<PAGE>

                   UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549

                                     FORM 10K-SB

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

                    For The Fiscal Year Ended DECEMBER 31, 1998

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

For the transition period from APRIL 30, 1998 to DECEMBER 31, 1998

        Date of Report (Date of Earliest Event Reported) JULY 6, 1999

                                 BRAINTECH, INC.
------------------------------------------------------------------------------
              (Exact name of Registrant as specified in its charter)

        NEVADA                                                98-0168932
----------------------      ------------------------      -------------------
(State or jurisdiction      (Commission File Number)        (IRS Employer
of incorporation)                                         Identification No.)


       930 West 1st Street #102, North Vancouver, B.C., Canada, V7P 3N4
------------------------------------------------------------------------------
                   (Address of Principal Executive offices)

Issuer's Telephone Number: (604) 988-6440

         Securities registered pursuant to section 12(b) of the Act:
------------------------------------------------------------------------------
                                     None

          Securities registered pursuant to section 12(g) of the Act:
------------------------------------------------------------------------------
                        Common Stock, $0.001 par value
                                (Title of Class)
<PAGE>

Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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            No   x
         -----         -----

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. ____________

State issuer's revenues for the most recent fiscal year: $57,510

State the aggregate market value of the voting and non-voting common equity
held by non-affiliates, computed by reference to the closing price for
trading of the issuer's stock on the OTC-Bulletin Board as at July 6, 1999:
$8,113,137.

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:  34,771,333 Common shares,
par value $0.001, as at July 6, 1999.

                           Index to Exhibits on Page 44
<PAGE>

                                BrainTech, Inc.
                                   Form 10-SB
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                             Page
<S>                                                                          <C>
PART I

Item 1.   Description of Business. . . . . . . . . . . . . . . . . . . . . . . .1

Item 2.   Description of Property. . . . . . . . . . . . . . . . . . . . . . . 27

Item 3.   Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 27

Item 4.   Submission of Matters to a Vote of Security Holders  . . . . . . . . 29


PART II

Item 5.   Market for Common Equity and Related Stockholder Matters . . . . . . 29

Item 6.   Management's Discussion and Analysis or Plan of Operation. . . . . . 32

Item 7.   Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 37

Item 8.   Changes in and Disagreements with Accountants. . . . . . . . . . . . 37


PART III

Item 9.   Directors, Executive Officers, Promoters and
            Control Persons. . . . . . . . . . . . . . . . . . . . . . . . . . 37

Item 10.  Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 39

Item 11.  Security Ownership of Certain Beneficial Owners and Management . . . 41

Item 12.  Certain Relationships and Related Transactions . . . . . . . . . . . 42

Item 13.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 44
</TABLE>
<PAGE>

     This Annual Report contains forward-looking statements which involve
risks and uncertainties. When used in this Annual Report, the words
"believes," "anticipates," "expects" and similar expressions are intended to
identify such forward-looking statements. Actual results of the Company (as
defined below) may differ significantly from the results discussed in the
forward-looking statements.  Factors that might cause such a difference
include, but are not limited to, those discussed in "ITEM 1. -- DESCRIPTION
OF BUSINESS -- Risk Factors."  Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

     An investment in the Company is highly speculative and involves a high
degree of risk.  Prospective investors should consider the risk factors
involved in an investment in the Company, including the following: (a) that
the Company is a development stage company that has not at any time generated
sufficient revenues to sustain ongoing operation, (b) the Company's history
of losses, (c) intense competition in the industry in which the Company
operates, (d) volatility of the Company's stock price and (e) the uncertainty
of future funding.  Prospective investors should carefully read each section
of this Annual Report which contain these and other risk factors.

     Unless otherwise stated, dollar figures stated in this Annual Report are
in United States dollars.  The Company's financial statements are reported in
United States dollars.  However, as the Company is headquartered in Canada,
many of its transactions are carried out in Canadian dollars.  For purposes
of this Annual Report, Canadian dollar amounts have been converted to United
States dollars using an exchange rate of 1.4645 Canadian dollars per United
States dollar, the exchange rate certified by the Federal Reserve Bank of New
York for customs purposes for cable transfers as at 12 noon on July 2, 1999.

PART I.

ITEM 1.  DESCRIPTION OF BUSINESS

THE COMPANY

     The Company was incorporated in Nevada on March 4, 1987 under the name
Tome Capital Inc.  The Company's name was changed to Nevada Manhattan Mining
Inc. on August 15, 1988, 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. The Company did not


                                       1
<PAGE>

carry on active business between the date of its incorporation and 1993.  The
Company was registered as an extraprovincial company under the British
Columbia COMPANY ACT on January 17, 1996.  The Company has one wholly owned
subsidiary, BrainWare Systems Inc., incorporated in British Columbia, Canada
on March 3, 1994. BrainWare Systems Inc. carries out the Company's research
and development and product development activities, and employs the Company's
technical personnel. As used herein, the "Company" refers to BrainTech, Inc.
and its subsidiary BrainWare Systems Inc.

     Historically, the Company's business has focused on the development and
marketing of solutions for the vision systems industry.  With the development
of the Odysee Development Studio, the Company plans to extend the potential
applications for its products to include a broader range of signal and data
processing functions.  The Odysee Development Studio is currently the
Company's principal project.

     The Company's executive offices are located at 930 West 1st Street #102,
North Vancouver, British Columbia, Canada V7P 3N4. Its telephone number is
(604) 988-6440 and its Internet address is www.bnti.com.

     The following technical terms are used in the description of the
Company's business products:

-    "Algorithm" refers to the underlying logical method or sequence of steps by
     which a given calculation or manipulation of data is performed.

-    "Architecture" of a computer program or system describes the types of data
     which the program or system handles, and the manner in which that data is
     manipulated.

-    "Beta testing" refers to the testing of a computer program or system under
     actual operating conditions.

-    "Block" refers to a section of a computer processing board whose components
     perform related functions, and which are conveniently designed as a group.

-    "Error Function" means a mathematical method for determining how closely
     similar two mathematical vectors are.

-    "Fuzzy mathematics" is a branch of mathematical logic in which propositions
     are not classified as absolutely true or absolutely untrue, but rather as
     true to a degree, or untrue to a degree.  Fuzzy mathematics has been used
     in a number of engineering and control applications.


                                       2
<PAGE>

-    "Interface" means a convention by which two software systems communicate.

-    "Machine vision" refers to the technology base that employs various
     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.

-    "Module" refers to a part of computer system or program that performs
     functions which are conveniently designed or performed as a group.
     Designing computer systems in separate modules, which are then linked
     together, can reduce development costs and make subsequent modifications
     easier.

-    "Vector" refers to a set of numbers, with each number relating to a
     specific physical quantity or measurement.


HISTORICAL DEVELOPMENT

     The Company entered the field of software development in the first
quarter of 1994.  Since that time, the majority of the Company's efforts have
been devoted to the development of products to be used in creating visual
recognition systems, and in designing visual recognition systems.

     The Company patterns the architecture of its systems and software around
the following principal modules.

     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.

     PREPROCESSING MODULE.  The preprocessing 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 Preprocessing 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 video 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 of the object
     (along its longest axis) or the length of its radius from midpoint to
     circumference along various designated radial lines.  The


                                       3
<PAGE>

     numerical quantities thus derived are stored as a vector, and referred to
     as the "physical signature" of the 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 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 a visual input, classification
     necessarily involves the comparison of uncertain quantities.  The
     classification of physical signatures thus requires a mathematical
     algorithm for deciding how closely two signatures match.  A variety of
     mathematical models, including fuzzy set 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 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 those stored in memory.

     CONTROL AND FEEDBACK MODULES.  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.  Where 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 in identify the "new" object in the future.

     In June 1995 the Company completed development of the first generation
of the BrainTron Processor, which employs the Olson Reticular Brainstem
("ORB") algorithm to carry out functions relating to the identification,
classification and matching of visual images.  ORB is an algorithm which
permits development of adaptive pattern recognition systems.  The Company
holds a license to use ORB pursuant to a License Agreement dated January 13,
1995.


                                       4
<PAGE>

     During the fiscal year ending December 31, 1998, the Company took the
following principal steps to advance its position as a supplier of products
and services in the vision systems industry:

(a)  In the first half of 1998, the Company commenced its first substantial
     initiatives to supply turnkey machine vision systems performing quality
     control functions.

(b)  In the first half of 1998, the Company commenced development of the Odysee
     Development Studio, a program initially designed to facilitate economical
     development of customized machine vision systems.

(c)  On July 6, 1998 the Company entered into a Product Development Agreement
     and a Manufacturing and Sales Agreement with United Technologies
     Microelectronic Systems Inc., then a wholly owned subsidiary of United
     Technologies Corp. ("UTMC").  Under those agreements, the Company and UTMC
     agreed to cooperate in the development of the Image Processor Accelerator
     Card ("IMPAC"), which would be manufactured by UTMC and marketed by the
     Company.

(d)  In the second half of 1998, the Company commenced the design of an enhanced
     version of the BrainTron processor, employing modified classification and
     training algorithms.

     Subsequent to December 31, 1998, the focus of the Company's business has
shifted.  The Company has not been able to obtain substantial contracts for
the supply of turnkey machine vision systems.  In addition, the Company has
enhanced the design and specifications of the Odysee Development Studio to
increase the scope of its potential applications.  Continued development and
marketing of the Odysee Development Studio is presently the Company's
principal project.  The Company has also commenced development of the Sorting
Precision Quality Recycling ("SPQR") system, described below.

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


PLAN OF OPERATION

     For the balance of its present fiscal year, the Company's efforts will
be directed towards the following projects:


                                       5
<PAGE>

1.   Marketing and continued development of the Odysee Development Studio.

2.   Development of the Sorting Precision Quality Recycling ("SPQR") system.

3.   Completing the IMPAC Accelerator Board and the BrainTron II processor.

4.   Marketing of quality control systems.

Further details on the status of these individual projects are contained
below.

     Marketing and continued development of the Odysee Development Studio is
the Company's top priority.  To the extent that the Company's resources are
limited, they will be directed to Odysee in preference to other projects.

     The Company currently employs 6 full time and 8 part time officers or
employees.  The Company's current monthly salary costs are approximately
$40,000.

     During the fiscal year ended December 31, 1998 the Company's average
monthly cash requirement, inclusive of salary costs, was approximately
$100,000. Accordingly, as at the date of this Annual Report, the Company has
sufficient cash balances to pay approximately one month's operating expenses
at their current level.

     By Press Release dated July 6, 1999 the Company announced a private
placement of 5,000,000 shares at a price of $0.20 per share, which will be
offered pursuant to Rule 506 of Regulation D to the Securities Exchange Act
of 1933.  The Company is in the process of identifying potential investors.
Based on the Company's success in raising private placement financing in the
past, the Company expects that it will be able to complete the proposed
financing.

     The financing described above, if completed, will provide the Company
with sufficient capital resources to pay ongoing operating expenses at their
present level for approximately one year.  If the Company is not able to
complete the financing, it will be forced to seek alternate sources of
financing.  If the Company is unable to generate sufficient funds to pursue
all of the projects identified above, the Company's first priority will be
the marketing and development of the Odysee Development Studio.  The Company
does not presently plan to incur significant capital expenses or to increase
its salary or other operating costs significantly during the balance of the
current fiscal year. Any significant capital expenses or increases in
operating costs will


                                       6
<PAGE>

be dependent on the Company raising additional capital or generating revenue
from the sales of its products or services.


RISK FACTORS

     INVESTMENT IN SHARES OF THE COMPANY IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL
REPORT, A POTENTIAL INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS
IDENTIFIED BY THE COMPANY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING SHARES ITS COMMON STOCK, $0.0001 PAR VALUE (THE "COMMON STOCK").

     DEVELOPMENT-STAGE COMPANY; EXPECTATION OF FUTURE LOSSES.  The Company is
a development stage company which has only recently begun to realize revenues
from operations.  The Company has had a limited operating history on which to
base an evaluation of the Company's prospects.  The Company has incurred
operating losses consistently since entering the field of software
development. The Company cannot assure that it will be able to generate
sufficient revenue to achieve profitable operation, to achieve positive cash
flow, or to continue its business as a going concern.

     POTENTIAL INSOLVENCY.  As at December 31, 1998, the Company had an
accumulated deficit during the development phase of $5,755,569.  As the
Company has not generated substantial revenue from operations, the Company
faces a risk of insolvency if it is not able to raise sufficient capital to
sustain operations.  The Company's audited financial statements include a
note stating that there is substantial doubt about the ability of the Company
to continue as a going concern, and that the Company's future operations are
dependent upon continued support by shareholders, the achievement of
profitable operations and the successful completion of management's plan to
obtain additional financing.

     UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS AND SERVICES. The Company
does not have an established history or record of sales on which to base an
evaluation of the Company's prospects. The Company cannot assure that its
products or services will gain sufficient acceptance, or achieve sufficient
sales revenue, to allow the Company to achieve profitable operation, to
achieve positive cash flow, or to continue its business as a going concern.

     EVOLVING DISTRIBUTION CHANNEL.  As a result of the Company's limited
operating history and the nature of the Company's business, the Company does
not have established distribution channels for the Company's products or
services. Some of the Company's products, including the Odysee Development
Studio, are products for which standard or typical distribution channels may
not exist. Accordingly, the Company may have to create and

                                       7
<PAGE>

implement distribution channels unique to its products before significant
sales can be achieved.  In addition, the Company cannot assure that any sales
results achieved by the Company will be repeatable or will continue for an
extended period.  Orders received by the Company may fluctuate greatly
between fiscal quarters or fiscal years, with resulting volatility in sales
and income.

     TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT.  The market for the
Company's products is characterized by rapidly changing technology.
Accordingly, the Company believes that its future success will depend upon
its ability to continue to develop and introduce new products with improved
price points and performance features.   The Company cannot assure that it
will be able to develop and market such new products successfully and respond
effectively to technological changes or new product announcements by others.

     COMPETITION.  The vision systems market is highly competitive and
rapidly changing.  New entrants into the market are common.  The Company's
Odysee Development Studio will compete with other development tools and
development environments available in the market.  The Company also competes
with other producers and vendors of optical sensors, classifiers, and data
processing boards, with vendors of machine vision systems, and with the
internal engineering efforts of the Company's current or prospective
customers, many of which may have greater financial and other resources than
the Company.  The Company cannot assure that it will be able to compete
successfully in the future or that the Company will not be required to incur
significant costs in connection with its engineering research, development,
marketing and customer service efforts to remain competitive. Moreover, many
of the Company's potential customers operate within highly competitive
industries and are highly dependent upon suppliers' ability to provide high
quality, cost effective products. Competitive pressures may result in price
erosion, reduced sales or other factors which will adversely affect the
Company's financial performance.

     NEED FOR ADDITIONAL FUNDING.  The Company will require additional
capital to continue the development of its products and services, to pay the
costs of marketing those products, and to cover operating losses until the
Company is able to become profitable.  Owing to the speculative and uncertain
nature of the Company's  business, management of the Company is unable to
calculate the amount of additional capital which the Company may have to
raise, though such amounts may be substantial.  The extent and timing of such
capital requirements will depend on many factors, including continued
progress in the Company's product development programs, the market acceptance
of any of the Company's products and services, administrative and legal
expenses, competitive products and the establishment of marketing

                                       8
<PAGE>


arrangements.  The Company will need to raise additional funds through
collaborations with corporate partners or through private or public
financings in order to support its long term product development and
commercialization programs.  The ability of the Company to raise capital will
be dependant on the perceived ability of the Company to develop and bring to
the market products and services capable of generating sales revenue at
profitable levels.  Any additional equity financing may be dilutive to
shareholders.  If adequate funds are not available, the Company would be
required to curtail one or more of its development programs, or attempt to
obtain funds through collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies or product
candidates that the Company would otherwise seek to develop itself or with
other parties.  The Company cannot assure that it will be able to raise the
amount of capital it requires.

     COMMON DIRECTORSHIPS.  The Company is party to agreements with NetMedia
Systems Inc. and Sideware Systems Inc.  Those agreements may be material to
the future profitability of the Company.  Grant Sutherland, Owen Jones, and
James Speros, directors of the Company, are also directors of Sideware
Systems Inc., a public company trading on the Vancouver Stock Exchange.  The
directors and shareholders of NetMedia Systems Inc. include Grant Sutherland
and Owen Jones, who are also directors of the Company.  NetMedia Systems Inc.
is a private company, in which Grant Sutherland and Owen Jones own,
respectively, approximately 30% and 23% of the issued and outstanding shares.
See "PART III, ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

     The Company is party to a cost sharing agreement with Sideware Systems
Inc. pursuant to which costs relating to the Company's business premises and
certain personnel are shared.  Sideware Systems Inc. is a development stage
software company which has not achieved profitable operation.  There can be
no assurance that Sideware Systems Inc. will be able to pay its share of the
costs for which it is responsible under the cost sharing arrangement, with
the result that the cash requirements of the Company to continue operation
may be substantially increased.  See "PART III, ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."

     The Company does not share any intellectual property or proceeds of the
sale of securities with Sideware Systems Inc.  From time to time, payments by
either the Company or Sideware Systems Inc. pursuant to the cost sharing
agreement described above may exceed that company's proportionate share.
Accordingly, those payments are reconciled and adjusted from time to time, as
required.  See "PART III, ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."


                                       9
<PAGE>

     ABILITY TO MANAGE GROWTH.  The Company could experience rapid growth in
orders, revenues, personnel, marketing activities, and complexity of
products. The Company cannot assure that it will be able to manage the
significant strains that future growth may place on the Company's
administrative infrastructure, systems, and controls.  The Company may be
unable to hire sufficiently qualified personnel to meet the demand for the
Company's products or services.  If the Company is unable to manage future
growth effectively, the Company's business, operating results and financial
condition may be materially adversely affected.

     DEPENDENCE ON KEY PERSONNEL.  The Company's success is substantially
dependent on the performance of its employees, most of whom have worked
together for a short period of time.  The Company's work force is relatively
small, and the Company thus employs only a small number of employees in
specific fields important to the Company's business.  The success of the
Company's product development and marketing efforts is substantially
dependent on the Company's President, Vice President of Research and
Development and Vice President of Engineering.  As a result, the departure of
a single employee or a  small number of employees could materially adversely
affect the Company's business.  The Company cannot assure that it will be
able to attract and retain qualified personnel on acceptable terms.  The
Company does not have key man insurance on any of its employees.

     PROPRIETARY TECHNOLOGY.  The Company relies heavily on its proprietary
hardware designs and software technology. Although the Company attempts to
maintain confidentiality of, and prevent improper disclosure of, its hardware
designs and software technology, the Company cannot assure that it has
adequately protected its technology from misappropriation. In addition,
others may attempt to "reverse engineer" the Company's products in order to
determine their method of operation and introduce competing products.
Similarly, others may develop competing technology independently. Any such
adverse circumstances could have a material adverse effect on the Company's
results of operations. Further, some of the markets in which the Company
competes are characterized by the existence of a large number of patents and
frequent litigation for financial gain that is based on patents with broad,
and sometimes questionable, application. As the number of the Company's
products increases, the markets in which its products are sold expands, and
the functionality of those products grows and overlaps with products offered
by competitors, the Company believes that it may become increasingly subject
to infringement claims. Although the Company does not believe any of its
products or proprietary rights infringe the rights of third parties, there
can be no assurance that infringement claims will not be asserted against the
Company in the future or that any such claims will not require the Company to
enter into royalty arrangements or result in costly litigation.


                                       10
<PAGE>

     Pursuant to a License Agreement dated January 5, 1995, the Company holds
a non-exclusive license from Willard W. Olson ("Olson") to use the Olson
Reticular Brainstem algorithm (the "ORB").  Management of the Company
understands that Olson holds a license from Motorola Corp., pursuant to which
he was given the authority and legal power to grant the license given to the
Company under the License Agreement.  The Company does not have a complete
copy of the license agreement between Motorola Corp. and Olson, which has
been withheld from the Company on grounds of confidentiality.  Management of
the Company is thus not able to confirm directly the authority and legal
power of Olson to grant the license contained in the License Agreement.
However, attorneys for Willard W. Olson have provided the Company with copies
of certain provisions contained in the license agreement between Motorola
Corp. and Olson, which provisions appear to management of the Company to
authorize the license granted to the Company pursuant to the License
Agreement.  In addition, the Company has made it publicly known for over
three years that it has used the ORB algorithm in the development of the
BrainTron processor, and has received no notice of any objection from
Motorola Corp.  Management of the Company has no reason to believe that its
use of the ORB algorithm is not properly authorized under the License
Agreement.

     ORB is the subject matter of U.S. Patent #5,390,261 (expiry date
February 14, 2012) and Taiwan Patent No. 62531, currently owned by Motorola
Corp.  To the best of the knowledge of management of the Company, neither
patent has been challenged in any form of court proceedings, with the result
that there exists no judicial confirmation of the validity or enforceability
of the patents. There can be no assurance that any of the patents referred to
herein are valid or enforceable.

     The Company is the registered owner of the trademark "BrainTron".  The
Company cannot assure that its trademark will not be challenged, invalidated,
infringed, circumvented or held unenforceable. Software code written by the
Company is protected by copyright.  However, the Company has not registered
copyright in any of its existing software code.  Copyright protection does
not prevent other developers of vision systems from designing or marketing
other systems which perform functions similar to, and compete directly with,
the Company's systems.

     POSSIBLE VOLATILITY OF STOCK PRICE.  The Company believes that factors
such as the announcement of new products or technologies by the Company or
its competitors, market conditions in the vision systems, industrial computer
hardware, and semiconductor industries generally, and quarterly fluctuations
in financial results are expected to cause the market price of the Common
Stock to vary substantially. Further, the Company's net sales or results of
operations in future quarters may be below the expectations of public market
securities analysts and investors.


                                       11
<PAGE>

In such event, the price of the Common Stock would likely decline, perhaps
substantially.  In addition, in recent years the stock market has experienced
price and volume fluctuations that have particularly affected the market
prices for many high technology companies and which often have been unrelated
to the operating performance of such companies.  The market volatility may
adversely affect the market price of the Common Stock.  See "PART II - ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."

     DIVIDEND POLICY.  The Company has never declared or paid cash dividends
on its capital stock. The Company currently intends to retain all its
earnings to finance the expansion and development of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.

     LITIGATION.  The Company is involved in court proceedings.  The
principal court proceedings are described under "ITEM 3. LEGAL PROCEEDINGS."
In those proceedings, opposing parties are advancing claims against the
Company totalling in excess of $700,000.  The Company has filed
counterclaims.  The Company is prosecuting its counterclaims and defending
its position in all of the litigation proceedings.  While the Company
believes that its positions will be sustained, there is a risk of potential
adverse outcomes in some or all of the court actions.  The results of such
adverse outcomes could include substantial pecuniary judgements against the
Company.

     POTENTIAL LIABILITY FOR PAST STOCK TRANSACTION.  In December 1993 the
Company issued certificates for 1,500,000 shares in the name of Arthur Scott.
The shares were to be issued in consideration for Mr. Scott completing the
design of the BrainTron processor.  Mr. Scott severed his relationship with
the Company shortly after the share certificates were issued, and did not do
the design work for which the shares were to be issued.  The Company has
retained possession of the certificates since the time they were issued, and
intends to cancel the certificates.  It is the position of the Company that
Arthur Scott has no entitlement to the shares in question, and no claim has
been advanced in respect of the shares by Mr. Scott.  The Company assesses
the risk of a successful claim against the Company in respect of the
1,500,000 shares as minimal.

     LOW PRICED STOCK.  The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define "penny stock" to
be any equity security that has a market price (as defined in their
regulations) less than $5.00 per share, subject to certain exceptions.  The
Company's securities may be covered by the penny stock rules, which impose
additional sales practice requirements on broker-dealers who sell to persons
other than established customers and accredited investors (generally,
institutions with assets in excess of $5,000,000 or individuals


                                       12
<PAGE>

with net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse).  For transactions covered by this rule,
the broker-dealers must make a special suitability determination for the
purchase and receive the purchaser's written agreement of the transaction
prior to the sale.  Consequently, the rule may affect the ability of
broker-dealers to sell the Company's securities and also affect the ability
of purchasers to sell their shares in the secondary market.


THE ODYSEE DEVELOPMENT SUITE

     DESCRIPTION OF ODYSEE

     The Company's Odysee Development Studio ("Odysee") was released for
commercial distribution on July 1, 1999.  Odysee is designed to facilitate
the expeditious and economical development of customized software solutions.

     Odysee stores and manipulates libraries of routines to perform the
various functions which can be included within a customized computer
application. Odysee includes a standardized interface to which all of the
routines are adapted, so that the routines can be combined easily and
efficiently into an integrated solution.  Odysee 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
Odysee interface.  Odysee thus eliminates the need to write specialized
computer code to link individual routines.

     Initially, Odysee was designed specifically for the development of
vision systems.  Accordingly, the routines that can be used within the Odysee
Development Studio are classified by the same general categories that the
Company applies to vision systems.

     ACQUISITION AND DIGITIZATION ROUTINES.  Acquisition and digitization
routines receive data (in either digital or analog form) and convert the data
into a digital format suitable for interpretation and manipulation by
subsequent routines.  In the case of a vision system, examples could include
routines which digitize the visual input from a camera.

     PREPROCESSING ROUTINES.  Preprocessing routines perform a variety of
data preprocessing functions, including the following:

     Filtering.  Filtering consists of eliminating or modifying data which could
     lead to erroneous results.  In the case of a vision system, filtering could
     include the elimination of background or reflected images.


                                       13
<PAGE>

     Segmentation.  Segmentation consists of identifying subsets of data which
     should be handled as a block.  In the case of a vision system, segmentation
     could include identifying the digital data relating to an individual
     object.

     Transformation.  Transformation consists of manipulating data into more
     usable form.  In the case of a vision system, transformation could include
     converting an entire image to grey scale.

     CLASSIFICATION ROUTINES.  Classification routines classify blocks of
data, by determining how closely they match other blocks or pre-determined
data patterns which the routine is attempting to identify.  In the case of a
vision system, classification could involve determining whether a particular
image resembles a particular type of object.  The Company will make its
BrainTron II classifier available as one of the classification routines that
can be used with Odysee.

     UTILITY ROUTINES.  Utility routines perform such functions as
controlling system input and output.

     Subsequent to commencing development of Odysee, the Company has modified
Odysee to accommodate additional routines, beyond those useful principally
for vision systems.  In its present design configuration, Odysee can
accommodate a broad range of data processing routines, including the
following:

-    Numerical calculation routines, which can perform mathematical computations
     required in science and engineering fields.

-    Statistical routines, which can perform statistical analyses required in
     such industries as the financial services industry.

-    Database manipulation routines, which can perform operations required in
     the organization and maintenance of large databases.

-    Communications routines, which can perform operations required as part of
     computerized communications systems.

To facilitate operations with databases, Odysee is compatible with the Open
DataBase Connectivity Library of Microsoft Corp.

     The routines which Odysee can use come from a wide variety of sources.
Some are standardized functions which are made available to members of the
public free of charge by other software producers.  Some are computer
programs sold by other software producers, which Odysee users will either
have to purchase from those producers or acquire through sub-license from


                                       14
<PAGE>

the Company. Others are routines which the Company has developed itself.  The
architecture of Odysee is "open", in the sense that the Company will make
available to Odysee users the technical information which they require to add
additional libraries to Odysee.

     Development of Odysee has been funded in part by a grant from the
National Research Council of Canada in the amount of $52,600.

     The software by which Odysee links the various subroutines within its
libraries is proprietary to the Company.  The BrainTron II processor, which
will be made available for use with Odysee, is also proprietary to the
Company. However, the majority of the individual routines that can be used
with Odysee are not proprietary to the Company.

     MARKETING FOR ODYSEE

     As presently configured, the potential market for Odysee is large.
Odysee is of potential use to any organization which has a need to create
customized computer programs or systems.  Large segments of the scientific
and engineering communities, vision systems industry, and financial services
industry are potential users of Odysee.  In addition, companies selling
computer systems, such as systems integrators, are potential users of Odysee.

     As Odysee has only recently been released for commercial distribution,
the Company is still in the process of attempting to identify suitable
distribution channels for Odysee.  The Company's current marketing strategy
for Odysee is as follows.

     First, Odysee is for sale through the Company's e-commerce website.
The Company hopes to develop its e-commerce website into the principal sales
outlet for Odysee.  The following libraries are also offered to Odysee users
free of charge through the Company's website:

     -    The Image Processing Library of Intel Corp. (image processing
          routines)
     -    The Signal Processing Library of Intel Corp. (signal processing
          routines)
     -    The Winsock Library of Microsoft Corp. (routines which facilitate
          internet communication)
     -    The Open DataBase Connectivity Library of Microsoft Corp. (routines
          which facilitate connection to databases)

     Second, the Company will seek to sell Odysee bundled with libraries and
routines used by Odysee.  The Company has secured agreements to sell the
following libraries together with Odysee:


                                       15
<PAGE>

     -    The Victor Image Processing Library of Catenary Systems (image
          processing routines)
     -    The Mathematics and Statistics Library of Visual Numerics Inc.
          (mathematical and statistical routines)
     -    The Wave Library of Visual Numerics Inc. (signal processing routines)
     -    The NAG Library of Numerical Algorithms Group (numerical calculation
          routines)
     -    The VisImage Pro Library of Visionary Solutions Inc. (vision
          processing routines)

     Third, the Company has made arrangements to have Odysee included in two
trade catalogues, Programmer's Paradise and Programmer's Supershop, both
published by Programmer's Paradise Inc. of Shrewsbury, New Jersey.  The
Company paid a total of $5,000 to have Odysee included in the two catalogues.

     Fourth, the Company will attempt to sell Odysee through the producers
and vendors of the libraries used by Odysee, by negotiating bundling
agreements with such producers and vendors.  The Company does not yet have
any agreements in place to market Odysee through such channels.

     There can be no assurance that the Company will be successful in
identifying or exploiting distribution channels for Odysee.  There can also
be no assurance that the Company will achieve sufficient sales of Odysee to
finance the Company's continued operations.

     The Company has set a base price of $2,250 for Odysee, which price
includes the Odysee software itself, but not individual routines owned by
third party software producers requiring material additional payment.  As
Odysee has only recently been released for commercial distribution, the price
for Odysee may be adjusted depending on market response.


IMPAC ACCELERATOR BOARD

     DESCRIPTION OF THE IMPAC BOARD

     In July 1998 the Company entered into a Product Development Agreement
with UTMC, pursuant to which the Company and UTMC agreed to cooperate in the
development of the IMPAC Accelerator Board.  IMPAC is a computer board
designed to allow the development of vision systems with increased computing
speed and efficiency.

     In its existing configuration, IMPAC consists of the following principal
blocks:

     THE COMMUNICATIONS BLOCK.  The communications block controls
communications between IMPAC and the main computer within which


                                       16
<PAGE>

IMPAC is installed.  In addition, the communications block controls
communications between the individual blocks of IMPAC.

     THE CAM ENGINE BLOCK.  The CAM engine block includes UTMC's proprietary
CAM engine.  The CAM engine is an integrated circuit which allows rapid
access to large lookup tables using associate keys rather than physical
addresses.  The CAM engine creates the ability to identify exact or close
matches to items stored in memory at speeds which can not currently be
achieved with PC-based software applications.

     THE MICROPROCESSOR BLOCK.  The microprocessor block includes a
conventional microprocessor to perform those computing functions required by
a vision system which are not performed by the communication block or the CAM
engine block.  In its present configuration, the microprocessor block of the
IMPAC board incorporates the G3 Power PC chip produced by Motorola.

     The IMPAC board was initially intended to incorporate a fourth block,
the BRAINTRON BLOCK, which would contain the Company's BrainTron II
processor, when completed, and associated memory.  The BrainTron II processor
would perform classification, matching and training functions in vision
systems.

     The design of the first generation of the IMPAC board has been
completed, and a prototype board has been produced.  Current work on the
IMPAC project consists of:

(a)  testing and de-bugging the prototype board; and
(b)  writing interface software for the IMPAC board.

     The Company believes that de-bugging of the board and completion of the
first level of software interface will be completed within approximately
three months, and will cost approximately $95,000.  The Company also believes
that a second level of interface, to make the IMPAC board specifically
compatible with the Odysee Development Studio, will be required before the
IMPAC board can be marketed in conjunction with Odysee.  The Company
estimates that the second level of interface will require approximately three
additional months to complete, and will cost approximately $25,000.  Until
the interface software is complete, there is no practicable market for the
IMPAC board.  Accordingly, the Company expects that the IMPAC board will be
released for commercial distribution in the fourth quarter of 1999 or the
first quarter of 2000.

     The first generation of the IMPAC board does not include the BrainTron
block, although the architecture and design of the board are compatible with
later addition of the BrainTron block.  The BrainTron block was not included
in the first generation of the IMPAC board because the Company did not have a
version of the first generation of the BrainTron processor in a physical
format


                                       17
<PAGE>

compatible with the IMPAC board layout, and did not have a hardware version
of the BrainTron II processor in time for inclusion in the first generation
IMPAC board.  The Company chose not to modify the first generation BrainTron
processor to fit on to the IMPAC board, and to concentrate its resources on
the development of Odysee and the BrainTron II processor instead.  In the
absence of the BrainTron block, the IMPAC board will be able to perform
classification, matching, and training functions in two ways.

1.   Software for classification, matching and training routines can be written
     and executed directly by the microprocessor block.

2.   While a hardware version of the BrainTron II processor is not complete,
     design work for a software version of the BrainTron II processor is
     complete and ready for beta testing (see BRAINTRON PROCESSOR, below).  The
     Company expects that testing of the software version will be complete by
     the time IMPAC is ready for commercial distribution.  The software version
     of the BrainTron II processor will be available as part of the Odysee
     Development Studio.  The IMPAC board and the BrainTron II processor can be
     incorporated into the same vision system through Odysee.

     The principal contributions of the Company to the IMPAC board have been:

     -    systems hardware architecture;
     -    preparation of specifications;
     -    circuit design; and
     -    manufacturing engineering services.

     A portion of the development work was carried out by North Shore Circuit
Design of Austin Tx.  During the fiscal year ended December 31, 1998 the
Company paid $116,294 to North Shore Circuit Design for work carried out on
the IMPAC accelerator board.

     MARKETING FOR IMPAC

     The IMPAC accelerator board is intended primarily for incorporation into
machine vision systems.  In substance, machine vision is the application of
electronic imaging, image processing, and image analysis techniques to
applications in manufacturing industries for the purpose of control (process
control, quality control, machine control, robot control).

     The Automated Imaging Association ("AIA") has published extensive
statistics on the market for machine vision systems.  Principal statistics
published by the AIA include the following:


                                       18
<PAGE>

-    In 1998, the North American market for merchant machine vision systems was
     approximately $1.2 billion (in revenue), or approximately 25,200 units.
     These figures represented increases of approximately 1.5% (in revenue) and
     23% (in units) over corresponding figures for 1997.

-    The principal industrial applications of machine vision systems are
     inspection (e.g., inspection of products for quality control purposes),
     location analysis (e.g., control of industrial machines or robots, or
     control of fitting and assembly of products) and pattern recognition (e.g.,
     optical character recognition).  In 1998, inspection applications accounted
     for approximately 85% of the market by revenue, and approximately 42% by
     units.  Location analysis applications accounted for approximately 11% of
     the market by revenue, and approximately 45% by units.  Pattern recognition
     applications accounted for approximately 4% of the market by revenue and
     13% of the market by units.

-    The principal end users in the North American market for visions systems
     were the following industries:

<TABLE>
<CAPTION>
     Industry            % by Revenue   % by Units
     --------            ------------   ----------
     <S>                 <C>            <C>
     Semiconductors           34%           24%
     Electronics              16%           22%
     Containers                3%            6%
     Food                      8%            4%
     Wood                      5%            1%
     Transportation            7%            9%
     Fabricated metals         3%            2%
     Plastic                   4%            5%
     Printing                  3%            6%
     Medical/Pharm.            4%            9%
</TABLE>

     The AIA has projected that by the year 2003, the North American market
for vision systems is projected to increase to approximately $2.2 billion in
revenue, and approximately 55,000 units.  These figures correspond to average
annual growth rates of approximately 11% for market revenue and 12.5% for
units during the period 1997 - 2002.

     The Company has not yet identified or established distribution channels
for the IMPAC accelerator board.  The Company's strategy for marketing IMPAC
will be centred on the following principles.

1.   MARKETING IN CONJUNCTION WITH ODYSEE.  If the Odysee Development Studio is
     able to achieve significant market acceptance, the Company will attempt to
     market IMPAC through


                                       19
<PAGE>

     the Odysee Development Studio, as a component which can be incorporated
     into vision systems through Odysee.

2.   DIRECT MARKETING TO PARTICIPANTS IN THE VISION SYSTEMS INDUSTRY.  The
     Company believes that IMPAC can be utilized by developers of vision systems
     and systems integrators.

3.   MANUFACTURING AND SALES AGREEMENT.  Simultaneously with the Product
     Development Agreement, the Company entered into a Manufacturing and Sales
     Agreement with UTMC.  Under the Manufacturing and Sales Agreement, UTMC
     will have responsibility for manufacturing IMPAC, which the Company will
     purchase from UTMC.  The Company will have responsibility for marketing and
     sales of IMPAC.  UTMC will assist in the marketing and sales of IMPAC by
     referring customers to the Company, by including IMPAC on its website and
     in certain catalogues of UTMC, and by such other means as UTMC considers
     appropriate.  UTMC will receive a commission of 10% on all business
     referred to the Company by UTMC, or 5% in cases where the Company also
     commenced an independent sales initiative.


BRAINTRON PROCESSOR

     In 1995, the Company developed the first generation of the BrainTron
processor, which performs the functions of a Training and Matching Module.
The first generation BrainTron processor is a plug-in PCI bus computer card
designed to operate under the Windows NT operating system.  The first
generation BrainTron processor exists in hardware and software versions.  The
software version was intended principally for initial testing, while the
hardware version was intended primarily for use in final applications.  The
first generation BrainTron processor has five chips performing the following
functions: communication with the host computer (bus interface), control of
data movement within the processor (state control), generation of addresses
to move data in memory (address generator), arithmetic operations (datapath)
and random access memory (RAM).  Two additional datapath chips can be added
for greater processing speed, and multiple processors can be installed within
a system, permitting the database of the system to be split among several
processors operating in parallel. The first generation BrainTron processor
uses fuzzy membership functions to match signatures stored in memory to
physical signatures.  Training functions carried out by the BrainTron
processor use the ORB algorithm.  The ORB algorithm includes a set of rules
for adapting fuzzy sets to reflect new data. Using the ORB algorithm, the
first generation BrainTron processor causes the range of fuzzy membership
functions to stretch or contract to accommodate new data values.


                                       20
<PAGE>

     During the fiscal year ended December 31, 1998 the Company commenced
development of the BrainTron II processor.  The principal enhancements
incorporated into the BrainTron II processor were:

1.   an improved mathematical error function; and

2.   an improved training algorithm, which operates independently of the order
     in which data are received.

     Design of the software version of the BrainTron II processor is
complete, and the software version of the BrainTron II processor is ready for
beta testing.  The Company expects that a beta test program can be completed
within approximately 90 days.  Some work on the BrainTron II processor has
been delayed, as the Company has diverted some internal resources to
accelerate the development of the Odysee Development Studio, which the
Company now considers to be its principal product.

     During the fiscal year ending December 31, 1998, the Company also
commenced development of a further enhancement to the BrainTron processor,
which would improve robustness by including contributions from "nearest
neighbours" in the vector components of physical signatures.  Owing to the
emphasis which the Company is presently placing on the Odysee project, the
Company does not have a specific timetable for the incorporation of this
modification.

     MARKETING FOR BRAINTRON

     The Company expects that it will offer the BrainTron II processor for
sale as an optional library which can be purchased for use with the Odysee
Development Studio.  The Company has not yet established a price at which
Odysee users will be able to purchase the BrainTron II processor.  As the
software version of the BrainTron II processor can be implemented through
Odysee, the Company does not have specific plans to create a hardware version
of the BrainTron II processor.

     The Company does not have established distribution channels for
BrainTron. The Company expects that its marketing strategy for BrainTron will
be similar to its marketing strategy for the IMPAC accelerator board,
described above.


DEVELOPMENT OF CUSTOM VISION SYSTEMS - QUALITY CONTROL

     In the first half of 1998, the Company entered the field of supplying
vision systems to perform quality control and inspection services.  The
Company identified, and pursued, the following business opportunities:


                                       21
<PAGE>

(a)  Marketing of a print quality inspection system to Epson Portland Inc.

(b)  Marketing of a fruit inspection system to Sunkist Growers.

(c)  Marketing of an inspection system for surgical stents to Cordis, a Johnson
     & Johnson company.

     The Company was not successful in gaining substantial contracts out of
these initiatives.  At this time, the Company's prospects for the sale of
customized vision systems directly to end users must be considered
speculative.


SORTING PRECISION QUALITY RECYCLER ("SPQR")

     Subsequent to December 31, 1998 the Company has commenced development of
the Sorting Precision Quality Recycler ("SPQR") system for plastic waste
recycling.  The SPQR system is in the preliminary design stage.  The SPQR
system is intended to facilitate recycling of plastic waste by using
automated vision to identify and sort different categories of recyclable
plastic.

     The large majority of plastics in commercial use fall into 6 chemically
distinct categories.  Recycling of plastic waste is practicable only after
the waste items have been sorted by category.  Each category of plastic has a
characteristic "Raman spectrum", which is a measure of how near infrared
light passing through the plastic is scattered.  Plastic waste can thus be
sorted by category by subjecting it to near infrared light, and by analyzing
how the infrared light is scattered.

     The SPQR system will consist of a conveyor belt upon which items of
plastic waste will be moved, a near infrared vision system that will identify
the different categories of plastic, and a robotic system which will remove
waste items from the conveyor and place them in storage units allocated to
the different categories of plastic.

     The Issuer has prepared a preliminary schedule and budget for the
development of SPQR.  Under the preliminary schedule and budget:

(a)  Development of SPQR will require approximately eighteen months.

(b)  Development of SPQR will require manpower costs of approximately $760,000.
     The proposed development team will include a project manager, vision
     scientist, research assistant, robotic/system integrator, industry expert,
     industry liaison, and robotics expert.  Of the above personnel, the vision
     scientist, research assistant, and robotic/system integrator will be
     require to devote the


                                       22
<PAGE>

     substantial majority of their time to the SPQR project during the eighteen
     month development period.  The remaining personnel will work on the
     project part time.

(c)  Development of a prototype SPQR system will require approximately $135,000
     in capital equipment, including sensors, computer equipment, a conveyor,
     and robotics equipment.

     On June 14, 1999 the Company entered into a non-binding Letter of
Understanding with International Paper Industries Ltd. ("IPI"), a company
engaged in waste management, to cooperate in the development of SPQR.  Under
the Letter of Understanding, IPI will provide demand expertise, and will give
the Company the opportunity to test SPQR under actual operating conditions.
The Letter of Understanding also records the intention of the parties to
negotiate a joint venture or other form of commercial agreement for the joint
development and exploitation of SPQR.  As at the date of this Annual Report,
no such commercial agreement exists.

     The British Columbia Science Council makes available, in appropriate
cases, funding to cover a portion of the research and development work of
projects deemed suitable.  The Company intends to apply for such funding, but
there can be no assurance that such funding will be available.


COMPETITION

     With respect of the Odysee Development Studio, the Company is aware of a
number of products which provide development environments for vision systems
using "drag and drop" components. The principal products include "WiT" of
Coreco Inc., "Visionblox" of Integral Vision, and "Labview" of National
Instruments. The Company believes that the ability of Odysee to incorporate a
large number of libraries and routines and its "open" architecture are
features of Odysee which are not common to other products.  In addition, some
of the competitive products require the use of external tools to complete a
vision system, which Odysee does not.

     With respect to the IMPAC accelerator board and the BrainTron II
processor, the market contains a large number of data processing boards,
processors, and classifiers with a wide variety of features and
functionality.

     Owing to the Company's limited history of sales, and to the fact that
Odysee, IMPAC, and the BrainTron II classifier are only recently released, or
have not yet been released, for commercial distribution, management of the
Company does not know of a reliable way to evaluate its future competitive
position within the industry.


                                       23
<PAGE>

SOURCES OF RAW MATERIALS AND THE NAMES OF PRINCIPAL SUPPLIERS

     The Company is not presently dependent on any particular suppliers for
its manufacturing.  Following completion of the IMPAC accelerator board, UTMC
may become a major supplier.  The Company and UTMC have entered into a
Manufacturing and Sales Agreement which the Company believes will ensure
availability of IMPAC to the Company.


INTELLECTUAL PROPERTY

     The Company considers software and related technical data which it has
developed to constitute intellectual property of the Company.  The software
and technical data over which the Company asserts intellectual property
rights includes principally the following:

(a)  software written by the Company and incorporated in the Odysee Development
     Studio, including the software by which Odysee links the various
     subroutines within its libraries;

(b)  software and design specifications incorporated in the BrainTron II
     processor; and

(c)  software routines developed by the Company from time to time in developing
     vision systems.

     The Company considers itself to be the owner of copyright in the
software described above, and that the software and other technical data
described above constitute trade secrets of the Company.  Certain types of
intellectual property, such as copyright, acquire legal protection without
any form of registration (although registration can result in procedural or
evidentiary advantages in the event of infringement proceedings).  Other
types of intellectual property protection, such as patent protection, are
dependent on registration.  To date, the Company has not obtained or applied
for copyright, patent, or any other form of registration in respect of any of
the intellectual property described above, as the Company has not considered
the additional protection that would be obtained to warrant the time and
expense involved.

     Under the Product Development Agreement between the Company and UTMC
dated July 6, 1998, the Company and UTMC will own jointly all intellectual
property created in the development of the IMPAC accelerator board.  The
stipulations as to joint ownership do not apply to existing intellectual
property owned by either the Company or UTMC, or to improvements or
modifications to such intellectual property.


                                       24
<PAGE>

     Pursuant to a License Agreement dated January 13, 1995 with Olson, the
Company holds a non-exclusive license to use ORB.  The term of the license is
for 10 years, expiring in January, 2005.

     ORB is a method of pattern classification which includes the following
features:

(a)  ORB measures the similarity of two visual patterns by developing a
     mathematical measurement for the degree of similarity in various features
     in the patterns.

(b)  ORB uses fuzzy mathematics to measure the similarity in individual
     features.

(c)  ORB is adaptive, in the sense that mathematical criteria which it uses in
     comparing features can be modified to take account of new data, as new
     patterns are observed.  In this way, a system using ORB can be "trained"
     over time to recognize and distinguish visual patterns more accurately.

For further information on the Company's license to use the ORB algorithm see
"Risk Factors -- Proprietary Technology".  The Company's BrainTron I
processor was designed incorporating ORB.  ORB is not utilized in the
BrainTron II processor.

     The Company's ability to compete successfully is dependent in part upon
its ability to protect its proprietary technology and information. As stated
above, the Company has not applied for registration of intellectual property
rights in respect of any of its software (although certain forms of legal
protection are available without registration).  Although the Company
attempts to prevent improper disclosure of its proprietary technology there
can be no assurance that the measures taken by the Company will be adequate
or that competitors will not be able to develop similar technology
independently. Further, there can be no assurance that claims allowed on any
patent issued to the Company will be sufficiently broad to protect the
Company's technology, that any patent will issue from any pending application
or that foreign intellectual property laws will protect the Company's
intellectual property. Litigation may be necessary to enforce or determine
the validity and scope of the Company's proprietary rights, and there can be
no assurance that the Company's intellectual property rights, if challenged,
will be upheld as valid. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results, regardless of
the outcome of the litigation. In addition, there can be no assurance that
any of the patents issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide
competitive advantages to the Company.


                                       25
<PAGE>

     There are no pending claims against the Company regarding infringement
of any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. Such claims could
include assertions that the Company's products infringe, or may infringe, the
proprietary rights of third parties, requests for indemnification against
such infringement or suggestions that the Company may be interested in
acquiring a license from such third parties. There can be no assurance that
any such claim made in the future will not result in litigation, which could
involve significant expense to the Company, and, if the Company is required
or deems it appropriate to obtain a license relating to one or more products
or technologies, there can be no assurance that the Company would be able to
do so on commercially reasonable terms, or at all.


GOVERNMENT APPROVAL REGULATION

     The Company is unaware of any government approval that is required for
any of its principal products or services.

     The Company believes that there are no environmental or other government
regulations which currently have a material effect on the Company's
operations.


RESEARCH AND DEVELOPMENT

     During the fiscal years ending December 31, 1997 and December 31, 1998
the Company spent approximately $148,527 and $321,378, respectively, on
research and development activities.

     None of the research and development expenditures incurred in 1997 or
1998 were borne by customers.  Development of Odysee has been funded in part
by the National Research Council of Canada grant discussed above.


EMPLOYEES

     As of July 6, 1999, the Company had 6 full time officers or employees.
The Company's full time employees include the Company's Vice President of
Research and Development, Vice President of Engineering, Senior Vision
Systems Engineer, Senior Vision Applications Engineer, Senior Systems
Integrator, and Senior Programmer.  In addition, the Company had 8 part time
officers or employees. The Company's part time officers or employees include
the Company's President and Chief Executive Officer, Chairman of the Board,
and Controller.  As at July 6, 1999, the Company's monthly payroll costs are
approximately $40,000.


                                       26
<PAGE>

     The services of the Company's part time officers or employees are
provided through Techwest Management Ltd.  Techwest Management Inc. is a
private management company whose shareholders include Owen Jones and Grant
Sutherland. The Company's part time officers and employees divide their time
between the Company and Sideware Systems Inc., a software development company
whose shares trade on the Vancouver Stock Exchange.   The Company and
Sideware Systems Inc. share the cost of the services of the Company's part
time employees.


ITEM 2.  DESCRIPTION OF PROPERTY

     The Company currently operates out of leased office premises in North
Vancouver, British Columbia, Canada.  Prior to September 1, 1998 the premises
used by the Company occupied approximately 7,900 square feet.  Effective
September 1, 1998, additional space was added to the leasehold premises,
increasing their area to 14,867 square feet.  The premises used by the
Company are shared with BrainTech, Inc., a software development company.  The
term of the lease expires August 31, 2003.  The Company and BrainTech, Inc.
each bear one half of the rent and related occupancy costs.

     The lease provides for annual minimum rent of approximately $197,271.00
(equal to $13.00 per square foot) for the first year of the lease commencing
September 1, 1998 and ending August 31, 1999.  Annual minimum rent under the
lease escalates to $13.24 per share foot in the second year, $13.50 per
square foot in the third year, $13.75 per square foot in the fourth year, and
$14.00 per square foot in the fifth year.  In addition, the lease requires
the tenant to pay additional costs relating to property taxes and common area
maintenance costs.  Those costs are presently approximately $4.10 per square
foot.

     The Company operates out of the premises under a cost sharing agreement
with Sideware Systems Inc. effective November 1, 1995, pursuant to which the
Company and Sideware Systems Inc. are each responsible for one half of the
rent described above and other related occupation costs.


ITEM 3.  LEGAL PROCEEDINGS

     The Company is party to the following material legal proceedings.

     1.  JMF MANAGEMENT INC. ET AL V. BRAINTECH, INC. ET AL,
         BRITISH COLUMBIA SUPREME COURT ACTION NO. C990550

     On February 1, 1999 JMF Management Inc. and Manfred Kurschner commenced
legal proceedings against the Company and TechWest Management Inc.  Mr.
Kurschner is the Company's former Manager of Investor Relations and JMF
Management Inc. is Mr.


                                       27
<PAGE>

Kurschner's personal management Company.  The Plaintiffs claim approximately
$100,000 in damages for alleged breach of a stock option agreement and
approximately $7,500 alleged to be owing pursuant to a consulting agreement.
The Company has filed a defence and counterclaim.  The Company's counterclaim
claims damages for breach of fiduciary duty and negligence.  No depositions
have been conducted in the action and trial date has been set.   The outcome
of the action is uncertain.

     2.  CACTUS CONSULTANTS CO. LTD. V. BRAINTECH, INC. ET AL, BRITISH COLUMBIA
     SUPREME COURT ACTION NO. C991377

     On March 16, 1999 Cactus Consultants Co. Ltd., Crystal Securities Inc.,
and Elmswell Investments Inc. commenced legal proceedings against the Company
and certain of its present and former directors.  The Plaintiffs claim
$606,000 as damages for breach of contract and conversion of stock
certificates.  The Company's records show that during the fiscal year ending
December 31, 1995, a total of 3,000,000 shares of Common Stock were
subscribed at a price of $0.25 per share, and that the Company received
$606,000 of the subscription amount. Prior to December 31, 1998 the Company
recorded $606,000 as "Subscriptions received" on its financial statements.
Subsequent to the commencement of court action, the Company has recorded the
same amount as "Amounts in dispute".  The Company has filed a defence and
counterclaim alleging that the plaintiffs and Jan Olivier, a former promoter
of the Company, caused share certificates of the Defendant to be issued to
the plaintiffs improperly, and caused funds of the Company to be used for
unauthorized and improper purposes.  The outcome of the action is uncertain.

     3.  BRAINTECH, INC. V. JOHN KOSTIUK, DISTRICT COURT OF HARRIS COUNTY ACTION
     96-55978; BRITISH COLUMBIA SUPREME COURT ACTION C972736; BRITISH COLUMBIA
     COURT OF APPEAL ACTION CA024459

     On May 7, 1997 the Company obtained judgment for damages in the amount
of $300,000 in legal proceedings commenced in the District Court of Harris
County in the State of Texas against John Kostiuk, a resident of British
Columbia, for defamatory and injurious statements which Mr. Kostiuk caused to
be published about the Company over the Internet.  On April 2, 1998 the
Company obtained a judgement of the Supreme Court of British Columbia
enforcing the Texas judgment.

     Effective October 31, 1998 Sideware Systems Inc. purchased a 50%
interest in the judgment for a purchase price of $200,000.  The agreement
between the Company and Sideware Inc. provided that the purchase price would
be adjusted depending on the benefit ultimately received by Sideware Systems
Inc.  On March 18, 1999, the British Columbia Court of Appeal reversed the
judgment of the British Columbia Supreme Court, rendering the judgment
(subject to


                                       28
<PAGE>

any further appeal) unenforceable against any assets of John Kostiuk in
British Columbia. Subsequent to the decision of the British Columbia Court of
Appeal, the Company returned the $200,000 paid by Sideware Systems Inc.  The
Company has filed an Application for Leave to Appeal to the Supreme Court of
Canada.  Any recovery in the proceeding must be considered speculative.


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

MARKET INFORMATION

     The Company's Common Stock trades on the Over-The-Counter Bulletin Board
(OTC-BB) in the United States, having the trading symbol "BNTI-BB" and CUSIP#
105,022-10-7.  The Common Stock commenced public trading on February 4, 1988
under a former name, Cozy Financial Corporation.

     The following table lists the volume of trading and the high, low, and
closing sales prices on the OTC-BB for the Company's common shares for the
last 10 fiscal quarters.  Data on the high and low bids for the Company's
shares, to the extent that they may be different from the high and low sales,
is not known to the Company.

<TABLE>
Caption
Quarter Ended        Volume      High       Low      Close
<S>               <C>            <C>       <C>       <C>
Jun. 30, 1999      8,711,000     $0.43     $0.17     $0.31
Mar. 31, 1999      4,828,400      0.31      0.14      0.17
Dec. 31, 1998      6,589,000      0.37      0.195     0.25
Sep. 30, 1998     11,663,700      1.08      0.234     0.27
June 30, 1998     14,182,800      0.94      0.43      0.73
Mar. 31, 1998     15,264,371      0.63      0.29      0.50
Dec. 31, 1997      8,665,708      0.39      0.15      0.21
Sep. 30, 1997      5,231,530      0.48      0.20      0.34
June 30, 1997      6,816,925      0.51      0.26      0.30
Mar. 31, 1997      7,638,137      0.57      0.29      0.41
</TABLE>

     The source of the transaction and high and low bid information is the
OTC-BB.  The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.


                                       29
<PAGE>

     During the fiscal year ending December 31, 1998 the Company filed a Form
10-SB to register its common shares under the SECURITIES EXCHANGE ACT of 1934
(the "Exchange Act").  The Company files information on the forms specified
under the Exchange Act and Rules promulgated thereunder.  The Company's
10-QSB for the first quarter of 1999 was not filed in a timely manner, as the
Company's financial statements for the fiscal year ending December 31, 1998
and the quarter ending March 31, 1999 were not available in time for a timely
filing.


HOLDERS

     As at the date of this Annual Report, the Company has 34,771,333 shares
issued and outstanding.  Holders of those shares (as shown on a shareholders'
list as at June 4, 1999) included 209 registered shareholders, including
approximately 200 registered shareholders in the United States (including
depositories) holding approximately 27 million shares.  Based on research
into the indirect holdings registered to various depositories and financial
institutions, the Company estimates that there are in excess of 4,000
beneficial shareholders in the Company.


DIVIDEND POLICY

     The Company has not paid or declared dividends during the last two
fiscal years. The Company currently intends to retain all of its cash and any
future earnings to finance the growth and development of its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.


RECENT SALES OF UNREGISTERED SECURITIES

     During the fiscal year ending December 31, 1996 the Company issued
4,683,333 shares in private placements. These shares were issued pursuant to
exemptions from registration pursuant to Rule 504 of Regulation D under the
Securities Act of 1933, as amended (the "Securities Act").  The consideration
received by the Company was $953,790, net of legal costs.  950,000 shares
were issued January 4, 1996 at a price of $0.1895 per share (equivalent to
gross proceeds of $180,000).  733,333 shares were issued April 3, 1996 at a
price of $0.2523 per share (equivalent to gross proceeds of $185,000).
2,000,000 shares were issued June 5, 1996 at a price of $0.20 per share
(equivalent to gross proceeds of $400,000).  1,000,000 shares were issued
September 23, 1996 at a price of $0.20 per share.


                                       30
<PAGE>

     During the fiscal year ending December 31, 1996 the Company issued
1,200,000 shares at a deemed value of $240,000 to a director of the Company
and a consultant to the Company in payment of performance bonuses for
technical services rendered to the Company.  400,000 shares were issued on
December 26, 1996 to Paco Nathan, then a director of the Company, at a deemed
value of $80,000.  800,000 shares were issued on December 26, 1996 to Brad
Martin at a deemed value of $160,000.  Brad Martin is a principal of North
Shore Circuit Design, a software consulting firm located in Austin, Texas.
North Shore Circuit Design provided services to the Company in relation to
the development of the BrainTron processor. These shares were issued pursuant
to exemptions from registration under Section 4(2) of the Securities Act.

     During the fiscal year ending December 31, 1997 the Company issued
3,000,000 shares in private placements. These shares were issued pursuant to
exemptions from registration pursuant to Rule 504 of Regulation D under the
Securities Act.  The consideration received by the Company was $548,270.50,
net of legal costs.  1,000,000 shares were issued March 20, 1997 at a price
of $0.20 per share (equivalent to gross proceeds of $200,000).  1,000,000
shares were issued May 29, 1997 at a price of $0.20 per share (equivalent to
gross proceeds of $200,000).  1,000,000 shares were issued December 24, 1997
at a price of $0.15 per share (equivalent to gross proceeds of $150,000).

     In May, 1997 the Company issued 300,000 shares at a deemed value of
$60,000 to Paragon Communications in consideration for investor relations
services. These shares were issued pursuant to exemptions from registration
Section 4(2) of the Securities Act.

     During the first half of 1998, the Company issued 1,600,000 shares in a
private placement. These shares were issued pursuant to exemptions from
registration pursuant to Rule 504 of Regulation D under the Securities Act.
The total consideration received by the Company was $396,870, net of legal
costs. 1,200,000 shares were issued on March 27, 1998 at price of $0.25
(equivalent to gross proceeds of $300,000).  Grant Sutherland, a director of
the Company, was the beneficial purchaser of 780,000 of the 1,200,000 shares.
400,000 shares were issued on May 4, 1998 at price of $0.25 (equivalent to
gross proceeds of $100,000).

     In July and August, 1998 the Company issued 900,000 shares on the
exercise of stock options granted to directors, officers, employees and
consultants of the Company.  The total consideration received by the Company
was $180,000. Directors of the Company exercised 600,000 of the 2,200,000
options exercised. These share were issued pursuant to exemptions from
registration pursuant to Rule 504 of Regulation D under the Securities Act.

     In September, 1998 the Company issued 1,250,000 shares in a private
placement.  These shares were issued pursuant to


                                       31
<PAGE>

exemptions from registration pursuant to Rule 504 of Regulation D under the
Securities Act.  The total consideration received by the Company was
$248,750, net of legal costs.  Grant Sutherland, a director of the Company,
was the beneficial purchaser of 300,000 of the shares.

     Subsequent to the fiscal year ending December 31, 1998, on March 26,
1999 the Company resolved to issue 7,000,000 shares by way of private
placement pursuant to Regulation D, Rule 506 at a price of $0.15 per share.
The shares were issued, and proceeds received, at various dates following
March 26, 1999. As at the date of this Annual Report, the Company has
received all of the proceeds, and issued all of the shares.

     All of the transactions described in this Item involved Common Stock.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION

OVERVIEW

     The Company was incorporated in 1987.  Since the first quarter of 1994,
the Company has been engaged in the development of products to be used in
creating visual recognition systems, and in designing visual recognition
systems.

     As of December 31, 1998 the Company had incurred aggregate net losses of
approximately $5,755,569 since its inception. The Company expects to continue
to incur significant additional operating losses over the foreseeable future
as its product development, research and development, and marketing efforts
continue to expand.  Operating losses may fluctuate from quarter to quarter
as a result of differences in the timing of expenses incurred and revenue
recognized.


RESULTS OF OPERATIONS

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


YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

     During the fiscal year ended December 31, 1998, the Company received
operating revenue of $57,510 from the sale of vision systems and related
services.  Of this, $18,000 was received from Epson Portland Inc. for sale of
the Company's print quality


                                       32
<PAGE>

inspection system.  $30,000 was received from Cordis, a Johnson & Johnson
company, for a feasibility study in respect of a shunt inspection system.
$7,500 was received from Tantus Electronics Corp. in respect of a proposed
fruit inspection system for Sunkist Growers.  The Company also received
$2,010 from NGI Technology, Inc. for a purchase of the BrainTron processor.
The Company did not have any operating revenue during the fiscal year ended
December 31, 1997.

     Cost of sales for the fiscal year ended December 31, 1998 were $30,005.
This figure included $1,250 in hardware costs and $28,755 in internal
manpower costs.  The internal manpower costs related to work done on those
projects which generated revenue, as described above.  The Company recorded
no cost of sales for the fiscal year ended December 31, 1997.

     Research and development expenses for the fiscal year ended December 31,
1998 were $321,378, compared with $148,527 for the fiscal year ended December
31, 1997.  A principal reason for the increase was payments made to North
Shore Circuit Design of Austin, Texas, who received $116,294 during the
fiscal year ended December 31, 1998 for work performed on the IMPAC
Accelerator board and on a prototype vision system.  During the fiscal year
ending December 31, 1997, the Company paid North Shore Circuit Design
approximately $11,000 for work on a prototype vision recognition system,
which amount was allocated to "Consulting and contractors".  The balance of
the increase in Research and development expenses from 1987 to 1988 was due
to an increase in the number of the Company's research and development
personnel.

     Consulting and contractor expenses increased to $24,785 for the fiscal
year ended December 31, 1998 from $17,770 for the fiscal year ended December
31, 1997.  Consulting and contractor expenses for the fiscal year ending
December 31, 1998 included approximately $17,000 for the preparation of a
business plan. There was no similar expense during the fiscal year ended
December 31, 1997. During the fiscal year ended December 31, 1997, the
Company paid North Shore Circuit Design approximately $11,000 for work on a
prototype vision recognition system.  As stated above, during the fiscal year
ended December 31, 1998, payments to North Shore Circuit Design were
allocated to Research and Development.

     Salaries and benefits expenses increased to approximately $1,226,230 for
the fiscal year ended December 31, 1998 from approximately $415,014 for the
fiscal year ended December 31, 1997.  The principal reason for the increase
was a compensation expense of $927,800 in respect of stock options issued to
officers, employees and consultants during the fiscal year ended December 31,
1998.  The corresponding compensation expense the for year ended December 31,
1998 was $200,000.  After deduction of the charges in respect of stock
options, salaries and benefits for the fiscal year ended December 31, 1998
were $327,185, which exceeded


                                       33
<PAGE>

the comparable figure for the fiscal year ended December 31, 1997 by
approximately $83,416.  The principal reason for this increase was additional
personnel hired by the Company.

     General, selling, and administrative expenses increased to approximately
$560,180 for the fiscal year ended December 31, 1998 from approximately
$348,731 for the fiscal year ended December 31, 1997.  Several factors
contributed to the increase.  Accounting costs increased from approximately
$14,000 to approximately $38,000, principally as a result of costs incurred
in registering the Company's shares pursuant to the Exchange Act.  Legal
costs increased from approximately $78,000 to approximately $140,000,
principally as a result of the costs incurred in registering the Company's
shares and costs incurred in legal disputes.  Travel and trade show costs
increased from approximately $40,000 to approximately $75,000, principally as
a result of increased trade show participation.  Premises costs increased
from approximately $55,000 to approximately $70,000, principally as a result
of the additional lease space occupied by the Company effective September 1,
1998.  Equipment rental increased from approximately $800 to approximately
$16,000.  This increase resulted from payments made by the Company to
reimburse Techwest Management Inc. for its portion of lease costs of certain
equipment used by the Company and Sideware Systems Inc.  The equipment in
question was acquired by Techwest Management Inc. through a sale to, and
lease back from, a financial institution.  As the equipment was used by both
the Company and Sideware Systems Inc., Techwest Management Inc. charged the
Company with 50% of the amount of the lease payments it was required to make
to the financial institution, without any markup or profit.  During the
fiscal year ending December 31, 1998 the Company also paid approximately
$31,000 (inclusive of applicable taxes) as compensation for the services of
the Company's Chairman.  The Company's Chairman did not receive any cash
remuneration during the fiscal year ending December 31, 1997.


YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

     The Company did not have any sales revenue during 1997 or 1996.

     Research and development expenses decreased to approximately $148,527 in
1997 from approximately $260,384 in 1996.  This decrease was due primarily to
the Company doing more development work with its own personnel during 1997,
as opposed to relying on outside consultants.

     Expenses for consultants and contractors decreased to approximately
$17,770 in 1997 from approximately $204,114 in 1996.  The principal reason
for this decrease was the inclusion of performance bonuses totalling $150,000
in 1996 to consultants


                                       34
<PAGE>

providing technical services to the Company.  In addition, during 1997 the
Company decreased its reliance on outside contractors and consultants.

     Salaries and benefits increased to approximately $415,014 in 1997 from
approximately $134,408 in 1996.  The principal reason for this increase was a
charge of $200,000 due to the granting of stock options at prices below
prevailing market prices for the Company's stock.  (The options in question
were granted pursuant to a directors' resolution passed December 17, 1997,
and pursuant to Stock Option agreements dated as at December 17, 1998.
However, the Stock Option agreements were not actually executed and delivered
until July, 1998).  In addition, the Company hired additional personnel in
1997, due to an increased level of development and marketing activity.

     Selling, general and administrative expenses increased to approximately
$348,731 in 1997 from approximately $314,839 in 1996.  The magnitude of this
increase is such that it cannot be attributed to any specific reason.


LIQUIDITY AND CAPITAL RESOURCES

     During the fiscal year ended December 31, 1998 the Company raised
approximately $840,000 in financing through private placements of shares.
Subsequent to December 31, 1998, the Company has raised an additional
$975,000 through private placements of shares.  Substantially all of the
funds raised by the Company were used to pay ongoing operating costs and to
retire the Company's outstanding indebtedness to Sideware Systems Inc.  As at
July 6, 1999, the Company's remaining cash balance is approximately $100,000.

     The Company currently employs 6 full time and 8 part time officers or
employees.  The Company's current monthly salary costs are approximately
$40,000.

     During the fiscal year ended December 31, 1998 the Company's average
monthly cash requirement, inclusive of salary costs, was approximately
$100,000. Accordingly, as at the date of this Annual Report, the Company has
sufficient cash balances to pay approximately one month's operating expenses
at their current level.

     By Press Release dated July 6, 1999 the Company announced a private
placement of 5,000,000 shares at a price of $0.20 per share, which will be
offered pursuant to Rule 506 of Regulation D to the Securities Exchange Act
of 1933.  The Company is in the process of identifying potential investors.
Based on the Company's success in raising private placement financing in the


                                       35
<PAGE>

past, the Company expects that it will be able to complete the proposed
financing.

     The financing described above, if completed, will provide the Company
with sufficient capital resources to pay ongoing operating expenses at their
present level for approximately one year.  If the Company is not able to
complete the financing, it will be forced to seek alternate sources of
financing.  If the Company is unable to generate sufficient funds to pursue
all of the projects identified above, the Company's first priority will be
the marketing and development of the Odysee Development Studio.  The Company
does not presently plan to incur significant capital expenses or to increase
its salary or other operating costs significantly during the balance of the
current fiscal year. Any significant capital expenses or increases in
operating costs will be dependent on the Company raising additional capital
or generating revenue from the sales of its products or services.


     YEAR 2000 ISSUES

     Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field.  These date
code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates.  As a result, in less than two years,
computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements.

     The Company's Year 2000 compliance program is under the direction of the
Company's systems administrator.  Beginning in the middle of 1998, the
Company's systems administrator commenced analyzing individual components of
the Company's computer systems to identify any components which are not Year
2000 compliant.

     The Company's systems administrator has examined substantially all of
the components of the Company's computer system.  The Company's systems
administrator has confirmed that all of the Company's individual computers
are Year 2000 compliant.  The only software component of the system that was
identified as being potentially non-compliant is the Company's accounting
system.  Accordingly, in May 1999 the Company replaced its accounting system
with a system which was Year 2000 compliant.  The cost of the new accounting
system was approximately $40,000, which will be shared between the Company
and Sideware Systems Inc.

     As the Company expects that all of its internal systems will be made
Year 2000 compliant, it has not developed any contingency plan, other than to
continue with its present program of analyzing the components of its system
to identify non-compliant components.


                                       36
<PAGE>

     With the exception of the local electrical utility, the Company is
unaware of any present suppliers, on whom the Company is dependent, whose
supply of goods or services might be interrupted by Year 2000 problems.  The
Company has not made any material investigations of any individual suppliers,
and has not developed a contingency plan.

     All of the Company's current products are Year 2000 compliant.  The
Company has not undertaken any investigation to determine whether any of the
products it has sold in the past are non-compliant.  However, given the small
volume of the Company's historical sales, the Company does not foresee a
material risk of liability arising in respect of its past sales.


ITEM 7.  FINANCIAL STATEMENTS

     Each of the following items are contained in the Company's Consolidated
Financial Statements and are set forth herein.

      (i)   Report of KPMG, Independent Auditors;

      (ii)  Balance Sheets as of December 31, 1997 and 1998;

      (iii) Statements of Operations for the Years Ended December 31, 1996,
1997 and 1998;

      (iv)  Statements of Stockholders' Equity for the Years Ended December
31, 1996, 1997 and 1998;

      (v)   Statements of Cash Flows for the Years Ended December 31, 1996,
1997 and 1998 and for the period from January 1, 1995 to December 31, 1997;
and

      (vi)  Notes to Financial Statements.


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

Not Applicable.


PART III

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

     The directors and executive officers of the Company and their ages as of
July 6, 1999 are as follows:


                                       37
<PAGE>

<TABLE>
<CAPTION>
      Name                Age                  Positions
<S>                       <C>      <C>
Owen L.J. Jones            47      Director, President, Chief Executive Officer
W. Grant Sutherland        53      Director, Chairman of the Board
James L. Speros            40      Director
</TABLE>

     OWEN L.J. JONES has been the President, Chief Executive Officer and a
director of the Company since December 1993. Prior to becoming a director of
the Company, Mr. Jones was the V.P. Sales, Marketing and Technology of
Evergreen International Technology Inc. (now Sideware Systems Inc.), a
software development company whose shares trade on the Vancouver Stock
Exchange.  Mr. Jones resigned from his position with Evergreen International
Technology Inc. in December 1993. In May 1995 Mr. Jones was elected as a
director of Evergreen International Technology Inc., and shortly thereafter
assumed the responsibilities of President and Chief Executive Officer of that
company. Subsequent to May 1995 Mr. Jones has divided his time and effort
between the affairs of the Company and the affairs of Sideware Systems Inc.
Mr. Jones is not a director of any public companies other than the Company
and Sideware Systems Inc.

     W. GRANT SUTHERLAND was appointed as a director of the Company and as
Chairman of the Company's Board of Directors in November 1995. Mr. Sutherland
is a licensed lawyer in the Province of British Columbia, and has been
engaged in the private practice of law for 26 years, currently as a partner
in the Vancouver law firm Sutherland Johnston MacLean. Mr. Sutherland has
also been a director of Sideware Systems Inc. since May 1993.  Since November
1995, Mr. Sutherland has devoted the majority of his time and effort to the
affairs of the Company and Sideware Systems Inc., and presently divides his
time between the affairs of the Company and the affairs of Sideware Systems
Inc. Mr. Sutherland is not a director of any public companies other than the
Company and Sideware Systems Inc.

     JAMES L. SPEROS was appointed a Director of the Company on September 15,
1998.  Mr. Speros is also a director of Sideware Systems Inc., President and
Chief Operating Officer of Sidweware Corporation, a wholly owned subsidiary of
Sideware Systems Inc., and the President and Chief Executive Officer of
Exploration Mirandor Inc., a publicly held mining exploration company.  Mr.
Speros was previously the President and owner of two professional sports
franchises, the Baltimore Stallions and Montreal Alouettes of the Canadian
Football League, and was the Vice Chairman and a member of the Board of
Governors of the Canadian Football League.


                                       38
<PAGE>

     Owen Jones and Grant Sutherland were directors of Sideware Systems Inc.
at times when two bankruptcy petitions under the BANKRUPTCY 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.

     The Company's directors will hold office until they resign, or until the
Company's next General Meeting.

     Owing to logistical delays, reports on Form 3 which the directors and
officers of the Company were required to file on the effective date of the
Company's Form 10-SB were delayed in filing.  The Company is not aware of the
specific dates on which each Form 3 arrived at the offices of the SEC.  To
the best of the Company's knowledge, the delays were less than 5 business
days in each case.  The Company is not aware of any other default for which
disclosure is required pursuant to Item 405 of Regulation S-B.


ITEM 10.  EXECUTIVE COMPENSATION

     The following table sets forth information regarding compensation earned
during the Company's last three fiscal years by its Chief Executive Officer.

                              SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                   AWARDS
                                                                 SECURITIES
                                                 ANNUAL          UNDERLYING
NAME AND PRINCIPAL                            COMPENSATION     OPTIONS GRANTED
POSITION                       PERIOD          SALARY ($)            (#)
------------------           -----------      ------------     ----------------
<S>                          <C>              <C>              <C>
Owen L.J. Jones (1)          December 31,        $34,141             --
PRESIDENT, CEO, AND          1998
DIRECTOR
                             December 31,        $20,485          1,500,000
                             1997
                             December 31,        $20,485             --
                             1996
</TABLE>


----------

(1) From August 1, 1995 until April 30, 1998, Mr. Jones received a salary of
approximately $40,800 per year from Techwest Management Ltd., the cost of
which was borne equally between the Company and Sideware Systems Inc.
Effective May 1, 1998 Mr. Jones' monthly salary was increased to
approximately $6,800 per month with the cost of the payments to Mr. Jones
shared equally between the Company and Sideware Systems Inc.  In April, 1998,
Mr. Jones also received a bonus of approximately $68,000, the cost of which
was born entirely by Sideware Systems Inc.

     The following table sets forth information on grants of stock options by
the Company during its last completed fiscal year:


                                       39
<PAGE>

                                    OPTION GRANTS
<TABLE>
<CAPTION>
                                                                      (3)Market Value
                                                                         of Shares
                                          (2)% of       Exercise     Underlying Options
                   (1)Shares Under     Total Options     Price         on the date of       Expiry
     Name          Options Granted        Granted       ($/share)      Grant ($/share)       Date
--------------     ---------------     -------------    --------     -------------------    --------
<S>                <C>                 <C>              <C>          <C>                    <C>
Owen L.J.Jones        1,500,000            22.8%          $.20               $.23           12/17/02
</TABLE>

(1)  The Options granted to Mr. Jones were granted pursuant to a directors'
resolution dated December 17, 1997.  Delivery of the stock option agreement
took place in July, 1998.

(2)  The percentage stated is the percentage of all stock options which the
Company had granted up to the end of its last completed fiscal year.

(3)  As at December 31, 1998 the value of the stock options granted to Mr.
Jones was approximately $75,000 (based on a December 29, 1998 closing share
price of $0.25).

     The following stock options were exercised during the Company's last
completed fiscal year by directors of the Company (including the Company's
Chief Executive Officer):

     -    Grant Sutherland exercised options to purchase 300,000 shares at $0.20
          per share.

     During the Company's last completed fiscal year, the Company did not
have any named executive officer, other than its Chief Executive Officer.

     In the Company's last completed fiscal year, no award or payment was
made by the Company under any Long Term Incentive Plan other than the
granting or exercise of stock options, as described above.

     The Company does not presently compensate its directors for services
provided as directors.  The Company provides the following compensation to
directors of the Company, who are also officers of the Company, for services
rendered as officers of the Company.

Owen Jones.  Effective May 1, 1998 Mr. Jones receives payments totalling
approximately $6,800 per month from the Company and Sideware Systems Inc.
The cost of the payments to Mr. Jones is shared equally between the Company
and Sideware Systems Inc.  Prior to May 1, 1998, Mr. Jones' monthly payments
(shared equally between the Company and Sideware Systems Inc.) were
approximately $3,400 per month.  In July, 1998, pursuant to a directors'
resolution dated December 17, 1997, Mr. Jones was granted options to acquire
1,500,000 shares of the Company at a price of $0.20 per share for a period of
five years, expiring December 17, 2002.  As at December 31, 1998 the value of
the stock options granted to Mr. Jones was approximately $75,000 (based on a
December 29, 1998 closing share price of $0.25).  Mr. Jones receives no other
compensation from the Company or any subsidiary of the Company.  In April,
1998, Mr. Jones also received a bonus of approximately


                                       40
<PAGE>

$68,000, the cost of which was born entirely by Sideware Systems Inc.

Grant Sutherland.  Effective May 1, 1998 Mr. Sutherland receives payments
totalling approximately $6,800 per month from the Company and Sideware
Systems Inc.  The cost of the payments to Mr. Sutherland is shared equally
between the Company and Sideware Systems Inc.  Prior to May 1, 1998, Mr.
Sutherland's monthly payments were approximately $3,400 per month, and were
borne entirely by Sideware Systems Inc.  In July, 1998, pursuant to a
directors' resolution dated December 17, 1997, Mr. Sutherland was granted
options to acquire 1,500,000 shares of the Company at a price of $0.20 per
share for a period of five years, expiring December 17, 2002.  In August
1998, Mr. Sutherland exercised options to acquire 300,000 shares.  As at
December 31, 1998 the value of the remaining stock options held by Mr.
Sutherland to acquire 1,200,000 shares was approximately $60,000 (based on a
December 29, 1998 closing share price of $0.25).  Mr. Sutherland receives no
other compensation from the Company or any subsidiary of the Company.


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

      The following table sets forth certain information regarding beneficial
ownership of Common Stock, as of July 6, 1999 by (i) each stockholder known
by the Company to be the beneficial owner of more than 5% of its outstanding
shares of Common Stock, (ii) each of the Company's Directors and executive
officers, and (iii) all Directors and executive officers as a group:

<TABLE>
<CAPTION>
         NAME AND ADDRESS            NUMBER OF SHARES        PERCENTAGE OF SHARES
       OF BENEFICIAL OWNER         BENEFICIALLY OWNED (1)    BENEFICIALLY OWNED (1)
-------------------------------    ---------------------     ----------------------
<S>                                <C>                       <C>
Owen L.J. Jones*(2)                      3,960,000                  10.9%
102 - 930 W. 1st North
Vancouver, B.C., Canada V7P 3N4

James L. Speros*(3)                        300,000                   0.9%
1111 Grand Hamptons Dr.
Herndon, Virginia
20170

W. Grant Sutherland*(4)                  3,035,000                   8.4%
1600 - 777 Dunsmuir St.
Vancouver B.C.
V7Y 1K4

Willard W. Olson                         2,500,000                   7.2%
6021 East Huntress Dr.
Paradise, Arizona
85253


                                       41
<PAGE>

All executive officers and               7,295,000                  19.3%
directors as a group
(3 Persons)(5)
</TABLE>

* 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 convertible within 60 days of July 6, 1999 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 1,500,000 options to purchase Common Stock which are exercisable
     within 60 days of July 6, 1999.

(3)  Includes 300,000 options to purchase Common Stock which are exercisable
     within 60 days of July 6, 1999.

(4)  Includes 1,200,000 options to purchase Common Stock which are exercisable
     within 60 days of July 6, 1999.

(4)  Includes 3,000,000 options to purchase Common Stock which are exercisable
     within 60 days of July 6, 1999.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company is party to an agreement with Sideware Systems Inc.
effective November 1, 1995 pursuant to which certain costs associated with
the Company's premises and operations are shared with Sideware Systems Inc.
The costs subject to the cost-sharing agreement include:

-    costs of the leasehold premises from which the Company operates;

-    personnel costs (billed through Techwest Management Ltd. - see below)
     including the salary costs of the Company's President, Chairman, accounting
     personnel, and receptionist; and

-    miscellaneous office charges, such as office supplies and telephone and fax
     charges.

     Sideware Systems Inc. is a software development company whose shares
trade on the Vancouver Stock Exchange.  Owen Jones is a director, the
President, and Chief Executive Officer of Sideware Systems Inc.  Grant
Sutherland is a director and the Chairman of Sideware Systems Inc.  James
Speros is the President and Chief Operating Officer of Sideware Corp., a
wholly owned subsidiary of Sideware Systems Inc.

     Shared costs under the cost sharing agreement are administered by
Techwest Management Ltd., a private management company.  In addition,
services of certain of the Company's personnel are provided to the Company
through Techwest Management Ltd.  Techwest Management Ltd. is a private
management company whose shareholders and directors include Owen Jones and
Grant


                                       42
<PAGE>

Sutherland.  The personnel whose services are provided through Techwest
Management Ltd. include Owen Jones, Grant Sutherland, and the Company's
accounting personnel and receptionist.  Owen Jones and Grant Sutherland each
own one third of the shares of Techwest Management Ltd.  Effective May 1,
1998, Mr. Jones and Mr. Sutherland each receive an annual salary of
approximately $82,000 per year from Techwest Management Ltd.  The cost of Mr.
Jones' and Mr. Sutherland's salaries are divided equally between the Company
and Sideware Systems Inc.

     From time to time, payments by either the Company or Sideware Systems
Ltd. exceed that Company's proportionate share, giving rise to indebtedness
as between the Company, Sideware Systems Inc. and Techwest Management Ltd.
Accordingly, those payments are reconciled and adjusted from time to time as
required.  No interest is charged in respect of indebtedness arising from
time to time under the cost sharing agreement.  As at July 6, 1999 there is
no material indebtedness owing to or from the Company by Sideware Systems
Inc. in respect of the cost sharing agreement.

     Techwest Management Ltd. passes shared costs (including personnel costs)
through to the Company and Sideware Systems Inc. for the same cost paid by
Techwest Management Ltd., without any markup.  The total amount paid by the
Company to Techwest Management Ltd. was $257,902 during the fiscal year
ending December 31, 1996, $205,498 during the fiscal year ending December 31,
1997 and approximately $788,000 during the fiscal year ending December 31,
1998.

     The Company entered into a worldwide non-exclusive license agreement
dated November 2, 1995 (the "License") with NetMedia Systems Inc.
("NetMedia") under which NetMedia was given the right to use the Company's
technology to develop and sell authoring tools for the Internet.  NetMedia is
a private company whose shareholders and directors include Grant Sutherland
and Owen Jones, both directors of the Company.  Grant Sutherland owns
approximately 30% of the issued and outstanding shares of NetMedia Systems
Inc.  Owen Jones owns approximately 23% of the issued and outstanding shares
of NetMedia Systems Inc.

     Under the terms of the License, NetMedia acquired the right to combine
the Company's technology with technology held by NetMedia to create Internet
software that will enable users to link CD-ROM based video with any World
Wide Web page.  NetMedia is responsible for raising the funds necessary to
develop and market this product, estimated at approximately $2-3.5 million.
The Company has received a $17,011 license payment and is entitled to a 5%
royalty on NetMedia's gross revenue exceeding $6.80 million, up to a maximum
royalty of $680,000.

     As at the date of this Annual Report NetMedia has not commenced
operation, and has not yet taken material steps to raise the funds it will
require to commence operation.

     The Company has also joined a technology consortium consisting of
Sideware Systems Inc., NetMedia and the Company.  Under the terms of the
joint venture agreement between consortium members dated November 23, 1995,
the technology of the three participants will be combined to create software
applications for


                                       43
<PAGE>

the Microsoft Corporation's Windows '95 platform.  The consortium will carry
on business through a private company called Concurrent Adaptive Recognition
Research Corp. ("Carr Corp.").  Each of the Company, Sideware Systems Inc.
and NetMedia Systems Inc. owns one-third of the shares of Carr Corp., subject
to adjustment for funds actually provided to Carr Corp. by each participant.
In addition, each member of the consortium has the right to use technology
developed by Carr Corp. to develop specified products.

     As at the date of this Annual Report Carr Corp. has not commenced
operation.

     On May 27, 1998, Grant Sutherland beneficially acquired 780,000 private
placement shares in the Company at price of $0.25 per share.

     On September 29, 1998 Grant Sutherland beneficially acquired 300,00
private placement shares in the Company at a price of $0.20 per share.

     Subsequent to the December 31, 1998, directors of the Company have
acquired the following private placement shares:

     -    Owen Jones beneficially acquired 1,000,000 shares at a price of $0.15.

     -    Grant Sutherland beneficially acquired 1,000,000 shares at a price of
          $0.15.


INDEX TO EXHIBITS

<TABLE>
<CAPTION>
NUMBER                               EXHIBIT
------                               -------
<S>      <C>
  3.1    Articles of Incorporation, dated February 27, 1987
  3.2    Articles of Amendment, dated July 14,1998
  3.3    Articles of Amendment, dated June 28, 1990
  3.4    Articles Of Amendment of the Company, dated February 8, 1993
  3.5    Articles of Amendment of the Company, dated April 6, 1993
  3.6    Articles of Amendment of the Company, dated December 6, 1993
  3.7    By-Laws of the Company
  4.1    Specimen Stock Certificate
 10.1    License Agreement between the Company and Willard W. Olson,
         dated January 5, 1995.
 10.2    Product Development Agreement between the Company and United
         Technologies Microelectronic Systems Inc., dated July 6, 1998.
 10.3    Manufacturing and Sales Agreement between the Company and
         United Technologies Microelectronic Systems Inc., dated July 6,
         1998.
 10.4    Operating Agreement between the Company and Sideware Systems
         Inc., dated November 1, 1995
 10.5    Worldwide Non-Exclusive License Agreement between the Company
         and NetMedia Systems Inc., dated November 2, 1995.
 10.6    Joint Venture Agreement by and among the Company, Sideware
         Systems Inc., and NetMedia Systems Inc., dated November 23,
         1995.
 10.6    Assignment of Lease and Modification of Lease Agreement dated
         August 17, 1998 between HOOPP Realty Inc., Techwest Management
         Inc., Sideware Systems Inc., and BrainTech, Inc.
 11.1    Computation of net loss per share
 21.1    Subsidiaries of the Registrant
 27.1    Financial Data Schedule for the Fiscal Year Ended December 31, 1997
 27.2    Financial Data Schedule for the Fiscal Year Ended December 31, 1998
</TABLE>


                                       44
<PAGE>

All of the above Exhibits with the exception of Exhibit 11.1, Exhibit 27.1,
and Exhibit 27.2 are already on file as a result of the Company filing a
Form 10-SB.

The Company did not file any reports on Form 8-K during the last quarter of
the period covered by this Annual Report.


                                       45
<PAGE>

                                   SIGNATURES

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


Dated: July 6, 1999                BrainTech, Inc.


"Owen L.J. Jones"                  "W. Grant Sutherland"
-------------------                ----------------------------------
Owen L.J. Jones                    W. Grant Sutherland
Director                           Director
President and Chief                Chairman of the Board of Directors
Executive Officer                  Chief Financial Officer


                                       46
<PAGE>


                         Consolidated Financial Statements of


                         BRAINTECH, INC.
                         (Expressed in U.S. Dollars)


                         Years ended December 31, 1998, 1997 and 1996
<PAGE>

[LETTERHEAD]


INDEPENDENT AUDITORS' REPORT

The Board of Directors
Braintech, Inc.

We have audited the consolidated balance sheets of Braintech, Inc. and
subsidiary, a development stage enterprise, as at December 31, 1998 and 1997
and the related consolidated statements of operations, stockholders' deficit
and cash flows for each of the years in the three year period ended December
31, 1998 and for the period from inception on January 3, 1994 to December 31,
1998. 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 generally accepted auditing
standards in the 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. and subsidiary, a development stage enterprise, as at
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the years in the three year period ended December 31, 1998
and for the period from inception on January 4, 1994 to December 31, 1998, in
conformity with generally accepted accounting principles in the United States.

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

/s/ KPMG LLP
Chartered Accountants

Vancouver, Canada

April 15, 1999, except as to note 12 which is as of June 30, 1999

<PAGE>

BRAINTECH, INC.
Consolidated Balance Sheets
(Expressed in U.S. Dollars)

December 31, 1998 and 1997

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                                                   1998            1997
---------------------------------------------------------------------------------------
<S>                                                         <C>             <C>
Assets

Current assets:
  Cash and cash equivalents                                 $    22,479     $   142,688
  Accounts receivable                                            22,433          21,462
  Marketable securities (note 4)                                      -           3,600
  Prepaid expenses                                               12,344           1,708
---------------------------------------------------------------------------------------
                                                                 57,256         169,458

Due from directors and officers (note 5(a))                      10,130          10,130

Capital assets (note 6)                                          75,237          13,272
---------------------------------------------------------------------------------------
                                                            $   142,623     $   192,860
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------

Liabilities and Stockholders' Deficit

Current liabilities:
  Accounts payable and accrued liabilities                  $    84,001     $    20,500
  Due to related companies (note 5(b))                          442,860         211,442
---------------------------------------------------------------------------------------
                                                                526,861         231,942

Amounts in dispute (note 9(b))                                  606,000         606,000
---------------------------------------------------------------------------------------
                                                              1,132,861         837,942

Stockholders' deficit:
  Common stock (note 7):
    Authorized: 50,000,000 shares, with $0.001 par value
      Issued: 30,371,333 shares (1997 - 26,583,333)              30,371          26,583
    Additional paid-in capital (note 7)                       4,793,760       3,032,148
    Accumulated deficit                                         (58,800)        (58,800)
    Deficit accumulated during the development stage         (5,755,569)     (3,645,013)
---------------------------------------------------------------------------------------
                                                               (990,238)       (645,082)

Future operations (note 2)
Contingencies (note 9)
Commitments (note 10)
Subsequent events (notes 9 and 12)
---------------------------------------------------------------------------------------
                                                            $   142,623     $   192,860
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

BRAINTECH, INC.
Consolidated Statements of Operations
(Expressed in U.S. Dollars)

<TABLE>
<CAPTION>
                                              Period from
                                             inception on
                                          January 3, 1994               Years ended December 31,
                                          to December 31,     -------------------------------------------
                                                     1998            1998            1997            1996
---------------------------------------------------------------------------------------------------------
<S>                                       <C>                 <C>             <C>             <C>
Sales                                         $    57,510     $    57,510     $         -     $         -
Cost of sales                                      30,005          30,005               -               -
---------------------------------------------------------------------------------------------------------
Gross margin                                       27,505          27,505               -               -

Expenses:
  Research and development                      1,139,560         321,378         148,527         260,384
  Consulting and contractors                      736,561          24,785          17,770         204,114
  Salaries and benefits (note 11)               1,849,936       1,226,230         415,014         134,208
  Selling, general and administrative           1,902,261         560,180         348,731         314,839
  Non-operating expenses:
    Loss on disposal of capital assets             20,136           1,888               -               -
    Write-down of investments                     100,000           3,600               -          46,400
    Write-down of intangible assets                17,189               -               -               -
    Write-down of organization costs               17,431               -               -               -
---------------------------------------------------------------------------------------------------------
                                                5,783,074       2,138,061         930,042         959,945
---------------------------------------------------------------------------------------------------------
Net loss                                      $(5,755,569)    $(2,110,556)    $  (930,042)    $  (959,945)
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------

Loss per share information:
  Basic                                       $     (0.26)    $     (0.07)    $     (0.04)    $     (0.05)
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Weighted average number of common
  shares outstanding                           21,813,674      28,620,884      25,464,978      20,354,525
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

BRAINTECH, INC.
Consolidated Statements of Stockholders' Deficit
(Expressed in U.S. Dollars)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                                                  Deficit
                                                                                              accumulated
                                                                Additional                     during the
                                                      Common       paid-in    Accumulated     development
                                           Shares      stock       capital        deficit           stage
---------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>        <C>           <C>             <C>
Balance, January 3, 1994               17,400,000    $17,400    $1,039,271    $   (58,800)    $         -

Loss for the period                             -          -             -              -      (1,006,716)
---------------------------------------------------------------------------------------------------------

Balance, December 31, 1994              17,400,00     17,400     1,039,271        (58,800)     (1,006,716)

Loss for the period                             -          -             -              -        (748,310)
---------------------------------------------------------------------------------------------------------

Balance, December 31, 1995             17,400,000     17,400     1,039,271        (58,800)     (1,755,026)

Common stock transactions
  (net of issue costs):
  Issued for cash at $.1895 per share     950,000        950       173,440              -               -
  Issued for cash at $.25 per share       733,333        733       183,167              -               -
  Issued for cash at $.20 per share     3,000,000      3,000       592,500              -               -
  Shares issued for services
    rendered                            1,200,000      1,200       238,800              -               -
Loss for the period                             -          -             -              -        (959,945)
---------------------------------------------------------------------------------------------------------

Balance, December 31, 1996             23,283,333     23,283     2,227,178        (58,800)     (2,714,971)

Common stock transactions
  (net of issue costs):
  Issued for cash at $.20 per share     2,000,000      2,000       396,991              -               -
  Issued for cash at $.15 per share     1,000,000      1,000       148,279              -               -
  Shares issued for services rendered     300,000        300        59,700              -               -
Compensatory benefit of employee
  stock options                                 -          -       200,000              -               -
Loss for the period                             -          -             -              -        (930,042)
---------------------------------------------------------------------------------------------------------

Balance, December 31, 1997             26,583,333     26,583     3,032,148        (58,800)     (3,645,013)

Common stock transactions
  (net of issue costs):
  Issued for cash at $.25 per share     1,600,000      1,600       398,400              -               -
  Issued for cash at $.20 per share     2,188,000      2,188       435,412              -               -
Compensatory benefit of employee
  stock options                                 -          -       927,800              -               -
Loss for the period                             -          -             -              -      (2,110,556)
---------------------------------------------------------------------------------------------------------

Balance, December 31, 1998             30,371,333    $30,371    $4,793,760    $   (58,800)    $(5,755,569)
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

BRAINTECH, INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)

<TABLE>
<CAPTION>
                                                      Period from
                                                     inception on
                                                  January 3, 1994             Years ended December 31,
                                                  to December 31,     -----------------------------------------
                                                             1998            1998            1997          1996
---------------------------------------------------------------------------------------------------------------
<S>                                               <C>                 <C>             <C>             <C>
Cash flows from operating activities:
  Loss for the period                                 $(5,755,569)    $(2,110,556)    $  (930,042)    $(959,945)
  Items not involving cash:
    Amortization                                           37,455          24,135          10,287             -
    Bad debt                                               75,108               -               -             -
    Write-down of investments                             100,000           3,600               -        46,400
    Write-down of intangible assets                        17,189               -               -             -
    Write-down of organization costs                       17,431               -               -             -
    Loss on disposal of capital assets                     20,136           1,888               -             -
    Shares issued for services rendered                   300,000               -          60,000       240,000
    Compensatory benefit of employee
      stock options                                     1,127,800         927,800         200,000             -
  Change in operating assets and liabilities:
      Accounts receivable                                 (22,433)           (971)        (21,462)            -
      Prepaid expenses                                    (12,344)        (10,636)         (1,708)            -
      Accounts payable and accrued liabilities             58,823          45,197         (36,942)     (177,718)
---------------------------------------------------------------------------------------------------------------

  Net cash used for operating activities               (4,036,404)     (1,119,543)       (719,867)     (851,263)

Cash flows from investing activities:
  Purchase of marketable securities                      (100,000)              -               -             -
  Purchase of capital assets                             (131,769)        (87,988)        (23,559)            -
  Proceeds from notes receivable                         (130,181)              -               -             -
  Proceeds from disposal of real estate                   306,752               -               -             -
---------------------------------------------------------------------------------------------------------------

  Net cash provided by (used for) investing
    activities                                            (55,198)        (87,988)        (23,559)            -

Cash flows from financing activities:
  Notes receivable                                         55,073               -               -        55,073
  Borrowings from directors and officers                   (2,826)         18,304         (39,881)            -
  Due to (from) related companies                         442,860         231,418         267,882       (58,144)
  Mortgages payable                                      (207,739)              -               -             -
  Common shares issued for cash                         3,582,601         837,600         548,270       953,790
---------------------------------------------------------------------------------------------------------------

  Net cash provided by financing activities             3,869,969       1,087,322         776,271       950,719
---------------------------------------------------------------------------------------------------------------

Increase (decrease) in cash and cash equivalents         (221,633)       (120,209)         32,845        99,456

Cash and cash equivalents, beginning of period            244,112         142,688         109,843        10,387
---------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of period              $    22,479     $    22,479     $   142,688     $ 109,843
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------

Supplemental information:
  Interest paid                                       $     2,902     $     2,155     $       747     $       -
  Taxes paid                                          $         -     $         -     $         -     $       -
Non-cash financing activities:
  Shares issued for services rendered                 $   300,000     $         -     $    60,000     $ 240,000
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)

Years ended December 31, 1998, 1997 and 1996

------------------------------------------------------------------------------

1.   ORGANIZATION:

     Braintech, Inc. (the "Company") was incorporated on March 4, 1987 under the
     laws of the State of Nevada as Tome Capital, Inc. The Company sold
     1,500,000 shares to the public on May 11, 1987, pursuant to Rule 504 of the
     Security Act of 1933, as amended. 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 video recognition software. All sales of its product
     and services are made in this industry segment.


2.   FUTURE OPERATIONS:

     During the year ended December 31, 1998, the Company incurred a loss of
     $2,110,556 and used cash for operating activities of $1,119,543. From
     inception of the business on January 3, 1994, the Company has incurred
     cumulative losses of $5,755,569 and used cash for operating activities of
     $4,036,404.

     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.
     Operations to date have been primarily financed by equity transactions. The
     Company's future operations are dependent upon continued support by
     shareholders, the achievement of profitable operations and the successful
     completion of management's plan to obtain additional equity financing,
     although there can be no assurances that the Company will be successful. As
     described in note 12, subsequent to December 31, 1998 the Company issued
     common shares for net proceeds of $1,083,750. 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.


3.   SIGNIFICANT ACCOUNTING POLICIES:

     (a)  Basis of presentation:

          These consolidated financial statements are prepared in accordance
          with generally accepted accounting principles in the United States and
          present the financial position, results of operations and cash flows
          of the Company and its wholly owned subsidiary Brainware Systems Inc.,
          incorporated under the Company Act of British Columbia on March 30,
          1994. All material intercompany balances and transactions have been
          eliminated.
<PAGE>

BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)

Years ended December 31, 1998, 1997 and 1996

------------------------------------------------------------------------------

3.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (a)  Basis of presentation (continued):

          Through December 31, 1997, the consolidated financial statements of
          the Company issued to shareholders were presented in accordance with
          generally accepted accounting principles in Canada. The application of
          United States accounting principles to these consolidated financial
          statements has been made on a retroactive basis. In addition, to
          December 31, 1998, for United States accounting and reporting purposes
          the Company was considered to be in development stage as it was
          devoting substantial efforts to developing its business operations.

     (b)  Cash and cash equivalents:

          Cash and cash equivalents include highly liquid investments, such as
          term deposits, having original maturities of three months or less at
          the date of acquisition, that are readily convertible to contracted
          amounts of cash.

     (c)  Research and development costs:

          Research and development costs are expensed as incurred.

     (d)  Revenue recognition:

          The Company recognizes revenue when title has passed to the customer,
          the collectibility of the consideration is reasonably assured and the
          Company has no significant remaining performance obligations. An
          allowance for estimated future returns is recorded at the time revenue
          is recognized.

     (e)  Marketable securities:

          Marketable securities are comprised of equity securities available for
          sale and are stated at market value. Decreases in market value that
          are considered to be other than temporary are charged to operations.

     (f)  Capital assets:

          Capital assets are carried at cost less accumulated amortization.
          Amortization is calculated annually as follows:

<TABLE>
<CAPTION>
          ---------------------------------------------------------------------
          Asset                                      Basis                 Rate
          ---------------------------------------------------------------------
          <S>                            <C>                         <C>
          Furniture and fixtures         declining-balance                  20%
          Computer equipment             declining-balance                  30%
          Trade show assets              declining balance                  20%
          Computer software                  straight-line                  50%
          Leasehold improvements             straight-line           lease term
          ---------------------------------------------------------------------
</TABLE>
<PAGE>

BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)

Years ended December 31, 1998, 1997 and 1996

------------------------------------------------------------------------------

3.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (g)  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.

     (h)  Foreign currency:

          Transactions denominated in foreign currencies are translated in U.S.
          dollars at the rate prevailing at the time of the transactions.

          At the balance sheet date, monetary assets and liabilities denominated
          in a foreign currency are translated at the current rate of exchange.
          Exchange gains and losses arising on translation or settlement of
          foreign currency denominated monetary items are included in the
          determination of net income for the current period.

     (i)  Stock-based compensation:

          The Company has elected to apply Accounting Principles Board Opinion
          No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
          related interpretations in accounting for its stock options. Under APB
          25, compensation expense is only recorded to the extent that the
          exercise price is less than fair value on the date of grant. The
          Company has adopted the disclosure-only provisions of Statement of
          Financial Accounting Standards 123, "Accounting for Stock-Based
          Compensation" ("SFAS 123").

     (j)  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.

     (k)  Concentration of credit risk:

          Financial instruments that potentially subject the Company to
          significant concentrations of credit risk consist principally of cash
          equivalents.

          The Company maintains cash equivalents with various financial
          institutions located in Canada and the United States. The Company's
          policy is to limit the exposure at any one financial institution and
          to invest solely in highly liquid investments that are readily
          convertible to contracted amounts of cash.
<PAGE>

BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)

Years ended December 31, 1998, 1997 and 1996

------------------------------------------------------------------------------

3.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (l)  Loss per share:

          Loss per share is calculated based on the weighted average number of
          shares outstanding.

          Fully diluted loss per share has not been presented as outstanding
          options are anti-dilutive.

     (m)  Comprehensive income:

          Net income for the Company is the same as comprehensive income.


4.   MARKETABLE SECURITIES:

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------
                                                                1998       1997
     --------------------------------------------------------------------------
     <S>                                                        <C>      <C>
     1,600 shares of Beverage Store Inc. of Trans Pacific
         Group Inc., at market                                  $  -     $3,600
     --------------------------------------------------------------------------
</TABLE>

     The Company has recorded losses in 1996, 1997 and 1998 of $46,400, $nil and
     $3,600 respectively, for permanent decreases in value.


5.   RELATED PARTY BALANCES AND TRANSACTIONS:

     (a)  Due from directors and officers:

          The amounts due from directors and officers represent cash advances
          provided to current directors and officers of the Company.

     (b)  Due to related companies:

          The amounts due to related companies under common control results from
          intercompany expense allocations and cash advances.

     (c)  Transactions with directors and officers:

          During the year, the Company was charged $129,538 (1997 - $nil; 1996 -
          $138,705) for management and consulting services provided by directors
          and officers.
<PAGE>

BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)

Years ended December 31, 1998, 1997 and 1996

------------------------------------------------------------------------------

6.   CAPITAL ASSETS:

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------
                                                                   December 31,
                                                                           1998
     --------------------------------------------------------------------------
                                                  Accumulated          Net book
                                      Cost       amortization             value
     --------------------------------------------------------------------------
     <S>                          <C>            <C>               <C>
     Furniture and fixtures       $ 16,419            $ 1,790           $14,629
     Computer equipment             47,046              8,612            38,434
     Trade show assets               8,446                845             7,601
     Computer software              23,740             21,648             2,092
     Leasehold improvements         14,008              1,527            12,481
     --------------------------------------------------------------------------
                                  $109,659            $34,422           $75,237
     --------------------------------------------------------------------------
     --------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------
                                                                   December 31,
                                                                           1997
     --------------------------------------------------------------------------
                                                  Accumulated          Net book
                                      Cost       amortization             value
     --------------------------------------------------------------------------
     <S>                          <C>            <C>               <C>
     Computer equipment           $  4,032            $ 1,961           $ 2,071
     Computer software              19,527              8,326            11,201
     --------------------------------------------------------------------------
                                  $ 23,559            $10,287           $13,272
     --------------------------------------------------------------------------
     --------------------------------------------------------------------------
</TABLE>


7.   COMMON STOCK:

     (a)  Of the shares outstanding at December 31, 1998, 5,280,000 shares (1997
          - 6,830,000) are subject to trading restrictions. These include the
          1,500,000 shares retained by the Company, as described in note 7(b).
          The Company believes that any hold periods relating to the remaining
          3,780,000 shares have expired but the shareholders have not applied to
          remove the restrictive designation.

     (b)  5,500,000 shares were issued for technology in 1993 and recorded at
          par value of $5,500. 1,500,000 shares have been retained by the
          Company because the development of the technology has not been
          completed.

     (c)  Additional paid-in capital arises on the issuance of common shares at
          a price in excess of par value.

     (d)  Stock options:

          The Company has reserved 7,500,000 common shares pursuant to a stock
          option plan. Options to purchase common shares of the Company may be
          granted by the Board of Directors and vest immediately.
<PAGE>

BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)

Years ended December 31, 1998, 1997 and 1996

------------------------------------------------------------------------------

     7.   COMMON STOCK (CONTINUED):

     (d) Stock options (continued):

          Stock option activity during the year ended December 31, 1998 is as
          follows:

<TABLE>
<CAPTION>
        ------------------------------------------------------------------------------------------------------------
                             Weighted
                              average     Weighted    Outstanding                                        Outstanding
         Expiry              exercise      average   December 31,                           Forfeited   December 31,
         dates                  price   fair value           1997     Granted   Exercised    /expired           1998
        ------------------------------------------------------------------------------------------------------------
         <S>                 <C>        <C>          <C>            <C>         <C>         <C>         <C>
         November 28, 2002      $0.20      $0.19        5,000,000        -        803,000     100,000     4,097,000
         November 28, 2002      $0.20      $0.76             -      1,420,000     110,000     100,000     1,210,000
         November 28, 2002      $0.20      $0.77             -        150,000      25,000        -          125,000
        ------------------------------------------------------------------------------------------------------------
                                                        5,000,000   1,570,000     938,000     200,000     5,432,000
        ------------------------------------------------------------------------------------------------------------
        ------------------------------------------------------------------------------------------------------------
</TABLE>

          The weighted average fair value of options was calculated using the
          Black-Scholes option pricing formula.

          The Company has adopted the disclosure provisions of Statement of
          Financial Accounting Standards No. 123, "Accounting for Stock-based
          Compensation" ("FAS 123") but has elected to continue measuring
          compensation costs using the intrinsic value based method of
          accounting. Under the intrinsic value based method, employee stock
          option compensation is the excess, if any, of the quoted market value
          of the stock at the date of grant over the amount on optionee must pay
          to acquire stock. Included in expenses for 1998 is $927,800
          representing a compensatory benefit (1997 - $200,000; 1996 - $nil).

          Had compensation cost been determined based on fair value at the grant
          dates of the stock options and charged to earnings consistent with the
          measurement provision of FAS 123, the impact would be as follows:

<TABLE>
<CAPTION>
          ----------------------------------------------------------------------------------------------------------
                                                     Period from
                                                    inception on
                                                      January 3,
                                                            1994                  Years ended December 31,
                                                 to December 31,       ---------------------------------------------
                                                            1998              1998              1997            1996
          ----------------------------------------------------------------------------------------------------------
          <S>                                    <C>                   <C>               <C>               <C>
          Loss for the year, as reported             $(5,755,569)      $(2,110,556)      $  (930,042)      $(959,945)
          Estimated fair value of option grants       (2,185,223)       (1,201,483)         (983,740)              -
          Less compensatory benefit included
            in salaries and benefits                   1,127,800           927,800           200,000               -
          ----------------------------------------------------------------------------------------------------------
          Pro forma loss                             $(6,812,992)      $(2,384,239)      $(1,713,782)      $(959,945)
          ----------------------------------------------------------------------------------------------------------
          ----------------------------------------------------------------------------------------------------------
          Loss per share                             $     (0.31)      $     (0.08)      $     (0.07)      $   (0.05)
          ----------------------------------------------------------------------------------------------------------
          ----------------------------------------------------------------------------------------------------------
</TABLE>

          The fair value of option grants has been estimated using the
          Black-Scholes Option-Pricing model with the following assumptions:
          dividend yield - 0% (1997 - 0%), risk-free interest rate - 6.0% (1997
          - 5.6%); expected option life - 5 years (1997 - 5 years); expected
          volatility - 156% (1997 - 108%).



<PAGE>

BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)

Years ended December 31, 1998, 1997 and 1996

------------------------------------------------------------------------------

8.   INCOME TAXES:

     To December 31, 1996, the Company has incurred losses for income tax
     purposes in Canada and the United States of approximately $25,000, which
     are available to reduce income for tax purposes through the year 2000.

     The unrecorded benefit of these loss carry forwards is approximately
     $12,500. Under the provisions of the Statement 109, the effect of this
     benefit has been fully offset by a valuation allowance due to the
     uncertainty of the realization of the benefits.


9.   CONTINGENCIES:

     The Company is engaged in the following legal disputes:

     (a)  On February 1, 1999 a former employee of the Company commenced legal
          proceedings against the Company claiming approximately $100,000 in
          damages for alleged breach of a stock option agreement and
          approximately $7,500 alleged to be owing pursuant to a consulting
          agreement. The Company has filed a defence and counterclaim alleging
          breach of fiduciary duty and negligence. While the ultimate outcome is
          uncertain, management of the Company believes it will be successful in
          defending this action and accordingly no amount has been provided in
          these financial statements.

     (b)  On March 16, 1999 three corporations commenced legal proceeding
          against the Company and certain of its present and former directors
          are claiming damages in the amount of $606,000 for breach of contract
          and conversion of stock certificates. The plaintiffs have not sought
          recovery of any shares of the Company. The Company has filed a defence
          and counterclaim alleging that the plaintiffs and a former promoter of
          the Company caused share certificates of the defendant to be issued to
          the plaintiffs improperly, and caused funds of the Company to be used
          for unauthorized and improper purposes. The Company has recorded the
          full amount of the $606,000 contingent claim.


10.  COMMITMENTS:

     The Company has the following minimum lease payments under operating leases
     for its premises:

<TABLE>
                  <S>                                  <C>
                  1999                                 $194,000
                  2000                                  198,000
                  2001                                  202,000
                  2002                                  206,000
                  2003                                  139,000
                  ---------------------------------------------
                                                       $939,000
                  ---------------------------------------------
                  ---------------------------------------------
</TABLE>

     Fifty percent of these amounts are recoverable pursuant to an agreement
     with a company with certain common shareholders and directors of the
     Company.
<PAGE>

BRAINTECH, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)

Years ended December 31, 1998, 1997 and 1996

------------------------------------------------------------------------------

11.  SALARIES AND BENEFITS:

     Salaries and benefits are comprised of the following:

<TABLE>
<CAPTION>
     -----------------------------------------------------------------------------------------
                                               Period from
                                              inception on
                                                January 3,
                                                   1994 to        Years ended December 31,
                                              December 31,    --------------------------------
                                                      1998          1998       1997       1996
     -----------------------------------------------------------------------------------------
     <S>                                      <C>             <C>          <C>        <C>
     Payments and accrued liabilities           $  722,136    $  298,430   $215,014   $134,208
     Compensatory benefit of employee
       stock options                             1,127,800       927,800    200,000          -
     -----------------------------------------------------------------------------------------
                                                $1,849,936    $1,226,230   $415,014   $134,208
     -----------------------------------------------------------------------------------------
     -----------------------------------------------------------------------------------------
</TABLE>

12.  SUBSEQUENT EVENTS:

     On March 26, 1999, the Board of Directors resolved to sell 7,000,000 shares
     of common stock at $0.15 per share, for aggregate proceeds of $1,050,000
     less estimated share issuance costs of $26,250 for net proceeds of
     $1,083,750. At June 30, 1999 all proceeds have been received.