased fixed
asset.  Amortization is calculated annually as follows:
  Asset
                                                                            Basis
                                                                            
                                                                            RateFurniture
      and
      fixtures
                                                                            declining-balance
                                                                            
                                                                            
                                                                            20
                                                                            %Computer
      equipment
                                                                            straight-line
                                                                            
                                                                            36
      monthsComputer
      software
                                                                            straight-line
                                                                            
                                                                            24
      monthsLeasehold
      improvements
                                                                            straight-line
                                                                            
                                                                            lease
      term
 Use of
estimates:
 The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period.  Significant areas requiring the use of
estimates relate to the collectability of accounts receivable, the impairment of
assets and rates for amortization, amount of income tax balances, the
assumptions used in the determination of the fair value of stock-based
compensation, the valuation of accrued liabilities, and the valuation of
intangible assets and goodwill.  The Company has recorded liabilities
under dispute which are subject to measurement uncertainty.  Any
adjustment may have a material effect on net loss and will be recognized in the
consolidated financial statements as they become known.  Actual
amounts may differ from these estimates.
  Foreign
currency:
  The
Company’s functional and reporting currency is the United States
dollar.  All foreign subsidiaries are considered to be
wholly-integrated and, as such, assets and liabilities are translated into
United States dollars based on current exchange rates, revenues and expenses are
translated based on average quarterly rates, and any resulting translation
adjustment is included in operating expenses under selling, general and
administration.  Foreign exchange gains (losses) were not material in
2008 or 2007.
 F-9
  BRAINTECH,
INC.
 
 Notes to
Consolidated Financial Statements
 (Expressed
in United States dollars)
 
 Years
ended December 31, 2008 and 2007
 
 2.         Significant
accounting policies (continued):
    The
Company follows Statement of Financial Accounting Standards No. 123R, “Share
Based Payment” (“SFAS 123R”).  SFAS 123R requires companies to
estimate the fair value of share-based payment awards on the date of grant using
an option pricing model.  The value of the portion of the award that
is ultimately expected to vest is recognized as an expense over the requisite
service period in the Company’s financial statements.  Stock-based
compensation recognized during the period is based on the value of the portion
of the stock-based payment awards that are ultimately expected to vest during
the period.  The Company estimates the fair value of stock options
using the Black-Scholes valuation model, consistent with the provisions of SFAS
123R.  The Black-Scholes valuation model requires the input of highly
subjective assumptions, including the option’s expected life and the price
volatility of the underlying stock.  The expected stock price
volatility assumption was determined using historical volatility of the
Company’s common stock.
  (k)         Income
taxes:
  Potential
benefits of income tax losses are not recognized in the accounts until
realization is more likely than not. The Company has adopted SFAS No. 109,
“Accounting for Income Taxes” (“SFAS 109”).  Pursuant to SFAS No. 109,
the Company is required to compute tax assets and liabilities based on estimated
future tax consequences attributable to differences between financial statement
income and income for income tax purpose.  Pursuant to the Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes” (“FIN 48”), as an interpretation of SFAS 109, the
Company recognizes the effect of uncertain tax positions where it is more likely
than not based on technical merits that the position could be sustained where
the tax benefit has a greater than 50% likelihood of being realized upon
settlement.  Potential benefits of net operating losses have not been
recognized in these financial statements because the Company cannot be assured
it is more likely than not it will utilize the net operating losses carried
forward in future years.  Accordingly a valuation allowance has been
provided.
  (l)         Loss
per share:
  Loss per
share is calculated based on the weighted average number of common shares
outstanding.
  As the
effect of all outstanding stock options (note 11) and share purchase warrants
(note 12) is anti-dilutive, diluted loss per share equals basic loss per
share.
  The number
of shares used to calculate loss per share for the years ended December 31, 2008
and 2007 was reduced by 300,000 shares in each year for shares issued and held
by the Company (note 10(b)).
  The number
of shares used to calculate loss per share for the year ended December 31, 2008
was reduced by 5,500,000 shares (2007 – 6,750,000 shares) for shares issued and
held in escrow pending completion of performance milestones (note
10(c)).
  F-10
  BRAINTECH,
INC.
 
 Notes to
Consolidated Financial Statements
 (Expressed
in United States dollars)
 
 Years
ended December 31, 2008 and 2007
 
  2.         Significant
accounting policies (continued):
  (m)         Deferred
leasehold inducements:
  Leasehold inducements are deferred
and amortized to reduce rent expense on a straight-line basis over the term of
the lease.
  (n)         Business
combinations and intangible assets including goodwill:
  The
Company accounts for business combinations using the purchase method of
accounting and, accordingly, the assets and liabilities of the acquired entites
are recorded at their estimated fair values at the date of
acquisition.  Goodwill represents the excess of the purchase price
over the fair value of the net assets, including the amount assigned to
identifiable intangible assets.
  Identifiable
intangible assets with finite lives are amortized over their estimated useful
lives.  They are generally amortized on a non-straight line approach
based on the associated projected cash flows in order to match the amortization
pattern to the pattern in which the economic benefits of the asset are expected
to be consumed.  They are reviewed for impairment if indicators of
potential impairment exist.  Goodwill and indefinite lived intangible
assets are tested for impairment on an annual basis, or sooner if an indicator
impairment occurs.
  3.         Recent accounting
pronouncements:
  (a)        In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the US, and
expands disclosures about fair value measurements. SFAS 157 is effective as of
the beginning of the first fiscal year that begins after November 15, 2007 and
as such, the Company adopted these provisions effective January 1,
2008.  SFAS 157 did not have a material impact on the Company’s
financial statements.
  (b)        In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”), which Permits
entities to elect to measure financial instruments and certain other items at
fair value that are not currently required to be measured at fair value and
include unrealized gains and losses in net income rather than
equity.  SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007.  The Company did not elect to apply the fair value
option to any of its financial instruments.
  (c)        In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”).  This new standard requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information needed to evaluate and understand the nature and financial effect of
the business combination.  SFAS 141R applies prospectively and is
effective for fiscal years beginning after December 15, 2008, and will be
applicable to the Company in the first quarter of fiscal 2009.  The
Company does not believe that SFAS 141R will have an impact on its financial
statements.
  F-11
  BRAINTECH,
INC.
 
 Notes to
Consolidated Financial Statements
 (Expressed
in United States dollars)
 
 Years
ended December 31, 2008 and 2007
 
  3.         Recent accounting pronouncements
(continued):
  (d)        In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”).  This new standard
requires all entities to report noncontrolling (minority) interests in
subsidiaries in the same way as equity in the consolidated financial
statements.  Moreover, SFAS 160 eliminates the diversity that
currently exists in accounting for transactions between an entity and
noncontrolling interests by requiring they be treated as equity
transactions.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be applicable to the Company in the first quarter of
fiscal 2009.  The Company does not believe that SFAS 160 will have an
impact on its financial statements.
  (e)        In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,”
(“SFAS 161”).  This new standard requires enhanced disclosures for
derivative instruments, including those used in hedging
activities.  It is effective for fiscal years and interim periods
beginning after November 15, 2008, and will be applicable to the Company in the
first quarter of fiscal 2009.  The Company is assessing the potential
impact that the adoption of SFAS 161 may have on its financial
statements.
  (f)        In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. (“SFAS 162”) which identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with GAAP in the US. It is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles”. The adoption of this statement is not expected
to have a material effect on the Company’s consolidated financial
statements.
 
  4.         Shafi
acquisition:
  On August
12, 2008, in a stock for stock transaction, the Company acquired 100% of the
outstanding shares of Shafi, Inc. and 80% of the shares of Shafi Innovation,
Inc. (together “Shafi”) from Adil Shafi pursuant to a Share Purchase Agreement
(“Shafi Purchase Agreement”).  Total consideration for the purchase
was 3,000,000 shares of the common stock of Braintech, Inc. at a fair value of
$0.33 per share (the “Closing Purchase Shares”) issued at the closing of the
acquisition (“Shafi Closing”) and 1,000,000 shares of Braintech, Inc. common
stock to be issued quarterly over the next 12 months upon the achievement of
specified performance criteria (the “Contingent Purchase Shares”).
  The
primary reason for the Shafi transaction was the acquisition of key proprietary
assets and the acceleration of revenues through the Shafi pipeline and to
provide the Company with a technological launching pad to accelerate its
expansion into a wide range of new markets that include aerospace, food and
beverage, government, medical, pharmaceutical, plastics, and
semi-conductors.
  Prior to
the completion of the purchase transaction, on June 5, 2008, the Company
advanced $100,000 to Shafi to meet its working capital needs.  This
advance was secured by all of the assets of Shafi, and was documented and
secured at the Shafi Closing by a demand promissory note bearing an annual
interest rate of 2.54%.
 F-12
 BRAINTECH,
INC.
 
 Notes to
Consolidated Financial Statements
 (Expressed
in United States dollars)
 
 Years
ended December 31, 2008 and 2007
 
 4.         Shafi
acquisition (continued):
  In order
to finance the $100,000 advance, the Company’s Chief Executive Officer and
former Chief Executive Officer each advanced to the Company $50,000 against
delivery by the Company of promissory notes.  The promissory notes
provide for interest at 6% per annum.  The promissory notes also
provide that, each of the promissory note holders will be issued 50,000 common
share purchase warrants as additional compensation.  On September 26,
2008, the promissory notes plus accrued interest were repaid in full and the
Company issued a total of 100,000 common share purchase warrants to the Chief
Executive Officer and former Chief Executive officer.  Each common
share purchase warrant entitles the holder to purchase one share for three years
at a price of $0.36 per share.
  The
acquisition was accounted for under the purchase method.  The
following table summarizes the preliminary estimated fair values of the assets
and liabilities of the Shafi Inc. companies net of the debt Adil Shafi
personally assumed as of August 12, 2008.
  Intangible
      assets of Shafi Inc.
                                                                                            
                                                                                            $
                                                                                            1,090,000Goodwill
      of Shafi Inc.
                                                                                            
                                                                                            
                                                                                            900,000Due
      to Braintech, Inc.
                                                                                            
                                                                                            
                                                                                            (100,000
                                                                                            )Current
      liabilities of Shafi Inc.
                                                                                            
                                                                                            
                                                                                            (900,000
                                                                                            )Net
      assets acquired of Shafi Inc.
                                                                                            
                                                                                            $
                                                                                            990,000Consideration:
      Common stock issued
                                                                                            
                                                                                            $
                                                                                            990,000
 Of the
$1,090,000 of acquired intangible assets, $500,000 was assigned to branding and
the Shafi customer base and contacts and $590,000 was assigned to the purchased
technology.  The $900,000 of goodwill was assigned to the estimated
value of future net revenues.  At December 31, 2008, management
believes that significant uncertainty exists as to the value of the Shafi Inc.
intangible assets and goodwill, and accordingly, an impairment charge of
$1,990,000 has been recorded.
  As part of
the Shafi acquisition, the parties agreed that any current liabilities of Shafi
in excess of $900,000 would be fully and finally satisfied in a timely manner by
Adil Shafi without liability to the Company or the Shafi
companies.  As of the date of closing the excess debt assumed by Adil
Shafi was approximately $172,000.  Through December 31, 2008,
Braintech, Inc. had advanced additional funds to Shafi Inc. thereby allowing
Shafi Inc. to repay $103,882 of the $900,000 in current
liabilities.
  Included
in accounts payable is the amount of $796,118 of Shafi Inc. current liabilities,
which is non-recourse to the Company.
  The
Closing Purchase Shares are subject to a lock-up agreement that restricts the
sale thereof for six months and thereafter places volume restrictions on the
number of such shares that may be sold during any weekly period.  The
Company also agreed to register for resale the shares of Company common stock
issued to Adil Shafi and to cause the related registration statement to be
effective not later than six months after the acquisition of
Shafi.  Mr. Shafi’s sales of common stock under the registration
statement will be subject to compliance with his lock-up agreement.
 
 F-13




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 20074.
                                    Shafi
      acquisition (continued):On
      February 6, 2009, the Company filed a lawsuit in the U.S. District Court
      for the Eastern District of Michigan, Southern Division, against Adil
      Shafi for rescission of the acquisition of Shafi, Inc. and Shafi
      Innovations, Inc.  While the Company has initiated this action
      and is vigorously pursuing it, the final outcome, which the Company
      believes will be favorable, cannot now be determined.  This
      matter is subject to inherent uncertainties and management’s view may
      change in the future.5.
                                    Related
      party balances and transactions:Transactions
      with directors and officers:As
      of December 31, 2007, the Company’s former Chief Executive Officer (“CEO”)
      was owed US$40,000 and was owed CDN$85,000 (equivalent to
      US$86,558).  The advances were unsecured, without interest and
      payable on demand.  On September 29, 2008, the former CEO was
      issued 554,910 common shares as full repayment of the amounts
      outstanding.6.
                                    Fixed
      assets:


Accumulated
                    
                    
                    Net
      bookDecember
      31, 2008
                    
                    Cost
                    
                    
                    amortization
                    
                    
                    valueFurniture
      and fixtures
                    
                    $
                    45,397
                    
                    
                    $
                    31,228
                    
                    
                    $
                    14,169Computer
      equipment
                    
                    
                    222,138
                    
                    
                    
                    192,125
                    
                    
                    
                    30,013Computer
      software
                    
                    
                    63,697
                    
                    
                    
                    57,136
                    
                    
                    
                    6,561$
                    331,232
                    
                    
                    $
                    280,489
                    
                    
                    $
                    50,743Accumulated
                    
                    
                    Net
      bookDecember
      31, 2007
                    
                    Cost
                    
                    
                    amortization
                    
                    
                    valueFurniture
      and fixtures
                    
                    $
                    80,581
                    
                    
                    $
                    67,417
                    
                    
                    $
                    13,164Computer
      equipment
                    
                    
                    232,907
                    
                    
                    
                    204,808
                    
                    
                    
                    28,099Computer
      software
                    
                    
                    57,415
                    
                    
                    
                    51,306
                    
                    
                    
                    6,109Leasehold
      improvements
                    
                    
                    10,829
                    
                    
                    
                    10,733
                    
                    
                    
                    96$
                    381,732
                    
                    
                    $
                    334,264
                    
                    
                    $
                    47,468
 
 F-14




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 20077.
                  Deferred
      leasehold
inducements:


2008
                
                
                2007Balance,
      beginning of year
                
                $
                14,327
                
                
                $
                30,155Amortization
                
                
                (13,832
                )
                
                
                (19,715
                )Foreign
      exchange adjustment
                
                
                (495
                )
                
                
                3,887Balance,
      end of year
                
                $
                -
                
                
                $
                14,327


8.
              Deferred
      revenue:


2008
                
                
                2007Balance,
      beginning of year
                
                $
                622,971
                
                
                $
                197,383Revenue
      invoiced and deferred for future recognition
                
                
                759,646
                
                
                
                526,343Previously
      deferred revenue currently recognized
                
                
                (122,107
                )
                
                
                (100,755
                )Balance,
      end of year
                
                $
                1,260,510
                
                
                $
                622,971


9.
                  Bank
      loan and loan guarantee:On
      October 23, 2006 the Company completed a transaction redeeming all of its
      previously outstanding secured convertible debentures. To facilitate the
      transaction, a bank loan of $2,473,000 amortized over 18 months commencing
      June 2007 was obtained from the Royal Bank of Canada (the “2006 RBC Loan
      Agreement”).  A general security agreement covering all of the
      Company’s personal and intangible property, including intellectual
      property, has been pledged as collateral.As
      additional security, the Royal Bank required that standby letters of
      credit securing the full amount of the loan be provided. Certain
      accredited investors (the “LC Providers”) agreed to provide the letters of
      credit as financing to the bank in order to enable the loan and as
      compensation the Company agreed to issue one Unit for each one dollar
      pledged as security for the bank loan.  Each Unit consists of
      two shares of the common stock of the Company, three share purchase
      warrants, each warrant entitling the holder to purchase one additional
      share of common stock at a price of $0.30 per share for a period of five
      years; and one and one-half share purchase warrants, each whole warrant
      entitling the holder to purchase one additional share of common stock at a
      price of $0.50 per share for a period of five years. Our CEO is the
      provider of the largest letter of credit and is the Managing Member of the
      LC Providers.  Another director, our former CEO, is the
      provider of the second largest letter of credit. A general security
      agreement covering all of the Company’s personal and intangible property,
      including intellectual property has been pledged as security to the LC
      Providers.  The general security agreement pledged to the LC
      Providers is subordinate to the general security agreement pledged to the
      Royal Bank.  In the event the Company defaults on the loan and
      the letters of credit are called by the Royal Bank, the Company will pay
      10% annual interest to the LC Providers for the balance of the outstanding
      letters of credit.  In the event that the letters of credit are
      drawn down by the Royal Bank or upon any other specified default by the
      Company, the Company will then require and accept the resignations of the
      then current directors of the Company and appoint the LC Providers as
      member of a new Board of Directors.  The Board of Directors will
      immediately decide upon and approve appropriate compensation for the
      Managing Member and decide upon the management of the
      Company.  In any case where the letters of credit are drawn by
      the Royal Bank to any level, the Company will immediately appoint the
      Managing Member as the manager of the Company’s assets with full power
      under the LC Providers’ general security agreement with the Company to
      take such action as is necessary to recover the amounts due to the LC
      Providers and manage the business and affairs of the Company, in the best
      overall interests of the LC
Providers.




F-15




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 20079.
                          Bank
      loan and loan guarantee (continued):A
      total of $2,450,000 letters of credit were obtained to secure the bank
      loan and accordingly the Company has issued 4,900,000 common shares,
      7,350,000 warrants exercisable at $0.30 and 3,675,000 warrants exercisable
      at $0.50.  As further compensation, the exercise price of
      332,500 share purchase warrants previously held by certain LC Providers
      has been reduced from $1.00 to $0.30 per share and the term of those
      warrants has been extended by 24 months to expire May 2,
      2010.  The Company has also agreed to reimburse the LC Providers
      for all banking fees incurred in establishing and maintaining the letters
      of credit.Of
      the letters of credit, $2,150,000 was received October 23, 2006 and,
      accordingly, 4,300,000 common shares were issued, 6,450,000 warrants were
      exercisable at $0.30 and 3,225,000 warrants were exercisable at $0.50. On
      October 23, 2006 $1,376,000 was recorded as an expense on account of the
      fair value of the common shares issuance and $2,350,617 on account of the
      fair value of the warrant issuance. The fair value of the common shares
      was calculated using the closing market price of the common stock on
      October 23, 2006 ($0.32) and the fair value of the warrants was calculated
      using the Black-Scholes valuation model and the following assumptions:
      dividend yield 0%, expected volatility 167%, risk-free interest rate
      4.90%, and an expected term of two years.The
      remaining $300,000 of the letters of credit was received February 5, 2007
      and, accordingly, 600,000 common shares were issued, 900,000 warrants were
      exercisable at $0.30 and 450,000 warrants were exercisable at $0.50. On
      February 5, 2007, $180,000 was recorded as an expense on account of the
      fair value of the common shares issuance and $302,835 on account of the
      fair value of the warrant issuance. The fair value of the common shares
      was calculated using the closing market price of the common stock on
      February 5, 2007 ($0.30) and the fair value of the warrants was calculated
      using the Black-Scholes valuation model and the following assumptions:
      dividend yield 0%, expected volatility 165%, risk-free interest rate
      4.92%, and an expected term of two years.The
      agreement governing the LC Providers and the Loan Guarantee terms required
      that the Company file a Registration Statement such that the securities
      issued to the LC Providers would qualify for resale pursuant to the
      Registration Statement.  The Agreement contained penalty
      provisions if the Company did not file a Registration Statement, and if
      the Registration Statement did not become effective, within certain time
      provisions.  Upon review, it was determined that the penalty
      provision clauses applied and, in accordance with the terms of the penalty
      provisions, the Company issued one additional common share to the LC
      Providers that delivered letters of credit on or before October 23,
      2006.  On August 10, 2007, the Company issued 1,625,000 common
      shares at a fair value of $0.48 per
share.




F-16




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 20079.
                            Bank
      loan and loan guarantee (continued):Prior
      to the receipt of the final letters of credit, cash collateral had been
      pledged by accredited investors to allow the Royal Bank of Canada to fund
      the total amount of the loan. The receipt of the final letters of credit
      allowed for the release of the cash collateral.  As compensation
      for pledging the cash collateral, on March 22, 2007 the Company issued to
      one of the accredited investors 100,000 common shares and 100,000 share
      purchase warrants exercisable at $0.30 for a period of three years. On
      March 22, 2007 the Company recorded as an expense, $36,000 on account of
      the fair value of the common shares issuance and $28,406 on account of the
      fair value of the warrant issuance. The fair value of the common shares
      was calculated using the closing market price of the common stock on March
      22, 2007 ($0.36) and the fair value of the warrants was calculated using
      the Black-Scholes valuation model and the following assumptions: dividend
      yield 0%, expected volatility 165%, risk-free interest rate 4.58%, and an
      expected term of two years.  As further compensation, the
      exercise price of 1,008,548 share purchase warrants previously held by the
      accredited investor was reduced from $0.60 to $0.30 per share and the term
      of those warrants was extended by 36 months to expire January 18,
      2011.On
      September 17, 2008, the Company entered into a letter agreement with the
      Royal Bank of Canada dated July 29, 2008 (the “2008 RBC Loan
      Agreement”).  The 2008 RBC Loan Agreement provides for a
      $250,000 revolving demand facility and a $2,405,000 non-revolving term
      loan and supersedes and cancels the 2006 RBC
      Agreement.  Immediately prior to funding under the 2008 RBC Loan
      Agreement, $1,197,837 remained outstanding under the 2006 RBC Loan
      Agreement.  The remaining balance under the 2006 RBC Loan
      Agreement was rolled into the $2,405,000 funded under the 2008 RBC Loan
      Agreement.  The term loan is repayable in 24 equal installments
      of $108,208 principal plus monthly accrued interest with the first payment
      due on October 11, 2008.   The term loan balance as of
      December 31, 2008 is $2,104,376.  The maturity date for the term
      loan is July 11, 2009.  Interest is calculated at the floating
      30 day LIBOR rate plus 1.50%.The
      Company’s obligations under the 2008 RBC Loan Agreement are collateralized
      by a general security agreement covering all of the Company’s personal and
      intangible property, including intellectual property of the Company and
      its subsidiary, Braintech Canada, Inc., and the irrevocable and
      unconditional standby letters of credit which were previously pledged by
      the LC Providers as security under the 2006 RBC Loan Agreement which were
      renewed and extended.  The LC Providers’ security arrangement
      remains in place as described earlier in this note 9.On
      September 26, 2008, as compensation for extending the letters of credit as
      described above, the Company issued an aggregate of 10,375,000 common
      share purchase warrants, each of which entitle the holder to purchase one
      share of the Company’s common stock at $0.30 per share for a period of
      five years, to the LC Providers.  Additionally, on September 29,
      2008, the Company issued an aggregate of 4,150,000 shares of the Company’s
      common stock to the LC Providers.  Each LC Provider received two
      shares of common stock and five share purchase warrants for each dollar of
      letter of credit provided.The
      Company has recorded an expense of $1,814,055 related to the share
      purchase warrants issued as compensation to the LC Providers and an
      expense of $626,650 related to the common shares issued to the LC
      Providers.  The fair value of the common shares was calculated
      using the closing market price of the common stock on September 29, 2008
      ($0.151) and the fair value of the warrants was calculated using the
      Black-Scholes valuation model and the following assumptions: dividend
      yield 0%, expected volatility 190%, risk-free interest rate 2.11%, and an
      expected term of two
years.




F-17




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200710.
                                  Common
      stock:(a)
                                  Of
      the common stock issued at December 31, 2008, 5,004,910 shares (2007 –
      3,259,286) are subject to trading restrictions of up to one year following
      issue unless a Registration Statement is filed qualifying the shares for
      distribution.  These include the 300,000 shares retained by the
      Company, as described in note 10(c).(b)
                                  In
      1993, 1,100,000 shares of common stock were issued for technology and
      recorded at a par value of $1,100.  Of these shares, 300,000
      have been retained by the Company because the development of the
      technology was not completed.(c)
                                  Bonus
      stock and bonus stock option incentive plan:At a
      meeting of the Board of Directors held October 22, 2007, the Company
      approved the Bonus Stock and Bonus Stock Option Plan (the “Bonus Plan”).
      The Bonus Plan provides for the issuance of common stock of the Company
      (“Bonus Stock”) and options to acquire common stock of the Company (“Bonus
      Stock Options”) to the participants upon the Company reaching certain
      identifiable milestones in its business plan. The aggregate amount of
      shares that may be issued under the Bonus Plan shall not exceed 30,000,000
      shares. The aggregate amount of shares to be issued as Bonus Stock shall
      not exceed 20,000,000 shares and the aggregate amount of shares to be
      issued pursuant to the exercise of Bonus Stock Options shall not exceed
      10,000,000 shares.On
      October 29, 2007, the Company issued 1,000,000 shares of Bonus Stock at a
      purchase price of $0.01 per share to the Company’s Chief Executive officer
      (“CEO”). The Company recorded stock based compensation in selling, general
      and administration expense of $430,000 relating to the issuance of these
      shares. The Company also issued to the CEO 7,000,000 shares of Bonus Stock
      at a purchase price of $0.01 per share and in accordance with the terms of
      his employment agreement, these shares were placed in escrow pending
      completion of eight individual milestones. The CEO paid a total of $80,000
      for these 8,000,000 shares.  When management determines that it
      is probable that the milestones will be met, the corresponding shares will
      be released from escrow and the Company will record stock-based
      compensation in selling, general and administration expense equal to $0.43
      per share. If the milestones are not completed, the Company will
      repurchase the shares at a purchase price of $0.01 per
    share.At a
      meeting held March 12, 2008, the Directors approved a resolution amending
      the CEO’s employment agreement to alter the individual milestones and
      escrow restrictions to more closely conform to the Company’s current
      objectives and strategic plan.  The number of milestones the CEO
      needs to achieve in order to fully vest all Bonus Stock and Bonus Stock
      Options is now six.  Under certain conditions, all unvested
      Bonus Stock and Bonus stock Options would vest
  immediately.On
      May 1, 2008, Revised Milestone #1 was achieved and, accordingly, 1,000,000
      shares of Bonus Stock were released from escrow and the Company recorded
      stock-based compensation in selling, general and administration expense of
      $430,000.On
      July 25, 2008, Revised Milestone #3 was achieved and, accordingly,
      2,000,000 shares of Bonus Stock were released from escrow and the Company
      recorded stock-based compensation in selling, general and administration
      expense of
$860,000.
 
 F-18




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200710.
                                    Common
      stock (continued):(c)
                                    Bonus
      stock and bonus stock option plan (continued):On
      November 10, 2008, Revised Milestone #5 was achieved and, accordingly,
      1,000,000 shares of Bonus Stock were released from escrow and the Company
      recorded stock-based compensation in selling, general and administration
      expense of $430,000.As
      of December 31, 2008, 3,000,000 shares of Bonus Stock remain in escrow
      pending the achievement of Revised Milestones #2 and
#4.On
      December 18, 2007, the Company issued 750,000 shares of Bonus Stock for
      the purchase price of $0.01 per shares in accordance with the terms of an
      Independent Contractor Agreement. These shares are being held in escrow
      pending completion of three individual milestones. When management
      determines that it is probable that the milestones will be met, the
      corresponding shares will be released from escrow and the Company will
      record stock based compensation expense in selling, general and
      administration expense equal to $0.32 per share. If the milestones are not
      completed, the Company will repurchase the shares for the purchase price
      of $0.01 per share.  As of December 31, 2008, none of the
      milestones have been achieved and all of the shares of Bonus Stock remain
      held in escrow.On
      October 24, 2008, the Company issued 250,000 shares of Bonus Stock to our
      Chief Sales Officer at a fair value of $0.10 per share as a signing bonus
      pursuant to an employment agreement.  The Company also issued to
      the employee 750,000 shares of Bonus Stock for the purchase price of $0.01
      per share and in accordance with the terms of the employment agreement,
      these shares were placed in escrow pending completion of three individual
      milestones. When management determines that it is probable that the
      milestones will be met, the corresponding shares will be released from
      escrow and the Company will record stock based compensation expense in
      selling, general and administration expense equal to $0.09 per
      share.  If the milestones are not completed, the Company will
      repurchase the shares at a purchase price of $0.01 per
      share.  As of December 31, 2008, none of the milestones have
      been achieved and all of the shares of Bonus Stock remain held in
      escrow.On
      November 19, 2008, the Company issued 1,750,000 shares of Bonus Stock to
      our President, Braintech Government & Defense, Inc. and General
      Counsel at a purchase price of $0.01 per share and in accordance with the
      terms of the two employment agreements, these shares were placed in escrow
      pending completion of individual milestones. When management determines
      that it is probable that the milestones will be met, the corresponding
      shares will be released from escrow and the Company will record stock
      based compensation expense in selling, general and administration expense
      equal to $0.08 per share.  If the milestones are not completed,
      the Company will repurchase the shares at a purchase price of $0.01 per
      share. As of December 31, 2008, none of the milestones have been achieved
      and all of the shares of Bonus Stock remain held in
  escrow.On
      November 19, 2008, the Company issued 250,000 shares of Bonus Stock to our
      Special Counsel at a purchase price of $0.01 per share and in accordance
      with the terms of the two employment agreements, these shares were placed
      in escrow pending completion of individual milestones. When management
      determines that it is probable that the milestones will be met, the
      corresponding shares will be released from escrow and the Company will
      record stock based compensation expense in selling, general and
      administration expense equal to $0.08 per share.  If the
      milestones are not completed, the Company will repurchase the shares at a
      purchase price of $0.01 per share. As of December 31, 2008, none of the
      milestones have been achieved and all of the shares of Bonus Stock remain
      held in escrow.(d)
                                    Common
      shares issued for services rendered are valued at the fair market value on
      the date of issuance.




F-19




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200711.
                        Stock
      options:The
      Company reserved 1,500,000 common shares pursuant to the 2000 Stock Option
      Plan, 2,500,000 common shares pursuant to the 2003 Stock Option Plan, and
      10,000,000 common shares pursuant to the 2007 Stock Option
      Plan.  As of December 31, 2008, 594,000 stock options are
      unallocated and remain available pursuant to the 2000 Stock Option Plan,
      598,000 stock options are unallocated and remain available pursuant to the
      2003 Stock option Plan, and 3,940,000 stock options are unallocated and
      remain available pursuant to the 2007 Stock Option Plan.  The
      Company’s board of directors has discretion to set the price, term,
      vesting schedules, and other terms and conditions for options granted
      under the 2000 plan and the Company’s Compensation Committee has
      discretion to set the price, terms, vesting schedules, and other terms and
      conditions for options granted under the 2003 and 2007
      plans.  The Company’s board of directors has granted the CEO
      authority to grant awards pursuant to the 2000 Stock Option Plan, 2003
      Stock Option Plan and 2007 Stock Option Plan.The
      Company also reserved 10,000,000 common shares pursuant to the Bonus Plan
      (note 10(c)).  As of December 31, 2008 4,675,000 stock options
      are unallocated and remain available pursuant to the Bonus
      Plan.  The Company’s Board of Directors and CEO have discretion
      to set the price, term, vesting schedules, and other terms and conditions
      for options granted under the Bonus Plan.The
      weighted average fair value of stock options granted during the year ended
      December 31, 2008 was $0.17 per option (2007 - $0.35).  The fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes valuation model and the straight-line amortization approach
      with the following weighted average
assumptions:


2008
                
                
                2007Expected
      life (years)
                
                
                2.0
                
                
                
                2.0Risk
      free interest rate
                
                
                1.90
                %
                
                
                3.89
                %Expected
      volatility
                
                
                192
                %
                
                
                170
                %Dividend
      yield
                
                
                0
                %
                
                
                0
                %Expected
      forfeitures
                
                
                0
                %
                
                
                0
                %


The
      Company recorded stock-based compensation related to stock options of
      $810,023 and other stock-based compensation of $1,720,000 for the year
      ended December 31, 2008 and stock-based compensation related to stock
      options of $2,960,600 and other stock-based compensation of $430,000 for
      the year ended December 31, 2007.As
      of December 31, 2008, the unrecorded deferred stock-based compensation
      balance related to stock options was $243,470 (2007 - $714,191) and will
      be recognized over an estimated weighted average amortization period of
      0.76 years (2007 – 1.54 years).During
      the years ended December 31, 2008 and 2007, the exercise price of all
      stock options granted was greater than or equal to the fair market value
      of the Company’s common stock at the date of grant except that during
      2007, 3,000,000 options were granted with an exercise price of $0.42 per
      share when the fair market value of the Company’s common stock at the date
      of grant was $0.49 per
share.




F-20




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200711.
                    Stock
      options (continued):(a)
                    A
      summary of the Company’s stock option activity is as
    follows:


WeightedNumber
                        
                        
                        averageof
      options
                        
                        
                        exercise
      priceBalance,
      December 31, 2006
                        
                        
                        3,396,000
                        
                        
                        $
                        0.48Options
      granted
                        
                        
                        10,265,000
                        
                        
                        $
                        0.43Options
      exercised
                        
                        
                        (137,000
                        )
                        
                        $
                        (0.35
                        )Vested
      options expired
                        
                        
                        (407,000
                        )
                        
                        $
                        (0.54
                        )Unvested
      options forfeited
                        
                        
                        (25,000
                        )
                        
                        $
                        (0.46
                        )Balance,
      December 31, 2007
                        
                        
                        13,092,000
                        
                        
                        $
                        0.43Options
      granted
                        
                        
                        2,175,000
                        
                        
                        $
                        0.21Options
      exercised
                        
                        
                        -
                        
                        
                        $
                        -Vested
      options expired
                        
                        
                        (922,500
                        )
                        
                        $
                        (0.40
                        )Unvested
      options forfeited
                        
                        
                        (77,500
                        )
                        
                        $
                        (0.48
                        )Balance,
      December 31, 2008
                        
                        
                        14,267,000
                        
                        
                        $
                        0.40


(b)
                Additional
      information regarding stock options outstanding is as
    follows:


As
      of December 31, 2007Outstanding
                                    
                                    
                                    ExercisableWeighted
      average
                                    
                                    
                                    Weighted
                                    
                                    
                                    
                                    
                                    
                                    Weightedremaining
                                    
                                    
                                    average
                                    
                                    
                                    
                                    
                                    
                                    averageExercise
                                    
                                    
                                    Number
      of
                                    
                                    
                                    contractual
                                    
                                    
                                    exercise
                                    
                                    
                                    Number
      of
                                    
                                    
                                    exerciseprice
                                    
                                    
                                    options
                                    
                                    
                                    life
      (years)
                                    
                                    
                                    price
                                    
                                    
                                    options
                                    
                                    
                                    price$
                                    0.00
      – 0.25
                                    
                                    
                                    
                                    735,000
                                    
                                    
                                    
                                    3.51
                                    
                                    
                                    $
                                    0.20
                                    
                                    
                                    
                                    735,000
                                    
                                    
                                    $
                                    0.20$
                                    0.26
      – 0.50
                                    
                                    
                                    
                                    9,885,000
                                    
                                    
                                    
                                    4.63
                                    
                                    
                                    $
                                    0.41
                                    
                                    
                                    
                                    8,542,500
                                    
                                    
                                    $
                                    0.41$
                                    0.51
      – 0.75
                                    
                                    
                                    
                                    2,427,000
                                    
                                    
                                    
                                    3.69
                                    
                                    
                                    $
                                    0.60
                                    
                                    
                                    
                                    1,902,000
                                    
                                    
                                    $
                                    0.60$
                                    0.76
      – 1.00
                                    
                                    
                                    
                                    45,000
                                    
                                    
                                    
                                    1.19
                                    
                                    
                                    $
                                    0.82
                                    
                                    
                                    
                                    45,000
                                    
                                    
                                    $
                                    0.8213,092,000
                                    
                                    
                                    
                                    4.38
                                    
                                    
                                    $
                                    0.43
                                    
                                    
                                    
                                    11,224,500
                                    
                                    
                                    $
                                    0.43As
      of December 31, 2008Outstanding
                                    
                                    
                                    ExercisableWeighted
      average
                                    
                                    
                                    Weighted
                                    
                                    
                                    
                                    
                                    
                                    
                                    Weightedremaining
                                    
                                    
                                    average
                                    
                                    
                                    
                                    
                                    
                                    
                                    averageExercise
                                    
                                    
                                    Number
      of
                                    
                                    
                                    contractual
                                    
                                    
                                    exercise
                                    
                                    
                                    Number
      of
                                    
                                    
                                    exerciseprice
                                    
                                    
                                    options
                                    
                                    
                                    life
      (years)
                                    
                                    
                                    price
                                    
                                    
                                    options
                                    
                                    
                                    price$
                                    0.00
      – 0.25
                                    
                                    
                                    
                                    2,425,000
                                    
                                    
                                    
                                    4.55
                                    
                                    
                                    $
                                    0.19
                                    
                                    
                                    
                                    625,000
                                    
                                    
                                    $
                                    0.18$
                                    0.26
      – 0.50
                                    
                                    
                                    
                                    9,845,000
                                    
                                    
                                    
                                    3.42
                                    
                                    
                                    $
                                    0.41
                                    
                                    
                                    
                                    9,470,000
                                    
                                    
                                    $
                                    0.41$
                                    0.51
      – 0.75
                                    
                                    
                                    
                                    1,977,000
                                    
                                    
                                    
                                    2.99
                                    
                                    
                                    $
                                    0.62
                                    
                                    
                                    
                                    1,977,000
                                    
                                    
                                    $
                                    0.62$
                                    0.76
      – 1.00
                                    
                                    
                                    
                                    20,000
                                    
                                    
                                    
                                    1.17
                                    
                                    
                                    $
                                    0.87
                                    
                                    
                                    
                                    20,000
                                    
                                    
                                    $
                                    0.8714,267,000
                                    
                                    
                                    
                                    3.55
                                    
                                    
                                    $
                                    0.40
                                    
                                    
                                    
                                    12,092,000
                                    
                                    
                                    $
                                    0.43




F-21




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200712.
                                Share
      purchase warrants:Detailed
      information regarding share purchase warrant activity during the years
      ended December 31, 2007 and 2008 is as follows:On
      January 16, 2007, in conjunction with a private placement, the Company
      issued 1,895,000 common share purchase warrants (the purchaser received
      one common share purchase warrant for each common share
      purchased).  Each common share purchase warrant entitles the
      holder to purchase one additional share for three years at a price of
      $0.25 per share.  In addition, the Company issued 30,000 common
      share purchase warrants as a finders’ fee.On
      February 5, 2007, the Company issued 900,000 warrants exercisable at $0.30
      per share and 450,000 warrants exercisable at $0.50 per share as
      compensation to accredited investors (the “LC Providers”) for providing
      standby letters of credit securing the bank loan (note 9).  The
      fair value of the warrants ($302,835) has been recorded as an
      expense.  The fair value was calculated using the Black-Scholes
      valuation model and the following assumptions: dividend yield 0%, expected
      volatility 165%, risk-free interest rate 4.92%, and an expected term of
      two years.  As further compensation, the exercise price of
      82,500 share purchase warrants previously held by certain LC Providers has
      been reduced from $1.00 to $0.30 per share and the term of those warrants
      has been extended by 24 months to expire May 2, 2010.On
      February 5, 2007, the exercise price of 484,375 share purchase warrants
      held by participants in a private placement closed on May 3, 2005 was
      reduced from $0.50 to $0.30.On
      February 21, 2007, in conjunction with a private placement, the Company
      issued 275,000 common share purchase warrants (the purchaser received one
      common share purchase warrant for each common share
      purchased).  Each common share purchase warrant entitles the
      holder to purchase one additional share for three years at a price of
      $0.25 per share.On
      March 22, 2007, as partial compensation for the pledging of cash
      collateral for the bank loan, the Company issued 100,000 share purchase
      warrants.  Each share purchase warrant entitles the holder to
      purchase one common share for two years at a price of $0.25 per
      share.  The fair value of the warrants ($28,406) was recorded as
      stock based compensation in financing expenses.  The fair value
      was calculated using the Black-Scholes valuation model and the following
      assumptions: dividend yield 0%, expected volatility 165%, risk-free
      interest rate 4.58%, and an expected term of two years.  As
      further compensation for pledging the cash collateral, the Company reduced
      the exercise price of 1,008,548 share purchase warrants from $0.60 to
      $0.30 per share and extended the term of those warrants by 36 months to
      expire January 18, 2011.On
      June 18, 2007, in conjunction with a private placement, the Company issued
      1,304,286 common share purchase warrants (the purchaser received one
      common share purchase warrant for each common share
      purchased).  Each common share purchase warrant entitles the
      holder to purchase one additional share for three years at a price of
      $0.30 per
share.




F-22




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200712.
                          Share
      purchase warrants (continued):On
      October 22, 2007, as partial compensation for investor relations services,
      the Company issued 150,000 share purchase warrants.  Each share
      purchase warrant entitles the holder to purchase one common share for two
      years at a price of $0.50 per share.  The fair value of the
      warrants ($57,372) was recorded as stock based compensation in financing
      expenses.  The fair value was calculated using the Black-Scholes
      valuation model and the following assumptions: dividend yield 0%, expected
      volatility 171%, risk-free interest rate 3.85%, and an expected term of
      two years.On
      September 26, 2008, as partial compensation for advancing $100,000 cash in
      return for promissory notes, the Company issued 100,000 common share
      purchase warrants to its CEO and its former CEO.  Each common
      share purchase warrant entitles the holder to purchase one share for three
      years at a price of $0.36 per share.  The fair value of the
      warrants ($17,082) was recorded as stock-based compensation in financing
      expenses.  The fair value was calculated using the Black-Scholes
      valuation model and the following assumptions: dividend yield 0%, expected
      volatility 190%, risk-free interest rate 2.11%, and an expected term of
      two years.On
      September 26, 2008, as compensation for extending the Letters of Credit
      required to secure the Bank Loan above (note 9), the Company issued
      10,375,000 common share purchase warrants. Each common share purchase
      warrant entitles the holder to purchase one share for five years at a
      price of $0.30 per share.  The fair value of the warrants
      ($1,814,055) was recorded as stock-based compensation in financing
      expenses.  The fair value was calculated using the Black-Scholes
      valuation model and the following assumptions: dividend yield 0%, expected
      volatility 190%, risk-free interest rate 2.11%, and an expected term of
      two years.(a)
                          A
      summary of the Company’s share purchase warrant activity is as
      follows:


WeightedNumber
                      
                      
                      averageof
      warrants
                      
                      
                      exercise
      priceBalance,
      December 31, 2006
                      
                      
                      20,176,509
                      
                      
                      $
                      0.37Warrants
      grantedPrivate
      placement
                      
                      
                      3,474,286
                      
                      
                      $
                      0.27Finders’
      fee
                      
                      
                      30,000
                      
                      
                      $
                      0.25Compensation
      to bank loan guarantors
                      
                      
                      1,450,000
                      
                      
                      $
                      0.36Investor
      relations services
                      
                      
                      150,000
                      
                      
                      $
                      0.50Warrants
      exercised
                      
                      
                      (53,616
                      )
                      
                      $
                      (0.25
                      )Warrants
      expired
                      
                      
                      (50,000
                      )
                      
                      $
                      (0.50
                      )Balance,
      December 31, 2007
                      
                      
                      25,177,179
                      
                      
                      $
                      0.34Warrants
      grantedPartial
      compensation for cash advances
                      
                      
                      100,000
                      
                      
                      $
                      0.36Compensation
      to bank loan guarantors
                      
                      
                      10,375,000
                      
                      
                      $
                      0.30Warrants
      exercised
                      
                      
                      -
                      
                      
                      $
                      -Warrants
      expired
                      
                      
                      (131,000
                      )
                      
                      $
                      (0.25
                      )Balance,
      December 31, 2008
                      
                      
                      35,521,179
                      
                      
                      $
                      0.33




F-23




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200712.
                    Share
      purchase warrants (continued):(b)
                    Additional
      information regarding warrants outstanding is as
  follows:


As
      of December 31, 2007Outstanding
      and ExercisableWeighted
      average
                        
                        
                        Weightedremaining
                        
                        
                        averageExercise
                        
                        
                        Number
      of
                        
                        
                        contractual
                        
                        
                        exerciseprice
                        
                        
                        warrants
                        
                        
                        life
      (years)
                        
                        
                        price$
                        0.00
      – 0.25
                        
                        
                        
                        7,064,156
                        
                        
                        
                        4.63
                        
                        
                        $
                        0.25$
                        0.26
      – 0.50
                        
                        
                        
                        17,737,251
                        
                        
                        
                        3.77
                        
                        
                        $
                        0.37$
                        0.76
      – 1.00
                        
                        
                        
                        375,772
                        
                        
                        
                        6.83
                        
                        
                        $
                        0.8525,177,179
                        
                        
                        
                        4.05
                        
                        
                        $
                        0.34As
      of December 31, 2008Outstanding
      and ExercisableWeighted
      average
                        
                        
                        Weightedremaining
                        
                        
                        averageExercise
                        
                        
                        Number
      of
                        
                        
                        contractual
                        
                        
                        exerciseprice
                        
                        
                        warrants
                        
                        
                        life
      (years)
                        
                        
                        price$
                        0.00
      – 0.25
                        
                        
                        
                        6,933,156
                        
                        
                        
                        3.70
                        
                        
                        $
                        0.25$
                        0.26
      – 0.50
                        
                        
                        
                        28,212,251
                        
                        
                        
                        3.50
                        
                        
                        $
                        0.35$
                        0.76
      – 1.00
                        
                        
                        
                        375,772
                        
                        
                        
                        5.83
                        
                        
                        $
                        0.8535,521,179
                        
                        
                        
                        3.56
                        
                        
                        $
                        0.33


Of
      the warrants outstanding as of December 31, 2008, 8,011,324 (2007 –
      5,961,324) were held by the Company’s former CEO and 7,411,250 (2007 –
      3,611,250) were held by the Company’s current CEO.13.
                  Income
      taxes:The
      potential benefit of net operating losses has not been recognized in these
      financial statements because the Company cannot be assured it is more
      likely than not it will utilize the net operating losses carried forward
      in future years.The
      total amounts of interest and penalties recognized in the consolidated
      statements of operations was $nil (2007 - $nil) and the total amounts of
      interest and penalties recognized in the consolidated balance sheets was
      $nil (2007 - $100,000).  These provisions relate to tax years
      ending December 31, 1998 through to December 31, 2003 which have now been
      approved by the relevant tax jurisdictions. During the year ended December
      31, 2008, the Company and the IRS agreed to settle this $100,000 liability
      for a payment of $50,000 plus interest in the amount of
      $4,378.  The $50,000 reduction in the liability is recorded as a
      gain on settlement of debt (note
18).




F-24




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200713.
                    Income
      taxes (continued):The
      reconciliation of income tax attributable to continuing operations
      computed at United States statutory tax rates of 34% (2007 – 34%) to
      income tax expense
is:


2008
                
                
                2007Income
      tax benefit computed at U.S. statutory tax rates
                
                $
                2,259,000
                
                
                $
                1,619,000Effect
      of foreign subsidiary taxed at different rates
                
                
                61,000
                
                
                
                (1,000
                )Non-deductible
      tax items
                
                
                (2,412,000
                )
                
                
                (1,684,000
                )Prior
      year SR&ED credits effect on taxable income
                
                
                -
                
                
                
                217,000Utilization
      of previously unrecognized foreign subsidiary tax losses
                
                
                618,000
                
                
                
                324,000Unrecognized
      tax losses expired
                
                
                -
                
                
                
                (241,000
                )Other
                
                
                26,000
                
                
                
                47,000Unrecognized
      tax losses
                
                
                (552,000
                )
                
                
                (281,000
                )Income
      tax expense
                
                $
                -
                
                
                $
                -


The
      components of deferred tax assets are compromised of the following at
      December 31:


2008
                
                
                2007Net
      operating loss carry forwards
                
                $
                3,946,000
                
                
                $
                3,869,000Unused
      income tax credits
                
                
                271,000
                
                
                
                368,000Excess
      of tax value over book value of equipment
                
                
                172,000
                
                
                
                211,000Share
      issue costs
                
                
                1,000
                
                
                
                1,000Valuation
      allowance
                
                
                (4,390,000
                )
                
                
                (4,449,000
                )Net
      deferred tax asset
                
                $
                -
                
                
                $
                -


As
      of December 31, 2008, the Company had net operating loss carry forwards of
      $5,909,000 available to offset taxable income earned in Canada and
      $7,201,000 available to offset taxable income earned in the United
      States.  These losses expire as
  follows:





Canada (CDN
      $)
                                
                                
                                US (US
      $)2009
                                
                                $
                                2,094,0002010
                                
                                
                                1,884,0002014
                                
                                
                                1,427,0002015
                                
                                
                                504,0002018
      and thereafter
                                
                                
                                -
                                
                                
                                $
                                7,201,000$
                                5,909,000
                                
                                
                                $
                                7,201,000







F-25




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200714.
                    Commitments:The
      Company has obligations under operating lease arrangements that require
      the following minimum annual payments:


Year
      ending December 31:2009
                  
                  $
                  242,0002010
                  
                  
                  234,0002011
                  
                  
                  174,0002012
                  
                  
                  170,0002013
                  
                  
                  55,0002014
                  
                  
                  34,000$
                  909,000


Lease
      expense for 2008 was $174,603 (2007 - $199,545)15.
                    Product
      warranty:The
      Company provides for estimated warranty costs at the time of product
      sale.  Warranty expense accruals are based on best estimates
      with reference to historical claims experience.  Since warranty
      estimates are based on forecasts, actual claim costs may differ from
      amounts provided.  On the basis of historical claim cost,
      management estimated that the warranty cost for 2008 and 2007 and the
      accumulated warranty liability would be negligible.16.
                    Selling,
      general and administrative expenses:Selling,
      general and administrative expenses are comprised of the
      following:


Years
      ended December 31,2008
                    
                    
                    2007Salaries
      and benefits
                    
                    $
                    1,562,100
                    
                    
                    $
                    1,121,775Stock-based
      compensation
                    
                    
                    2,531,244
                    
                    
                    
                    3,155,289Marketing
      and investor relations
                    
                    
                    306,271
                    
                    
                    
                    375,762Legal,
      patent and audit
                    
                    
                    535,829
                    
                    
                    
                    241,561Rent
      and facilities
                    
                    
                    268,274
                    
                    
                    
                    278,263Foreign
      exchange loss
                    
                    
                    8,224
                    
                    
                    
                    22,683Amortization
                    
                    
                    29,562
                    
                    
                    
                    23,572Other
                    
                    
                    298,540
                    
                    
                    
                    171,133$
                    5,540,044
                    
                    
                    $
                    5,390,038




F-26




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200717.
                                                Financial
      instruments:(a)
                                                Fair
      values of financial instruments:The
      Company’s financial instruments consist of cash and cash equivalents,
      accounts receivable, accounts payable, accrued liabilities, amount due to
      related party and bank loan.  Other than the bank loan, the fair
      value of these financial instruments approximate their carrying values due
      to their relative short term to maturity.The
      carrying value of the bank loan approximates fair value as the interest
      rate fluctuates with market conditions.(b)
                                                Foreign
      currency risk:Revenues
      and expenses of the Company denominated in foreign currencies come due in
      the short-term and, accordingly, management of the Company believes there
      is no significant exposure to foreign currency
      fluctuations.  The Company does not have foreign currency
      derivative instruments in place.(c)
                                                Credit
      risk:Financial
      instruments that potentially subject the Company to concentrations of
      credit risk consist primarily of cash and cash equivalents, and accounts
      receivable. The Company maintains cash and cash equivalents with high
      quality Canadian financial institutions.  As of December 31,
      2008, one customer represented 100% of outstanding trade accounts
      receivable (2007 – 100%).  All trade accounts receivable were
      collected subsequent to the year end.(d)
                                                Interest
      rate risk:The
      interest rate of the Company’s bank loan is at the floating 30 day Libor
      rate plus 1.50% and, therefore, the Company is exposed to interest rate
      cash flow risk.18.
                                                Gain
      on settlement of debt:The
      gain on settlement of debt is the result of a reduction in accrued
      directors’ fees of $25,750 pertaining to the fiscal years 2004 and 2005, a
      reduction in the provision of income tax penalties of
    $50,000.




F-27




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 200719.
                                    Contingencies:The
      Company may, from time to time, be subject to claims and legal proceedings
      brought against it in the normal course of business. Such matters are
      subject to many uncertainties. Management believes that adequate
      provisions have been made in the accounts where required and the ultimate
      resolution of such contingencies will not have a material adverse effect
      on the financial position of the Company. However, we are not able to
      predict the outcome of the pending legal proceedings listed below, or
      other legal proceedings, to which we may become subject in the normal
      course of business or estimate the amount or range of any possible loss we
      might incur if we do not prevail in the final, non-appealable
      determinations of such matters. Therefore, the Company has no current
      accruals for these potential contingencies. The Company cannot provide
      assurance that the legal proceedings listed here, or other legal
      proceedings not listed here, will not have a material adverse impact on
      our financial condition or results of operations.On
      February 10, 2009, Babak Habibi, formerly our Chief Technology Officer,
      initiated an action in the Supreme Court of British Columbia against
      Braintech Canada, Inc. and Braintech Inc.  Mr. Habibi claimed
      that he had “good reason” to resign and secured a Garnishing Order before
      Judgment for $334,632.73 (Canadian) claiming entitlement to that amount
      under his employment agreement.  The Company is vigorously
      defending these actions and is seeking the return of the garnished
      funds.  On March 30, 2009 we filed an Amended Statement of
      Defence in the Supreme Court of British Columbia asserting that Mr. Habibi
      lacked “good reason” to resign and that no severance is
      owing.  By motion we previously asserted that Mr. Habibi
      improperly garnished these funds.  On March 30, 2009, we filed a
      lawsuit in the Circuit Court of Fairfax County, Virginia against Mr.
      Habibi for, inter
      alia, misappropriation of trade secrets, tortious interference with
      our contractual and banking relations, and tortious interference with
      business expectancy relating to our employees.  The Virginia
      lawsuit seeks compensatory damages of not less than $100,000 and punitive
      damages of not more than $350,000.On
      February 13, 2009 two other former employees, released as part of a
      reduction in force by Braintech Canada, Inc., after receiving full salary
      pay, statutory severancepayments,
      time-bank payments, accrued vacation payments and signing full releases,
      instituted claims in the Provincial Court of British Columbia (small
      claims court) for common law entitlement.  Each claim is for
      $25,000 (Canadian).  The Company disputes the plaintiffs’ claims
      and believes that it has meritorious defenses and intends to vigorously
      defend these actions.Management
      believes that any potential loss associated with these matters is neither
      probable nor reasonably estimable at this time and accordingly has not
      accrued any amounts for any potential loss.20.
                                    Subsequent
      events:On
      January 26, 2009, as final compensation for advancing $255,000 in
      emergency financing in 2006, the Company issued 410,000 shares of common
      stock at a fair value of $0.10 per share to a single party in addition to
      100,000 shares and 100,000 share purchase warrants previously issued to
      such party.  In conjunction with this final compensation
      arrangement, such party returned to the Company for cancellation the
      100,000 share purchase warrants, each entitling the holder to purchase one
      additional share of common stock exercisable at $0.30 per
      share.  Although this compensation arrangement was settled in
      January 2009, the arrangement was made in December
      2008.  Accordingly, the Company accrued the fair value of the
      financing expense ($39,752) as of December 31,
  2008.




F-28




BRAINTECH,
      INC.Notes
      to Consolidated Financial Statements(Expressed
      in United States dollars)Years
      ended December 31, 2008 and 2007


20.
                Subsequent
      events (continued):On
      March 12, 2009, in accordance with the terms of an employment agreement
      with our Executive Vice President and President of Braintech Industrial,
      Inc., the Company issued 1,750,000 shares of common stock for the purchase
      price of $0.01 per share.  These shares are being held in escrow
      pending completion of five individual milestones.  When the
      Company determines that an individual milestone has been achieved, the
      corresponding shares will be released from escrow and the Company will
      record an expense equal to $0.09 per share.  In the event an
      individual milestone is not achieved within the time requirement for
      achieving that milestone, the Company will purchase the shares from the
      employee for the purchase price of $0.01 per
  share.




F-29