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


Form
10-Q








(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the QUARTERLY PERIOD ENDED September 30,
2008




or





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ___________ to
  ___________




Commission
File Number 000-24911








BRAINTECH,
INC.
 (Name
of small business issuer in its charter)


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


1750
Tysons Boulevard
 Suite
350
 McLean,
VA 22102
 (Address
of principal executive offices)
 (703)
637-9752
 (Issuer’s
telephone number)


Securities
registered pursuant to Section 12(b) of the Act:


None
 (Title
of class)
 Securities
registered pursuant to Section 12(g) of the Act:
 Common
Stock, $.001 Par Value
 (Title
of class)


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.    Yes  x    No   ̈




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




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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   ̈




As of
November 10, 2008, there were 54,502,245 shares of the registrant’s common
stock, par value $.001 per share, outstanding.









Braintech, Inc.


Form
10-Q


TABLE OF
CONTENTS






PART
      I
            FINANCIAL
      INFORMATIONItem
      1.
            Financial Statements
            1Item
      2.
            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            2Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            8Item
      4T.
            Controls and Procedures
            8PART
      II
            OTHER
      INFORMATIONItem
      1.
            Legal Proceedings
            9Item
      1A.
            Risk Factors
            9Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            13Item
      3.
            Defaults Upon Senior Securities
            13Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            13Item
      5.
            Other Information
            14Item
      6.
            Exhibits
            14SIGNATURES
            15




i




PART
I - FINANCIAL INFORMATION




Item 1.     Financial
Statements




Each of
the following items is contained in our Condensed Consolidated Financial
Statements and form part of this quarterly report.




(i)
            Condensed
      Consolidated Balance sheets as of September 30, 2008 (unaudited) and
      December 31, 2007;




(ii)
            Condensed
      Consolidated Statements of Operations (unaudited) for the three and nine
      months ended September 30, 2008 and
2007;




(iii)
            Condensed
      Consolidated Statement of Stockholders’ Equity (Deficiency) (unaudited)
      for the nine months ended September 30,
2008;




(iv)
            Condensed
      Consolidated Statements of Cash Flows (unaudited) for the nine months
      ended September 30, 2008 and 2007;
and




(v)
            Notes
      to Condensed Consolidated Financial Statements (unaudited) for the nine
      months ended September 30, 2008 and
2007.




1












Condensed
      Consolidated Financial Statements(Expressed
      in United States dollars)BRAINTECH,
      INC.Nine
      months ended September 30, 2008 and 2007Three
      months ended September 30, 2008 and 2007(Unaudited
      – Prepared by Management)












F-1




BRAINTECH,
      INC.Condensed
      Consolidated Balance Sheets(Expressed
      in United States dollars)September
      30,
                2008
              
              
              December
      31,
                2007(unaudited)Assets
      (note
    5)Current
      assets:Cash
      and cash equivalents
              
              $
              2,113,266
              
              
              $
              921,367Accounts
      receivable
              
              
              1,617,949
              
              
              
              1,239,106Inventory
              
              
              19,804
              
              
              
              8,680Prepaid
      expenses
              
              
              29,835
              
              
              
              60,7213,780,854
              
              
              
              2,229,874Intangible
      assets and goodwill (note 10)
              
              
              1,990,000
              
              
              
              -Fixed
      assets
              
              
              40,537
              
              
              
              47,468$
              5,811,391
              
              
              $
              2,277,342Liabilities
      and Stockholders’ Equity (Deficiency)Current
      liabilities:Accounts
      payable (note 11)
              
              $
              1,111,826
              
              
              $
              106,588Accrued
      liabilities
              
              
              805,020
              
              
              
              610,001Deferred
      leasehold inducements (note 3)
              
              
              -
              
              
              
              14,327Deferred
      revenue (note 4)
              
              
              1,103,043
              
              
              
              622,971Due
      to related party (note 6(a))
              
              
              -
              
              
              
              126,558Bank
      loan (note 5)
              
              
              2,405,000
              
              
              
              2,052,8375,424,889
              
              
              
              3,533,282Stockholders’
      equity (deficiency):Common
      stock (note 6):Authorized:
      200,000,000 shares, with $0.001 par valueIssued:
      53,502,245 shares
              
              
              53,502
              
              
              
              45,797(December
      31, 2007 – 45,797,335)Additional
      paid-in capital
              
              
              34,619,905
              
              
              
              29,485,476Accumulated
      deficit
              
              
              (34,286,905
              )
              
              
              (30,787,213
              )386,502
              
              
              
              (1,255,940
              )$
              5,811,391
              
              
              $
              2,277,342




See
accompanying notes to condensed consolidated financial statements.


F-2




BRAINTECH,
      INC.Condensed
      Consolidated Statements of Operations(Unaudited
      – Prepared by Management)(Expressed
      in United States dollars)Nine
      Months Ended September 30
                      
                      
                      Three
      Months Ended September 302008
                      
                      
                      
                      2007
                      
                      
                      
                      2008
                      
                      
                      
                      2007Sales
                      
                      $
                      3,581,679
                      
                      
                      $
                      2,205,854
                      
                      
                      $
                      1,375,309
                      
                      
                      $
                      936,919Cost
      of sales
                      
                      
                      360,456
                      
                      
                      
                      173,307
                      
                      
                      
                      140,143
                      
                      
                      
                      73,413Gross
      margin
                      
                      
                      3,221,223
                      
                      
                      
                      2,032,547
                      
                      
                      
                      1,235,166
                      
                      
                      
                      863,506Operating
      expenses:Research
      and development
                      
                      
                      402,739
                      
                      
                      
                      429,206
                      
                      
                      
                      89,640
                      
                      
                      
                      139,987Selling,
      general and administration
                      
                      
                      3,797,523
                      
                      
                      
                      2,034,323
                      
                      
                      
                      829,670
                      
                      
                      
                      524,6624,200,262
                      
                      
                      
                      2,463,529
                      
                      
                      
                      919,310
                      
                      
                      
                      664,649Operating
      income/(loss)
                      
                      
                      (979,039
                      )
                      
                      
                      (430,982
                      )
                      
                      
                      315,856
                      
                      
                      
                      198,857Non-operating:Interest
      income
                      
                      
                      673
                      
                      
                      
                      1,251
                      
                      
                      
                      209
                      
                      
                      
                      662Gain
      on settlement of debt
                      
                      
                      25,750
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Loss
      on disposition of fixed assets
                      
                      
                      (1,999
                      )
                      
                      
                      -
                      
                      
                      
                      (1,999
                      )
                      
                      
                      -Financing
      expensesInterest
      on bank loan
                      
                      
                      (60,828
                      )
                      
                      
                      (131,484
                      )
                      
                      
                      (18,862
                      )
                      
                      
                      (41,626
                      )Fair
      value of equity issued ascompensation
      to bank loan guarantors
                      
                      
                      (2,440,705
                      )
                      
                      
                      (1,327,241
                      )
                      
                      
                      (2,440,705
                      )
                      
                      
                      97,500Bank
      loan guarantee expenses
                      
                      
                      (18,469
                      )
                      
                      
                      (7,355
                      )
                      
                      
                      (12,514
                      )
                      
                      
                      (316
                      )Other
      financing expenses
                      
                      
                      (25,075
                      )
                      
                      
                      -
                      
                      
                      
                      (19,490
                      )
                      
                      
                      -Fair
      value of equity issued ascompensation
      for financing services
                      
                      
                      -
                      
                      
                      
                      (90,000
                      )
                      
                      
                      -
                      
                      
                      
                      -(2,520,653
                      )
                      
                      
                      (1,554,829
                      )
                      
                      
                      (2,493,361
                      )
                      
                      
                      56,220Net
      income/(loss) and comprehensiveincome/(loss)
      for the period
                      
                      $
                      (3,499,692
                      )
                      
                      $
                      (1,985,811
                      )
                      
                      $
                      (2,177,505
                      )
                      
                      $
                      255,077Loss
      per share information:Basic
                      
                      $
                      (0.08
                      )
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.05
                      )
                      
                      $
                      0.01Diluted
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      0.01Weighted
      average number of shares outstandingBasic
                      
                      
                      46,053,031
                      
                      
                      
                      34,109,250
                      
                      
                      
                      47,146,302
                      
                      
                      
                      35,301,354Diluted
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      45,611,845




See
accompanying notes to condensed consolidated financial statements.




F-3




BRAINTECH,
      INC.Condensed
      Consolidated Statements of Stockholders’ Equity
    (Deficiency)(Unaudited
      – Prepared by Management)(Expressed
      in United States dollars)Common
      stock
              
              
              
              
              
              
              
              
              TotalNumber
              
              
              
              
              
              Additional
              
              
              Accumulated
              
              
              stockholders’of
      shares
              
              
              Amount
              
              
              paid-in
      capital
              
              
              deficit
              
              
              equity
      (deficit)Balance,
      December 31, 2007
              
              $
              45,797,335
              
              
              $
              45,797
              
              
              $
              29,485,476
              
              
              $
              (30,787,213
              )
              
              $
              (1,255,940
              )Common
      stock transactions(net
      of share issue costs)Shares
      issued pursuant toShafi
      Acquisition
              
              
              3,000,000
              
              
              
              3,000
              
              
              
              987,000
              
              
              
              -
              
              
              
              990,000Shares
      issued to bank loanguarantors
              
              
              4,150,000
              
              
              
              4,150
              
              
              
              622,500
              
              
              
              -
              
              
              
              626,650Shares
      issued for debt
              
              
              554,910
              
              
              
              555
              
              
              
              121,525
              
              
              
              -
              
              
              
              122,080Fair
      value of stock options expensed
              
              
              -
              
              
              
              -
              
              
              
              282,267
              
              
              
              -
              
              
              
              282,267Fair
      value of shares earned pursuantto
      the bonus stock plan
              
              
              -
              
              
              
              -
              
              
              
              1,290,000
              
              
              
              -
              
              
              
              1,290,000Fair
      value of warrants issued to bankloan
      guarantors
              
              
              -
              
              
              
              -
              
              
              
              1,814,055
              
              
              
              -
              
              
              
              1,814,055Fair
      value of warrants issued ascompensation
      for loan
              
              
              -
              
              
              
              -
              
              
              
              17,082
              
              
              
              -
              
              
              
              17,082Loss
      for the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,499,692
              )
              
              
              (3,499,692
              )Balance,
      September 30, 2008
              
              $
              53,502,245
              
              
              $
              53,502
              
              
              $
              34,619,905
              
              
              $
              (34,286,905
              )
              
              $
              386,502




See
accompanying notes to condensed consolidated financial statements.




F-4


BRAINTECH,
      INC.Condensed
      Consolidated Statements of Cash Flows(Unaudited
      – Prepared by Management)(Expressed
      in United States dollars)Nine
      months ended September 302008
                
                
                2007Cash
      flows from operations:Loss
      for the period
                
                $
                (3,499,692
                )
                
                $
                (1,985,811
                )Items
      not involving cash:Amortization
                
                
                22,533
                
                
                
                15,732Loss
      on disposition of fixed assets
                
                
                1,999
                
                
                
                -Fair
      value of warrants issued for services rendered
                
                
                17,082
                
                
                
                -Fair
      value of shares issued for services rendered
                
                
                -
                
                
                
                95,400Stock
      option expense
                
                
                282,267
                
                
                
                606,594Fair
      value of warrants and common shares issuedas
      compensation to loan guarantors
                
                
                2,440,705
                
                
                
                1,327,241Fair
      value of shares earned pursuant to thebonus
      stock plan
                
                
                1,290,000
                
                
                
                -Changes
      in non-cash operating working capital:Accounts
      receivable
                
                
                (378,843
                )
                
                
                133,453Inventory
                
                
                (11,124
                )
                
                
                879Prepaid
      expenses
                
                
                30,886
                
                
                
                (38,083
                )Accounts
      payable and accrued liabilities
                
                
                200,257
                
                
                
                (42,684
                )Due
      to related party
                
                
                (4,478
                )
                
                
                12,734Deferred
      leasehold inducements
                
                
                (14,327
                )
                
                
                (10,672
                )Deferred
      revenue
                
                
                480,072
                
                
                
                299,720Net
      cash provided by operations
                
                
                857,337
                
                
                
                414,503Cash
      flows from investments:Proceeds
      of disposition of fixed assets
                
                
                5,161
                
                
                
                -Purchase
      of fixed assets
                
                
                (22,762
                )
                
                
                (32,175
                )Net
      cash used in investments
                
                
                (17,601
                )
                
                
                (32,175
                )Cash
      flows from financing:Common
      shares issued, net of issue costs
                
                
                -
                
                
                
                597,984Bank
      loan advance
                
                
                1,207,163
                
                
                
                -Repayment
      of bank loan
                
                
                (855,000
                )
                
                
                (210,000
                )Net
      cash provided by financing
                
                
                352,163
                
                
                
                387,984Increase
      in cash and cash equivalents
                
                
                1,191,899
                
                
                
                770,312Cash
      and cash equivalents, beginning of period
                
                
                921,367
                
                
                
                16,950Cash
      and cash equivalents, end of period
                
                $
                2,113,266
                
                
                $
                787,262Supplemental
      information:Non-cash
      financing:Warrants
      issued for services rendered
                
                $
                17,082
                
                
                $
                -Shares
      issued for services rendered
                
                
                -
                
                
                
                95,400Shares
      issued for debt
                
                $
                122,080
                
                
                $
                -Shares
      and warrants issued to bank loan guarantors
                
                $
                2,440,705
                
                
                $
                1,327,241Shares
      issued for Shafi Inc acquisition
                
                $
                990,000
                
                
                $
                -Cash
      interest paid
                
                $
                60,828
                
                
                $
                131,484
  See accompanying notes to
condensed consolidated financial statements.
  F-5
  BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007
  1.    
Description
of business and future operations:
  Braintech,
Inc. (the “Company”) together with its wholly owned subsidiaries is a high tech
development company, developing advanced software for the vision guidance of
robotic systems.  In the nine months ended September 30, 2008, 98% of
sales revenue was generated from ABB Inc. (“ABB”), and for the nine months ended
September 30, 2007, 99% of sales revenue was generated from
ABB.
 
 These
condensed 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
and debt transactions.   The Company is currently generating
revenues from ABB pursuant to its Exclusive Global Channel Partner Agreement,
which expires in accordance with its terms on December 31, 2008.  The
Company’s future operations and its continuation as a going concern are
dependent upon its ability to raise additional capital, continue sales of its
products by selling its products to its current channel partner as well as to
additional machine vision markets, enter into a new distribution agreement with
ABB or an alternative channel partner, on terms satisfactory to the Company,
generating positive cash flows from operations and ultimately attaining
profitability.  There can be no assurances that appropriate financings
having favourable economic terms will be available as required.
  There can
be no assurance that an equity or debt financing can be obtained as anticipated,
that revenue from ABB will continue after December 31, 2008, or that the Company
will be able to enter into a new distribution agreement with ABB or an
alternative channel partner, on terms satisfactory to the Company.  If
none of these events occur, there is a risk that the business will
fail.  These condensed consolidated financial statements do not
include any adjustments relating to the recoverability of assets and
classification of assets and liabilities that might be necessary should the
Company be unable to continue as a going concern.
   2.    
Basis
of presentation:
  (a)    Unaudited
financial information:
  These
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and reflect all adjustments (all of which are normal and recurring in nature)
that, in the opinion of management, are necessary for fair presentation of the
interim financial information.  The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire year ending December 31,
2008. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These unaudited condensed
consolidated financial statements and notes included herein have been prepared
on a basis consistent with and should be read in conjunction with the Company’s
audited consolidated financial statements and notes for the year ended December
31, 2007, as filed in its annual report on Form 10-KSB.
 F-6
  BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007
  2.    
Basis
of presentation (continued):
  (b)   
Principles
of consolidation:
  These
condensed consolidated financial statements include the accounts of the Company,
and its wholly-owned subsidiaries Braintech Canada, Inc. and Shafi
Inc.  All material inter-company balances and transactions have been
eliminated.
  (c)    Use
of estimates:
  The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period.  Significant areas requiring the use of
estimates relate to the impairment of assets and rates for amortization, amount
of income tax balances, the valuation of accrued liabilities, the calculation of
stock-based compensation, and valuation of goodwill.  Actual amounts
may differ from these estimates.
  (d)   
Stock based compensation:
  In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123R, “Share Based Payment”
(“SFAS 123R”). SFAS 123R requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as an expense over the requisite service period in the Company’s
financial statements. Stock-based compensation recognized during the period is
based on the value of the portion of the stock-based payment awards that are
ultimately expected to vest during the period. The Company estimates the fair
value of stock options using the Black-Sholes valuation model, consistent with
the provisions of SFAS 123R.  The Black-Sholes valuation model
requires the input of highly subjective assumptions, including the option’s
expected life and the price volatility of the underlying stock. The expected
stock price volatility assumption was determined using historical volatility of
the Company’s common stock.
  The
weighted average fair value of stock options granted during the nine months
ended September 30, 2008 was $0.20 per option (2007 - $0.35).  The
fair value of each option grant is estimated on the date of grant using the
Black-Sholes valuation model and the straight-line amortization approach with
the following weighted average assumptions:
 F-7




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




2.    
Basis
of presentation (continued):




(d)   Stock
based compensation (continued):




Nine
      Months EndedSeptember
      30, 2008
              
              
              September
      30, 2007Expected
      life (years)
              
              
              2.0
              
              
              
              2.0Risk
      free interest rate
              
              
              2.06
              %
              
              
              4.70
              %Expected
      volatility
              
              
              188
              %
              
              
              168
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Expected
      forfeitures
              
              
              0
              %
              
              
              0
              %






The
Company adopted SFAS 123R effective January 1, 2006, using the modified
prospective method.  This method requires that awards granted,
modified, repurchased or cancelled in the quarter beginning after the adoption
date use the fair value method to recognize stock-based
compensation.  Also any unvested options, where compensation was
amortized over the vesting period, and was previously disclosed in the notes to
financial statements as pro-forma, shall now be expensed over the same
amortization period.




In
applying the modified prospective application method for the nine month periods
ended September 30, 2008 and 2007, the Company recorded stock-based compensation
totaling the amount that would have been recognized had the fair value method
been applied since the effective date of SFAS 123.  Previous amounts
have not been restated.  Accordingly, the Company recorded stock-based
compensation related to stock options of $282,267 for the nine month period
ended September 30, 2008 and stock-based compensation related to stock options
of $606,594 for the nine month period ended September 30,
2007.




As of
January 1, 2006, the Company had an unrecorded deferred stock-based compensation
balance related to stock options of $263,132 before estimated
forfeitures.  In the Company’s pro-forma disclosures prior to the
adoption of SFAS 123R, the Company accounted for forfeitures upon
occurrence.  SFAS 123R requires forfeitures to be estimated at the
time of grant and revised if necessary in subsequent periods if actual
forfeitures differ from those estimates.  Accordingly, as of January
1, 2006, the Company estimated that the stock-based compensation for the awards
not expected to vest was nil and, therefore, the unrecorded deferred stock-based
compensation balance related to stock options was not adjusted for estimated
forfeitures.




As of
September 30, 2008, the unrecorded deferred stock-based compensation balance
related to stock options was $736,930 (2007 - $301,405) and will be recognized
over an estimated weighted average amortization period of 1.18 years (2007 –
1.06 years).




(e) Deferred
leasehold inducements:




Leasehold
inducements are deferred and amortized to reduce rent expense on a straight-line
basis over the term of the lease.




F-8




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




2.    
Basis
of presentation (continued):




(f)    Loss
per share:




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




As the
effect of all outstanding stock options (note 7) and share purchase warrants
(note 8) is anti-dilutive, diluted loss per share does not differ from basic
loss per share.
  The number
of shares used to calculate loss per share for the nine month periods ended
September 30, 2008 and 2007 was reduced by 300,000 shares in each period for
shares issued and held by the Company.




(g)   
Revenue recognition:




The
Company recognizes revenue when there is persuasive evidence of an arrangement,
the fee is fixed or determinable, collectibility is reasonably assured, and
there are no substantive performance obligations remaining.  The
Company’s revenue recognition policies are in conformity with the AICPA’s
Statement of Position No. 97-2 (“SOP 97-2”), “Software Revenue
Recognition”.




Cash
received or accounts receivable recorded in advance of meeting the revenue
recognition criteria are recorded as deferred revenue and the costs related to
that revenue are recorded as deferred costs.


(h)   
Intangible assets and goodwill:
  Assets acquired and
liabilities assumed in business combinations were recorded on the Company’s
Consolidated Condensed Balance Sheets as of the respective acquisition dates
based upon their estimated fair values at such dates. The results of operations
of businesses acquired by the Company have been included in the Company’s
Consolidated Condensed Statements of Operations since their respective dates of
acquisition. The excess of the purchase price over the estimated fair values of
the underlying assets acquired and liabilities assumed is allocated to goodwill.
In certain circumstances, the allocations of the excess purchase price are based
upon preliminary estimates and assumptions. Accordingly, the allocations may be
subject to revision when the Company receives final information, including
appraisals, technology reviews, and other analyses. Any revisions to the fair
values, within the allocation period, will be recorded by the Company as further
adjustments to the purchase price allocations.






3.    
Deferred
leasehold inducements:




Nine
      Months Ended September 302008
              
              
              2007Balance,
      beginning of period
              
              $
              14,327
              
              
              $
              30,155Amortization
              
              
              (13,832
              )
              
              
              (14,334
              )Foreign
      exchange adjustment
              
              
              (495
              )
              
              
              3,662Balance,
      end of period
              
              $
              -
              
              
              $
              19,483




F-9




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




4.    
Deferred
revenue:




Nine
      Months Ended September 302008
              
              
              2007Balance,
      beginning of period
              
              $
              622,971
              
              
              $
              197,383Revenue
      invoiced and deferred for future recognition
              
              
              572,092
              
              
              
              370,297Previously
      deferred revenue recognized in current period
              
              
              (82,020
              )
              
              
              (70,577
              )Balance,
      end of period
              
              $
              1,103,043
              
              
              $
              497,103






5.    
Bank
loan and loan guarantee:




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




As
additional security, the Royal Bank required that standby letters of credit
securing the full amount of the loan be provided. Certain accredited investors
(the “LC Providers”) agreed to provide the letters of credit as financing to the
bank in order to enable the loan and as compensation the Company agreed to issue
one Unit for each one dollar pledged as security for the bank
loan.  Each Unit consists of two shares of the common stock of the
Company, three share purchase warrants, each warrant entitling the holder to
purchase one additional share of common stock at a price of $0.30 per share for
a period of five years; and one and one-half share purchase warrants, each whole
warrant entitling the holder to purchase one additional share of common stock at
a price of $0.50 per share for a period of five years. A general security
agreement covering all of the Company’s personal and intangible property,
including intellectual property has been pledged as security to the LC
Providers.  The general security agreement pledged to the LC Providers
is subordinate to the general security agreement pledged to the Royal
Bank.




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




F-10




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




5.    
Bank
loan and loan guarantee (continued):




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




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




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




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




F-11




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




5.    
Bank
loan and loan guarantee (continued):




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




The
Company’s obligations under the 2008 RBC Loan Agreement are secured by a general
security agreement covering all of the Company’s personal and intangible
property, including intellectual property of the Company and its subsidiary,
Braintech Canada, Inc., and the irrevocable and unconditional standby letters of
credit which were previously pledged by the LC Providers as security under the
2006 RBC Loan Agreement.
  On
September 26, 2008, as compensation for extending the letters of credit as
described above, the Company issued an aggregate of 10,375,000 common share
purchase warrants, each of which entitle the holder to purchase one share of the
Company’s common stock at $0.30 for a period of five years, to the LC
Providers.  Additionally, on September 29, 2008, the Company issued an
aggregate of 4,150,000 shares of the Company’s common stock to the LC
Providers.  Each LC Provider received two shares of common stock and
five share purchase warrants for each dollar of letter of credit
provided.




The
Company has recorded an expense of $1,814,055 related to the share purchase
warrants issued as compensation to the LC Providers and an expense of $626,650
related to the common stock issued to the LC Providers.






6.    
Common
stock:




(a)   
During the nine month period ended September 30, 2008, common shares were issued
as follows:
  On August
13, 2008, the Company issued 3,000,000 shares of its common stock at a deemed
price of $0.33 per share as partial consideration for the purchase of 100% of
the outstanding stock of Shafi, Inc. and 80% of the outstanding stock of Shafi
Innovation, Inc.  An additional 1,000,000 shares of the Company’s
common stock is payable quarterly over a 12 month period subject to the
achievement of specified performance criteria.




On
September 29, 2008, the Company issued 4,150,000 shares of its common stock at a
deemed price of $0.151 as partial compensation to LC Providers for extending the
letters of credit required to secure the credit facility under the 2008 RBC Loan
Agreement.
  On
September 29, 2008, the Company issued 554,910 shares of its common stock at a
deemed price of $0.22 per share for repayment of advances made to the Company by
the Company’s former CEO.




(b)   
Bonus stock and bonus stock option incentive plan:


F-12




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




6.    
Common
stock (continued):




(b)   
Bonus stock and bonus stock option incentive plan (continued)
  At a
meeting of the Board of Directors held October 22, 2007, the Company approved
the Bonus Stock and Bonus Stock Option Plan (the “Bonus Plan”). The Bonus Plan
provides for the issuance of common stock of the Company (“Bonus Stock”) and
options to acquire common stock of the Company (“Bonus Stock Options”) to the
participants upon the Company reaching certain identifiable milestones in its
business plan. The aggregate amount of shares that may be issued under the Bonus
Plan shall not exceed 30 million shares. The aggregate amount of shares to be
issued as Bonus Stock shall not exceed 20 million shares and the aggregate
amount of shares to be issued pursuant to the exercise of Bonus Stock Options
shall not exceed 10 million shares.




On October
29, 2007, the Company issued 1,000,000 shares of Bonus Stock for the purchase
price of $0.01 per share to the Company’s CEO. The Company recorded an expense
of $430,000 relating to the issuance of these shares. The Company also issued to
the CEO 7,000,000 shares of Bonus Stock for the purchase price of $0.01 per
share and in accordance with the terms of his employment agreement, these shares
were placed in escrow pending completion of eight individual milestones. When
management determines that it is likely that the milestones will be met, the
corresponding shares will be released from escrow and the Company will record an
expense equal to $0.43 per share. If the milestones are not completed, the
Company will repurchase the shares for the purchase price of $0.01 per
share.
  At a
meeting held March 12, 2008, the Directors approved a resolution amending the
employment agreement to alter the individual milestones and escrow restrictions
to more closely conform to the Company’s current objects and strategic
plan.  The number of milestones the CEO needs to achieve in order to
fully vest all Bonus Stock and Bonus Stock Options is now six.  Under
certain conditions, all unvested Bonus Stock and Bonus stock Options would vest
immediately.
  On May 1,
2008, Milestone #1 was achieved and, accordingly, 1,000,000 shares of Bonus
Stock were released from escrow and the Company recognized an expense of
$430,000.  Milestone #1 was the six month anniversary of the CEO’s
employment.




On July
25, 2008, Milestone #3 was achieved and, accordingly, 2,000,000 shares of Bonus
Stock were released from escrow and the Company recognized an expense of
$860,000.  Milestone #3 was the establishment of a new strategic
relationship in a specified industry.
  On
December 18, 2007, the Company issued 750,000 shares of Bonus Stock for the
purchase price of $0.01 per shares in accordance with the terms of an
Independent Contractor Agreement. These shares are being held in escrow pending
completion of three individual milestones. When management determines that it is
likely that the milestones will be met, the corresponding shares will be
released from escrow and the Company will record an expense equal to $0.32 per
share. If the milestones are not completed, the Company will repurchase the
shares for the purchase price of $0.01 per share.




F-13




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




7.    
Stock options:




A summary
of the Company’s stock option activity is as follows:
  WeightedNumber
                
                
                averageof
      shares
                
                
                exercise
      priceBalance,
      December 31, 2007
                
                
                13,092,000
                
                
                $
                0.43Options
      granted
                
                
                1,550,000
                
                
                $
                0.24Options
      exercised
                
                
                -
                
                
                
                -Vested
      options expired
                
                
                (297,500
                )
                
                $
                0.44Unvested
      options forfeited
                
                
                (12,500
                )
                
                $
                0.44Balance,
      September 30, 2008
                
                
                14,332,000
                
                
                $
                0.41






Of those
outstanding at September 30, 2008, 11,332,000 are exercisable (December 31, 2007
– 11,224,500), having a weighted average exercise price of $0.43 (December 31,
2007 - $0.43).




The
outstanding options as of September 30, 2008 have a weighted average remaining
contractual life of 3.72 years (December 31, 2007 – 4.36 years)
  The
Company has reserved 1,500,000 common shares pursuant to the 2000 Stock Option
Plan, 2,500,000 common shares pursuant to the 2003 Stock Option Plan, and
10,000,000 common shares pursuant to the 2007 Stock Option
Plan.  Subject to the requirements of any stock exchange on which the
Company’s shares are listed, the Company’s Board of Directors has discretion to
set the price, term, vesting schedules, and other terms and conditions for
options granted under the 2000 plan and the Company’s Compensation Committee has
discretion to set the price, terms, vesting schedules, and other terms and
conditions for options granted under the
2003 and 2007 plans.  The Company’s board of directors has granted the
Company’s Chief Executive Officer authority to grant awards pursuant to the 2000
Stock Option Plan, 2003 Stock Option Plan and 2007 Stock Option
Plan.  The Company has also reserved 10,000,000 common shares pursuant
to the Bonus Plan (note 6(b)). The Company’s Board of Directors and CEO have
discretion to set the price, term, vesting schedules, and other terms and
conditions for options granted under the Bonus
Plan.




F-14




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




8.    
Share
purchase warrants:




On
September 26, 2008, as partial compensation for advancing $100,000 cash in
return for promissory notes, the Company issued 100,000 common share purchase
warrants to its Chief Executive Officer and its former Chief Executive
Officer.  Each common share purchase warrant entitles the holder to
purchase one share for three years at a price of $0.36 per share.  The
fair value of the warrants ($17,082) has been recorded as an
expense.  The fair value was calculated using the Black-Sholes
valuation model and the following assumptions: dividend yield 0%, expected
volatility 190%, risk-free interest rate 2.11%, and an expected term of two
years.




On
September 26, 2008, as compensation for extending the Letters of Credit required
to secure the Bank Loan above (note 5), the Company issued 10,375,000 common
share purchase warrants. Each common share purchase warrant entitles the holder
to purchase one share for five years at a price of $0.30 per
share.  The fair value of the warrants ($1,814,055) has been recorded
as an expense.  The fair value was calculated using the Black-Sholes
valuation model and the following assumptions: dividend yield 0%, expected
volatility 190%, risk-free interest rate 2.11%, and an expected term of two
years.
  A summary of the
Company’s share purchase warrant activity is as follows:
  Number
                    of
      shares
                  
                  
                  Weighted
                    average
                    exercise
      price
                  
                  
                  Weighted
                    average
      remaining
                    contractual
      life
                    (years)Balance,
      December 31, 2007
                  
                  
                  25,177,179
                  
                  
                  $
                  0.34
                  
                  
                  
                  4.05Warrants
      grantedPartial
      compensation for cash advances
                  
                  
                  100,000
                  
                  
                  $
                  0.36
                  
                  
                  
                  3.00Compensation
      to bank loan guarantors
                  
                  
                  10,375,000
                  
                  
                  $
                  0.30
                  
                  
                  
                  4.98Warrants
      expired
                  
                  
                  (75,000
                  )
                  
                  $
                  0.25
                  
                  
                  
                  -Warrants
      exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance,
      September 30, 2008
                  
                  
                  35,577,179
                  
                  
                  $
                  0.33
                  
                  
                  
                  3.98
   Of the
share purchase warrants outstanding at September 30, 2008, 8,011,324 were held
by the Company’s former CEO and 7,411,250 were held by the Company’s current
CEO.


9.    
Commitments:
   Year
      ending December 31:2008
                  
                  $
                  29,3282009
                  
                  
                  128,4632010
                  
                  
                  141,0692011
                  
                  
                  140,8662012
                  
                  
                  137,582$
                  577,308
 F-15




BRAINTECH,
INC.
  Notes to
Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007






On
August 12, 2008, in a stock for stock transaction, the Company acquired 100% of
the outstanding shares of SHAFI, Inc. and 80% of the shares of SHAFI Innovation,
Inc. (together “Shafi”) from Adil Shafi pursuant to a Share Purchase Agreement
(“Shafi Purchase Agreement”).  Total consideration for the purchase
was 3,000,000 shares of the common stock of Braintech, Inc. at a deemed value of
$0.33 per share (the “Closing Purchase Shares”) paid at the closing of the
acquisition (“Shafi Closing”) and 1,000,000 shares of Braintech, Inc. common
stock payable quarterly over the next 12 months upon the achievement of
specified performance criteria (the “Contingent Purchase
Shares”).  This contingent consideration will be recognized when it is
more than probable that the performance criteria will be met.  The
performance criteria include certain revenue related
commitments.




The
primary reason for the Shafi transaction was the acquisition of key proprietary
assets from Shafi to provide the Company with a technological launching pad to
accelerate its expansion into a wide-range of new markets that include
aerospace, food and beverage, government, medical, pharmaceutical, plastics, and
semi-conductor.




The
following table summarizes the estimated fair values of the assets and the
liabilities of the Shafi Inc. company net of the debt Adil Shafi personally
assumed.  The Company is in the process of obtaining third-party
valuations of certain intangible assets and purchased technology and therefore
the allocation of the purchase price is subject to refinement.
  As
      of August 12, 2008Intangible
      assets, of Shafi Inc.
                
                $
                1,090,000Goodwill,
      of Shafi Inc.
                
                
                900,000Current
      liabilities, of Shafi Inc.
                
                
                (1,000,000
                )Net
      assets acquired, of Shafi Inc.
                
                $
                990,000


Of
the $1,090,000 of acquired intangible assets, $500,000 was assigned to branding
and the Shafi customer base and contacts and $590,000 was assigned to the
purchased technology.  The $900,000 of goodwill was assigned to the
estimated value of future net revenues.




The
Closing Purchase Shares and Contingent Purchase Shares are subject to a lock-up
agreement that restricts the sale thereof for 6 months and thereafter places
volume restrictions on the number of such shares that may be sold during any
weekly period.  In addition, the Contingent Purchase Shares, as and
when earned, will be placed in escrow during the 12 months following the Shafi
Closing to serve as a fund against which indemnification claims of the Company
under the Shafi Purchase Agreement may be made.  The Company also
agreed to register for resale the shares of Company common stock paid to Adil
Shafi and to cause the related registration statement to be effective not later
than six months after the Shafi Closing.  Mr. Shafi’s sales under the
registration statement will be subject to compliance with his lock-up
agreement.


F-16




BRAINTECH,
INC.
  Notes
to Condensed Consolidated Financial Statements
 (Unaudited
– Prepared by Management)
 (Expressed
in United States dollars)
 Nine
months ended September 30, 2008 and 2007




10.   Shafi
acquisition (continued):




As
part of the Shafi acquisition, the parties agreed that any debt of Shafi in
excess of certain identified debt in the aggregate amount of $900,000 would be
fully and finally satisfied in a timely manner by Adil Shafi without liability
to the Company or the Shafi companies.  As of the date of closing the
excess debt assumed by Adil Shafi was approximately $172,000.  Through
September 30, 2008, Shafi Inc. has paid $98,981 of the $900,000
debt.
  Prior
to the completion of the purchase transaction, on June 5, 2008, the Company
advanced $100,000 to Shafi to meet its working capital needs.  This
advance was secured by all of the assets of Shafi, and was memorialized at the
Shafi Closing by a demand promissory note bearing an annual interest rate of
2.54%. In
order to finance the $100,000 advance, the Company’s Chief Executive Officer and
former Chief Executive Officer each advanced to the Company $50,000 against
delivery by the Company of promissory notes.  The promissory notes
provide for interest at 6% per annum.  The promissory notes also
provide that, each of the promissory note holders will be issued 50,000 common
share purchase warrants.  On September 26, 2008, the promissory notes
plus accrued interest were repaid in full and we issued a total of 100,000
common share purchase warrants to our Chief Executive Officer and former Chief
Executive officer.  Each common share purchase warrant entitles the
holder to purchase one share for three years at a price of $0.36 per
share.
  11.   Accounts
payable:
  Included
in accounts payable is the amount of $801,019 of Shafi Inc. debt, which is
non-recourse to the Company.  See note 10 for additional
details.




12.   Subsequent
event:  On
October 24, 2008, in accordance with the terms of an employment agreement, the
Company issued 1,000,000 shares of capital stock for the purchase price of $0.01
per share.  750,000 of these shares are being held in escrow pending
completion of three individual milestones.  When the Company
determines that an individual milestone has been achieved, the corresponding
shares will be released from escrow and the company will record an expense equal
to $0.09 per share.  In the event that an individual milestone is not
achieved within the time restriction for achieving that milestone, the Company
will purchase the shares from the employee for the purchase price of $0.01 per
share.  The remaining 250,000 were not subject to escrow restrictions
and accordingly these shares were delivered to the employee and the Company
recorded an expense of $22,500.
  F-17




Item 2.     Management’s Discussion and
Analysis of Financial Conditions and Results of Operations




CAUTIONARY
NOTICE REGARDING FORWARD LOOKING STATEMENTS




This
Quarterly Report of Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act.  We intend that certain matters discussed in this report
are “Forward-Looking Statements” intended to qualify for the safe harbor from
liability established by the Private Securities Litigation Reform Act of
1995.  Forward-looking statements deal with our current plans,
intentions, beliefs and expectations and relate to future events or our future
financial performance.  In some cases, you can identify
forward-looking statements by terminology such as “may”, “will”, “should”,
“intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”,
“predicts”, “potential” or “continues” or the negative of these terms or other
comparable terminology.




Forward-looking
statements are only predictions and involve known and unknown risks,
uncertainties and other factors that may cause our actual results in future
periods to differ materially from what is currently anticipated.  We
make cautionary statements throughout this report and the documents we have
incorporated by reference.  You should read these cautionary
statements as being applicable to all related forward-looking statements
wherever they appear in this report, the materials referred to in this report,
and the materials incorporated by reference into this report.  You are
also urged to carefully review and consider the various disclosures made by us
which attempt to advise interested parties of the factors which affect our
business, including without limitation the disclosures made under the caption
“Management Discussion and Analysis or Plan of Operation” and the audited
consolidated financial statements and related notes included in our annual
report filed on Form 10-KSB for the year ended December 31, 2007 and the
disclosures under the heading “Risk Factors” in this Quarterly Report and in the
Form 10-KSB as well as other reports and filings we make with the Securities and
Exchange Commission.




We cannot
guarantee our future results, levels of activity, performance or
achievements.  We are under no duty to update any of the
forward-looking statements after the date of this report.




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




Overview




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




We were
incorporated in Nevada on March 4, 1987, and since January 3, 1994 our corporate
name has been Braintech, Inc. Our principal executive offices are located at
1750 Tysons Blvd., Suite 350, McLean, Virginia, USA 22102.  Our
telephone number is (703) 637-9752 and our Internet address is
www.braintech.com.




We have
five wholly-owned subsidiaries: Braintech Canada, Inc., a British Columbia
corporation, Shafi, Inc. a Michigan corporation, Braintech Government &
Defense, Inc., a Delaware corporation, Braintech Consumer & Service, Inc., a
Delaware corporation, and Braintech Industrial, Inc., a Delaware
corporation.  Braintech Canada, Inc. carries out our research and
development activities, and employs a majority of our technical
personnel.  All management and administration functions are employed
by Braintech, Inc. and have recently been relocated to McLean,
Virginia.  In the first quarter of 2008, we incorporated the three
Delaware corporations in order to get closer to the customer and to seek to
develop new business in the industrial, government, and consumer
markets.




We
generate the majority of our revenues from the sale of robotic vision software
that we have developed.  Our software sales have principally involved
computerized vision systems used for the guidance of industrial robots
performing automated assembly, material handling, and part identification and
inspection functions.  We have generated total revenues, from the
inception of our current operations on January 3, 1994 to September 30, 2008, in
the amount of $11,464,461.  For the nine month period ended September
30, 2008, operating activities provided cash of $857,337.




We have
incurred aggregate net losses of $34,286,905 during the period from the
inception of our current operations on January 3, 1994, to September 30,
2008.  We will likely continue to incur significant additional
operating losses as our product development, research and development, and
marketing efforts continue.  Operating losses may fluctuate from
quarter to quarter as a result of differences in the timing of expenses incurred
and revenue recognized.




2




Shafi
Acquisition




On August
12, 2008, in a stock for stock transaction, the Company acquired 100% of the
outstanding shares of SHAFI, Inc. and 80% of the shares of SHAFI Innovation,
Inc. (together “Shafi”) from Adil Shafi pursuant to a Share Purchase Agreement
(“Shafi Purchase Agreement”).  Total consideration for the purchase
was 3,000,000 shares of the common stock of Braintech, Inc. at a deemed value of
$0.33 per share (the “Closing Purchase Shares”) paid at the closing of the
acquisition (“Shafi Closing”) and 1,000,000 shares of Braintech, Inc. common
stock payable quarterly over the next 12 months upon the achievement of
specified performance criteria (the “Contingent Purchase
Shares”).  This contingent consideration will be recognized when it is
more than probable that the performance criteria will be met.  The
performance criteria include certain revenue related commitments.




The
primary reason for the Shafi transaction was the acquisition of key proprietary
assets from Shafi to provide the Company with a technological launching pad to
accelerate its expansion into a wide-range of new markets that include
aerospace, food and beverage, government, medical, pharmaceutical, plastics, and
semi-conductor.




The
following table summarizes the estimated fair values of the assets and the
liabilities of the Shafi Inc. company net of the debt Adil Shafi personally
assumed.  The Company is in the process of obtaining third-party
valuations of certain intangible assets and purchased technology and therefore
the allocation of the purchase price is subject to refinement.






As
      of August 12, 2008Intangible
      assets, of Shafi Inc.
            
            $
            1,090,000Goodwill,
      of Shafi Inc.
            
            
            900,000Current
      liabilities, of Shafi Inc.
            
            
            (1,000,000
            )Net
      assets acquired, of Shafi Inc.
            
            $
            990,000







Of the
$1,090,000 of acquired intangible assets, $500,000 was assigned to branding and
the Shafi customer base and contacts and $590,000 was assigned to the purchased
technology.  The $900,000 of goodwill was assigned to the estimated
value of future net revenues.




The
Closing Purchase Shares and Contingent Purchase Shares are subject to a lock-up
agreement that restricts the sale thereof for 6 months and thereafter places
volume restrictions on the number of such shares that may be sold during any
weekly period.  In addition, the Contingent Purchase Shares, as and
when earned, will be placed in escrow during the 12 months following the Shafi
Closing to serve as a fund against which indemnification claims of the Company
under the Shafi Purchase Agreement may be made.  The Company also
agreed to register for resale the shares of Company common stock paid to Adil
Shafi and to cause the related registration statement to be effective not later
than six months after the Shafi Closing.  Mr. Shafi’s sales under the
registration statement will be subject to compliance with his lock-up
agreement.




As part of
the Shafi acquisition, the parties agreed that any debt of Shafi in excess of
certain identified debt in the aggregate amount of $900,000 would be fully and
finally satisfied in a timely manner by Adil Shafi without liability to the
Company or the Shafi companies.  As of the date of closing the excess
debt assumed by Adil Shafi was approximately $172,000.  Through
September 30, 2008, Shafi Inc. has paid $98,981 of the $900,000
debt.




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




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




3




Critical
Accounting Policies and Estimates




There have
been no material changes in our critical accounting policies and estimates for
the nine month period ended September 30, 2008 from our disclosure in our Annual
Report on Form 10-KSB for the year ended December 31, 2007.  For a
discussion of our critical accounting policies, please see our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2007.




Results
of Operations




Three
Months Ended September 30, 2008 Compared to the Three Months Ended September 30,
2007




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




Three
      Months EndedSeptember
      30
            
            
            September
      302008
            
            
            2007Statement
      of Operations Data:Sales
            
            
            100.00
            %
            
            
            100.00
            %Cost
      of sales
            
            
            (10.19
            )
            
            
            (7.84
            )Gross
      profit
            
            
            89.81
            
            
            
            92.16Research
      and development
            
            
            (6.51
            )
            
            
            (14.94
            )Selling,
      general and administration
            
            
            (60.33
            )
            
            
            (56.00
            )Operation
      income
            
            
            22.97
            
            
            
            21.22Financing
      expenses
            
            
            (181.16
            )
            
            
            5.93Other
      income (expense), net
            
            
            (0.13
            )
            
            
            0.07Income/(loss)
      for the period
            
            
            (158.32
            )
            
            
            27.22
            %







Sales
            
            Three
      Months EndedSeptember
      30
            
            
            September
      30
            
            
            %2008
            
            
            2007
            
            
            Change$
            1,375,309
            
            
            $
            936,919
            
            
            
            46.8
            %








Our
increase in sales year over year is attributable to the increase in the ABB,
Inc. minimum purchase guarantee in accordance with the terms of our Exclusive
Global Channel Partner Agreement with ABB.  During the three month
period ended September 30, 2008, we invoiced $1,504,187 for software licenses
delivered for installation in manufacturing plants.  Of this amount,
we deferred $210,837 for future recognition in accordance with the American
Institute of Certified Public Accountant’s Statement of Position (SOP)
97-2.  We also recorded $52,536 for engineering and other services and
$29,423 of previously deferred revenue.  During the three month period
ended September 30, 2007, we invoiced $988,436 for software licenses delivered
for installation in manufacturing plants.  Of this amount, we deferred
$142,567 for future recognition in accordance with SOP 97-2.  We also
recorded $61,864 for engineering and other services and $29,186 of previously
deferred revenue.








Research
      and Development Expenses
            
            Three
      Months EndedSeptember
      30
            
            
            September
      30
            
            
            %2008
            
            
            2007
            
            
            Change$
            89,640
            
            
            $
            139,987
            
            
            
            (36.0
            %)




4




Research
and development expenditures decreased $50,347, or 36.0%, to $89,640 for the
three month period ended September 30, 2008, from $139,987 for the three month
period ended September 30, 2007.  The decrease was mainly due to an
increase in the Precarn funding grant received.  During the three
month period ended September 30, 2007 we received a grant of $28,720 compared to
a grant of $76,081 received during the three month period ended September 30,
2008.








Selling,
      General and Administrative Expenses
            
            Three
      Months EndedSeptember
      30
            
            
            September
      30
            
            
            %2008
            
            
            2007
            
            
            Change$
            829,670
            
            
            $
            524,662
            
            
            
            58.1
            %






Selling,
general and administration (SG&A) expenses increased $305,008, or 58.1%, to
$829,670 for the three month period ended September 30, 2008, from $524,662 for
the three month period ended September 30, 2007.  The increase in
SG&A expenses was due to an increase of approximately $97,400 in accounting
and legal expenses, an increase of approximately $141,757 in wages and benefits
as a result of an increase in our administration staff of three individuals, an
increase in office and miscellaneous expenses of approximately $7,700, an
increase in stock option expense of approximately $20,500 and an increase in
trade show and marketing expenses of approximately $37,700








Interest
      and Financing Expenses
            
            Three
      Months EndedSeptember
      30
            
            
            September
      30
            
            
            %2008
            
            
            2007
            
            
            Change$
            2,491,571
            
            
            $
            (55,558
            )
            
            
            4,584.6
            %






Interest
and financing expenses increased $2,547,129 to $2,491,571 for the three month
period ended September 30, 2008, from $(55,558) for the three month period ended
September 30, 2007.  The negative value for interest and financing
expense for the three month period ended September 30, 2007 is due to a decrease
in the fair value of the equity issued as compensation to bank loan guarantors
originally calculated as of June 30, 2007 compared to the actually issue in the
third quarter of 2007.  During the three month period ended September
30, 2008 we recorded an expense of $2,440,705 for the fair value of equity
issued as compensation to the bank loan guarantors.  The interest on
the bank loan decreased $22,764 to $18,862 for the three month period ended
September 30, 2008, from $41,626 for the three month period ended September 30,
2007.  The decrease was mainly due to the reduction in the principal
amount of the bank loan and due to a slight reduction in the interest
rate.





Nine
Months Ended September 30, 2008 Compared to the Nine Months Ended September 30,
2007




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




Nine
      Months EndedSeptember
      30
            
            
            September
      302008
            
            
            2007Statement
      of Operations Data:Sales
            
            
            100.00
            %
            
            
            100.00
            %Cost
      of sales
            
            
            (10.06
            )
            
            
            (7.86
            )Gross
      profit
            
            
            89.94
            
            
            
            92.14Research
      and development
            
            
            (11.24
            )
            
            
            (19.46
            )Selling,
      general and administration
            
            
            (106.02
            )
            
            
            (92.22
            )Operation
      income/(loss)
            
            
            (27.32
            )
            
            
            (19.54
            )Interest
      and financing expenses
            
            
            (71.06
            )
            
            
            (70.54
            )Other
      income (expense), net
            
            
            0.68
            
            
            
            0.06Income/(loss)
      for the period
            
            
            (97.70
            )
            
            
            (90.02
            )







Sales
            
            Nine
      Months EndedSeptember
      30
            
            
            September
      30
            
            
            %2008
            
            
            2007
            
            
            Change$
            3,581,679
            
            
            $
            2,205,854
            
            
            
            62.2
            %




5




Our
increase in sales year over year is attributable to the increase in the ABB,
Inc. minimum purchase guarantee in accordance with the terms of the Exclusive
Global Channel Partner Agreement.  During the nine month period ended
September 30, 2008, we invoiced $4,002,430 for software licenses delivered for
installation in manufacturing plants.  Of this amount, we deferred
$572,092 for future recognition in accordance with the American Institute of
Certified Public Accountant’s Statement of Position (SOP) 97-2.  We
also recorded $59,321 for engineering and other services and $92,020 of
previously deferred revenue.  During the nine month period ended
September 30, 2007, we invoiced $2,433,781 for software licenses delivered for
installation in manufacturing plants.  Of this amount, we deferred
$370,297 for future recognition in accordance with SOP 97-2.  We also
recorded $69,344 for engineering and other services and $73,026 of previously
deferred revenue.








Research
      and Development Expenses
            
            Nine
      Months EndedSeptember
      30
            
            
            September
      30
            
            
            %2008
            
            
            2007
            
            
            Change$
            402,739
            
            
            $
            429,206
            
            
            
            (6.2
            %)





Research
and development expenditures decreased $26,467, or 6.2%, to $402,739 for the
nine month period ended September 30, 2008, from $429,206 for the nine month
period ended September 30, 2007.  The decrease was mainly due to an
increase in the Precarn funding grant received.  During the nine month
period ended September 30, 2007 we received a grant of $83,090 compared to a
grant of $186,234 received during the nine month period ended September 30,
2008.  The decrease was partially offset by an increase in our
research and development staff of one individual, an increase in the amount of
stock option expense allocated to research and development and an increase in
laboratory expenses.








Selling,
      General and Administrative Expenses
            
            Nine
      Months EndedSeptember
      30
            
            
            September
      30
            
            
            %2008
            
            
            2007
            
            
            Change$
            3,797,523
            
            
            $
            2,034,323
            
            
            
            86.7
            %





Selling,
general and administration (SG&A) expenses increased $1,763,200, or 86.76%,
to $3,797,523 for the nine month period ended September 30, 2008, from
$2,034,323 for the nine month period ended September 30, 2007.  The
increase was mainly due to the recognition during the second quarter of 2008 of
$1,290,000 in stock based compensation arising from the issuance of shares of
our common stock to our Chief Executive Officer upon the achievement of certain
milestones, pursuant to the terms of our employment agreement with our Chief
Executive Officer, as amended, and our Bonus Stock and Stock Option
Plan.  The increase in SG&A expenses was also due to an increase
of approximately $292,633 in accounting and legal expenses, an increase of
approximately $402,054 resulting from an increase in our administration staff of
three individuals, an increase in office and miscellaneous expenses of
approximately $41,719, and an increase in trade show and marketing expenses of
approximately $59,338.  Offsetting these increases was a decrease in
stock option expense of approximately $348,294.








Financing
      Expenses
            
            Nine
      Months EndedSeptember
      30
            
            
            September
      30
            
            
            %2008
            
            
            2007
            
            
            Change$
            2,520,002
            
            
            $
            1,556,080
            
            
            
            61.9
            %





Interest
and financing expenses increased $963,922, or 61.9%, to $2,520,002 for the nine
month period ended September 30, 2008, from $1,556,080 for the nine month period
ended September 30, 2007.  The increase was mainly due to an increase
of $1,113,464 in the fair value of equity issued as compensation to bank loan
guarantors from $1,327,241 for the nine month period ended September 30, 2007 to
$2,440,705 for the nine month period ended September 30, 2008.  The
interest on the bank loan decreased $70,656 to $60,828 for the nine month period
ended September 30, 2008, from $131,484 for the nine month period ended
September 30, 2007.  The decrease was mainly due to the reduced
average principal amount of the bank loan and due to a slight reduction in the
interest rate.  Bank loan guarantee expenses increased $11,114 from
$7,355 to $18,469, and we incurred other financing expenses of $25,075 during
the nine months ended September 30, 2008 for which there was no corresponding
expense during the nine month period ending September 30,
2007.  Offsetting the increase in financing expenses was an expense of
$90,000 for the fair value of equity issued as compensation for financing
services incurred in the nine months ended September 30, 2007 for which there
was no corresponding expense for the nine months ended September 30,
2008.





6




Liquidity
and Capital Resources




Cash
Flows




During the
nine month period ended September 30, 2008 we financed our research and
development activities, our selling, general and administrative activities, our
investment in fixed assets, and the repayment of our bank loan using cash
provided by our operations.  At September 30, 2008 we had cash and
cash equivalents of $2,113,266, an increase of $1,191,899 from cash and cash
equivalents of $921,367 at December 31, 2007.




Operating
activities provided cash of $857,337 for the nine month period ended September
30, 2008 and $414,503 for the nine month period ended September 30,
2007.  Cash provided by operating activities during the nine months
ended September 30, 2008 resulted from a net loss of $3,499,692, an increase in
current liabilities of $181,452, an increase in deferred revenue of $480,072,
non-cash amortization expenses of $22,533, non-cash loss on disposition of fixed
assets of $1,999, non-cash stock option expenses of $282,267, non-cash stock
compensation expense of $1,290,000, non-cash compensation to loan guarantors of
$2,440,705, and non cash compensation for services rendered of $17,082 offset by
an increase in current assets of $359,081.




Investing
activities used cash of $17,601 during the nine month period ended September 30,
2008 and $32,175 during the nine month period ended September 30,
2007.  Cash used for investing activities during the nine month period
ended September 30, 2008 resulted from the purchase of fixed assets in the
amount of $22,762 offset by proceeds of disposition of fixed assets of
$5,161.  Cash used for investing activities during the nine month
period ended September 30, 2007 resulted from the purchase of fixed
assets.




Financing
activities provided cash of $1,207,163 as a result of an advance on our bank
loan and used cash of $855,000 for repayment of the bank loan during the nine
month period ended September 30, 2008.  Financing activities provided
cash of $597,984 as a result of selling shares of our common stock during the
nine month period ended September 30, 2007 and used cash of $210,000 for
repayment of the bank loan.




We
estimate that, at our level of operation as of September 30, 2008, our cash
expenses are approximately $400,000 per month. We base this estimate on the
following data:




•
            As
      of November 10, 2008, we had 24 employees and our salary costs are
      approximately $225,000 per month. For the nine month period ended
      September 30, 2008, our average monthly cash expenditures for general,
      overhead and administration, exclusive of salary costs, were approximately
      $150,000 per month. We expect that our general overhead and administrative
      costs, exclusive of salary costs, will increase by approximately $25,000
      per month over the next there
months.




•
            We
      do not expect to incur significant capital expenditures during the
      remainder of 2008 unless they result from an increase in our level of
      operation.




Our
Exclusive Global Channel Partner Agreement dated May 5, 2006 with ABB Inc.
provides for a minimum purchase guarantee of $5,500,000 for the year ended
December 31, 2008; however, we have agreed with ABB to a reduction of $250,000
in the minimum purchase guarantee for the quarter ending December 31,
2008.  The minimum purchase guarantee for the quarter ending December
31, 2008 will now be $1,250,000.   At our current level of
operations, the 2008 minimum purchase guarantee would result in positive cash
flow from operations for the year ended December 31, 2008. However, it is
management’s intention to expand our business by developing products and
services suitable for the consumer robotics market and the government and
military markets. The full cost of expanding into these markets has not been
determined but it is expected that some form of equity financing will be
required to finance the expanded operations and to fund our bank loan
repayment.




Recent
Accounting Pronouncements




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




7




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




During
the first three quarters of fiscal 2008, we adopted the following accounting
standards:




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




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






Item 3.     Quantitative and Qualitative
Disclosures about Market Risk




Not
applicable.  The Company is a smaller reporting company, and smaller
reporting companies are not required to file the quantitative and qualitative
disclosures about market risk.






Item 4T.    Controls and
Procedures




Evaluation
of Disclosure Controls and Procedures




As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end
of the period covered by this Quarterly Report on Form 10-Q, September 30, 2008,
we have carried out an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures.  This
evaluation was carried out under the supervision and with the participation of
the Company’s management, including the Company’s principal executive officer
and principal financial and accounting officer. Based upon that evaluation, the
Company’s principal executive officer and the Company’s principal financial and
accounting officer concluded that the Company’s disclosure controls and
procedures are effective as of the end of the period covered by this
report.




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




Changes
in Internal Control over Financial Reporting




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




8




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




Our
management identified no changes in our internal controls over financial
reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.






PART
II – OTHER INFORMATION




Item 1.     Legal Proceedings




We are not
aware of any material, active or pending legal proceedings against us, nor are
we involved as plaintiff in any material proceeding or pending
litigation.  We are not aware of any proceedings in which any of our
directors, officers or affiliates, or any registered beneficial shareholder are
an adverse party or has a material interest adverse to us.








Item 1A.    Risk Factors




We operate
in a rapidly changing environment that involves a number of risks, some of which
are beyond our control. This discussion highlights some of the risks which may
affect future operating results. These are the risks and uncertainties we
believe are most important for you to consider. Additional risks and
uncertainties not presently known to us, which we currently deem immaterial or
which are similar to those faced by other companies in our industry or business
in general, may also impair our business operations. If any of the following
risks or uncertainties actually occurs, our business, financial condition and
operating results would likely suffer.




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




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




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




We have
generated only approximately $11.4 million in revenues since the inception our
current operations January 3, 1994 and we expect to incur operating losses
in the future. Our net loss from inception of our current operations in 1994 to
September 30, 2008 was approximately $34 million. We had cash in the amount of
$2,113,266 as of September 30, 2008. We estimate our average monthly operating
expenses to be approximately $400,000 each month for the balance of 2008. We
cannot provide assurances that we will be able to successfully develop our
business. These circumstances raise doubt about our ability to continue as a
going concern as described in an explanatory paragraph to our independent
auditors’ report on our audited financial statements, dated February 29,
2008.If
we are unable to continue as a going concern, investors will likely lose all of
their investments in our Company.




Currently,
we rely on a single channel partner to distribute and generate sales of our
products. If our channel partner is unsuccessful in distributing and generating
sales of our products, or if the relationship with our channel partner is
terminated and we are unable to find a suitable replacement, our business may
fail and investors may lose their entire investment.




9




Currently,
we rely chiefly on ABB Inc. to purchase our products and distribute them to end
users pursuant to an Exclusive Global Channel Partner Agreement entered into in
May 2006.  This Channel Partner Agreement expires in accordance with
its terms on December 31, 2008 and ABB has accumulated ongoing unsold inventory
under the existing Channel Partner agreement.  We cannot assure you
that we will be able to enter into an extension of the existing Channel Partner
Agreement, or a new distribution agreement with ABB, on terms satisfactory to
us, or at all.  Among other things, ABB may not be willing to extend
the existing Channel Partner Agreement, or enter into a new distribution
agreement with us, if it is unable to sell the large amount of the inventory it
has purchased from us pursuant to the current Channel Partner
Agreement.  If ABB is unsuccessful in generating sales of our products
or reduces its purchases from us, if our Channel Partner Agreement is not
extended or if we do not enter into a new distribution agreement with ABB, or if
our relationship with ABB is otherwise terminated and we are unsuccessful in
establishing a relationship with an alternative channel partner who offers to
purchase and distribute our products for similar prices, or if we fail to
introduce our products into other markets with other customers, our results of
operations could be adversely affected, our business may fail and investors may
lose their entire investment.




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




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




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




The Board
of Directors is authorized to issue up to 200,000,000 common shares, of which
54,502,245 are issued and outstanding as of November 10, 2008. Our board of
directors has the authority to cause our Company to issue additional shares of
common stock without the consent of any of our shareholders. Consequently, our
shareholders may experience significant dilution in their ownership of our
Company in the future.




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




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




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




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


10


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




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




•
            issue
      additional equity securities that would dilute the ownership of our
      stockholders;•
            use
      cash that we may need in the future to operate our
    business;•
            incur
      or assume debt on terms unfavorable to us or that we are unable to
      repay;•
            incur
      large charges or substantial liabilities;•
            encounter
      difficulties retaining key employees of an acquired company or integrating
      diverse business cultures; and•
            become
      subject to adverse tax consequences, substantial depreciation or deferred
      compensation charges.







For
example, in our acquisition of Shafi, the consideration we paid consisted of
shares of our common stock, which diluted the ownership of our existing
stockholders.




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




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




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




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




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




11




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




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




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




The sale
of a substantial number of shares of our common stock in the public market could
cause a reduction in the market price of our common stock. We had 54,502,245
shares of common stock issued and outstanding as of November 10, 2008. On
April 20, 2007 we filed a registration statement under the Securities Act
of 1933. This registration statement, declared effective on May 11, 2007,
relates to the resale by certain selling stockholders of up to 13,977,494 shares
of common stock and 23,694,259 shares of common stock issuable to security
holders upon exercise of share purchase warrants. The 13,977,494 shares
registered by this registration statement are included in the number of our
issued and outstanding common shares as of November 10, 2008, shown above. Upon
the exercise of the outstanding warrants an additional 23,694,259 shares will
also be outstanding and further dilute your interest as a shareholder.
Furthermore, in connection with out acquisition of Shafi, we issued shares of
our common stock, and agreed to register those shares for resale.  Any
significant downward pressure on the price of our common stock as the selling
stockholders under one or more registration statements sell the shares of our
common stock could encourage short sales by the selling stockholders or others.
Any such short sales could place further downward pressure on the price of our
common stock. If the price of our common stock goes down, investors could lose
most of the value of their investments.




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




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




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




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




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




12




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




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




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







Item 2.     Unregistered Sales of Equity
Securities and Use of Proceeds




As
described above under “Management’s Discussion and Analysis of Financial
Conditions and Results of Operations – Shafi Acquisition,” in order to finance
the Company’s $100,000 advance to Shafi prior to the Shafi Closing, on August
12, 2008, the Company’s Chief Executive Officer and former Chief Executive
Officer each advanced to the Company $50,000 against delivery by the Company of
promissory notes.  The promissory notes provide for interest at 6% per
annum.  The promissory notes also provide that each of the promissory
note holders will be issued 50,000 common share purchase warrants.  On
September 26, 2008, the promissory notes plus accrued interest were repaid in
full and we issued a total of 100,000 common share purchase warrants to our
Chief Executive Officer and former Chief Executive Officer.  Each
common share purchase warrant entitles the holder to purchase one share for
three years at a price of $0.36 per share.  The above promissory
notes, common share purchase warrants and shares issuable upon exercise of the
warrants (the “Warrant Shares” and together with the promissory notes and
warrants, the “Securities”) have not been registered under the Securities Act of
1933, as amended (“Securities Act”), and was, or will be in the case of the
Warrant Shares, issued and sold in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.  Each of the Chief Executive Officer and former Chief
Executive Officer is an accredited investor and acquired the Securities for his
own account for investment purposes only and not for resale unless registered
under the Securities Act or pursuant an exemption from such
registration.






Item 3.     Defaults upon Senior
Securities




Not
applicable






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




Not
applicable




13





Item 5.     Other
Information




Not
applicable







Item 6.     Exhibits




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






Exhibits


Number
            Exhibit3.1(1)
            Restated
      Articles of Incorporation of the Company dated June 1,
  20003.2*
            By-Laws
      of the Company3.3(2)
            Amendment
      to By-Laws of the Company10.1(3)
            Share
      Purchase Agreement, dated August 12, 2008, by and among Braintech, Inc.,
      SHAFI, Inc., SHAFI Innovation, Inc. and Adil Shafi10.2(3)
            Employment
      Agreement, dated August 12, 2008, by and between Braintech, Inc. and Adil
      Shafi10.3(3)
            Non-Competition
      Agreement, dated August 12, 2008, of Adil Shafi10.4(3)
            Lock-Up
      Agreement, dated August 12, 2008, of Adil Shafi10.5(4)
            Letter
      Agreement between Royal Bank of Canada and the Company10.6*
            Form
      of Warrant issued to the registrant’s Chief Executive Officer and former
      Chief Executive Officer on September 26, 200810.7*
            Form
      of Warrant issued to the LC Providers on September 26,
  200831.1*
            Certificate
      of the Principal Executive Officer pursuant to Sec 302 of the
      Sarbanes-Oxley Act of 200231.2*
            Certificate
      of Principal Financial and Accounting Officer pursuant to Sec 302 of the
      Sarbanes-Oxley Act of 200232.1*
            Certificate
      of Principal Executive Officer pursuant to Sec 906 of the Sarbanes-Oxley
      Act of 200232.2*
            Certificate
      of Principal Financial and Accounting Officer pursuant to Sec 906 of the
      Sarbanes-Oxley Act of 2002




Exhibits
filed herewith are designated with an asterisk (*)





(1)
            Exhibit
      incorporated by reference to an exhibit to the registrant’s Form S-1 filed
      with the Securities and Exchange Commission on May 2,
  2001.


(2)
            Exhibit
      incorporated by reference to an exhibit to the registrant’s Form 10-KSB
      for the year ended December 31, 2001 filed with the Securities and
      Exchange Commission on March 29,
2002.


(3)
            Exhibit
      incorporated by reference to an exhibit to the registrant’s Form 8-K filed
      with the Securities and Exchange Commission on August 18,
      2008.


(4)
            Exhibit
      incorporated by reference to an exhibit to the registrant’s Form 8-K filed
      with the Securities and Exchange Commission on September 23,
      2008.




14




SIGNATURES




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





BRAINTECH, INC. (the
Registrant)





Signature
            
            Title
            Date/s/ Frederick Weidinger
            
            Chief
      Executive Officer,
            November
      14, 2008Frederick
      Weidinger
            
            (Principal
      Executive Officer)/s/ Edward A. White
            
            Treasurer,
            November
      14, 2008Edward
      A. White
            
            (Principal
      Financial Officer)




15




EXHIBIT
INDEX





Number
            Exhibit3.1(1)
            Restated
      Articles of Incorporation of the Company dated June 1,
  20003.2*
            By-Laws
      of the Company3.3(2)
            Amendment
      to By-Laws of the Company10.1(3)
            Share
      Purchase Agreement, dated August 12, 2008, by and among Braintech, Inc.,
      SHAFI, Inc., SHAFI Innovation, Inc. and Adil Shafi10.2(3)
            Employment
      Agreement, dated August 12, 2008, by and between Braintech, Inc. and Adil
      Shafi10.3(3)
            Non-Competition
      Agreement, dated August 12, 2008, of Adil Shafi10.4(3)
            Lock-Up
      Agreement, dated August 12, 2008, of Adil Shafi10.5(4)
            Letter
      Agreement between Royal Bank of Canada and the Company10.6*
            Form
      of Warrant issued to the registrant’s Chief Executive Officer and former
      Chief Executive Officer on September 26, 200810.7*
            Form
      of Warrant issued to the LC Providers on September 26,
  200831.1*
            Certificate
      of the Principal Executive Officer pursuant to Sec 302 of the
      Sarbanes-Oxley Act of 200231.2*
            Certificate
      of Principal Financial and Accounting Officer pursuant to Sec 302 of the
      Sarbanes-Oxley Act of 200232.1*
            Certificate
      of Principal Executive Officer pursuant to Sec 906 of the Sarbanes-Oxley
      Act of 200232.2*
            Certificate
      of Principal Financial and Accounting Officer pursuant to Sec 906 of the
      Sarbanes-Oxley Act of 2002




Exhibits
filed herewith are designated with an asterisk (*)





(1)
            Exhibit
      incorporated by reference to an exhibit to the registrant’s Form S-1 filed
      with the Securities and Exchange Commission on May 2,
  2001.


(2)
            Exhibit
      incorporated by reference to an exhibit to the registrant’s Form 10-KSB
      for the year ended December 31, 2001 filed with the Securities and
      Exchange Commission on March 29,
2002.


(3)
            Exhibit
      incorporated by reference to an exhibit to the registrant’s Form 8-K filed
      with the Securities and Exchange Commission on August 18,
      2008.


(4)
            Exhibit
      incorporated by reference to an exhibit to the registrant’s Form 8-K filed
      with the Securities and Exchange Commission on September 23,
      2008.






16