UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  Form 10-KSB  [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year endedDecember 31, 2004  o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period fromto  Commission file number  BRAINTECH, INC. Name of small business issuer in its charter)   Nevada

98-0168932(State or other jurisdiction of incorporation or organization)

IRS Employer Identification No.#102 - 930 West 1stSt., North Vancouver, B.C. Canada

V7P 3N4(Address of principal executive offices)

(Postal Code)   Issuers telephone number
(604) 988-6440  Securities registered under Section 12(b) of the Exchange Act:  Title of each class

Name of each exchange on which registeredNone  Securities registered under Section 12(g) of the Exchange Act:  Common Stock, $0.001 par value(Title of class)(Title of class)   Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                         Yes          [ X ]        No           o  Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.          o  State issuer's revenues for the most recent fiscal year:
$749,969   1     State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. As at March 24, 2004: $10,406,643.



State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:



21,050,507 common shares, par value $0.001, as at March 24, 2005.





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Braintech, Inc.

Form 10-KSB

TABLE OF CONTENTS

Page

PART I



Risk Factors
4

Item 1.
Description of Business
8

Item 2.
Description of Property
17

Item 3.
Legal Proceedings
17

Item 4.
Submission of Matters to a Vote of Security Holders
17

PART II



Item 5.
Market for Common Equity and Related Stockholder Matters
17

Item 6.
Management's Discussion and Analysis
18

Item 7.
Financial Statements
30

Item 8.
Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure
31

Item 8A.
Controls and Procedures
31

Item 8B.
Other Information
31



PART III



Item 9.
Directors, Executive Officers, Promoters, andControl Persons
31

Item 10.
Executive Compensation
34

Item 11.
Security Ownership of Certain Beneficial Owners and ManagementAnd Related Stockholder Matters
36

Item 12.
Certain Relationships and Related Transactions
38

Item 13.
Exhibits and Reports on Form 8-K
42

Item 14.
Principal Accountant Fees and Services
43



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CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS



This report 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 are statements of future economic performance. Statements containing terms like "believes," "does not believe," "plans," "expects," "intends," "estimates," "anticipates," and other phrases of similar meaning are considered to imply uncertainty and are forward-looking statements.



Forward-looking statements involve known and unknown risks and uncertainties 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.



RISK FACTORS



Investment in our common stock involves a high degree of risk. Prospective investors should carefully consider the following risk factors in addition to other information in this annual report before purchasing our common stock.



Because we have earned revenue of only $1,670,547 from inception to December 31, 2004, we face a risk of insolvency.



We have never earned substantial operating revenue. We have been dependent on equity financing to pay operating costs and to cover operating losses.



We have sufficient cash to pay ongoing operating expenses, at their current level, to approximately June 15, 2005. To continue operation beyond that we will have to raise additional capital and/or generate significant revenue. If we are unable to do so, we face a risk of insolvency.



The auditors report on our December 31, 2004 consolidated financial statements includes an additional paragraph that identifies conditions which raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



Because we have no significant sales history and are substantially dependent on our Exclusive Channel Partner Agreement with ABB Inc. to generate future sales, our future is uncertain if our relationship with ABB fails.



We plan to market our vision guided robotic technologies, software products, and Internet based support and service system through our channel partner agreement with ABB. We believe our channel partner agreement with ABB is our best prospect for generating sales revenue. We have no other established distribution channels or marketing arrangements, and if we are unable to generate sales through ABB, our prospects for generating revenue are highly speculative.



Because our agreement with ABB is new, we have no assurance that it will lead to additional sales.



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We made our original alliance agreement with ABB in March 2000. In February 2004, we entered into an exclusive channel partner agreement with ABB to try to make additional sales through that relationship.



In January 2005, the agreement was amended allowing ABB to marketTrueView, a vision guided robotic technology exclusively powered by our eVF software, to the countries of the European Economic Union and sub-licenseTrueViewto their business partners on a worldwide basis.



Together we have been awarded contracts for over 70 vision guided robotic systems to date.



However, our channel partner agreement with ABB is new and our prospects for generating sales under the ABB agreement are uncertain. Furthermore, additional sales through ABB will be dependent upon our products and services meeting customer demands.



Because our Internet based service and support system is in the development stage, we have no assurance that we will complete development successfully.



We commenced development of our Internet based service and support system during the fall of 2000. That system is still in the development stage. We have no assurance that we will be able to complete development of the system, or that any market will exist for the system when it is completed.



Because of our limited operating and sales history, we cannot make reliable projections of our future operating costs.



If we are able to generate sales, we may have to hire additional personnel to service our customers and to continue development of our technology. We may also have to incur additional marketing and overhead expenses. As a result of our lack of historical sales, we cannot make reliable projections of the number of additional personnel we will require, the cost of employing those personnel, or the level of marketing and overhead expenses we will incur. We thus have no assurance that any revenue we earn will be sufficient to cover the cost of earning that revenue, or to generate operating profits.



Because we develop and install customized vision guidance systems for specific customer needs, we may not be able to create a repeat customer base.



Most vision guidance systems are designed for the specific needs of a particular customer, and represent isolated purchases by the customers in question. As a result, we have no assurance that we will be able to obtain additional contracts to supply our custom vision guidance systems, or that any customers we secure will become repeat customers.



Because our work force is small, with only 23 people employed either as officers, employees or contractors, we are vulnerable to the loss of key people or to rapid expansion.



We employ only 23 people either as officers, employees or contractors. We try to employ people with skill sets that match the specific fields important to our business. As a result, the departure of a single person or a small number of people could materially adversely affect our business. We do not have key man insurance on any of the people we employ.



Qualified technical personnel are in great demand in all high technology industries. Accordingly, it may be difficult for us to replace people who depart, or to hire additional people we may require if we are able to generate substantial sales.



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Because we do not have patent protection for all of our products, our intellectual property may be copied or misappropriated.



On January 31, 2002, we filed an application in the Canadian Patent Office regarding theMethod And Apparatus For Single Camera 3D Vision Guided Roboticsand on May 24, 2002 we filed an identical application in the United States Patent Office. On January 31, 2003 we filed an International Application according to the Patent Cooperation Treaty. The Patent Cooperation Treaty provides a procedure enabling applicants to obtain patents in many countries. On November 9, 2004, the United States Patent Office issued U.S. Patent No. 6,816,755 regarding theMethod And Apparatus For Single Camera 3D Vision Guided Robotics.On July 14, 2004 We filed an application in the United States Patent Office regarding theMethod And Apparatus For Multi Camera Surround 3D Vision Guided Robotics.



These are the only instances in which we have applied for patent protection of our intellectual property. Accordingly, we have limited legal means to prevent other companies from developing products that perform similar functions in a similar way.



We believe that the software code that we have written for eVisionFactory, the BrainTron processor, the Odysee Development Studio, and each of our custom vision guidance systems is protected by copyright law. However, copyright law does not prevent other companies from developing their own software to perform the same functions as our products.



Because the market price of our common stock has been particularly volatile, purchasers of our common stock face a high degree of market risk.



The market price of our common stock has experienced extreme fluctuations. Since January 1, 2004 the market price of our common stock has varied between $0.32 and $0.91. As we have not announced any material changes to our operations, we believe that the fluctuations in our stock price have resulted primarily from market perceptions of the speculative value of our business opportunities. The susceptibility of our stock price to fluctuation exposes purchasers of our stock to a high degree of risk.



Because we have generated revenue of only $1,670,547 from inception to December 31, 2004, and our business has not been profitable with accumulated losses of $17,346,467 from inception to December 31, 2004, we may not be able to raise the additional capital we need.



We will require additional capital to continue the development of our products, to pay the costs of marketing those products, or to cover operating losses until we are able to become profitable. As we have never generated operating profits or significant sales revenue, we may not be able to raise the amount of capital we require.



Several other factors may also hinder our efforts to raise capital. They include the following:




Our share price has been highly volatile during 2002, 2003 and 2004. The volatility of our share price may deter potential investors.
Subsequent to the beginning of 2000, many technology companies have experienced financial difficulties and rapidly declining share prices. As a result, potential investors may be less willing to invest in technology companies generally.
Subsequent to the beginning of 2000, capital markets have become tighter generally, with less financing available for technology companies.
Capital markets have become tighter due to international tensions beginning on September 11, 2001.

Because we will have to raise additional capital, the interests of shareholders may be diluted.





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To raise additional capital we may have to issue additional shares, which may dilute the interests of existing shareholders substantially. Alternatively, we may have to borrow large sums, and assume obligations to make substantial interest and capital payments. We may also have to sell significant interests in some or all of our products. If we are able to raise additional capital, we cannot assure that it will be on terms that enhance the value of our common shares.



Because a significant percentage of our issued shares has recently become free trading, and because of the size of anticipated share offerings, there is a risk of downward pressure on our stock price.



During 2001 and 2002, we issued approximately 6.1 million shares in private placements and other transactions. In 2003 we issued 2,354,621 common shares and 1,177,310 share purchase warrants for settlement of promissory notes payable. Those shares are now eligible for re-sale under Rule 144 to the Securities Act of 1933. In addition, during 2003 and 2004 we issued $2,250,000 in convertible debentures bearing interest at 8% per annum. The debenture principal and accrued interest are convertible into units at $0.25 per unit, each unit consisting of one common share and one-half share purchase warrant. In conjunction with the convertible debentures, we issued 595,000 common shares and 297,500 share purchase warrants for finders fees. During 2004 and 2005, we issued 1,750,000 shares and 875,000 share purchase warrants in private placement transactions. We may register these shares and share purchase warrants for resale.
The market price of our stock could drop significantly if the owners of these shares sell all or a large portion of the shares, or are perceived as intending to sell them.



Because our stock may be subject to low price stock rules, the market for our stock may be limited.



The Securities and Exchange Commission has adopted regulations which generally define a "penny stock" to be any equity security that has a market price less than $5.00. Our stock is presently covered by those rules, and may continue to be so. The penny stock rules require broker-dealers to make a special suitability determination before selling our stock to investors who are not either regular customers or accredited investors. As a result, the potential market for our stock may be limited.





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PART I.



ITEM 1. DESCRIPTION OF BUSINESS



Our financial statements are presented in United States dollars, and dollar figures stated in this annual report refer to United States dollars (except where specified otherwise). As our head office is in Canada, many of our transactions (including payment of salaries to our employees) are completed in Canadian dollars (Cdn$). For purposes of this annual report, other than amounts extracted from our financial statements, Canadian dollar amounts have been converted to United States dollars at an exchange rate of Cdn$1.00 = US$0.77, being the average exchange rate during the year ended December 31, 2004.



Business Development



Our company was incorporated in Nevada on March 4, 1987 under the name Tome Capital Inc. We changed our name to Nevada Manhattan Mining Inc. on August 15, 1988, then back to Tome Capital Inc. on July 5, 1990, to Offshore Reliance Ltd. on February 19, 1993, to Cozy Financial Corporation on April 20, 1993 and to Braintech, Inc. on January 3, 1994.



We were registered as an extra-provincial company under the British ColumbiaCompany Acton January 17, 1996. Our principal executive offices are located at Unit 102-930 West 1stStreet, North Vancouver, British Columbia, Canada V7P 3N4. Our telephone number is (604) 988-6440 and our Internet address is www.braintech.com.



We have two wholly owned subsidiaries. The first, Braintech Canada, Inc., was incorporated in British Columbia, Canada on March 3, 1994 under the name Brainware Systems Inc. Brainware Systems Inc. changed its name to Braintech Canada, Inc. on September 19, 2001. Braintech Canada, Inc. carries out our research and development activities, employs our technical and managerial personnel, and carries on our sales activities.



The description of our business in this annual report includes the activities of both Braintech, Inc. and Braintech Canada, Inc.



Our other subsidiary was incorporated on September 15, 1999, as 9141 Investments Ltd. On September 19, 2001, 9141 Investments Ltd. changed its name to Brainware Systems Inc. This subsidiary currently has no active operations. Its function is to hold the Brainware Systems name.



Business of Issuer



Historical Development



We entered the technology field in the first quarter of 1994. Since then, the majority of our efforts have been devoted to developing technologies and products to be used in developing machine vision or "computerized vision". Machine vision refers to the technology base that employs any number of electro-optical or non-contact techniques to acquire image data, process that data and analyze it to draw conclusions with little or no operator intervention. Basically, machine vision is the application of electronic imaging, image processing, and image analysis techniques to applications in the manufacturing industries for the purpose of control (process control, quality control, machine control, and robot control).



In 1998, we began to apply our technology and expertise to the development of machine vision systems for industrial applications. We have developed machine vision systems used in product inspection, location analysis, and parts handling and assembly.





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In March 2000, we entered into a strategic alliance with ABB Inc. ("ABB"). ABB is a major supplier of industrial robotics as well as manufacturing automation systems. Since entering into our alliance with ABB, we have focused on the development and implementation of vision guidance systems for robots used in the automobile manufacturing industry.



In 2000, we commenced the development of eVisionFactory ("eVF"), a software environment whose main components are: e - Real-Time Internet Support, V - Vision Science & Engineering, and F - Application Development & Operation. eVF combines vision technology, systems engineering, and Internet-based service and support system. The Internet-based service and support system is designed to provide technical support through the Internet to purchasers of our vision guidance systems. The Internet-based support system could also be used to provide technical support to companies operating other types of industrial or non-industrial machinery and systems.



Early in 2002 we completed a commercial version of eVisionFactory that did not include our Internet based service and support system. We included eVisionFactory software with the systems we delivered in 2002 and 2003.



In the 2ndquarter of 2001, at the request of Ford Motor Company, we completed the development of a 3D single camera vision guidance system for robots used in automotive manufacturing systems ("SC3D"). The SC3D system uses a single conventional CCD (Charge Coupled Device) camera. Software algorithms use images from the camera mounted on the robot arm or stationary position to determine the position and orientation of an object of interest. That information is used to guide the robot to operate on or manipulate the object. As a result of our completion of the development of the SC3D proof of concept, we received from ABB an order for 19 vision guidance systems for installation into two engine assembly plants of Ford Motor Company.



During 2002, 2003 and 2004 we continued to add functionality to eVF by developing additional components as follows:



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.



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); SR3D is similar to SC3D but involves multiple cameras configured to view different areas of the same part.



We have not at any time been able to generate sufficient revenue from sales of our services or products to sustain ongoing operations, and we do not have an established record of sales or established distribution channels for our services or products. In order to continue as a going concern, we will have to begin generating significant sales revenue.



As of December 31, 2004, we have incurred an aggregate deficit of approximately $17.3 million during our development and operations stage. We may continue to incur significant additional operating losses



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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 recognised.



We have generated total revenues, from inception on January 3, 1994 to December 31, 2004, in the amount of $1,670,547.



Principal Products and Services



Our business consists the development, supply and support of machine vision guidance systems for robots used in the automotive manufacturing industry. The field of vision guided robotics requires our vision systems to incorporate advanced robotic engineering and programming know-how for optimal integration with the robotic systems.



Our products and services are suitable for both product inspection and location analysis applications, and the projects we have completed with ABB have involved both applications. The vision guided robotic systems we have sold to date are used mainly in the manufacture of automotive parts, but we believe that we are capable of developing systems that can be applied in a large number of industrial sectors.



We develop vision guided robotic 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 intended to provide a comprehensive software environment for the design, development, operation, and support of vision guided robotic systems. eVF consists of two principal elements, a development environment and an Internet based service and support system.



We use eVF to develop custom vision guided robotic systems. We include a version of eVF without the Internet-based service and support system in all of the vision guidance systems that we deliver. The Internet based support system is still in the development stage and will be released separately.



eVisionFactory - Development Environment

The development software included in eVisionFactory performs functions similar to the Odysee Development Studio, which we completed in 1999. That software is designed to facilitate the expeditious and economical development of custom vision guided robotic systems. eVisionFactory stores and manipulates libraries of routines to perform the various functions that can be included within a vision guided robotic system. eVisionFactory 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. eVisionFactory 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 eVisionFactory interface. eVisionFactory thus eliminates the need to write
specialized computer code to link individual routines.



eVisionFactory is installed on a users computer system 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. eVisionFactory will permit users to make minor modifications directly. We will supply major modifications or upgrades at an extra charge.





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eVisionFactory will also include 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. We expect to release the maintenance and support features separately, in 2004.



The software by which eVisionFactory links the various routines within its libraries is proprietary to us. However, we do not have proprietary ownership of the majority of the individual routines that can be used with eVisionFactory, some of which are available in the public domain.



eVisionFactory  Internet-based Service and Support System



In the fall of 2000, we commenced development of a system for Internet based service and support of industrial systems. During the first half of 2001, for development purposes we began to incorporate this system as part of eVisionFactory. The principal components of the system include the following:



-
communication devices, to transmit messages between on-site personnel and a server operating at the industrial site;-
a server which controls communication within the industrial site, and which also connects to internet sites offering web based technical support; and-
web based technical support applications, queuing mechanisms, channel managers, and synchronization mechanisms designed to respond to technical inquiries over the Internet.

Initially, our Internet-based service and support system will use networked computers to carry out its communication functions. We also plan to incorporate wireless communication features for use by on-site personnel. We plan to implement the wireless components of the system through universally accepted standards for short-range wireless communications, such as Bluetooth communications protocols or the 802.11b standard protocol. Both sets of protocols are used in implementing wireless networks, and are compatible with TCP/IP protocols used in transmitting data over the Internet. We do not yet have a timetable for completion of the wireless components.



To complete development of the system we will have to develop interfaces between the wireless components and software applications that will be used to support Internet based communications.



We are developing software that will permit companies operating the Internet based service and support system to obtain the following types of support services in a secure manner:



-
Fault Information Wizards. The wizards will ask the system operator a few simple questions aimed at identifying the nature of the problem and its location. The system then transmits the support request to the remote support facility. The technical support staff will acknowledge the receipt of the support request and respond by invoking one of three support mechanisms provided by the system;

-
Two-way text chat capability. If the problem description is unclear from the request, the technical support person can initiate a chat session and ask specific questions to ascertain the true nature of the problem. The chat capability will be available from the eVF interface installed in the PC on the factory floor.

-
Trouble-shooting Wizards. The system is capable of storing troubleshooting wizards for typical problems that can be transmitted to the system operator. The wizards are designed to guide the operator in a step-by-step fashion with the aid of clear schematics to resolve the fault;

-
Remote Diagnostics. The system has been designed to enable the support person to take remote control of the vision system when offline and when permitted by the operator, to identify and resolve a problem.



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We plan initially to market our Internet-based service and support system to users of our vision guided robotic systems. However, our Internet-based service and support system can be adapted for use with a variety of industrial manufacturing systems. Accordingly, we also we plan to market the system through our alliance with ABB, to users of industrial robotic systems developed by ABB.



Investors are cautioned that our Internet-based service and support system is in the development stage, and that we have no assurance that we will be able to complete technical development of the system, or to market the system successfully if it is completed.



Single Camera 3D Vision Systems

Our principal vision guidance robotic technology is called Single Camera 3D (SC3D). 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.



A CCD (Coupled Charged Devise) 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. The SC3D system determines the position of the part in 3D space, ie. 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 via Ethernet. The robot uses this information 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 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-moulded products.



We believe that the major advantages of our SC3D systems are its compactness for installation on the end of the robotic arm, low-cost conventional sensor and computing platform, ease of calibration, and short cycle times.



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 backgrounds, 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.



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Technical description - computerized vision

Computerized vision involves analysing visual images in a digital electronic form. To do so, a computerized vision system must first express a visual image in digital form. The system must then analyse the digital data to recognize patterns or specific objects.



We separate the development of a vision system into the following modules, which correspond to the logical steps that must be followed in analysing an electronic visual image.



Acquisition and Digitization Module.The acquisition and digitization module receives input such as the signal from a video monitor, and creates a digitized version of that input.



Pre-processing Module.

The pre-processing module receives digitized output from the acquisition and digitization module and performs certain operations and modifications on the digital data to facilitate pattern recognition. The pre-processing module performs the following principal functions:

-
It filters out noise and other apparent anomalies in the digital data.-
It segments the data by identifying subsets of the digital data which represent candidates for physical objects that the vision system is intended to recognize.-
It transforms data by deriving selected numerical characteristics of the data subsets identified as potential objects. The numerical characteristics may include such quantities as the length or width of the object, or a series of numbers describing its colour or texture. The numerical quantities thus derived are stored as a vector, referred to as the "physical signature" of the potential object.

Training and Matching Module.

The training and matching module performs two essential functions.



-
It receives the physical signatures of potential objects and attempts to match them to the signatures of specified objects already stored in memory (the objects the system is trying to locate or recognize). The training and matching module "classifies" physical signatures by calculating how well they match the signatures stored in memory. Since physical objects are unlikely to be perfectly identical, or to be described perfectly by a digitized version of visual input, classification necessarily involves the comparison of approximate quantities. The classification of physical signatures thus requires a mathematical algorithm for deciding how closely a physical signature and a signature match. A variety of mathematical models, including fuzzy mathematics and standard probability error functions, can be used to fulfil this requirement. While the technical details of the mathematical models
differ, they have the common object of producing a numerical measure of how closely two mathematical data vectors match.-
It refines the stored signatures to which future physical signatures can be matched, that is it "trains" the system for more accurate object recognition in the future. Depending on the mathematical algorithm used to identify matching signatures, the training and matching module can adjust the appropriate memory signatures, or the mathematical parameters or functions used in matching physical signatures to the signatures stored in memory.

Control and Feedback Modules.



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The control and feedback module controls input to, and output from, the system. The control and feedback module determines the extent to which the system is being trained and also permits direct operator participation in certain steps of the process, such as the identification of candidate objects or new objects. When a physical signature does not match any of the signatures stored in memory, the control and feedback module can also initiate procedures to create a "new" signature in memory, to be used to identify the "new" object in the future.



Customer projects



Our attempts to sell customized vision systems were unsuccessful until the final quarter of 1999. Since then, we have sold and installed over 50 vision guided robotic systems and have received purchase orders for an additional 30 systems which will be installed during the 2nd, 3rdand 4thquarters of 2005.



ABB, Inc.



In March 2000, we entered into an alliance agreement with ABB Inc. ABB is a technology group based in Europe, employing over 165,000 people in more than 100 countries.



Under the alliance agreement, we agreed to cooperate with ABB in identifying, developing, and pursuing business opportunities that combine the expertise and technology of the two companies.



We received an initial purchase order from ABB to develop a vision system to identify and sort automobile transmission casing parts. We completed and installed the system in May 2000.



Between July 2000 and August 2001, we received purchase orders for four additional vision guided robotic systems utilizing our 2D guidance technology.



In the second quarter of 2001, at the request of Ford Motor Company, we completed the development of a 3D single camera vision guidance system. As a result of our completion of the development of the SC3D proof of concept, we received from ABB an order for 19 vision guidance systems for installation into two engine assembly plants of Ford Motor Company. Installation of the systems commenced in the second quarter of 2002 and the final systems were installed in February 2004.



Between April 2003 and July 2003, we received purchase orders for six additional vision guided robotic systems utilizing our SC3D guidance technology. These systems were installed between August 2003 and February 2004.



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. This agreement resulted in the receipt of purchase orders for fourteen additional vision guided robotic systems. These systems were completed and installed in the second, third and fourth quarters of 2004 and the first quarter of 2005.



The success of these orders and installations convinced ABB to create a marketing strategy centred on a brand called TrueView. TrueView Vision Guided Robotics systems fully integrate SC3D vision guidance technology and the eVF software platform.



As a result of achieving market acceptance for TrueView through 2004, the two companies initiated a significant sales program that started in January 2005. Accordingly in January 2005, the February 1, 2004 agreement was amended to allow ABB to market TrueView, exclusively powered by our technology, to the countries of the European Economic Union and sub-license TrueView to their business partners on a worldwide basis.





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As at March 24, 2005, we have received purchase orders for twenty eight additional systems as a result of the acceptance by end users of TrueView Vision Guided Robotics systems.



In addition to supplying vision guided robotic systems to ABB, we have provided them with eVF upgrades for previously installed systems, we have held training seminars for their technical staff and we have provided engineering services to assist them in design of vision guided robotic systems. We expect this type of revenue to continue especially in light of our amended Exclusive Channel Partner Agreement.



Marubeni Corporation



In July 2001, we entered into a Memorandum of Understanding with Marubeni Corporation, pursuant to which the two companies have agreed to cooperate in developing and marketing vision systems for industrial applications including vision guided robots in Japanese and Asian markets. During the 1sthalf of 2002, we continued the development of our relationship with Marubeni Corporation and that culminated in the signing of a Marketing and Development Agreement on June 24, 2002. The agreement, which covers Southeast Asia and Australia, provided for mutual exclusivity, whereby Marubeni was granted an exclusive license to manufacture and distribute our Vision Guided Robotic systems and Marubeni agreed that it would not deal with any competitive technology or products. In March 2002, Marubeni placed an order for two eVF development licenses and these licenses were delivered upon
completion of the Marketing and Development Agreement. In December 2002, Marubeni placed an order for two run-time licenses and those licenses were delivered in March 2003.



On November 4, 2004, Marubeni agreed to remove the exclusivity clauses on the condition that we repurchase from Marubeni one of the eVF development licenses and one of the run-time licenses for the sales price of $20,000.



The June 24, 2002 agreement was for a period of three years and in accordance with the terms of the agreement, we have given notice to Marubeni that the agreement will be allowed to terminate on June 24, 2005.



Talk Engineering Co., Ltd.



On December 2, 2004, we signed a non-exclusive developer's agreement with Talk Engineering Co., Ltd. to develop Vision Guided Robotic solutions powered by our eVisionFactory technologies specifically for the auto manufacturing industry in Japan. Talk is a regional Japanese machine vision developer and integrator primarily serving Japanese automobile and foods manufacturers, and was introduced by us to ABB Japan as a regional resource for developing TrueView solutions for the Japanese market.



Talk ordered one eVf Developers license and two eVF run-time licenses. One of the run-time licenses is for installation at Toyota Motor Corporation's auto production plant located in Tsutsumi, Japan, where the automaker produces the Camry, ES 300 and Prius.



Competitive Position -Vision Guided Robotic Systems



Vision guided robotics is an emerging industry and as such, no statistics are available to determine the size or composition of the overall market. Many of our potential competitors are substantially larger than we are and earn substantially greater revenue. We do not know of a reliable way to evaluate our future competitive position within the industry. We believe that a substantial number 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;



15






through our alliance with ABB, we have demonstrated an ability to complete projects for major industrial clients; and
our pending patent regarding the Method and Apparatus for Single Camera 3D Vision Guided Robotics 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 the year ended December 31, 2004, we incurred research and development expense of $503,145, and during the year ended December 31, 2003, we incurred research and development expense of $467,074. Substantially all of our research and development expenses consisted of internal personnel costs allocated to research and development. For 2005, our own employees will do substantially all of our research and development work.



Intellectual Property



We believe that software and related technical data which we have developed constitute intellectual property belonging to us. 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, Xi2D (Single/Multi-Camera 2D), DD3D (Direct Depth 3D), and SR3D (Surround Vision 3D);
software we have written and incorporated in the Internet based service and support system included in eVisionFactory;
software routines we have written from time to time in developing machine vision systems; and
software routine we have written from time to time in developing vision guided robotic systems.

We have registered the trademarks Braintech and BrainTron with the United States Patent and Trademark office. We have also applied for registration of the trademarksSC3D,eVisionFactoryandeVFwith the United States Patent and Trademark Office. In the Canadian Trade-marks Office we have applied for and received notice of registration for the trademarksSC3D,and applied for registration of the trademarks,eVF, andeVisionFactory.



On January 31, 2002, we filed an application in the Canadian Patent Office regarding theMethod And Apparatus For Single Camera 3D Vision Guided Roboticsand on May 24, 2002 we filed an identical application in the United States Patent Office. On January 31, 2003 we filed an International Application according to the Patent Cooperation Treaty. The Patent Cooperation Treaty provides a procedure enabling applicants to obtain patents in many countries. On November 9, 2004, the United States Patent Office issued U.S. Patent No. 6,816,755 regarding theMethod And Apparatus For Single Camera 3D Vision Guided Robotics.On July 14, 2004 We filed an application in the United States Patent Office regarding theMethod And Apparatus For Multi Camera Surround 3D Vision Guided Robotics.



Our ability to compete successfully will depend in part on our ability to protect our proprietary technology and information. Except for the U.S. Patent No. 6,816,755 regarding theMethod And Apparatus ForSingle Camera 3D Vision Guided Roboticsdescribed above, our application in the United States Patent Office regarding theMethod And Apparatus For Multi Camera Surround 3D Vision Guided



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Robotics,and apart from the above trademarks and trade mark applications, we have not applied for registration of intellectual property rights in respect of any of our software (although certain forms of legal protection, such as copyright ownership, are available without registration). 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.



ITEM 2. DESCRIPTION OF PROPERTY



Our office premises are located at Unit 102, 930 West 1stStreet, North Vancouver, British Columbia, Canada and consist of approximately 11,300 square feet. The term of the lease is five (5) years to August 31, 2008. The annual rent is approximately $162,500 per year, inclusive of operating costs. The lease agreement provides that a rental credit equal to six months minimum rent be applied to the first six months rent payable. For financial statement purposes the monthly rental credits are recorded as deferred leasehold inducements and applied over the term of the lease.



Our premises at Unit 102-930 West 1stStreet are suitable and adequate for our current and future anticipated research and development and production operations. Additional facilities at other locations will be occupied as dictated by our needs and growth.



ITEM 3. LEGAL PROCEEDINGS



As at the date of this annual report, we are not involved in any legal proceedings.



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



Not Applicable.



PART II



ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



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 quarters indicated.





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Quarter

High
Low
Close($)
($)
($)2004Fourth quarter

0.66
0.32
0.45Third quarter

0.48
0.33
0.48Second quarter

0.80
0.42
0.42First quarter

0.78
0.36
0.702003Fourth quarter

0.65
0.35
0.41Third quarter

0.67
0.40
0.45Second quarter

0.87
0.27
0.52First quarter

0.51
0.11
0.30

The source of this information is 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 at March 24, 2005, we have 21,050,507 shares issued and outstanding. We have approximately 390 registered shareholders. Approximately 9.7 million shares are registered in the name of CEDE & Co., a depository. Based on research into the indirect holdings registered in the names of depositories and financial institutions, we estimate that we have over 9,500 beneficial shareholders.



Common Stock



Our authorized capital stock consists of 200,000,000 shares of common stock with a par vale of $0.001 per share. The holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available at times and in amounts as the board of directors may from time to time determine. Holders of common stock are entitled to one vote per share on all matters on which the holders of common stock are entitled to vote. The common stock is not entitled to pre-emptive rights and may not be redeemed or converted. Upon liquidation, dissolution or winding up, the assets legally available for distribution to our shareholders are divided among the holders of the common stock in proportion to the number of shares of common stock held by each of them, after payments of all of our debts and liabilities.



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.



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS



The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes and the information included under the caption "Risk Factors" included elsewhere in this document. 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



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implementing our business strategies. See "Special Note Regarding Forward-Looking Statements" for further information regarding forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements as a result of a number of factors, many of which are beyond our control, including those factors discussed under "Risk Factors" and other headings in this document, which could, among other things, cause the price of our common stock to fluctuate substantially.



Overview



We generate the majority of our revenues from the sale of computer software that we have developed and that we believe constitutes intellectual property belonging to us. 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. We have generated total revenues, from inception on January 3, 1994 to December 31, 2004, in the amount of $1,670,547.



We have incurred aggregate net losses of approximately $17.3 million during the period from our inception on January 3, 1994, to December 31, 2004. 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.



At the beginning of fiscal 2004, we set strategic operating priorities for the ensuing year. These priorities and the results are as follows:



Our first and major priority for 2004 was to grow our revenue through our Channel Partner Agreement with ABB. We were successful in that we recorded revenues of nearly $750,000. Although not significant in terms of annual revenue, it is significant in terms of increase over previous years and as a percent of our total revenue generated from inception. We accomplished this by attending trade shows with ABB, by providing eVF training to both ABB technical and sales staff and by jointly developing sales and marketing materials. The marketing approach includes the exclusive branding by ABB of jointly developed Vision Guided Robotic solutions. In May 2004, ABB announced the launch of a North American marketing campaign for TrueView. TrueView is a family of vision guided robotic systems that fully integrate our proprietary vision guidance technologies and the eVisionFacory software platform. We believe that, in
combination with ABBs North American sales, engineering and field service teams, TrueView will be able to achieve significant market penetration. In order to accomplish this market penetration, the two companies initiated a significant sales and marketing program that started in January 2005. Accordingly, in January 2005, the February 1, 2004 agreement was amended to allow ABB to market TrueView, exclusively powered by our technology, to countries of the European Economic Union and sub-license TrueView to their business partners on a worldwide basis.





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Another priority for 2004 was to develop markets for our Internet-based service and support system. By leveraging our Channel Partner Agreement with ABB we set up a full operating system to demonstrate to potential end users the value and flexibility of both the Internet-based service and support system and the eVF platform on which it is built. On November 1, 2004, we announced the beta release of the new product: theCommunity Of Businesses Using Support Systems, or Cobuss.Cobuss is a web-based technical support tool built on top of a community-based peer-to-peer telecommunications software architecture.Field trials have shown the system to be capable of providing remote electronic support to our VGR systems at multiple major networks in the automotive industry. We anticipate that Cobuss can play a major role in providing
support, such as fault diagnostics, remote communication, trend monitoring and control, as well as online training for industrial system processes. We expect that the application of Cobuss to industrial systems will significantly reduce downtime and enable effective training, while providing manufacturing enterprises with very efficient remote access to factory floor data for process optimization.



Another priority for 2004 was to continue the development of our business in Asia through our relationship with Marubeni. In November 2004, Marubeni agreed to remove the exclusivity clauses of our Agreement dated June 24, 2002. The June 24, 2002 agreement was for a period of three years and in accordance with the terms of the agreement, we have given notice to Marubeni that the agreement will be allowed to terminate on June 24, 2005. During 2004, we developed a relationship with Talk Engineering Co., Ltd., the integrator used by Marubeni to install an eVF system in the Hino Motors engine plant. In December 2004, we entered into a non-exclusive developers agreement with Talk Engineering to develop Vision Guided Robotic solutions powered by our eVF technologies specifically for the auto manufacturing industry in Japan. Talk has ordered one eVf Developers license and two eVF run-time licenses. One of the run-time
licenses is for installation at Toyota Motor Corporation's auto production plant located in Tsutsumi, Japan, where the automaker produces the Camry, ES 300 and Prius.



Our strategic operating priorities for fiscal 2005 include the following:



Our first and major priority for 2005 is to significantly grow our revenue so that we may eventually reduce our reliance on equity financing to fund our operations. We intend to achieve this revenue growth on several fronts as follows:



We intend to assist ABB with their TrueView marketing and sales program to expand their sales in North America, Europe and Asia. We intend to expand the product line of eVF application solutions for ABBs automotive customers. The eVF application solutions developed for ABB now center on rigid part handling in power train applications. We intend to expand our product line beyond power train into body panel handling, adhesive application and inspection, and real time visual tracking of moving parts. It is our plan to eventually develop applications for each of the automotive business units within ABB. and in doing so, we will be able to take utilize the sale personnel attached to each of these divisions. We also intend to explore the possibility of developing eVF application solutions for ABBs channel partners in non-manufacturing industries.



We also intend to expand our revenue sources outside ABB and the automotive industry. We are pursuing opportunities with the United States Government and are intending to develop a version of eVF suitable for sale to the research and educational markets, both private and public.



Another priority for 2005 is to develop a commercialized version of Cobuss, our Internet-based service and support system. Once developed, we intend to leverage our Channel Partner Agreement with ABB so that full operating systems can be set up to demonstrate to potential end users the value and flexibility of both the Internet-based service and support system and the eVF platform on which it is built. We anticipate that our first sales of Cobuss will occur during 2005 and will be in the automobile manufacturing industry. We also intend to seek out potential end users outside the automobile manufacturing industry.





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In 2005 we also intend to continue the development of our business in Asia through our relationship with Talk Engineering Co., Ltd. We intend to facilitate a marketing strategy that combines the strength of ABBs TrueView brand of Vision Guided Robotics and the strength of Talks relationship with the Japanese automotive industry.



Another priority for 2005 is to increase the public and investor visibility of our company and our products. In order to accomplish this, we entered into Marketing Communications Services Agreement with Baldacci Communications, LLC. The agreement is effective February 1, 2005 and comprises an Investment Stakeholder Development Plan designed by Baldacci. The plan integrates the key elements of marketing communications, investor relations, public relations, and portfolio development. Our director, James Speros, will be contracted by Baldacci to provide a portion of the services.



We also intend to continue to add functionality to eVF by developing additional components and features.



Critical Accounting Policies and Changes to Existing 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.



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, 2004 we incurred a foreign exchange loss of $13,674 (2003 - $76,238). 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, 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, 2004 and December 31, 2003 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.





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Quantitative and Qualitative Disclosures about Market Risk



As at December 31, 2004 we have not entered into or acquired financial instruments that have a material market risk. We have no financial instruments for trading or other purposes or derivative or other financial instruments with off balance sheet risk. All financial assets and liabilities are due within the next twelve months and are classified as current assets or liabilities in the consolidated balance sheet provided with this annual report. The fair value of all financial instruments at December 31, 2004 approximate their carrying values.



To December 31, 2004, the majority of our cash costs have been realized or incurred in Canadian dollars. To date we have not entered into foreign currency contracts to hedge against foreign currency risks between the Canadian dollar or other foreign currencies and our reporting currency, the United States dollar. Generally, however, we attempt to manage our risk of exchange rate fluctuations by maintaining sufficient net assets in Canadian dollars to retire our liabilities as they come due.



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.



The majority of our cash costs have been incurred in Canadian dollars. Our reporting currency is the United States dollar. At the end of each reporting period, we translate our expenses incurred in Canadian dollars into United States dollars at the average exchange rate for the period. Fluctuations in the foreign exchange rate can have a substantial influence on reported expenses even though the actual expenditure has not increased or decreased to the same extent.





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Year ended December 31, 2004 compared with year ended December 31, 2003



The weighted average exchange rate used to translate the Canadian Dollar into the United States Dollar for the year ended December 31, 2004 was 1.29207. For the year ended December 31, 2003, the exchange rate was 1.37119. The change in our operating expenses illustrates the effect of fluctuating foreign exchange rates have on our reported results. Exclusive of the software license settlement, we reported an increase in operating expenses of approximately $213,748 from $2,139,815 for the year ended December 31, 2003 to $2,353,563 for the year ended December 31, 2004. However, when adjusted for the change in the foreign exchange rate, the actual change in operating expense activity was an increase of approximately $83,714. The foreign exchange adjustment accounted for an increase of $130,034 in reported operating expenses. We have isolated the effect the fluctuating foreign exchange rates has on our reported results in the
discussion below.



Revenue from operations for the year ended December 31, 2004 was $749,969 (December 31, 2003 - $213,584). The amount of our revenues is calculated in accordance with the software revenue recognition rules outlined in the American Institute of Certified Public Accountant's Statement of Position (SOP) 97-2, as described in the significant accounting policies note to our consolidated financial statements.



Revenue for the year ended December 31, 2004, included approximately $494,000 for vision systems delivered to ABB for installation in various end users, approximately $68,500 for training and consulting revenue, approximately $138,900 for vision systems delivered to an independent integrator, and approximately $68,600 initially recorded as deferred revenue and now recognized as revenue. We also recorded a credit to revenue of $20,000 regarding the repurchase of licenses from Marubeni.



Cost of sales for the year ended December 31, 2004 was $76,939.



Revenue for the year ended December 31, 2003, included approximately $111,250 for vision systems delivered to ABB for installation in various end users, approximately $20,000 for eVF run time licenses for Marubeni, approximately $7,400 for training and consulting revenue, and approximately $70,000 initially recorded as deferred revenue and now recognized as revenue.



Cost of sales for the year ended December 31, 2003 was $24,286.



We reported that research and development expenses increased $36,071 from $467,074 for the year ended December 31, 2003 to $503,145 for the year ended December 31, 2004. The foreign exchange differential accounted for an increase of approximately $29,000 indicating that actual research and development activity increased by approximately $7,000. The increase is attributable to an increase in salaries cost.



We reported that selling, general, and administrative expenses increased $177,677 from $1,672,741 for the year ended December 31, 2003 to $1,850,418 for the year ended December 31, 2004. The foreign exchange differential accounted for an increase of approximately $101,000 indicating an actual increase in activity of approximately $76,700. Several factors contributed to the decrease and in discussing these factors, the foreign exchange element has been indicated. The principal factors were as follows:




Actual general and administrative salaries increased approximately $161,900 from $695,100 to $857,000. The foreign exchange differential accounted for an increase of approximately $52,500 resulting in a net reported increase of approximately $214,400. The increase is mainly attributable to the hiring of our sales vice-president and one additional administrative staff.


For the year ended December 31, 2003, we recorded a stock based compensation charge of $185,400 in accordance with the application of the Black-Scholes option pricing model on the issuance of 500,000 share purchase warrants granted in connection with a consulting agreement

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for the provision of strategic introductions and general consulting in the manufacturing industry. For the year ended December 31, 2004, we recorded a stock based compensation charge of $21,632 in accordance with the application of the Black-Scholes option pricing model on the issuance of 50,000 share purchase warrants granted in connection with a consulting agreement for the provision of consulting services.




Actual amortization expenses decreased approximately $33,500 from $60,000 to $26,500 principally as a result of the diminishing value of our fixed assets and the full amortization of fixed assets amortized on the straight-line basis. The foreign exchange differential accounted for an increase of approximately $1,600 resulting in a net reported decrease of approximately $31,900.


Actual legal expenses decreased approximately $2,700 from $72,200 to $69,500, principally due to a reduction in the use of outside legal counsel and an increase in our patent activity. The foreign exchange differential accounted for an increase of approximately $4,300 resulting in a net reported increase of approximately $1,600.


Actual accounting expenses decreased approximately $500 from $64,900 to $64,400. The foreign exchange differential accounted for an increase of approximately $4,000 resulting in a net reported increase of approximately $3,500.


Actual overall travel and marketing expenditures increased approximately $1,100 from approximately $238,400 to approximately $239,500. The foreign exchange differential accounted for an increase of approximately $14,700 resulting in a net reported increase of approximately $15,800. The individual components of the actual decrease are as follows: Expenditures for marketing materials increased from $8,100 to $23,300, trade shows decreased from $94,800 to $36,000, investor relations increased from $79,700 to $106,600, travel increased from $27,800 to $28,900, and web site expenditures increased from $6,000 to $19,500.


Actual rent and premises cost increased $30,800 from $151,800 to $182,600. The foreign exchange differential accounted for an increase of approximately $11,200 resulting in a net reported increase of approximately $42,000. The increase is the results from the occupation of additional premises, an increase in insurance costs and additional repairs and maintenance costs.


For the year ended December 31, 2004, we recorded a $100,000 charge relating to corporate income tax compliance expenses. There was no similar charge in the year ended December 31, 2003.




For the year ended December 31, 2004, we recorded a $103,883 charge relating to a software license settlement regarding our potential use of unlicensed software. There was no similar charge in the year ended December 31, 2003.



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Liquidity and Capital Resources



Working Capital and Operations



As of December 31, 2004, our trade accounts receivable balance was $84,643. Subsequent to December 31, 2004 and to March 24, 2005 all but $8,560 of this balance was received in full. In addition, we have received $31,500 for products and services billed in 2005. We also received proceeds of $287,000 on the private placement of 717,500 shares and 358,750 share purchase warrants. Our accounts receivable as at March 24, 2005 is approximately $65,000 and our cash position is approximately $660,000 inclusive of subscriptions received of $600,000 pertaining to the private placement of 1,875,000 units at $0.80 per unit approved by the Board of Directors on March 10, 2005.



We estimate that, at our current level of operation, our cash expenses are approximately $225,000 per month. We base this estimate on the following data:



-
As at March 24, 2005, we have 23 employees and our salary costs are approximately $125,000 per month.

-
For the year ended December 31, 2004, our average monthly cash expenditures for general, overhead and administration, exclusive of salary costs, were approximately $70,000 per month. We expect that our general overhead and administrative costs, exclusive of salary costs, will increase to approximately $90,000 per month over the next six months, because of an anticipated increase in general business activity.


We do not expect to incur significant capital expenditures during the remainder of 2004 unless they result from an increase in our level of operation.


An organization representing leading software manufacturers made enquiries regarding our potential use of unlicensed software. A self-audit revealed that we had unlicensed copies of software installed on our computers and, therefore, we agreed on June 16, 2004 to pay $103,883 as a settlement. The settlement amount, which was accrued as at June 30, 2004, is payable in thirteen monthly installments. Accordingly, our cash expenditures will include approximately $8,000 per month for the next 4 months.

Based on the foregoing, we estimate that our total cash expenditures for the period from March 24, 2005 to October 31, 2005 will be approximately $1,800,000. Accordingly, at our anticipated level of operation, our existing cash balances, our existing accounts receivable, our expected sales revenue based on purchase orders received, and the anticipated proceeds from the $1,500,000 private placement financing described elsewhere in this document should be sufficient to pay our anticipated cash expenditures to approximately October 31, 2005. To continue beyond October 31, 2005 as a going concern, we will either have to raise additional capital or generate substantial sales revenue. If we cannot do either by October 31, 2005, we face the risk that our business will fail.



Financing Activities



Because our business has not been profitable we have been required to finance the development of our products, to pay the costs of marketing those products, and to cover operating losses by way of equity financing. During 2003 and 2004 we obtained financing as follows:



Promissory Notes Payable



In January and March 2003, our Chief Executive Officer advanced CAD $235,000 ($155,838) in return for unsecured demand promissory notes with an annual interest rate of 8%. Between April 12, 2003 and July 29, 2003, the Chief Executive Officer advanced a further CAD $833,000 ($594,355). These



25





additional financings bear interest at 8% per annum and are repayable on demand. A general security agreement covering all of our real, personal and intangible property was pledged as security for the additional advances. The agreements governing the issuance of the convertible debentures (see below) provide that the general security agreement pledged as security for the promissory notes issued to the Chief Executive Officer be discharged, provided that $250,000 of the proceeds from the convertible debentures be used to repay the notes, and further provided that the unpaid balance of the notes be repaid by issuing units at a deemed price of $0.25 per unit. We considered the value of $0.25 per unit to be the fair market of the shares and share purchase warrants which form the units, because that was the value we negotiated with independent third parties to be the conversion price of the convertible debentures that were
assuming a position similar to the promissory notes being repaid. A partial repayment of $50,000 was made on September 22, 2003 and on November 3, 2003 a further $200,000 was repaid. All of the promissory notes were repayable in Canadian Dollars and as such as at November 3, 2003 a foreign exchange loss of $58,855 and interest of $29,607 was accrued. On November 3, 2003, the unpaid balance of the promissory notes was repaid by the issuance of 2,354,621 common shares and 1,177,310 share purchase warrants. Each share purchase warrant has a five year term and is exercisable into one common share at a price of $0.25 per share. Since the promissory notes did not have terms for conversion into equity, the transaction is considered a settlement of debt for accounting purposes. A gain or loss for accounting purposes was recognizable on settlement to the extent that the carrying value of the debt plus accrued interest is compared to the fair value of the cash and equity, based on the trading price on the date
the Company committed to the issuance of the convertible debentures, received by the Chief Executive Officer. Accordingly we have recorded a loss on settlement of debt in the amount of $741,705.



Convertible Debentures



On September 25, 2003, we executed a funding term sheet whereby investors agreed to provide up to $2,250,000 in exchange for convertible debentures. A general security agreement covering all of our real, personal and intangible property is pledged as security for the debentures. The debentures mature on August 25, 2006 and bear interest at eight percent (8%) per annum. All convertible debentures rankpari passuwith all other convertible debentures issued pursuant to the term sheet. The principal amount and accrued interest are convertible until maturity into units at a price of $0.25 per unit. Each unit comprises one common share and one half-share (1/2) share purchase warrant. Each whole warrant has a five (5) year term and is exercisable at any time into one common share at a price of $0.25 per share. The debentures may be redeemed by repayment of all outstanding principal
and accrued interest at any time on 7 days notice. The debenture holders have a first right to convert all or any portion of the principal and accrued interest into units prior to redemption. We may at our discretion require the debenture holders to convert the outstanding principal and accrued interest into units if the closing trading price of our shares on the OTCBB or other principal trading market is $1.00 or greater for any 30 consecutive trading days after the shares issuable pursuant to conversion of the debentures are registered under the Securities Act of 1933.



Between September 5, 2003 and May 21, 2004, in accordance with the terms of Securities Purchase Agreements, we issued convertible debentures in the amount of $2,250,000. Finders fees were paid to investors, persons related to investors, and independent third parties by way of cash payment of $26,250 and by way of issuance of 595,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the cash finders fees and the fair value of the units underlying the finders fees have been recognized in stockholders equity.



Because the conversion price was less than the closing trading prices of our shares on the commitment date, the convertible debentures contain a beneficial conversion feature. In accordance with Emerging Issues Task Force (EITF) Issue 98-5, the embedded beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value of the beneficial conversion feature exceeds the face value of the



26





debentures and is therefore limited to the face value. The face value of the debt has been allocated to additional paid-in capital and is being accreted to the face value of the convertible debentures over the term of the debentures by a charge to interest expense. Accrued interest is also recorded based on the face value of the debentures at the stated interest rate (8%). The amount recorded on the balance sheet as at December 31, 2004 has been calculated as follows:



Face value of convertible debentures issued (cash received)


$
2,250,000Beneficial conversion feature allocated to additional paid-in capital



(2,249,995)Beneficial conversion feature accreted to convertible debentures



991,717Accrued interest payable



186,171Conversion of debentures



(194,998)Convertible debentures at December 31, 2004


$
982,895

On conversion of the debentures into common shares and share purchase warrants, the fair value of the share purchase warrants will be assigned and recognized as an expense. On April 15, 2004, $125,000 of principal and $5,397 of accrued interest was converted into 521,588 common shares and 260,794 share purchase warrants. Accordingly, we expensed $42,170 as the fair value of the warrants issued. On September 10, 2004, $62,500 of principal and $2,101 of accrued interest was converted into 258,404 common shares and 129,202 share purchase warrants. Accordingly, we expensed $20,892 as the fair value of the warrants issued.



Private Placement



At a directors meeting held October 13, 2004, approval was given to a private placement of 1,250,000 units at a price of $0.40 per unit for gross proceeds of $500,000. Each unit comprises one share and one-half (1/2) share purchase warrant. Each whole warrant is exercisable at $0.50 into one common share for five years. At a directors meeting held December 21, 2004, approval was given to extend the private placement to $700,000 under the same terms and conditions. The $700,000 private placement was closed in several traunches as follows:

December 1, 2004
$
158,000December 20, 2004

75,000December 29, 2004

180,000January 12, 2005

165,000March 4, 2005

122,000Total
$
700,000

In conjunction with this private placement, we paid $32,880 and issued 24,500 units as finders fees.



Employee Stock Options



The exercise of 100,000 employee stock options has generated $21,700 from January 1, 2004 to March 24, 2005.



Private Placement



At a meeting held March 10, 2005, the Board of Directors approved the private placement of up to 1,875,000 units at a price of $0.80 per unit for total proceeds of $1,500,000. Each unit comprises one common share and one half-share (1/2) share purchase warrant. Each whole warrant has a three (3) year term and is exercisable at any time into one common share at a price of $1.00 per share. It is anticipated that the private placement will close on or about March 31, 2005. In conjunction with this private placement, we will pay up to 10% in finders fees in cash and/or shares.





27





Off-Balance Sheet Arrangements



Not Applicable.



Going Concern Statement



Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on the consolidated audited financial statements for the period ended December 31, 2004, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our consolidated audited financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.



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.





28





ITEM 7. FINANCIAL STATEMENTS



Each of the following items is contained in our consolidated financial statements, which are attached as an exhibit to our annual report.



-
Report of Independent Registered Public Accounting Firm;-
Consolidated Balance sheets as of December 31, 2004 and 2003;-
Consolidated Statements of Operations for each of the years in the three year period ended December 31, 2004;
Consolidated Statements of Stockholders' Equity (Deficit) for the three year period ended December 31, 2004;
Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31, 2004; and
Notes to Consolidated Financial Statements.

Supplementary financial data showing unaudited quarterly financial information such as revenues, gross margin, net loss for the period and net loss per share during our two most recent fiscal years is contained in note 15 to our audited consolidated financial statements.





29





Consolidated Financial Statements

(Expressed in United States dollars)

BRAINTECH, INC.



Years ended December 31, 2004, 2003 and 2002









REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders ofBraintech, Inc.



We have audited the accompanying consolidated balance sheets of Braintech, Inc. as of December 31, 2004 and 2003 and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for each of the years in the three year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Braintech, Inc. as of December 31, 2004 and 2003 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

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, the Company has incurred recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



Chartered Accountants

Vancouver, Canada

February 7, 2005, except for note 18,which is as of March 10, 2005









BRAINTECH, INC.Consolidated Balance Sheets(Expressed in United States dollars)December 31, 2004 and 20032004
2003AssetsCurrent assets:Cash and cash equivalents
$
196,012
$
741,474Accounts receivable
84,643
61,175Inventory
6,569
16,232Prepaid expenses
53,550
40,803340,774
859,684Fixed assets (note 4)
60,638
53,129$
401,412
$
912,813Liabilities and Stockholders Equity (Deficit)Current liabilities:Accounts payable
$
123,210
$
40,627Accrued liabilities
222,600
68,694Deferred leasehold inducements (note 5)
64,226
49,629Deferred revenue
35,133
28,953445,169
187,903Non-current liabilitiesConvertible debentures (note 7)
982,895
164,991Total liabilities
1,428,064
352,894Stockholders equity (deficit):Common stock (note 8):Authorized: 200,000,000 shares, with $0.001 par value(2003  40,000,000 shares)Issued: 20,294,257 shares
20,294
18,183(2003  18,183,015)Additional paid-in capital
16,299,521
15,027,934Accumulated deficit
(17,346,467)
(14,486,198)(1,026,652)
559,919$
401,412
$
912,813

Future operations (note 1)

Commitments (note 11)

Subsequent events (note 16)



See accompanying notes to consolidated financial statements.







F-1





BRAINTECH, INC.Consolidated Statements of Operations(Expressed in United States dollars)Years ended December 31,2004

2003

2002Sales
$
749,969
$
213,584
$
460,093Cost of sales

76,939

24,286

36,449Gross margin

673,030

189,298

423,644Operating expenses:Research and development

503,145

467,074

477,392Selling, general and administrative(note 13)

1,850,418

1,672,741

1,525,646Software license settlement (note 16)

103,883

-

-2,457,446

2,139,815

2,003,038Operating loss

(1,784,416)

(1,950,517)

(1,579,394)Non-operating:Interest income

109

79

804Loss on settlement of debt (note 6)

-

(741,705)

-Interest on promissory notes (note 6)

-

(29,501)

-Interest on convertible debentures (note 7)

(156,226)

(29,945)

-Beneficial conversion feature accretedto convertible debentures (note 7)

(856,674)

(135,043)

-Fair value of warrants issued onconversion of debentures (note 7)

(63,062)

-

-(1,075,853)

(936,115)

804Loss for the year
$
(2,860,269)
$
(2,886,632)
$
(1,578,590)Loss per share information:Basic and diluted
$
(0.15)
$
(0.19)
$
(0.13)Weighted average number of commonShares outstanding

18,516,638

15,408,397

12,189,358See accompanying notes to consolidated financial statements.







F-2





BRAINTECH, INC.Consolidated Statements of Stockholders Equity (Deficit)(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 2002Common stock

Deferred

TotalNumber

Additional
stock-based
Accumulated
stockholdersof shares
Amount
paid-in capital
compensation
deficit
equity (deficit)Balance, December 31, 2001
11,358,668
11,359
10,280,074
(10,000)
(10,020,976)
260,457Common stock transactions(net of share issue costs)Shares issued for cash(net of subscriptions received in 2001)
3,760,716
3,760
1,431,466
-
-
1,435,226Shares issued for services renderedin prior years
20,000
20
(20)
-
-
-Shares issued for services rendered
80,000
80
63,920
-
-
64,000Shares issued for fractional sharesresulting from reverse stock split
10
-
-
-
-
-Stock based compensation
-
-
39,409
-
-
39,409Deferred stock-based compensation
-
-
(10,000)
10,000
-
-Loss for the year
-
-
-
-
(1,578,590)
(1,578,590)Balance, December 31, 2002
15,219,394

15,219

11,804,849

-

(11,599,566)

220,502Common stock transactions(net of share issue costs)Shares issued for promissory notespayable
2,354,621
2,355
586,300
-
-
588,655Shares issued for services rendered
20,000
20
5,380
-
-
5,400Shares issued for cash on exerciseof employee stock options
107,000
107
21,293
-
-
21,400Shares issued for finders fees
482,000
482
(482)
-
-
-Compensatory benefit of warrantsissued to contractors
-
-
189,521
-
-
189,521Cash paid for finders fee
-
-
(26,250)
-
-
(26,250)Loss on settlement of debt
-
-
741,705
-
-
741,705Fair value of debenture beneficialconversion feature
-
-
1,724,997
-
-
1,724,997Debenture issue expenses
-
-
(19,379)
-
-
(19,379)Loss for the year
-
-
-
-
(2,886,632)
(2,886,632)Balance, December 31, 2003
18,183,015

18,183

15,027,934

-

(14,486,198)

559,919Common stock transactions(net of share issue costs)Shares issued for cash
1,032,500
1,032
411,968
-
-
413,000Shares issued for services rendered
100,000
100
47,900
-
-
48,000Shares issued for cash on exerciseof employee stock options
77,000
77
17,023
-
-
17,100Shares issued on conversion ofconvertible debentures
779,992
780
194,218
-
-
194,998Shares issued for finders fees
121,750
122
(122)
-
-
-Compensatory benefit of warrants




-issued to contractors
-
-
33,038
-

33,038Cash paid for finders fees
-
-
(19,090)
-
-
(19,090)Fair value of debenture beneficialconversion feature
-
-
524,998
-
-
524,998Debenture issue expenses
-
-
(1,408)
-
-
(1,408)Fair value of warrants issued on conversionof debentures
-
-
63,062
-
-
63,062Loss for the year
-
-
-
-
(2,860,269)
(2,860,269)Balance, December 31, 2004
20,294,257
$
20,294
$
16,299,521
$

$
(17,346,467)
$
(1,026,652)

See accompanying notes to consolidated financial statements.





F-3





BRAINTECH, INC.Consolidated Statements of Cash Flows(Expressed in United States dollars)Years ended December 31,2004

2003

2002Cash flows from operations:Loss for the year
$
(2,860,269)
$
(2,886,632)
$
(1,578,590)Items not involving cash:Amortization

28,071

59,990

78,579Bad debt

-

-

68,251Loss on settlement of debt

-

741,705

-Shares issued for services rendered

48,000

5,400

64,000Stock based compensation

-

-

39,409Compensatory benefit of warrants issued to contractor

33,038

189,521

-Interest on promissory notes

-

29,501

-Accretion of debenture beneficial conversion feature

856,674

135,043

-Fair value of warrants issued onconversion of debentures

63,062

-

-Changes in non-cash operating working capital:Accounts receivable

(23,468)

137,760

(194,971)Inventory

9,663

(14,973)

34,208Prepaid expenses

(12,747)

(1,528)

4,972Deferred cost of sales

-

1,488

6,277Accounts payable and accrued liabilities

236,489

27,663

(46,006)Accrued interest on convertible debentures

156,226

29,945

-Deferred leasehold inducements

14,597

49,629

-Deferred revenue

6,180

(51,515)

47,968Net cash used in operations

(1,444,484)

(1,547,003)

(1,475,903)Cash flows from investments:Deposit on lease

-

(16,000)

-Purchase of fixed assets

(35,580)

(7,136)

(9,515)Net cash used in investments

(35,580)

(23,136)

(9,515)Cash flows from financing:Promissory notes payable (note 6)

-

809,154

-Promissory notes repayment (note 6)

-

(250,000)

-Convertible debenture payable (note 7)

525,000

1,725,000

-Debenture issue costs

(1,408)

(45,629)

-Common shares issued, net of issue costs

411,010

21,400

1,435,226Net cash provided by financing

934,602

2,259,925

1,435,226Increase (decrease) in cash and cash equivalents

(545,462)

689,786

(50,192)Cash and cash equivalents, beginning of year

741,474

51,688

101,880Cash and cash equivalents, end of year
$
196,012
$
741,474
$
51,688Supplemental information:Non-cash financing activities:Shares issued for services rendered
$
48,000
$
5,400
$
64,000Shares issued for promissory notes payable

-

1,330,360

-Shares issued for promissory notes receivable
$
-

-
$
-Shares and warrants issued on conversion ofconvertible debentures
$
255,060

-
$
-



See accompanying notes to consolidated financial statements.





F-4





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20021.
Description of business and future operations: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, 2004, 79% of sales revenue (2003  82%; 2002  83%) was generated from a single customer.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 has generated only small amounts of revenues and is continuing to develop its business. Operations to date have been primarily financed by equity transactions. Past equity financings from related parties are detailed in note 8(d). The Companys future operations and its continuation as a going concern are dependent upon its ability to raise additional capital, increase sales of its products by leveraging its Channel Partner Agreement and Sales and Marketing Agreement with a major supplier of robotic systems, generating positive cash flows from operations and ultimately attaining profitability. It is the Companys intention to focus on developing this
partnership and continuing as their principal supplier of vision systems, raising financing and achieving profitable operations. There can be no assurances that appropriate financings having favourable economic terms will be available as required.Based on its current financial position and anticipated financings (note 18), the Company believes that its present and anticipated cash resources from operations and equity and/or debt financings will be sufficient to pay ongoing cash operating expenses until approximately October 31, 2005. However, there can be no assurance that the Company can or will obtain sufficient funds from operations or additional financings on terms acceptable to the Company. To continue as a going concern, the Company will either have to raise additional capital or begin to generate substantial sales revenue. If the Company cannot do either by the end of October 2005, 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.2.
Significant accounting policies:(a)
Basis of presentation:These consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America and present the financial position, results of operations and cash flows of the Company and its wholly-owned subsidiary, Braintech Canada, Inc., incorporated under the Company Act (British Columbia) on March 30, 1994. All material intercompany balances and transactions have been eliminated.







F-5





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20022.
Significant accounting policies (continued):(b)
Cash and cash equivalents:Cash and cash equivalents include highly liquid investments, such as term deposits, having terms to maturity of three months or less at the date of acquisition and that are readily convertible to contracted amounts of cash.(c)
Research and development costs:Research and development costs are expensed as incurred.(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 AICPAs Statement of Position No. 97-2 (SOP 97-2), Software Revenue Recognition.Cash received in advance of meeting the revenue recognition criteria is 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.(g)
Fixed assets:Fixed assets are carried at cost less accumulated amortization. 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







F-6





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20022.
Significant accounting policies (continued):(h)
Impairment or disposal of long-lived assets:The Company adopted the provisions in FASB Statement of Financial Accounting Standards (SFAS) No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets as of January 1, 2002. Under this standard, an impairment loss calculated as the difference between the carrying amount and the fair value of the asset should be recognized on long-lived assets held and used only if the carrying amount of the asset is not recoverable from its undiscounted cash flows. Long-lived assets to be disposed other than by sale should be considered held and used until they are disposed of. Long-lived assets to be disposed of by sale should be measured at the lower of its carrying amount or fair value less cost to sell.(i)
Use of estimates:The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ from these estimates.(j)
Foreign currency:The Companys functional currency is the United States dollar. Assets and liabilities denominated in a foreign currency have been translated into the functional currency at rates of exchange in effect at the balance sheet date. Revenue and expense items are translated at average exchange rates during the year. Exchange gains and losses are included in operations.(k)
Stock-based compensation:The Company has elected to apply the provision of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its stock options granted to employees. Under APB 25, compensation expense is only recorded to the extent that the exercise price is less than fair value on the measurement date. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation (SFAS 123). Non-employee options are recognized at the fair value of the options as determined by an option pricing model as the services are performed and the options earned. Had compensation cost been determined based on the fair value of employee stock options at their grant date, the Companys net loss and net loss per share
would have been as follows:







F-7





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20022.
Significant accounting policies (continued):(k)
Stock-based compensation (continued):Years ended December 31,2004
2003
2002Net loss as reported
$
(2,860,269)
$
(2,886,632)
$
(1,578,590)Stock-based employeecompensation if fair-valuebased method applied
(299,248)
(121,535)
(78,235)Pro forma loss as if fair-valuebased method had been applied
$
(3,159,517)
$
(3,008,167)
$
(1,656,825)Basic and diluted loss per shareAs reported
$
(0.15)
$
(0.19)
$
(0.13)Pro forma
$
(0.17)
$
(0.20)
$
(0.14)The fair value for the options was estimated using the Black-Scholes option pricing model assuming no expected dividends and the following weighted average assumptions:OptionsInterest

Expectedrate
Term
Dividends
VolatilityYears ended:December 31, 2004
2.24%
2 years
0%
243%December 31, 2003
1.90%
2 years
0%
255%December 31, 2002
2.75%
2 years
0%
80%Weighted average

Weighted averageexercise price

grant-date fair valueDecember 31,

December 31,2004
2003
2002

2004
2003
2002Exercise price exceedsmarket price of stockon grant date
$
0.46
$
0.56
$
0.28

$
0.41
$
0.51
$
0.09







F-8





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20022.
Significant accounting policies (continued):(l)
Income taxes:The Company follows the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized based on the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. When the likelihood of realization of a deferred tax asset is not considered to be more likely than not, a valuation allowance is provided.(m)
Loss per share:Loss per share is calculated based on the weighted average number of shares outstanding.As the effect of all outstanding convertible debentures (note 7) options (note 8(f)) and warrants (note 9) is anti-dilutive, diluted loss per share does not differ from basic loss per share.The number of shares used to calculate loss per share for the years ended December 31, 2004, 2003 and 2002 was reduced by 300,000 shares in each year for shares issued and held by the Company.(n)
Comprehensive loss:Loss for the year for the Company is the same as comprehensive loss.(o)
Comparative figures:The Company has reclassified certain of the figures presented for comparative purposes to conform to the financial statement presentation adopted in the current year.(p)
Deferred leasehold inducements:Leasehold inducements are deferred and amortized to reduce rent expense on a straight-line basis over the term of the lease.3.
Related party balances and transactions:Transactions with directors and officers:During the year, the Company was charged nil (2003 - nil; 2002 - $54,885) for legal services provided by a former director. This arrangement for the provision of legal services by the director was terminated effective June 30, 2002. These charges are included in selling, general and administrative expenses. Equity financings with directors and officers are detailed in note 8.





F-9





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20024.
Fixed assets:Accumulated

Net bookDecember 31, 2004

Cost

amortization

valueFurniture and fixtures
$
80,581
$
49,931
$
30,650Computer equipment

183,084

178,425

4,659Computer software

51,449

35,017

16,432Leasehold improvements

10,829

1,932

8,897$
325,943
$
265,305
$
60,638Accumulated

Net bookDecember 31, 2003

Cost

amortization

valueFurniture and fixtures
$
80,581
$
41,571
$
39,010Computer equipment

175,888

164,908

10,980Computer software

33,893

30,754

3,139Leasehold improvements

20,538

20,538

-$
310,900
$
257,771
$
53,1295.
Deferred leasehold inducements:2004

2003Balance, beginning of year
$
49,629
$
Leasehold inducements received during the period

25,410

52,260Amortization

(15,769)

(5,004)Foreign exchange adjustment

4,956

2,373Balance, end of year
$
64,226
$
49,6296.
Promissory notes payable:In January and March, 2003, the Companys Chief Executive Officer advanced $155,838 (CAD $235,000) in return for unsecured demand promissory notes with an annual interest rate of 8%.Between April 12, 2003 and July 29, 2003, the Companys Chief Executive Officer advanced a further $594,355 (CAD $833,000) to the Company. These additional financings bore interest at 8% per annum and were repayable on demand. A general security agreement covering all of the Companys real, personal and intangible property was pledged as security for the additional advances.







F-10





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20026.
Promissory notes payable (continued):The agreements governing the issuance of the convertible debentures (note 7) provided that the general security agreement pledged as security for the promissory notes issued to the Companys Chief Executive Officer be discharged, provided that $250,000 of the proceeds be used to repay the notes, and further provided that the unpaid balance of the notes be repaid by issuing units at a deemed price of $0.25 per unit. A partial repayment of $50,000 was made on September 22, 2003 and on November 3, 2003, the remaining $200,000 was repaid.All of the promissory notes were repayable in Canadian Dollars and as such as at November 3, 2003 a foreign exchange loss of $58,855 and interest of $29,501 was accrued.On November 3, 2003, the unpaid balance of the promissory notes was repaid by the issuance of 2,354,621 common shares and 1,177,310 share purchase warrants. Each share purchase warrant has a five year term and is exercisable into one common share at a price of $0.25 per share. Since the promissory notes did not have terms for conversion into equity, the transaction is considered a settlement of debt for accounting purposes. The face value of the debt plus accrued interest is compared to the fair market value of the cash and equity received by the Chief Executive Officer and a gain or loss for the difference was recognized. Accordingly, the Company has recorded a loss on settlement of debt in the amount of $741,705.7.
Convertible debentures:On September 25, 2003, the Company executed a funding term sheet whereby investors agreed to provide up to $2,250,000 in exchange for convertible debentures. A general security agreement covering all of the Companys real, personal and intangible property is pledged as security for the debentures. The debentures are to mature on August 25, 2006 and bear interest at eight percent (8%) per annum. All convertible debentures rankpari passuwith all convertible debentures to be issued pursuant to the term sheet. The principal amount and accrued interest are convertible until maturity into units at a price of $0.25 per unit. Each unit comprises one common share and one half-share (1/2) share purchase warrant. Each whole warrant has a five (5) year term and is exercisable at any time into one common share at a price of $0.25 per
share.The debentures may be redeemed by repayment of all outstanding principal and accrued interest at any time on 7 days notice. The debenture holders have a first right to convert all or any portion of the principal and accrued interest into units prior to redemption.The Company may at its discretion require the debenture holders to convert the outstanding principal and accrued interest into units if the closing trading price of the Companys shares on the OTCBB or other principal trading market is $1.00 or greater for any 30 consecutive trading days after the shares issuable pursuant to conversion of the debentures are registered under the Securities Act of 1933.







F-11





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20027.
Convertible debentures (continued):Between September 5, 2003 and May 21, 2004, in accordance with the terms of Securities Purchase Agreements, the Company issued convertible debentures in the amount of $2,250,000. Finders fees were paid to investors, persons related to investors, and independent third parties by way of cash payment of $26,250 and by way of issuance of 595,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the cash finders fees and the fair value of the units underlying the finders fees have been recognized as a cost of issuance and in stockholders equity.On conversion of the debentures into common shares and share purchase warrants, the fair value of the share purchase warrants will be assigned and recognized as an expense. On April 15, 2004, $125,000 of principal and $5,397 of accrued interest was converted into 521,588 common shares and 260,794 share purchase warrants. Accordingly, the Company expensed $42,170 as the fair value of the warrants issued. On September 10, 2004, $62,500 of principal and $2,101 of accrued interest was converted into 258,404 common shares and 129,202 share purchase warrants. Accordingly, the Company expensed $20,892 as the fair value of the warrants issued.Because the conversion price was less than the closing trading prices of the Companys shares on the commitment date, the convertible debentures contain a beneficial conversion feature. In accordance with Emerging Issues Task Force (EITF) Issue 98-5, the embedded beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value of the beneficial conversion feature exceeds the face value of the debentures and is therefore limited to the face value. The face value of the debt has been allocated to additional paid-in capital and is being accreted to the face value of the convertible debentures over the term of the debentures by a charge to interest expense. Accrued interest is also recorded based on the face value of the debentures at the stated
interest rate (8%). The amount recorded on the balance sheet as at December 31, 2004 has been calculated as follows:Face value of convertible debentures issued (cash received)


$
2,250,000Beneficial conversion feature allocated to additional paid-in capital



(2,249,995)Cumulative beneficial conversion feature accreted to convertibledebentures



991,717Accrued interest payable



186,171Conversion of debentures



(194,998)Convertible debentures at December 31, 2004


$
982,895







F-12





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20028.
Common stock:(a)
At a special meeting of shareholders held January 19, 2004, the stockholders approved an increase in the authorized share capital of the Company from 40 million common shares to 200 million common shares having a par value of $0.001 each.(b)
Of the common stock issued at December 31, 2004, 2,034,242 shares (2003  3,156,621; 2002  4,160,716) 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 8(c).(c)
In 1993, 1,100,000 common stock were issued for technology and recorded at a par value of $1,100. 300,000 of these shares have been retained by the Company because the development of the technology was not completed.(d)
During the year ended December 31, 2004, nil (2003  79%; 2002  87%) of the common share issuances were to the Chief Executive Officer and nil (2002  nil; 2002  10%) were with a former director of the Company. Except for the 2,354,621 common shares issued in 2003 to the Chief Executive Officer at a deemed price of $0.25 per unit (note 6), the private placements completed during 2004, 2003, and 2002 were at market value determined by the trading price of the Companys common stock on the date of the private placement.(e)
Promissory notes receivable:In conjunction with a private placement completed during the first quarter of 2001, the Chief Financial Officer of the Company received a promissory note in the amount of $100,000 in payment for 133,334 common shares and 66,667 common share purchase warrants. This note receivable has been recorded as a deduction from additional paid-in capital in stockholders equity. Each common share purchase warrant entitles the holder to purchase one additional share at $0.75 per share until February 28, 2004. These warrants expired on February 28, 2004 and none of these warrants were exercised prior to expiry. In accordance with an Agreement for Escrow of Share Certificates dated February 27, 2001, the common share certificate and warrant certificate issued will remain in escrow until the Company receives full payment of the $100,000 note receivable. The amount is due upon demand, unsecured and
no interest is payable on this note.







F-13





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20028.
Common stock (continued):(e)
Promissory notes receivable (continued):In conjunction with a private placement completed during the second quarter of 2001, the Chief Operating Officer and President of the Company received a promissory note in the amount of $100,000 in payment for 133,334 common shares and 66,667 common share purchase warrants. This note receivable has been recorded as a deduction from additional paid-in capital in stockholders equity. Each common share purchase warrant entitles the holder to purchase one additional share at $0.75 per share until February 28, 2004. These warrants expired on February 28, 2004 and none of these warrants were exercised prior to expiry. In accordance with an Agreement for Escrow of Share Certificates dated June 26, 2001, the common share certificate and warrant certificate issued will remain in escrow until the Company receives full payment of the $100,000 note receivable. The amount is due upon demand,
unsecured and no interest is payable on this note.(f)
Stock options:The Company has reserved 1,500,000 common shares pursuant to the 1997 Stock Option Plan, 1,500,000 common shares pursuant to the 2000 Stock Option Plan and 2,500,000 common shares pursuant to the 2003 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 1997 and 2000 plans 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 plan.(i)
A summary of the Companys stock option activity is as follows:WeightedNumber

averageof shares

exercise priceBalance, December 31, 2001
1,060,500

$
1.14Options granted
1,219,000

0.28Options exercised
-

-Options cancelled/expired
(464,000)

(1.06)Balance, December 31, 2002
1,815,500

0.59Options granted
940,000

0.55Options exercised
(107,000)

(0.20)Options cancelled/expired
(118,500)

(0.83)Balance, December 31, 2003
2,530,000
$
0.57Options granted
290,000

0.46Options exercised
(77,000)

(0.22)Options cancelled/expired
(221,000)

(0.73)Balance, December 31, 2004
2,522,000

$
0.55







F-14





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20028.
Common stock (continued):(f)
Stock options (continued):(ii)
Additional information regarding options outstanding as at December 31, 2004 is as follows:Outstanding

ExercisableWeightedaverage
Weighted


Weightedremaining
average


averageExercise
Number of
contractual
exercise

Number of
exerciseprices
shares
life (years)
price

shares
Price$ 0.00  0.25
897,000
2.94
$ 0.20

897,000
$ 0.20$ 0.26  0.50
265,000
4.44
0.45

28,750
0.48$ 0.51  0.75
900,000
3.72
0.60

487,500
0.61$ 0.76  1.00
25,000
3.42
0.78

18,750
0.78$ 1.01  1.25
435,000
1.02
1.25

435,000
1.252,522,000
3.05
$ 0.55

1,867,000
$ 0.569.
Share purchase warrants:During the year ended December 31, 2001, in conjunction with private placements, the Company issued 1,066,902 common share purchase warrants. By directors resolutions, the expiry date of these warrants was subsequently extended to February 28, 2004. These warrants expired on February 28, 2004 and none of these warrants were exercised prior to expiry.During the year ended December 31, 2002, in conjunction with private placements, the Company issued 1,880,358 common share purchase warrants (the purchasers received one common share purchase warrant for each two common shares purchased). Each common share purchase warrant entitles the holder to purchase one additional share for one year at prices of $0.20 to $1.00 per share. By a directors resolution dated March 20, 2003, the Company extended the expiry date of 564,319 of the warrants to February 28, 2004. These warrants expired on February 28, 2004 and none of these warrants were exercised prior to expiry. By a directors resolution dated November 5, 2003, the Company extendedthe expiry date of the share purchase warrants which expired on October 28, 2003 to October 28, 2005 and extended the expiry date of the remaining 1,316,039 share
purchase warrants which were to expire on December 17, 2003 to December 17, 2005. The Companys Chief Executive Officer and a former director hold all of the share purchase warrants issued during the year ended December 31, 2002. None of these warrants have been exercised or cancelled.







F-15





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20029.
Share purchase warrants (continued):On October 17, 2002, the Company authorized the issuance of 500,000 common share purchase warrants to the Companys Chief Executive Officer pursuant to an agreement dated September 30, 2002, whereby the officer agreed to accept the warrants in settlement of salary owed for the period from January 1, 2002 to September 30, 2002. Each share purchase warrant entitles the holder to purchase one common share for two years at $0.31 per share, which was the market value of the common shares on September 30, 2002, therefore the intrinsic market value of the warrants is nil. The fair value of the warrants as calculated by the Black-Scholes option pricing model of $39,409 has been recorded as an expense and additional paid-in capital in the year ended December 31, 2002.As partial consideration for an investor relations service agreement, the Company issued share purchase warrants as follows:50,000 warrants exercisable at $0.50 vesting on April 8, 200350,000 warrants exercisable at $0.75 vesting on July 7, 200350,000 warrants exercisable at $1.00 vesting on October 6, 200350,000 warrants exercisable at $1.25 vesting on January 4, 2004The fair value of the warrants ($4,121) has been recorded as an expense and additional paid-in capital in the year ended December 31, 2003. The fair value was calculated using the Black-Scholes optionpricing model and the following assumptions: dividend yield 0%, expected volatility 95%, risk free rate interest rate 2.61%, and an expected term of 1 year.As partial consideration for finders fees relating to the issuance of convertible debentures (note 7), the Company issued a total of 297,500 share purchase warrants exercisable at $0.25 per share for a period of five (5) years.Pursuant to the agreements governing the issuance of convertible debentures (note 7), the Company executed a consulting agreement with one of the investors for strategic introductions and general consulting in the manufacturing industry. The consulting agreement is for a period of two (2) years commencing December 22, 2003. As consideration for entering into the consulting agreement, the Company issued 500,000 share purchase warrants exercisable at $0.45 per share for a period of five (5) years. The fair value of the warrants ($185,400) has been recorded as an expense and additional paid-in capital in the year ended December 31, 2003. The fair value was calculated using the Black-Scholes optionpricing model and the following assumptions: dividend yield 0%, expected volatility 256%, risk free rate interest rate 1.84%, and an expected term of 2 years.On November 5, 2003, as partial repayment of the promissory notes payable (note 6), the Company issued to its Chief Executive Officer, 1,177,310 share purchase warrants exercisable at $0.25 per share for a period of five (5) years.







F-16





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20029.
Share purchase warrants (continued):As consideration for a consulting agreement, on January 9, 2004, the Company issued share purchase warrants as follows:25,000 warrants exercisable at $0.25 vesting on January 9, 2004250,000 warrants exercisable at $0.25 vesting in accordance with certain performance criteria.The fair value of the 25,000 warrants ($11,406) has been recorded as an expense and additional paid-in capital in the nine months ended September 30, 2004. The fair value was calculated using the Black-Scholes optionpricing model and the following assumptions: dividend yield 0%, expected volatility 256%, risk free rate interest rate 1.68%, and an expected term of 2 years. The fair value of the 250,000 warrants will be recorded when management determines that it is likely that the warrants will become exercisable in accordance with the performance criteria.At the request of certain debenture holders (note 7), on April 15, 2004 the Company converted $125,000 of principal and $5,397 of accrued interest into 521,588 common shares and 260,794 share purchase warrants. Each warrant is exercisable at $0.25 into one common share for five (5) years. The fair value of the warrants ($42,170) has been recorded as an expense.At the request of certain debenture holders (note 7), on September 10, 2004 the Company converted $62,500 of principal and $2,101 of accrued interest into 258,404 common shares and 129,202 share purchase warrants. Each warrant is exercisable at $0.25 into one common share for five (5) years. The fair value of the warrants ($20,892) has been recorded as an expense.On September 24, 2004, as partial consideration for an investor relations service agreement, the Company issued 50,000 share purchase warrants exercisable at $0.50 into one common share for a period not to exceed three (3) years. The fair value of the warrants ($21,632) has been recorded as an expense. The fair value was calculated using the Black-Scholes optionpricing model and the following assumptions: dividend yield 0%, expected volatility 233%, risk free rate interest rate 2.62%, and an expected term of 2 years.During December 2004, in conjunction with private placements the Company issued 516,250 common share purchase warrants (the purchasers received one common share purchase warrant for each two common shares purchased). Each common share purchase warrant entitles the holder to purchase one additional share for five (5) years at a price of $0.50 per share. In conjunction with this private placement, the Company issued 8,750 common shares and 4,375 common share purchase warrants as a finders fee. Each of these common share purchase warrants entitles the holder to purchase one additional share for five (5) years at a price of $0.50 per share.Of the warrants outstanding at December 31, 2004, 2,941,324 were held by the Companys Chief Executive Officer (2003  3,524,658; 2002  2,347,348).







F-17





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20029.
Share purchase warrants (continued):A summary of the Companys share purchase warrants outstanding as at December 31, 2004, 2003, and 2002 is as follows:2004
Expiry
ExerciseNumber of warrants
date
price427,797

October 28, 2005
$0.85133,553

October 28, 2005
$0.36500,000

October 28, 2005
$0.3152,500

December 1, 2005
$0.25148,667

December 17, 2005
$0.32113,740

December 17, 2005
$0.26203,820

December 17, 2005
$0.20288,462

December 17, 2005
$0.25275,000

January 9, 2006
$0.2550,000

April 7, 2006
$0.5050,000

April 7, 2006
$0.7550,000

April 7, 2006
$1.0050,000

April 7, 2006
$1.2550,000

September 23, 2007
$0.5075,000

September 5, 2008
$0.2556,000

October 1, 2008
$0.251,177,310

November 8, 2008
$0.2557,500

December 22, 2008
$0.25500,000

December 22, 2008
$0.45260,794

April 14, 2009
$0.2556,500

May 27, 2009
$0.25129,202

September 9, 2009
$0.25197,500

November 30, 2009
$0.5093,750

December 19, 2009
$0.504,375

December 20, 2004
$0.50225,000

December 28, 2009
$0.505,226,470


Weighted average exercise price
$0.382003
Expiry
ExerciseNumber of warrants
date
price1,066,902

February 28, 2004
$0.75564,319

February 28, 2004
$1.00427,797

October 28, 2005
$0.85133,553

October 28, 2005
$0.36500,000

October 28, 2005
$0.3152,500

December 1, 2005
$0.25148,667

December 17, 2005
$0.32113,740

December 17, 2005
$0.26203,820

December 17, 2005
$0.20288,462

December 17, 2005
$0.2550,000

April 7, 2006
$0.50





F-18





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 20029.
Share purchase warrants (continued):2003 (continued)
Expiry
ExerciseNumber of warrants
date
price50,000

April 7, 2006
$0.7550,000

April 7, 2006
$1.0075,000

September 5, 2008
$0.2556,000

October 1, 2008
$0.251,177,310

November 8, 2008
$0.2557,500

December 22, 2008
$0.25500,000

December 22, 2008
$0.455,515,570


$0.512002
Expiry
ExerciseNumber of warrants
date
price1,066,902

February 28, 2003
$0.75564,319

April 17, 2003
$1.00427,797

October 28, 2003
$0.85133,553

October 28, 2003
$0.36500,000

October 28, 2004
$0.31148,667

December 17, 2003
$0.32113,740

December 17, 2003
$0.26203,820

December 17, 2003
$0.20288,462

December 17, 2003
$0.253,447,260


$0.6210.
Income taxes:Income taxes attributable to loss for the year in these consolidated financial statements differ from amounts computed by applying the Canadian federal and provincial statutory rate of 35.6% (2003  35.6%; 2002  37.6%) as follows:2004
2003
2002Expected tax recovery
$
1,018,000
$
1,028,000
$
594,000Tax effect of:Loss of foreign parent taxed at lower rates

(22,000)

(11,000)

(3,000)Permanent and other differences

(193,000)

(3,000)

(3,000)Non-capital losses of prior years expired

(220,000)

-

-Change in valuation allowance

(583,000)

(1,014,000)

(588,000)$
-
$
-
$
-Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as net operating loss and tax credit carryforwards.





F-19





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 200210.
Income taxes (continued):The Companys deferred income tax assets are comprised of the following at December 31:2004
2003Net deferred tax assets and liabilities:Net operating loss carryforwards and otherdeductible temporary differences
$
3,873,000
$
3,290,000Total deferred tax assets

3,873,000

3,290,000Valuation allowance

(3,873,000)

(3,290,000)Net deferred tax assets
$
-
$
-At December 31, 2004, management believes that sufficient uncertainty exists as to whether or not the deferred tax assets will be realized, and accordingly, a valuation allowance is required.As of December 31, 2004, the Company had net operating loss carryforwards of$10,278,093 available to offset taxable income earned in Canada and $2,102,627 available to offset taxable income earned in the United States. These losses expire as follows:Canada
US2005
$
1,022,9372006

1,255,1612007

1,081,2752008

1,966,3052009

1,817,5262010

1,647,3422011

1,487,5472018 and thereafter

-

2,102,627$
10,278,093
$
2,102,627





F-20





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 200211.
Commitments:The Company has obligations under operating lease arrangements which require the following minimum annual payments:Year ending December 31:2005
183,0962006
179,8792007
177,4622008
117,771$
658,20812.
Contingent liabilities:Product warranty:The Company provides for estimated warranty costs at the time of product sale. Warranty expense accruals are based on best estimate with reference to historical claims experience. Since warranty estimates are based on forecasts, actual claim costs may differ from amounts provided. An analysis of changes in liability for product warranty follows:Years ended December 31,2004
2003
2002Balance, beginning of year
$
4,038
$
11,436
$
-Increase for new product sales
18,728
4,038
14,242Reversal for expired warranty
(4,038)
(11,436)
(2,806)Balance, end of year
$
18,728
$
4,038
$
11,436





F-21





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 200213.
Selling, general and administrative expenses:Selling, general and administrative expenses are comprised of the following:Years ended December 31,2004
2003
2002Salaries and benefits
$
960,931
$
908,211
$
710,610Marketing
254,219
238,414
290,083Legal and audit
142,130
137,092
156,093Rent and facilities
193,804
151,792
140,698Foreign exchange loss
13,674
76,238
1,623Other
285,660
160,994
226,539$
1,850,418
$
1,672,741
$
1,525,64614.
Financial instruments:(a)
Fair values of financial instruments:The Companys financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and convertible debentures. The fair value of these financial instruments approximate their carrying values due to their relatively short term to maturity.(b)
Foreign currency risk:Foreign currency risk reflects the risk that the Companys net assets or operations will be negatively impacted due to fluctuations in exchange rates. 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 financial institutions. As at December 31, 2004, one customer represented 97% of outstanding trade accounts receivable. (2003 - 100%). Management is of the opinion that any risk of accounting loss is significantly reduced due to the financial strength of its current customers. The Company's customers are currently concentrated in Canada and the United States. The Company performs ongoing credit evaluations, generally does not require collateral and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information.





F-22





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 200214.
Financial instruments (continued):(c)
Credit risk (continued):Effect of foreignBeginning

Recoveries
exchange on
End ofof year
Charged to
and
conversion
yearbalance
expenses
write-offs
to US$
balanceAllowance for doubtful accountsYear ended December 31,2004

-

-

-

-

-Year ended December 31,2003

-

-

-

-

-Year ended December 31,2002
$
-
$
68,251
$
(67,195)
$
(1,056)
$
-15.
Unaudited interim financial information:The following table sets forth selected unaudited quarterly information for the Companys last eight fiscal quarters (in thousands):Fiscal 2004 Quarter EndDecember 31

September 30

June 30

March 31Revenues

46

399

18

286Gross margin

44

343

16

270Net loss for the period

(817)

(541)

(941)

(461)Net loss per share

(0.04)

(0.03)

(0.05)

(0.03)Fiscal 2003 Quarter EndDecember 31

September 30

June 30

March 31Revenues

57

56

25

75Gross margin

53

41

24

72Net loss for the period

(1,555)

(428)

(565)

(339)Net loss per share

(0.09)

(0.03)

(0.04)

(0.02)16.
Software license settlement:As previously disclosed, an organization representing leading software manufacturers has made enquiries regarding the Companys potential use of unlicensed software. The enquiry did not relate to software that the Company sold, but to software used in the conduct of its business. A self-audit revealed that the Company had unlicensed copies of software installed on its computers and, therefore, the Company agreed on June 16, 2004 to pay $103,883 as a settlement. The settlement amount, which was accrued in the three months ended June 30, 2004, is payable in thirteen monthly installments. The Company has since developed and implemented processes to monitor and control the installation and usage of software.





F-23





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 200217.
Segmented information:(a)
Segment information:During 2004, 2003 and 2002, the Corporation was operating only in the advanced software for vision guidance of robotics system segment.(b)
Geographic information:Substantially all assets and operations are in Canada. A summary of sales by region of customer location is as follows:Years ended December 31,2004
2003
2002Canada
$
270,643
$
140,405
$
422,164U.S.
499,326
50,491
16,640Japan
(20,000)
22,688
21,289$
749,969
$
213,584
$
460,093(c)
Major customers:Sales to customers representing greater than 10% of total sales are as follows:Years ended December 31,2004
2003
2002Customer A
$
611,237
$
174,586
$
379,597Customer B
145,420
-
-Customer C
-
22,688
21,289Customer D
-
9,248
59,20718.
Subsequent events:On March 4, 2005, the Company closed a private placement of 305,000 units at $0.40 per unit for total proceeds of $122,000. Each unit comprises one common share and one half-share (1/2) share purchase warrant. Each whole warrant has a five (5) year term and is exercisable at any time into one common share at a price of $0.50 per share. A cash finders fee of $8,540 was paid in conjunction with this private placement.







F-24





BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 200218.
Subsequent events (continued):At a meeting held March 10, 2005, the Board of Directors approved the private placement of up to 1,875,000 units at a price of $0.80 per unit for total proceeds of $1,500,000. Each unit comprises one common share and one half-share (1/2) share purchase warrant. Each whole warrant has a three (3) year term and is exercisable at any time into one common share at a price of $1.00 per share. It is anticipated that the private placement will close on or about March 31, 2005.19.
Recent accounting pronouncements:(a)
In January 2003, the FASB issued FASB Interpretation No. 46, as amended ("FIN No. 46R"), Consolidation of Variable Interest Entities. FIN No. 46R clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46R applies to the Company in fiscal 2004. The adoption of FIN No. 46 has had no material impact on the Companys financial statements.(b)
In May 2003, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 150"Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity"(FAS 150). FAS 150 establish standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before the issuance date of FAS 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The application of FAS 150 has had no impact on the Companys financial statements.(c)
Effective July 1, 2003, the Company adopted Emerging Issues Task Force 00-21 ("EITF 00-21"). EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities are sufficiently separable, and there may be sufficient evidence of their fair value to separately account for some or all of the deliverables. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. The adoption of this standard had no material impact on the Company's financial statements.

BRAINTECH, INC.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended December 31, 2004, 2003 and 200219.
Recent accounting pronouncements (continued):(c)
In December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition", which superseded Staff Accounting Bulletin No. 101 ("SAB 101"),"Revenue Recognition in Financial Statements." The primary purpose of SAB 104 was to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of EITF 00-21. SAB 104 also incorporated certain sections of the SEC's "Revenue Recognition in Financial StatementsFrequently Asked Questions and Answers" document. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101, as they apply to the Company, remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 had no material impact on the Companys
financial statements.(d)
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The statement amends Accounting Research Bulletin (ARB) No. 43, Inventory Pricing to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. ARB No. 43 previously stated that these costs must be so abnormal as to require treatment as current period charges. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not
expected to have any material impact on the Companys financial statements.(e)
In December 2004, the FASB revised its SFAS No. 123 (SFAS 123R). The revision requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The accounting provisions of SFAS 123R are effective for reporting periods beginning after December 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See "Stock-based compensation" in note 2 for the pro forma net loss and net loss per share amounts, for fiscal 2002 through fiscal 2004, as if we had used a fair-value-based method in those years, similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. Although it has not yet
been determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, the Company is evaluating the requirements under SFAS 123R and expects the adoption to have a significant adverse impact on the amounts reported in our consolidated statements of operations and net loss per share.







F-26









30





ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



Not Applicable.



ITEM 8A. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



As at the end of the period covered by this report being December 31, 2004, the Companys Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its periodic Securities and Exchange Commission ("SEC") filings is recorded, processed and reported within the time periods specified in the SEC's rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as at the end of the period covered by this report, the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.



Changes in Internal Controls

There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.



The Company maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Additionally, the cost of a particular accounting control should not exceed the benefit expected to be derived.



ITEM 8B. OTHER INFORMATION



Not Applicable

PART III



ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT



Directors, Executive Officers and Key Employees



The following table sets forth certain information, as of March 24, 2004,with respect to our directors, executive officers and key employees.





31





Name
Age
PositionOwen L.J. Jones
53
Director, and Chief Executive OfficerBabak Habibi
34
Director, President, and Chief Operating OfficerEdward A. White
60
Director, Chief Financial Officer, Treasurer, and SecretaryLionel Dodd*
65
DirectorJames L. Speros*
46
DirectorGeorge Joseph
59
DirectorAllen Sello*
65
DirectorFrederick Weidinger
46
Director

* Denotes member of the audit committee.



The Board of Directors has determined that Allen Sello, Chairman of the Audit Committee, and Lionel Dodd a member of the Audit Committee are financial experts in accordance with the SEC definition of that term and that they are independent as that term is used under the Exchange Act.



Owen L.J. Joneshas been Chief Executive Officer and a Director since December 1993. Between May 1995 and November 30, 2000, Mr. Jones divided his time and effort between our affairs and the affairs of Sideware Systems Inc. Mr. Jones resigned as the President of Sideware Systems Inc. on October 16, 2000, and as a director of Sideware Systems Inc. on November 30, 2000. Mr. Jones now works full time for Braintech, Inc. Mr. Jones is not a director of any other public companies.



Babak Habibiwas appointed as a Director and president effective June 19, 2001. Prior to his appointment as President, Mr Habibi was Vice President of Engineering. Mr. Habibi supervises the design, development, and deployment of machine vision systems, and has also been involved in the development of eVisionFactory. Mr. Habibi holds Bachelors and Masters Degree in Applied Science from the University of Waterloo. Mr. Habibi is not a director of any other public companies.



Edward A. Whitewas appointed as a Director and Chief Financial Officer and Treasurer effective November 1, 2000 and was appointed as Secretary on August 28, 2002. Mr. White has been a member of the British Columbia Institute of Chartered Accountants for 29 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. Mr. White was a director of Sideware Systems Inc. from October 1995 to March 20, 2002. Mr. White holds a Bachelor of Commerce Degree for the University of British Columbia as well as his CA Degree. Mr. White is not a director of any other public companies.



Lionel Doddwas appointed a Director on August 1, 2002. During the period from 1996 to 2000 Mr. Dodd was the President and Chief Executive Officer of Versacold Corporation (TSX:ICE). Since that time he has sat on the boards of many public and private companies. Currently, Mr. Dodd sits as an independent director on the boards of Pope and Talbot, Inc. (NYSE:POP), Napier International Technologies Inc. (TSX:NIC), and International Absorbents Inc. (AMEX:IAX). Mr. Dodd holds a Masters degree in Business from the University Of California at Berkeley.



James L. Speroswas appointed a Director on September 15, 1998. Mr. Speros was also a Director, President and Chief Executive Officer of Sideware Systems Inc. and of Sideware Corp., a wholly owned subsidiary of Sideware Systems Inc. From June 1993 to January 1997 Mr. Speros was the President and owner of two professional sports franchises, the Baltimore Stallions and Montreal Alouettes of the Canadian Football League.



George J. Josephwas appointed as a director on December 19, 2003. Mr. Joseph is a retired Director of



32





Global Business Development for Ford Motor Company specializing in technology acquisitions. He has led the formation of strategic alliances and acquired technology-rich companies in a variety of disciplines in the automotive sector. In addition, he managed the formation of a telematics joint venture with a global telecommunications and vehicle positioning technology partner to service Fords 6 million annual vehicle production fleet. He has held a board of directors position in Zebra Imaging, a 3-D technology firm from 1998-2003. He is presently a partner in a regional venture capital firm, holds an MBA and has 35 years of experience in Fords central finance and business development activities.



Allen Sellowas appointed as a director on September 16, 2004. Beginning in 1964 he was employed at Ford Motor Company of Canada, Gulf Canada Resources Ltd., International Forest Products Ltd., and UMA Group Ltd. where he held the position of Chief Financial Officer and other senior marketing, financial and corporate development positions. He has also served as a director on the boards of energy and mining companies. He holds a Master of Business Administration degree from the University of Toronto.



Frederick Weidingerwas appointed as a director on February 14, 2005. He has worked for nearly two decades at the forefront of technology. As a telecommunications entrepreneur, he has played central roles in the founding and growth of multiple emerging technology companies worldwide. In addition to his recently successful entrepreneurial endeavor and sale of Pontio, Mr. Weidinger is credited with key roles in over 25 transactions, totaling approximately $18 Billion. These include the $2 Billion acquisition of UUNET by MFS Communications and the subsequent acquisition of MFS by WorldCom in a $14 Billion transaction in 1996. Mr. Weidinger, who retired from WorldCom in March of 1999, had earlier joined MFS at its foundation in 1989.



Owen Jones was a director of Sideware Systems Inc. at the time when two bankruptcy petitions under theBankruptcy and Insolvency Act(Canada) were brought in the Supreme Court of British Columbia against that company by former directors of that company or private corporations controlled by them. Both bankruptcy petitions were dismissed in January 1998.



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



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, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. 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, with the exception of the following:

Name
Number ofLate Reports
Number of Transactions NotReported on a Timely Basis
Failure to FileRequested FormsBabak Habibi
1(2)
1(2)
NilOwen Jones
1(3)
1(3)
NilGeorge Joseph
2(1)(2)
2(1)(2)
Nil



33





Allen Sello
1(1)
1(1)
NilJames Speros
2(2)
2(2)
NilEdward White
1(2)
1(2)
Nil(1) The named officer, director or greater than 10% shareholder, as applicable, filed a late Form 3 - Initial Statement of Beneficial Ownership.

(2) The named, officer, director or greater than 10% shareholder, as applicable, filed a late Form 4 - 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.



ITEM 10. EXECUTIVE COMPENSATION



During our last completed fiscal year our only named executive officer was our Chief Executive Officer. The following table shows compensation paid to our Chief Executive Officer during our last three fiscal years.

Summary Compensation Table



Name and Principal Position
Year
Annual Compensation
Long Term Compensation
All Other CompensationSalary
Bonus
Other
Awards
PayoutsRestricted Stock Awards
Securities Underlying Options/SARsOwen Jones, CEO and Director
200420032002
115,50035,500Nil
NilNilNil
NilNilNil
NilNilNil
NilNil200,000
NilNilNil
NilNilNil

The following table sets forth information on grants of stock options to our Chief Executive Officer during our last fiscal year:



Option / SAR Grants in Last Fiscal Year



Name
Number of securities underlying Options/SARs granted
Percent of total options/SARs granted to employees in fiscal year
Exercise or base price
Expiration

Date
Grant date present value(1)Owen Jones
Nil

(1)Grant date present value was calculated by multiplying the number of option shares by the difference between the exercise price and the closing trading price on the date of grant.





34





The following table sets out the options exercised by our Chief Executive Officer during the last fiscal year.



Aggregated Option / SAR Exercises in Last Fiscal Year and FY-End Option / SAR Values



Name
Shares acquired on exercise
Value realized
Number of securities underlying unexercised options/SARs at end of fiscal year
Value of unexercised in-the-money options/SARs at end of fiscal yearExercisable/Unexercisable
Exercisable/UnexercisableOwen Jones
Nil
Nil
240,000(1)/ Nil
$60,000(2)/ N/A

(1)The total of 240,000 options granted to Mr. Jones represents, 40,000 options granted to Mr. Jones during the fiscal year ended December 31, 2000, and 200,000 options granted to Mr. Jones during the fiscal year ended December, 31, 2002.



(2)Theclosing price for our shares on the OTC-Bulletin Board as of December 31, 2004 was $0.50.



Compensation to our Directors



We currently provide the following compensation to our directors who are executive officers:



Owen Jones.Between January 1, 2001 and August 31, 2003, Mr. Jones worked for us without salary. On October 17, 2002, we issued 500,000 common share purchase warrants to Mr. Jones in settlement of salary owed for the period from January 1, 2002 to September 30, 2002. Each share purchase warrant entitles him to purchase one common share for two years at $0.31 per share, which was the fair market value of the common shares on September 30, 2002. The fair value of the warrants as calculated by the Black-Scholes option-pricing model of $39,409 has been recorded as an expense and additional paid-in capital in the year ended December 31, 2002. Commencing September 1, 2003, Mr. Jones receives a salary of $9,625 per month from us. Mr. Jones receives no other compensation from us or any of our subsidiaries.



Babak Habibi.Mr. Habibi receives a salary of $7,700 per month from us. Mr. Habibi also holds stock options as listed in the table below. Mr. Habibi receives no other compensation from us or any of our subsidiaries.



Edward A. White. Mr. White receives a salary of $7,700 per month from us. Mr. White also holds stock options as listed in the table below. Mr. White receives no other compensation from us or any of our subsidiaries.



We currently provide the following compensation to our non-executive directors:



By a directors resolution dated August 11, 2004 and on the recommendation of the Compensation Committee we provide compensation to non-executive directors as follows:




Annual fee of $7,700 to be paid at the beginning of each calendar quarter.
Board of Director meeting fees of $577 per meeting attended.
Committee meeting fees of $385 per meeting attended.
Annual stock option award.

The independent director compensation was implemented as of October 1, 2004. None of these directors fees have been paid to date.



In addition to the above compensation, in conjunction with private placements, in 2004, director James Speros received $12,500 in finders fees.



35





The aggregate amount of cash remuneration that we paid or accrued to our directors as a group, was approximately $329,160 during the fiscal year ended December 31, 2004. None of our directors receive any pension plan or similar benefits.



Stock options granted to our Directors



The following table shows the stock options held by our directors and officers as at December 31, 2004.



Name
Options Granted
NumberExercised
Number Outstanding
Exercise Price
Market Value of Underlying Shares at Date of Grant
Expiry Date(m/d/y)Owen Jones
200,00040,000
NilNil
200,00040,000
$0.20$1.25
$0.20$1.00
12/01/0711/30/05Babak Habibi
500,000150,00080,000
NilNilNil
500,000150,00080,000
$0.60$0.20$1.25
$0.60$0.15$1.00
11/04/0812/16/0711/30/05Edward A. White
150,000100,000
NilNil
150,000100,000
$0.20$1.25
$0.15$1.00
12/16/0711/30/05James Speros
50,000
Nil
50,000
$0.20
$0.20
12/01/07Lionel Dodd
100,000
Nil
100,000
$0.75
$0.60
07/31/07George Joseph
100,000
Nil
100,000
$0.48
$0.48
01/12/09Allen Sello
100,000
Nil
100,000
$0.41
$0.41
09/14/09

We do not have a long-term incentive plan, and have not granted any stock appreciation rights.



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



Equity Compensation Plan Information



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 shareholders
2,522,000
$0.55
1,779,800Equity compensation plans not approved by security holders
1,326,875
$0.43
NilTotal
3,848,875
$0.51
1,863,800



The following table shows certain information regarding beneficial ownership of common stock, as of March 24, 2005 by (i) each shareholder whom we know to be the beneficial owner of more than 5% of



36





outstanding shares, (ii) each of our Directors and executive officers, and (iii) all Directors and executive officers as a group:



NAME AND ADDRESSOF BENEFICIAL OWNER
NUMBER OF SHARESBENEFICIALLY OWNED(1)
PERCENTAGE OF SHARESBENEFICIALLY OWNED(1)Owen L.J. Jones*(2)309  9thAvenueNew Westminster, B.C.Canada V3L 2A2
9,644,639
39.80%Babak Habibi*(3)3308 Manning CrescentNorth Vancouver, B.C.Canada V7H 2R6
738,334
3.41%Edward A. White*(4)416-5 K de K CourtNew Westminster, B.C.Canada V3M 6B6
483,334
2.26%James L. Speros*(5)1921 Gallos Road, Suite 540Vienna, VirginiaUSA 22182
430,750
2.03%Lionel Dodd*(6)3508 Mathers AvenueWest Vancouver, B.C.Canada V7V 2K9
147,000
0.69%George Joseph*(7)256 Chestnut CircleBloomfield Hills, MichiganUSA 48034-2104
484,606
2.28%Allen Sello*(8)2248 Kings AvenueWest Vancouver, B.C.Canada V7V 2C2
25,000
0.12%Frederick Weidinger*(9)588 Innsbruck AvenueGreat Falls, VirginiaUSA 22066
333,750
1.58%All executive officers and directors as a group (8 Persons)(10)
12,287,413
47.43%

* Denotes Director of the Company



(1)Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or



37





convertible within 60 days of March 24, 2005 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned.



(2)Includes 240,000 shares issuable pursuant to stock options and 2,941,324 shares issuable pursuant to share purchase warrants, all being exercisable within 60 days. Figures stated for Mr. Jones exclude 321,934 shares owned by Judy Jones, of which Mr. Jones disclaims beneficial ownership.



(3)Includes 605,000 shares issuable pursuant to stock options, all being exercisable within 60 days.



(4)Includes 350,000 shares issuable pursuant to stock options exercisable within 60 days.



(5)Includes 97,000 shares issuable pursuant to stock options and 111,250 shares issuable pursuant to share purchase warrants, all being exercisable within 60 days.



(6)Includes 147,000 shares issuable pursuant to stock options, all being exercisable within 60 days.



(7)Includes 97,000 shares issuable pursuant to stock options and 129,202 shares issuable pursuant to share purchase warrants, all being exercisable within 60 days.



(8)Includes 25,000 shares issuable pursuant to stock options exercisable within 60 days.



(9)Includes 111,250 shares issuable pursuant to share purchase warrants, all being exercisable within 60 days.



(10)Includes 1,561,000 shares issuable pursuant to stock options and 3,293,026 shares issuable pursuant to share purchase warrants, all being exercisable within 60 days.



We are unaware of any arrangements, the operation of which may at a subsequent date result in a change of corporate control.



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Transactions involving Directors



Transactions within the last three years of which our directors have an interest are as follows:



We have acquired legal services from the law firm Sutherland Johnston, of which Grant Sutherland, a former director, is a partner. During the year ended December 31, 2004, we were charged nil (2003 - nil; 2002 - $54,855) for legal services provided by a former director. This arrangement for the provision of legal services by the director was terminated effective June 30, 2002. These charges are included in selling, general and administrative expenses.



Except where otherwise indicated all of the transactions set out below were carried on at terms and with conditions comparable to those offered to arms lenght parties.



During our last three fiscal years and to March 24, 2005 Grant Sutherland, a former director, has directly or indirectly participated in the following securities transactions:




Beau J Holdings Ltd., a private company owned by Mr. Sutherland purchased 333,334 shares at a price of $0.75 per share in a private placement conducted in the last quarter of 2000 and the first quarter of 2001. For each two shares purchased, Beau J Holdings Ltd. received one share purchase warrant, which entitles the holder to purchase one additional share for one year at $1.00 per share. We have voluntarily and without receipt of any further consideration agreed to extend

38





the share purchase warrants until February 28, 2004 and to reduce the exercise price to $0.75 per share. These warrants expired on February 28, 2004 without being exercised;




Beau J Holdings Ltd. purchased 295,304 shares at a price of $0.75 per share in a private placement conducted in the last quarter of 2001 and first quarter of 2002. For each two shares purchased, Beau J Holdings Ltd. received one share purchase warrant, which entitles the holder to purchase one additional share for one year at $1.00 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until February 28, 2004. These warrants expired on February 28, 2004 without being exercised;


Beau J Holdings Ltd. Purchased 104,050 shares at a price of $0.60 per share in a private placement conducted in last quarter of 2002. For each two shares purchased, Beau J Holdings Ltd. received one share purchase warrant, which entitles the holder to purchase one additional share for one year at $0.85 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until October 28, 2005.

During our last three fiscal years and to March 24, 2005 Owen Jones, a director and our Chief Executive Officer, has directly participated in the following securities transactions:




Purchased 333,334 shares at a price of $0.75 per share in a private placement conducted in last quarter of 2000 and first quarter of 2001. For each two shares purchased, Mr. Jones received one share purchase warrant, which entitles him to purchase one additional share for one year at $1.00 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until February 28, 2004 and to reduce the exercise price to $0.75 per share. These warrants expired on February 28, 2004 without being exercised;


Purchased 833,334 shares at a price of $0.75 per share in a private placement conducted in the last quarter of 2001 and first quarter of 2002. For each two shares purchased, Mr. Jones received one share purchase warrant, which entitles him to purchase one additional share for one year at $1.00 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until February 28, 2004. These warrants expired on February 28, 2004 without being exercised;


Purchased 751,544 shares at a price of $0.60 per share in a private placement conducted in the last quarter of 2002. For each two shares purchased, Mr. Jones received one share purchase warrant, which entitles him to purchase one additional share for one year at $0.85 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until October 28, 2005;


Purchased 267,106 shares at a price of $0.31 per share in a private placement conducted in the last quarter of 2002. For each two shares purchased, Mr. Jones received one share purchase warrant, which entitles him to purchase one additional share for one year at $0.36 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until October 28, 2005;


Purchased 297,334 shares at a price of $0.27 per share in a private placement conducted in the last quarter of 2002. For each two shares purchased, Mr. Jones received one share purchase warrant, which entitles him to purchase one additional share for one year at $0.32 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until December 17, 2005;


Purchased 227,480 shares at a price of $0.21 per share in a private placement conducted in the last quarter of 2002. For each two shares purchased, Mr. Jones received one share purchase warrant, which entitles him to purchase one additional share for one year at $0.26 per share. We

39





have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until December 17, 2005;




Purchased 407,640 shares at a price of $0.15 per share in a private placement conducted in the last quarter of 2002. For each two shares purchased, Mr. Jones received one share purchase warrant, which entitles him to purchase one additional share for one year at $0.20 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until December 17, 2005;


Purchased 576,924 shares at a price of $0.20 per share in a private placement conducted in the last quarter of 2002. For each two shares purchased, Mr. Jones received one share purchase warrant, which entitles him to purchase one additional share for one year at $0.25 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until December 17, 2005;

In January and March 2003, Owen Jones, a director and our Chief Executive Officer advanced CAD $235,000 ($155,838) in return for unsecured demand promissory notes with an annual interest rate of 8%. Between April 12, 2003 and July 29, 2003, the Chief Executive Officer advanced a further CAD $833,000 ($594,355). These additional financings bore interest at 8% per annum and were repayable on demand. A general security agreement covering all of our real, personal and intangible property was pledged as security for the additional advances. The agreements governing the issuance of the convertible debentures (see below) provide that the general security agreement pledged as security for the promissory notes issued to the Chief Executive Officer be discharged, provided that $250,000 of the proceeds from the convertible debentures be used to repay the notes, and further provided that the unpaid balance of the notes be repaid by
issuing units at a deemed price of $0.25 per unit. We considered the value of $0.25 per unit to be the fair market of the shares and share purchase warrants which form the units, because that was the value we negotiated with independent third parties to be the conversion price of the convertible debentures that were assuming a position similar to the promissory notes being repaid. A partial repayment of $50,000 was made on September 22, 2003 and on November 3, 2003 a further $200,000 was repaid. All of the promissory notes were repayable in Canadian Dollars and as such as at November 3, 2003 a foreign exchange loss of $58,855 and interest of $29,607 was accrued. On November 3, 2003, the unpaid balance of the promissory notes was repaid by the issuance of 2,354,621 common shares and 1,177,310 share purchase warrants. Each share purchase warrant has a five year term and is exercisable into one common share at a price of $0.25 per share. Since the promissory notes did not have terms for conversion into
equity, the transaction is considered a settlement of debt for accounting purposes. A gain or loss for accounting purposes was recognizable on settlement to the extent that the carrying value of the debt plus accrued interest is compared to the fair value of the cash and equity, based on the trading price on the date the Company committed to the issuance of the convertible debentures, received by the Chief Executive Officer. Accordingly we have recorded a loss on settlement of debt in the amount of $741,705.



In June 2001, Judy Jones, wife of Owen Jones, acquired 333,334 shares at a price of $0.75 per share in a private placement. For each two shares purchased, Mrs. Jones received one share purchase warrant, which entitles her to purchase one additional share for one year at $1.00 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until February 28, 2004 and to reduce the exercise price to $0.75 per share. These warrants expired on February 28, 2004 without being exercised.



In March 2001, Edward White acquired 133,334 shares at a price of $0.75 in a private placement. Mr. White provided us with a demand promissory note in the amount of $100,000 without interest to pay for the shares and has signed an agreement to hold the share certificate and warrant certificate in escrow. The date of the agreement is February 27, 2001. According to the agreement, the shares and warrants issued to him will remain in escrow until he submits full payment to us. For each two shares purchased, Mr. White received one share purchase warrant, which entitles him to purchase one additional share for



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one year at $1.00 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until February 28, 2004 and to reduce the exercise price to $0.75 per share. These warrants expired on February 28, 2004 without being exercised. If Mr. White fails to pay the demand promissory note, we will cancel the share certificate issued to him.



In June 2001, Babak Habibi acquired 133,334 shares at a price of $0.75 in a private placement. Mr. Habibi provided us with a demand promissory note in the amount of $100,000 without interest to pay for the shares and has signed an agreement to hold the share certificate and warrant certificate in escrow. The date of the agreement is June 26, 2001. According to the agreement, the shares and warrants issued to him will remain in escrow until he submits full payment to us. For each two shares purchased, Mr. Habibi received one share purchase warrant, which entitles him to purchase one additional share for one year at $1.00 per share. We have voluntarily and without receipt of any further consideration agreed to extend the share purchase warrants until February 28, 2004 and to reduce the exercise price to $0.75 per share. These warrants expired on February 28, 2004 without being exercised. If Mr. Habibi fails to pay the
demand promissory note, we will cancel the share certificate issued to him.



On December 10, 2003 George Joseph purchased convertible debentures in the amount of $12,500 and on May 10, 2004 he purchased additional convertible debentures in the amount of $50,000. The debentures were to mature on August 25, 2006 and bear interest at eight percent (8%) per annum. The principal amount and accrued interest are convertible until maturity into units at a price of $0.25 per unit. Each unit comprises one common share and one half-share (1/2) share purchase warrant. Each whole warrant has a five (5) year term and is exercisable at any time into one common share at a price of $0.25 per share. On September 10, 2004, Mr. Joseph converted $62,500 of principal and $2,101 of accrued interest into 258,404 common shares and 129,202 share purchase warrants.



On December 29, 2004 Jim Speros purchased 125,000 Units at a purchase price of $0.40 per Unit. On March 4, 2005 he purchased an additional 97,500 Units at a purchase price of $0.40 per Unit. Each Unit comprises one share and one-half (1/2) share purchase warrant. Each whole warrant is exercisable at $0.50 into one common share for five years. In conjunction with private placements, in 2004, he received $12,500 in finders fees and in 2005 he received $13,790 in finders fees. It is expected that he will also participate in the private placement of 1,875,000 units at $0.80 per unit approved by the Board of Directors on March 10, 2005 and described previously under Financing Activities. In conjunction with this private placement, it is expected that he will receive a finders fee relating to certain investors.




We have entered into a Marketing Communications Services Agreement with Baldacci Communications LLC. The agreement is effective February 1, 2005 and specifies monthly payments of $26,000 for the first six months and $18,000 for the final six months. Of these payments, Jim Speros is entitled to receive from Baldacci $12,000 per month during the first six months and $10,000 per month during the final six months. The agreement also provides for the issuance to Baldacci of 210,000 of common shares. Jim Speros is entitled to receive from Baldacci 105,000 of these shares.



On January 12, 2005 Frederick Weidinger purchased 125,000 Units at a purchase price of $0.40 per Unit. On March 4, 2005 he purchased an additional 97,500 Units at a purchase price of $0.40 per Unit. Each Unit comprises one share and one-half (1/2) share purchase warrant. Each whole warrant is exercisable at $0.50 into one common share for five years. It is expected that he will also participate in the private placement of 1,875,000 units at $0.80 per unit approved by the Board of Directors on March 10, 2005 and described previously under Financing Activities.



We do not have established policies about entering into future transactions with affiliates. Management addresses individual transactions on their individual merits.





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ITEM 13.
INDEX TO EXHIBITS

Number
Exhibit3.1(1)
Articles of Incorporation, dated February 27, 19873.2(1)
Articles of Amendment, dated July 14, 19983.3(1)
Articles of Amendment, dated June 28, 19903.4(1)
Articles Of Amendment of the Company, dated February 8, 19933.5(1)
Articles of Amendment of the Company, dated April 6, 19933.6(1)
Articles of Amendment of the Company, dated December 6, 19933.7(5)
Restated Articles of Incorporation of the Company dated June 1, 20003.8(1)
By-Laws of the Company3.9(6)
Amendment to By-Laws of the Company4.1(1)
Specimen Stock Certificate4.2(2)
1997 Stock Option Plan4.3(2)
2000 Stock Option Plan4.4(4)
Amended 2000 Stock Option Plan dated November 1, 200010.1(4)
Agreement for Escrow of Share Certificate & Promissory Note between Edward White and the Company dated February 27, 200110.2(5)
Agreement for Escrow of Share Certificate and Promissory Note between Babak Habibi and the Company dated June 21, 200110.3(7)
License Agreement with Marubeni Corporation10.4(8)
Certificate of Reverse Stock Split10.5(9)
Corporate Governance Committee Charter10.6(9)
Audit Committee Charter10.7(9)
Compensation Committee Charter10.8(9)
Code of Business Conduct and Ethics for Directors, Officers and Employees10.9(9)
Corporate Governance Guidelines10.10(10)
Loan Agreement10.11(10)
General Security Agreement10.12(10)
Service Agreement with Elite Financial Communications Group10.13(10)
2003 Stock Option Plan10.14(11)
Lease Agreement dated July 30, 2003 between Hoop Realty and Braintech Canada, Inc.10.15(12)
ABB Exclusive Channel Partner Agreement for Licensing of Braintechs Technologies10.16(13)
ABB Exclusive Channel Partner Agreement for Licensing of Braintechs Technologies10.17(14)
Marketing Communications Services Agreement with Baldacci Communications, LLC,11.1
Computation of net loss per share23
Consent Letter from the Auditor dated March 29, 200431.1
Certificate of Owen L.J. Jones pursuant to Sec 302 of the Sarbanes-Oxley Act of 200231.2
Certificate of Edward A. White pursuant to Sec 302 of the Sarbanes-Oxley Act of 200232.1
Certificate of Owen L.J. Jones pursuant to Sec 906 of the Sarbanes-Oxley Act of 200232.2
Certificate of Edward A. White pursuant to Sec 906 of the Sarbanes-Oxley Act of 2002



(1) Exhibit already on file - exhibit to our Form 10-SB registration statement filed September 25, 1998.

(2) Exhibit already on file - exhibit to our Schedule 14A proxy information filed March 1, 2000.



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(3) Exhibit already on file - exhibit to our Form S-1 registration statement filed February 11, 2000.

(4) Exhibit already on file - exhibit to our Form 10-KSB for the year ended December 31, 2000.

(5) Exhibit already on file - exhibit to our Form S-1/A registration statement filed July 3, 2001.

(6) Exhibit already on file - exhibit to our Form 10-KSB for the year ended December 31, 2001

(7) Exhibit already on file - exhibit to our Form 8-K filed July 5, 2002.

(8) Exhibit already on file  exhibit to our Form 8-K filed September 9, 2002.

(9) Exhibit already on file  exhibit to our Form 10KSB for the year ended December 31, 2002.

(10) Exhibit already on file  exhibit to our Form 10QSB covering the quarter ended March 31, 2003.

(11) Exhibit already on file  exhibit to our Form 10QSB covering the quarter ended September 30, 2003.

(12) Exhibit already on file - exhibit to our Form 8-K filed March 9, 2004.

(13) Exhibit already on file - exhibit to our Form 8-K filed January 19, 2005.

(14) Exhibit already on file - exhibit to our Form 8-K filed March 3, 2005.





ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees



Fees for audit services totalled $30,814 for the year ended December 31, 2004 and $43,452 for the year ended December 31, 2003, including fees associated with the annual audit and audit completion assistance.



Audit-Related Fees



Fees for audit-related services totalled $22,245 for the year ended December 31, 2004, consisting of review of the interim consolidated financial statements for quarter 1, quarter 2 and quarter 3. Fees for audit-related services totalled $25,560 for the year ended December 31, 2003, consisting of $22,010 for the review of the interim consolidated financial statements for quarter 1, quarter 2 and quarter 3, and $3,550 for scoping and planning assistance with respect to Sarbanes-Oxley Section 404: Managements Assessment of Internal Control.



Tax Fees



Fees for tax services totalled $3,850 for the year ended December 31, 2004, regarding conversion of debt to equity, including various telephone discussions and preparation of related correspondence. Fees for tax services totalled $1,242 for the year ended December 31, 2003, regarding activities in the United States.



All Other Fees



No fees were billed by KPMG, LLP for professional services during the fiscal years ended December 31, 2004 and 2003 other than those specified above.



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. Audit fees are fixed and contained in the proposal.



There were no fees in 2004 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).





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SIGNATURES



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





Signature
Title
Date

/s/ Owen L. J. Jones
Chief Executive Officer,
March 29, 2005Owen L.J. Jones
Director(Principal Executive Officer)



/s/ Babak Habibi
President, Director,
March 29, 2005Babak Habibi



/s/ Edward A. White
Chief Financial Officer,
March 29, 2005Edward A. White
Director(Principal Financial and AccountingOfficer)





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