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



FORM 10-QSB

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

For the quarterly period ended June 30, 2004

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

For the transition period from

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



|Nevada(State or jurisdiction of incorporation) | 000-24911(Commission File Number) | 98-0168932(IRS Employer Identification No.)
|---------------------------------------------- | --------------------------------- | -------------------------------------------

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



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



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

None

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $0.001 par value
(Title of Class)



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

Yes [x] No [ ]

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 18,874,603 Common shares, par value $0.001, as at August 11, 2004.

Transitional Small Business Disclosure Format (check one):

Yes [ ] No [x]

Index to Exhibits on Page 33

-2-

Braintech, Inc.

Form 10-QSB

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements page 3

Item 2. Management's Discussion and Analysis or Plan of Operation page 19

Item 3 Controls and Procedures page 31



PART II. OTHER INFORMATION

Item 1. Legal Proceedings page 32

Item 2. Changes in Securities page 32

Item 3. Defaults upon Senior Securities page 32

Item 4. Submission of Matters to a Vote of Securities Holders page 32

Item 5. Other Information page 32

Item 6. Exhibits and Reports on Form 8-K page 33

-3-

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 at June 30, 2004 (unaudited) and December 31, 2003;

(ii) Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2003 and 2004;

(iii) Condensed Consolidated Statements of Stockholders' Equity (unaudited) for the six months ended June 30, 2004;

(iv) Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2003 and 2004; and

(v) Notes to Condensed Consolidated Financial Statements (unaudited) for the six months ended June 30, 2003 and 2004.

-4-

|Condensed Consolidated Financial Statements of
(Expressed in United States dollars)BRAINTECH, INC.Six months ended June 30, 2004 and 2003
Three months ended June 30, 2004 and 2003
(Unaudited - Prepared by Management)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-5-



|BRAINTECH, INC.                                                           
|--------------------------------------------------------------------------
|                                                                          
|Condensed Consolidated Balance Sheets
(Expressed in United States dollars)
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Assets                                                                    
|                                                                          
|Current assets:                                                           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Fixed assets                                                              
|                                                                          
|                                                                          
|                                                                          
|Liabilities and Stockholders' Equity (Deficiency)                         
|Current liabilities:                                                      
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Non-current liabilities                                                   
|                                                                          
|                                                                          
|Total liabilities                                                         
|                                                                          
|Stockholders' equity (deficiency):                                        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          

See accompanying notes to condensed consolidated financial statements.

-6-

|BRAINTECH, INC.                                                                                                          
|-------------------------------------------------------------------------------------------------------------------------
|                                                                                                                         
|Condensed Consolidated Statements of Operations
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                         

|                            | Six Months Ended June 30               | Three Months Ended June 30        
|--------------------------- | -------------------------------------- | ----------------------------------
|2004                        | 2003                                   | 2004                              
|                           
|Sales                       |                                        | $                                 
|Cost of sales               | 18,641                                 | 4,243                             
|                           
|Gross margin                | 285,630                                | 96,224                            
|Operating expenses:         |                                        |                                   
|                            | Research and development               | 246,581                           
|                            | Selling, general and administration    | 828,323                           
|                            | Software license settlement (note 9)   | 103,883                           
|                           
|                            |                                        | 1,178,787                         
|                           
|Operating loss              | (893,157)                              | (895,410)                         
|Non-operating:              |                                        |                                   
|                            | Interest income                        | 20                                
|                            | Interest on promissory notes           | -                                 
|                            | Interest on convertible debentures     | (72,059)                          
|                            | Beneficial conversion feature accreted |                                   
|                            |                                        | to convertible debentures (note 5)
|                            | Fair value of warrants issued on       |                                   
|                            |                                        | conversion of debentures (note 5) 
|                           
|                            |                                        | (508,843)                         
|                           
|Loss for the period         | $                                      | (1,402,000)                       
|                           
|                            |                                        |                                   
|Loss per share information: |                                        |                                   
|                            | Basic and diluted                      | $                                 
|                           
|                            |                                        |                                   
|Weighted average number of  |                                        |                                   
|                            | Common shares outstanding              | 18,153,822                        
|                           
|                            |                                        |                                   

See accompanying condensed notes to consolidated financial statements.

-7-

|BRAINTECH, INC.                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                
|Condensed Consolidated Statements of Stockholders' Equity (Deficiency)
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                                                

|                                            | Common stock                       | Additional
paid-in capital | Accumulated
deficit | Total
stockholders'
equity (deficit)
|------------------------------------------- | ---------------------------------- | -------------------------- | ------------------- | ------------------------------------
|
|
|Number of
shares                            | Amount                            
|
|                                           
|Balance, December 31, 2003                  | 18,183,015                         | $                          | 18,183              | $                                   
|Common stock transactions                   |                                    |                            |                     |                                     
|                                            | (net of share issue costs)         | -                          | -                   | -                                   
|                                            | Shares issued for cash on exercise |                            |                     |                                     
|                                            |                                    | of employee stock options  | 57,000              | 57                                  
|                                            | Shares issued on conversion of     |                            |                     |                                     
|                                            |                                    | convertible debentures     | 521,588             | 522                                 
|                                            | Shares issued for finders fees     | 113,000                    | 113                 | (113)                               
|Compensatory benefit of warrants            |                                    |                            |                     |                                     
|                                            | issued to contractor               | -                          | -                   | 11,406                              
|Fair value of debenture beneficial          |                                    |                            |                     |                                     
|                                            | conversion feature                 |                            |                     | 524,998                             
|Debenture issue expenses                    |                                    |                            | (1,408)             |                                     
|Fair value of warrants issued on conversion |                                    |                            |                     |                                     
|                                            | of debentures                      |                            |                     | 42,170                              
|Loss for the period                         | -                                  | -                          |                     | (1,402,000)                         
|                                           
|Balance, June 30, 2004                      | 18,874,603                         | $                          | 18,875              | $                                   
|                                           

See accompanying condensed notes to consolidated financial statements.

-8-

|BRAINTECH, INC.                                                                                            
|-----------------------------------------------------------------------------------------------------------
|                                                                                                           
|Condensed Consolidated Cash Flows
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                           

|                                                 |                                                |                                                          
|------------------------------------------------ | ---------------------------------------------- | ---------------------------------------------------------
|                                                 | Six Months Ended June 30                      
|                                                 | 2004                                           | 2003                                                     
|                                                
|Cash flows from operating activities             |                                                |                                                          
|                                                 | Loss for the period                            | $                                                        
|                                                 | Items not involving cash:                      |                                                          
|                                                 |                                                | Amortization                                             
|                                                 |                                                | Shares reserved for issuance for services rendered       
|                                                 |                                                | Compensatory benefit of warrants issued to contractors   
|                                                 |                                                | Interest on promissory notes                             
|                                                 |                                                | Accretion of debenture beneficial conversion feature     
|                                                 |                                                | Fair value of warrants issued on conversion of debentures
|                                                 | Changes in non-cash operating working capital: |                                                          
|                                                 |                                                | Inventory                                                
|                                                 |                                                | Accounts receivable                                      
|                                                 |                                                | Prepaid expenses                                         
|                                                 |                                                | Deferred costs                                           
|                                                 |                                                | Accounts payable and accrued liabilities                 
|                                                 |                                                | Accrued interest on convertible debentures               
|                                                 |                                                | Deferred leasehold inducements                           
|                                                 |                                                | Deferred revenue                                         
|                                                
|                                                 | Net cash used in operating activities          | (888,316)                                                
|Cash flows from investing activities             |                                                |                                                          
|                                                 | Purchase of fixed assets                       | (18,220)                                                 
|                                                
|                                                 | Net cash used in investing activities          | (18,220)                                                 
|Cash flows from financing activities             |                                                |                                                          
|                                                 | Promissory notes payable                       | -                                                        
|                                                 | Convertible debentures issued                  | 525,000                                                  
|                                                 | Debenture issue costs                          | (1,408)                                                  
|                                                 | Common shares issued, net of issue costs       | 13,100                                                   
|                                                
|                                                 | Net cash provided by financing activities      | 536,692                                                  
|                                                
|Increase (decrease) in cash and cash equivalents | (369,844)                                      | 16,267                                                   
|Cash and cash equivalents, beginning of period   | 741,474                                        | 51,688                                                   
|                                                
|Cash and cash equivalents, end of period         | $                                              | 371,630                                                  
|                                                
|Supplemental information:                        |                                                |                                                          
|                                                 | Non-cash financing and investing activities:   |                                                          
|                                                 |                                                | Fair value of debenture beneficial conversion feature    
|                                                 |                                                | Fair value of warrants issued on conversion of debentures
|                                                 |                                                |                                                          
|                                                

See accompanying condensed notes to consolidated financial statements.

-9-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|1.                                                                                                                            
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|2.                                                                                                                            
|                                                                                                                              
|                                                                                                                              



-10-



|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|2.                                                                                                                            
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              



-11-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                              
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              
|2.                                                                                                                            
|                                                                                                                              
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-12-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                              
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              

|3. | Deferred leasehold inducement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4. | Promissory notes payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | In January and March, 2003, the Company's Chief Executive Officer advanced CAD $235,000 ($155,838) in return for unsecured demand promissory notes with an annual interest rate of 8%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Between April 12, 2003 and July 29, 2003, the Company's Chief Executive Officer advanced a further CAD $833,000 ($594,355) to the Company. These additional financings bore interest at 8% per annum and were repayable on demand. A general security agreement covering all of the Company's real, personal and intangible property was pledged as security for the additional advances.                                                                                                                                                                                                                                                                                                                                                                      
|   | The agreements governing the issuance of the convertible debentures (note 5) provided that the general security agreement pledged as security for the promissory notes issued to the Company's Chief Executive Officer be discharged, provided that $250,000 of the proceeds be used to repay the notes, and further provided that the unpaid balance of the notes be repaid by issuing units at a deemed price of $0.25 per unit. A partial repayment of $50,000 was made on September 22, 2003 and on November 3, 2003, the remaining $200,000 was repaid.                                                                                                                                                                                                   
|   | All of the promissory notes were repayable in Canadian Dollars and as such as at November 3, 2003 a foreign exchange loss of $58,855 and interest of $29,607 was accrued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | On November 3, 2003, the unpaid balance of the promissory notes was repaid by the issuance of 2,354,621 common shares and 1,177,310 share purchase warrants. Each share purchase warrant has a five year term and is exercisable into one common share at a price of $0.25 per share. Since the promissory notes did not have terms for conversion into equity, the transaction is considered a settlement of debt for accounting purposes. The face value of the debt plus accrued interest is compared to the fair market value of the cash and equity received by the Chief Executive Officer and a gain or loss is recognized. Accordingly the Company recorded a loss on settlement of debt in the amount of $741,705 in the year ended December 31, 2003.

-13-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                              
|                                                                                                                              
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              

|5. | Convertible debentures:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | On September 25, 2003, the Company executed a funding term sheet whereby investors agreed to provide up to $2,250,000 in exchange for convertible debentures. A general security agreement covering all of the Company's real, personal and intangible property is pledged as security for the debentures. The debentures are to mature on August 25, 2006 and bear interest at eight percent (8%) per annum. All convertible debentures rank pari passu with all convertible debentures to be issued pursuant to the term sheet. The principal amount and accrued interest are convertible until maturity into units at a price of $0.25 per unit. Each unit comprises one common share and one half-share (1/2) share purchase warrant. Each whole warrant has a five (5) year term and is exercisable at any time into one common share at a price of $0.25 per share.                                                                                
|   | The debentures may be redeemed by repayment of all outstanding principal and accrued interest at any time on 7 days notice. The debenture holders have a first right to convert all or any portion of the principal and accrued interest into units prior to redemption.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company may at its discretion require the debenture holders to convert the outstanding principal and accrued interest into units if the closing trading price of the Company's shares on the OTCBB or other principal trading market is $1.00 or greater for any 30 consecutive trading days after the shares issuable pursuant to conversion of the debentures are registered under the Securities Act of 1933.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On September 5, 2003, in accordance with the terms of a Securities Purchase Agreement, the Company issued a convertible debenture in the amount of $750,000. A finder's fee was paid to a person related to the investor by way of issuance of 150,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finder's fee has been recognized in stockholders' equity. An additional finder's fee was paid to an unrelated third party by payment of $26,250 cash and the issuance of 105,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the finder's fees has been recognized in stockholders' equity.
|   | On October 1, 2003, in accordance with the terms of Securities Purchase Agreements, the Company issued convertible debentures in the amount of $400,000. A finder's fee was paid to one of the investors by way of issuance of 112,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finder's fee has been recognized in stockholders' equity.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | On December 10, 2003, in accordance with the terms of Securities Purchase Agreements, the Company issued convertible debentures in the amount of $575,000. A finder's fee was paid to one of the investors by way of issuance of 115,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finder's fee has been recognized in stockholders' equity.                                                                                                                                                                                                                                                                                                                                                                                                                 

-14-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                              
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              

|5. | Convertible debentures (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | On May 10, 2004, in accordance with the terms of Securities Purchase Agreements, the Company issued convertible debentures in the amount of $337,500. Finders' fees were paid to two of the investors by way of issuance of 75,500 units at $0.25 per unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finders' fees has been recognized in stockholders' equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | On May 21, 2004, in accordance with the terms of Securities Purchase Agreements, the Company issued convertible debentures in the amount of $187,500. A finders' fee was paid to one of the investors by way of issuance of 37,500 units at $0.25 per unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finders' fees has been recognized in stockholders' equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | On conversion of the debentures into common shares and share purchase warrants, the fair value of the share purchase warrants will be assigned and recognized as an expense. At the request of some debenture holders, on April 15, 2004 the Company converted $125,000 of principal and $5,397 of accrued interest into 521,588 common shares and 260,794 share purchase warrants. Accordingly, the Company expensed $42,170 as the fair value of the warrants issued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Because the conversion price of the debentures was less than the closing trading prices of the Company's shares on the commitment date, the convertible debentures contain a beneficial conversion feature. In accordance with Emerging Issues Task Force ("EITF") Issue 98-5, the embedded beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. In this case, the intrinsic value of the beneficial conversion feature exceeds the face value of the debentures and is therefore limited to the face value. The face value of the debt has been allocated to additional paid-in capital and is being accreted to the face value of the convertible debentures over the term of the debentures by a charge to interest expense. Accrued interest is also recorded based on the face value of the debentures at the stated interest rate (8%). The amount recorded on the balance sheet as at June 30, 2004 has been calculated as follows:
|  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Face value of convertible debentures issued (cash received)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Beneficial conversion feature allocated to additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Beneficial conversion feature accreted to convertible debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Accrued interest payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Conversion of debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   | Convertible debentures at June 30, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  

-15-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                              
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | Shareholders' equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|7. | Share purchase warrants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | During the year ended December 31, 2001, in conjunction with the private placements, the Company issued 1,066,902 common share purchase warrants. By directors' resolutions, the expiry date of these warrants was subsequently extended to February 28, 2004. These warrants expired on February 28, 2004 and none of these warrants were exercised prior to expiry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | During the year ended December 31, 2002, in conjunction with the private placements the Company issued 1,880,358 common share purchase warrants (the purchasers received one common share purchase warrant for each two common shares purchased). Each common share purchase warrant entitles the holder to purchase one additional share for one year at prices of $0.20 to $1.00 per share. By a directors resolution dated March 20, 2003, the Company extended the expiry date of 564,319 of the warrants to February 28, 2004. These warrants expired on February 28, 2004 and none of these warrants were exercised prior to expiry. By a directors' resolution dated November 5, 2003, the Company extendedthe expiry date of the share purchase warrants which expired on October 28, 2003 to October 28, 2005 and extended the expiry date of the share purchase warrants which were to expire on December 17, 2003 to December 17, 2005. None of these warrants have been exercised or cancelled

-16-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                              
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              

|7. | Share purchase warrants (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | On October 17, 2002, the Company authorized the issuance of 500,000 common share purchase warrants to the Company's Chief Executive Officer pursuant to an agreement dated September 30, 2002, whereby the officer agreed to accept the warrants in settlement of salary owed for the period from January 1, 2002 to September 30, 2002. Each share purchase warrant entitles the holder to purchase one common share for two years at $0.31 per share, which was the fair market value of the common shares on September 30, 2002, therefore the intrinsic market value of the warrants was nil. The fair value of the warrants as calculated by the Black-Scholes option pricing model of $39,409 has been recorded as an expense and additional paid-in capital in the year ended December 31, 2002.                                                                                      
|   | As partial consideration for finders' fees relating to the issuance of convertible debentures (note 5), the Company issued a total of 241,000 share purchase warrants exercisable at $0.25 per share for a period of five (5) years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | As partial consideration for an investor relations service agreement, the Company issued share purchase warrants as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 50,000 warrants exercisable at $0.75 vesting on July 7, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 50,000 warrants exercisable at $1.00 vesting on October 6, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 50,000 warrants exercisable at $1.25 vesting on January 4, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The fair value of the warrants ($4,121) has been recorded as an expense and additional paid-in capital in the year ended December 31, 2003. The fair value was calculated using the Black-Scholes option-pricing model and the following assumptions: dividend yield 0%, expected volatility 95%, risk free rate interest rate 2.61%, and an expected term of 1 year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Pursuant to the agreements governing the issuance of convertible debentures (note 5), the Company executed a consulting agreement with one of the investors for strategic introductions and general consulting in the manufacturing industry. The consulting agreement is for a period of two (2) years commencing December 22, 2003. As consideration for entering into the consulting agreement the Company issued 500,000 share purchase warrants exercisable at $0.45 per share for a period of five (5) years. The fair value of the warrants ($185,400) has been recorded as an expense and additional paid-in capital in the year ended December 31, 2003. The fair value was calculated using the Black-Scholes option-pricing model and the following assumptions: dividend yield 0%, expected volatility 256%, risk free rate interest rate 1.84%, and an expected term of 2 years.
|   | On November 5, 2003, as partial repayment of the promissory notes payable (note 4), the Company issued to its Chief Executive Officer, 1,177,310 share purchase warrants exercisable at $0.25 per share for a period of five (5) years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



-17-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                              
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              

|7. | Share purchase warrants (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | As consideration for a consulting agreement, on January 9, 2004, the Company issued share purchase warrants as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The fair value of the 25,000 warrants ($11,406) has been recorded as an expense and additional paid-in capital in the six months ended June 30, 2004. The fair value was calculated using the Black-Scholes option-pricing model and the following assumptions: dividend yield 0%, expected volatility 256%, risk free rate interest rate 1.68%, and an expected term of 2 years. The fair value of the 250,000 warrants will be recorded when management determines that it is likely that the warrants will become exercisable in accordance with the performance criteria.
|   | On April 15, 2004 the Company converted $125,000 of principal and $5,397 of accrued interest into 521,588 common shares and 260,794 share purchase warrants. Each warrant is exercisable at $0.25 into one common share for five (5) years. The fair value of the warrants ($42,170) has been recorded as an expense.                                                                                                                                                                                                                                                        
|   | A summary of the Company's share purchase warrants outstanding as at June 30, 2004 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   | Number of warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 427,797                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 133,553                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 500,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 52,500                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 148,667                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 113,740                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 203,820                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 288,462                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 275,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 50,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 50,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 50,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 50,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 75,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 56,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 1,177,310                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | 57,500                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | 500,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 260,794                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 56,500                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   | 4,209,349                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  

-18-

|BRAINTECH, INC.                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|Notes to Condensed Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in United States dollars)
|                                                                                                                              
|Six months ended June 30, 2004 and 2003                                                                                       
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|8.                                                                                                                            
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|9.                                                                                                                            
|                                                                                                                              



-19-

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Forward-looking statements deal with our current plans, intentions, beliefs and expectations and are statements of future economic performance. Statements containing terms like "believes", "does not believe", "plans", "expects", "intends", "estimates", "anticipates", and other phrases of similar meaning are considered to imply uncertainty and are forward-looking statements.

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

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

Where we say "we", "us", "our", or "the Company", we mean Braintech Inc. and its subsidiaries.

OVERVIEW

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

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

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

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

Early in 2002 we completed a commercial version of eVisionFactory that did not include our Internet based service and support system. We included eVisionFactory software with the systems we delivered in 2002, 2003 and 2004.

In the 2nd quarter of 2001, at the request of Ford Motor Company, we completed the development of a 3D single camera vision guidance system for robots used in automotive manufacturing systems ("SC3D"). The SC3D system

-20-

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

To date, we have delivered all 19 SC3D vision systems ordered by ABB. All of these systems include the commercialized version of eVF, SC3D and AutoCal-3D. These systems are integrated with ABB robots and are currently operating in Ford's automotive power train assembly lines.

In July 2001, we entered into a Memorandum of Understanding with Marubeni Corporation, pursuant to which the two companies agreed to cooperate in developing and marketing of the Braintech technology for industrial applications including vision guided robots in the Japanese and Asian markets. Marubeni is a Japanese trading company with offices and subsidiaries throughout the world. Marubeni is ranked 25th on the 2002 Fortune Global 500 ranking of the world's largest corporations, based on 2001 revenues.

During 2002, we continued the development of our relationship with Marubeni Corporation and that culminated in the signing of a Marketing and Development Agreement. The agreement, which covers Southeast Asia and Australia, provides for mutual exclusivity, whereby Marubeni is granted an exclusive license to manufacture and distribute Braintech's vision guided robotic systems and Marubeni agrees that it will not deal with any competitive technology or products during the three-year term. Marubeni placed an order for two eVF development systems and these systems were delivered upon completion of the Marketing and Development Agreement. We have completed the integration work for utilization of eVF with Kawasaki robots. We have also set up the demonstration/training models of eVF in the Marubeni Vision Techno Centre in Nagoya, Japan and have provided onsite training to Marubeni engineers. In addition, Mr. Babak Habibi, our President, gave a presentation to senior level executives of Marubeni at the Techno Centre. We have also hired a Vice-President Marketing and Business Relations - Asian Region to oversee and manage our relationship with Marubeni.

During 2002 to 2004 we continue to add functionality to eVF by developing additional components as follows:

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

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

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

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

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

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

Effective February 1, 2004, ABB and Braintech entered into an Exclusive Channel Partner Agreement For The Licensing Of Braintech's Vision Guided Robotics Technologies And Software Products to develop and market

-21-

vision guided robotic systems to ABB's North American automotive customers. This agreement has to date resulted in the receipt of additional purchase orders for vision guided robotic systems. These systems will be completed and installed in the third and fourth quarters of 2004.

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

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

As of June 30, 2004, we have incurred an aggregate deficit of approximately $15.9 million during our development and operations stage. We may 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 recognised.

We have generated total revenues, from inception on January 3, 1994 to June 30, 2004, in the amount of $1,224,849.

Plan Of Operations

Our strategic operating priorities for the year ended December 31, 2004 include the following:

Our first and major priority for 2004 is to grow our revenue through our Channel Partner Agreement with ABB. We intend to accomplish this by providing eVF training to both their technical and sales staff and by jointly developing sales and marketing materials. The marketing approach includes the exclusive branding by ABB of jointly developed Vision Guided Robotic solutions. In May 2004, ABB announced the launch of a North American marketing campaign for "TrueView". TrueView is a family of vision guided robotic systems that fully integrate Braintech's proprietary vision guidance technologies and the eVisionFacory software platform. We believe that, in combination with ABB's North American sales, engineering and field service teams, Braintech and TrueView will be able to achieve significant market penetration.

Another priority for 2004 is to develop markets for our Internet-based service and support system. We intend to accomplish this by leveraging our Channel Partner Agreement with ABB so that full operating systems can be set up to demonstrate to potential end users the value and flexibility of both the Internet-based service and support system and the eVF platform on which it is built. We also intend to seek out potential end users outside the automobile manufacturing industry.

In 2004 we also intend to continue the development of our business in Asia through our relationship with Marubeni. These developments may include an arrangement with an Asian integrator to leverage the inherent strengths of Marubeni's trading and business relationships.

Critical Accounting Policies and Changes to Existing Accounting Policies

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

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

-22-

Revenue Recognition.

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

Income Taxes.

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

Effects of Foreign Currency Exchange Rates and Inflation

While we record our financial statements in United States dollars, many of our expenses are incurred in Canadian dollars. As a result, fluctuations in the Canadian dollar exchange rate can affect our expenses, and thus our profit or loss. During the six-month period ended June 30, 2004 we incurred a foreign exchange gain of $110. Foreign exchange gains and losses resulted principally from transactions recorded in United States dollars for reporting purposes, but actually carried out in Canadian dollars. As at the date of this annual report, we have not engaged in exchange rate-hedging activities. To the extent we implement such hedging activities in the future, we cannot assure that we will be successful.

In the year ended December 31, 2003 and the six-month period ended June 30, 2004 inflation has had a limited impact on our operations. However, there can be no assurance that inflation will not have a material adverse effect on our results of operations in the future.

Quantitative and Qualitative Disclosures about Market Risk

As at June 30, 2004 we have not entered into or acquired financial instruments that have a material market risk. We have no financial instruments for trading or other purposes or derivative or other financial instruments with off balance sheet risk. All financial assets and liabilities are due within the next twelve months and are classified as current assets or liabilities in the consolidated balance sheet provided with this annual report. The fair value of all financial instruments at June 30, 2004 approximate their carrying values.

To June 30, 2004, the majority of our cash costs have been realized or incurred in Canadian dollars. To date we have not entered into foreign currency contracts to hedge against foreign currency risks between the Canadian dollar or other foreign currencies and our reporting currency, the United States dollar. Generally, however, we attempt to manage our risk of exchange rate fluctuations by maintaining sufficient net assets in Canadian dollars to retire our liabilities as they come due.



Results of Operations

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

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

-23-

Six-month period ended June 30, 2004 compared with the six-month period ended June 30, 2003

The weighted average exchange rate used to translate the Canadian Dollar into the United States Dollar for the six-month period ended June 30, 2004 was 1.33984. For the six-month period ended June 30, 2003 the weighted average exchange was 1.44431. The change in our operating expenses illustrates the effect of fluctuating foreign exchange rates have on our reported results. We reported an increase in operating expenses of approximately $83,000 from $991,634 for the six-month period ended June 30, 2003 to $1,074,904 for the six-month period ended June 30, 2004. However, when adjusted for the change in the foreign exchange rate, the actual change in operating expense activity was an increase of approximately $5,500. The foreign exchange adjustment accounted for an increase of $77,500 in reported operating expenses. We have isolated the effect the fluctuating foreign exchange rates has on our reported results in the discussion below.

Revenue from operations for the six-month period ended June 30, 2004 was $304,271 (June 30, 2003 - $100,467). The amount of our revenues is calculated in accordance with the software revenue recognition rules outlined in the American Institute of Certified Public Accountant's Statement of Position (SOP) 97-2. More detail on how we apply SOP 97-2 is provided at page 22.

Revenue for the six month period ended June 30, 2004 included approximately $233,400 for the installation of eight vision systems delivered to ABB for installation in Ford Motor Company engine assembly plants, approximately $20,000 for engineering services, approximately $28,500 for training and commissioning, and approximately $22,300 previously recorded as deferred revenue and now recognized as revenue.

Cost of sales for the six-month period ended June 30, 2004 was $18,641 or approximately 6.1% of sales.

Revenue for the six-month period ended June 30, 2003, includes approximately $27,250 for a vision system delivered to ABB for Ford Motor Company, approximately $20,000 for eVF run time licenses for Marubeni, approximately $7,400 for training and consulting, and approximately $43,000 previously recorded as deferred revenue and now recognized as revenue.

Cost of sales for the six-month period ended June 30, 2003 was $4,243 or approximately 4.2%.

Research and development expenses increased $1,526 from $245,055 for the six-month period ended June 30, 2003 to $246,581 for the six-month period ended June 30, 2004. The foreign exchange differential accounted for an increase of approximately $17,800 indicating that actual research and development activity decreased by approximately $16,300. The decrease is accounted for by a reduction in wage and benefit costs.

Selling, general, and administrative expenses increased $81,744 from $746,579 for the six-month period ended June 30, 2003 to $828,323 for the six-month period ended June 30, 2004. The foreign exchange differential accounted for an increase of approximately $59,900 indicating an actual increase in activity of approximately $21,800. Several factors contributed to the increase and in discussing these factors, the foreign exchange element has been indicated. The principal factors were as follows:

- Actual general and administrative salaries increased approximately $98,400 from $326,300 to $424,700. The foreign exchange differential accounted for an increase of approximately $33,100 resulting in a net reported increase of approximately $131,500. The actual increase resulted from minor salary increases, the payment of a salary to our chief Executive Officer (he received no salary for the six-month period ended June 30, 2003), the reduction of our administrative staff by one employee and the hiring on January 1, 2004 of our Detroit based Vice-President of Sales and General Manager North American Operations.
- For the six-month period ended June 30, 2004, we recorded a stock based compensation charge of $11,406 in accordance with the application of the Black-Scholes option pricing model on the issuance of 25,000 share purchase warrants granted in connection with a consulting agreement. There was no similar charge during the six-month period ended June 30, 2003.

-24-

- Actual amortization expenses decreased approximately $19,700 from $34,200 to $14,500 principally as a result of the diminishing value of our fixed assets and the full amortization of fixed assets amortized on the straight-line basis. The foreign exchange differential accounted for an increase of approximately $1,100 resulting in a net reported decrease of approximately $18,600.
- Actual legal expenses were unchanged from 2003 to 2004.
- Actual accounting expenses decreased approximately $8,100 from $30,900 to $22,800. The foreign exchange differential accounted for an increase of approximately $1,800 resulting in a net reported decrease of approximately $6,300.
- Actual overall travel and marketing expenditures decreased approximately $21,300 from approximately $114,900 to approximately $93,600. The foreign exchange differential accounted for an increase of approximately $7,300 resulting in a net reported decrease of approximately $14,000. The individual components of the actual increase are as follows: trade shows decreased from $59,700 to $32,300, investor relations increased from $27,800 to $32,200, travel decreased from $12,000 to $8,000, and marketing materials increased from $100 to $5,000.
- Actual rent and premises cost increased $6,800 from $77,400 to $84,200. The foreign exchange differential accounted for an increase of approximately $6,600 resulting in a net reported increase of approximately $13,300.

Three-month period ended June 30, 2004 compared with the three-month period ended June 30, 2003

The weighted average exchange rate used to translate the Canadian Dollar into the United States Dollar for the three-month period ended June 30, 2004 was 1.35483. For the three-month period ended June 30, 2003 the weighted average exchange was 1.38861. We reported a decrease in operating expenses of approximately $53,600 from $581,043 for the three-month period ended June 30, 2003 to $527,472 for the three-month period ended June 30, 2004. However, when adjusted for the change in the foreign exchange rate, the actual change in operating expense activity was a decrease of approximately $66,400. The foreign exchange adjustment accounted for an increase of $12,800 in reported operating expenses. We have isolated the effect the fluctuating foreign exchange rates has on our reported results in the discussion below.

Revenue from operations for the three-month period ended June 30, 2004 was $18,007 (June 30, 2003 - $25,413).

Revenue for the three-month period ended June 30, 2004 included approximately $5,400 for training and commissioning, and approximately $12,600 previously recorded as deferred revenue and now recognized as revenue.

Cost of sales for the three-month period ended June 30, 2004 was $2,311 or approximately 12.8% of sales.

Revenue for the three-month period ended June 30, 2003, includes approximately $7,400 for training and consulting revenue and approximately $42,000 previously recorded as deferred revenue and now recognized as revenue.

Cost of sales for the three-month period ended June 30, 2003 was $1,472 or approximately 5.8%.

Research and development expenses decreased $3,238 from $130,856 for the three-month period ended June 30, 2003 to $127,618 for the three-month period ended June 30, 2004. The foreign exchange differential accounted for an increase of approximately $3,100 indicating that actual research and development activity decreased by approximately $6,300. The decrease is accounted for by a reduction in wage and benefit costs.

Selling, general, and administrative expenses decreased $50,333 from $450,187 for the three-month period ended June 30, 2003 to $399,854 for the three-month period ended June 30, 2004. The foreign exchange differential accounted for an increase of approximately $9,700 indicating an actual decrease in activity of approximately $60,100. Several factors contributed to the increase and in discussing these factors, the foreign exchange element has been indicated. The principal factors were as follows:

-25-

- Actual general and administrative salaries increased approximately $41,100 from $170,600 to $211,700. The foreign exchange differential accounted for an increase of approximately $5,300 resulting in a net reported increase of approximately $46,400. The actual increase resulted from minor salary increases, the payment of a salary to our chief Executive Officer (he received no salary for the three-month period ended June 30, 2003), the reduction of our administrative staff by one employee and the hiring on January 1, 2004 of our Detroit based Vice-President of Sales and General Manager North American Operations.
- Actual amortization expenses decreased approximately $9,800 from $17,300 to $7,500 principally as a result of the diminishing value of our fixed assets and the full amortization of fixed assets amortized on the straight-line basis. The foreign exchange differential accounted for an increase of approximately $200 resulting in a net reported decrease of approximately $9,600.
- Actual legal expenses increased approximately $1,900 from $18,400 to $20,300. The foreign exchange differential accounted for an increase of approximately $500 resulting in a net reported increase of approximately $2,400.
- Actual accounting expenses decreased approximately $5,500 from $18,800 to $13,200. The foreign exchange differential accounted for an increase of approximately $300 resulting in a net reported decrease of approximately $5,200.
- Actual overall travel and marketing expenditures decreased approximately $46,400 from approximately $88,200 to approximately $41,800. The foreign exchange differential accounted for an increase of approximately $1,000 resulting in a net reported decrease of approximately $45,400. The individual components of the actual increase are as follows: trade shows decreased from $40,800 to $2,000, investor relations decreased from $31,000 to $20,400, travel decreased from $6,500 to $5,700, and marketing materials increased from $Nil to $5,300.
- Actual rent and premises cost increased $5,300 from $40,200 to $45,500. The foreign exchange differential accounted for an increase of approximately $1,100 resulting in a net reported increase of approximately $6,400.
- Actual annual general meeting expenses increased $4,700 from $21,000 to $25,700. The foreign exchange differential accounted for an increase of approximately $600 resulting in a net reported increase of approximately $5,300.



Liquidity and Capital Resources

Working Capital and Operations

As of August 11, 2004, our trade accounts receivable balance was approximately $385,000 and our cash position was approximately $150,000. He have also completed or are nearing completion of three additional systems totalling approximately $120,000 and expect to invoice these systems during the last half of August or the first half of September.

We estimate that, at our anticipated level of operation for the next twelve months, our cash expenditures will be approximately $200,000 per month. We base this estimate on the following data:

- As at August 11, 2004, we have 22 employees and our salary costs are approximately $115,000 per month;
- For the year ended December 31, 2003 and for the first six months of 2004, our average monthly cash expenditures for general, overhead and administration, exclusive of salary costs, were approximately $65,000. We expect that our general overhead and administrative costs, exclusive of salary costs, will increase to approximately $75,000 per month over the next six months, because of an anticipated increase in general business activity;

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- We do not expect to incur significant capital expenditures during the remainder of 2004 unless they result from an increase in our level of operation; and
- An organization representing leading software manufacturers made enquiries regarding the Company's potential use of unlicensed software. A self-audit revealed that the Company had unlicensed copies of software installed on its computers and, therefore, the Company agreed on June 16, 2004 to pay $103,883 as a settlement. The settlement amount, which was accrued in the three months ended June 30, 2004, is payable in thirteen monthly instalments. Accordingly, our cash expenditures will include approximately $7,360 per month for the next 10 months.

Based on the foregoing, we estimate that our total cash expenditures for the period from August 11, 2004 to October 31, 2004 will be approximately $600,000. Accordingly, at our anticipated level of operation, our existing cash balances, our existing accounts receivable, and our expected sales revenue based on purchase orders received should be sufficient to pay our anticipated cash expenditures to approximately October 31, 2004. To continue beyond October 31, 2004 as a going concern, we will either have to raise additional capital or generate substantial sales revenue. If we cannot do either by October 31, 2004, we face the risk that our business will fail.

Financing Activities

Because our business has not been profitable we have been required to finance the development of our products, to pay the costs of marketing those products, and to cover operating losses by way of equity financing. Since January 1, 2003 we have obtained financing as follows:

Promissory Notes Payable

In January and March 2003, our Chief Executive Officer advanced CAD $235,000 ($155,838) in return for unsecured demand promissory notes with an annual interest rate of 8%. Between April 12, 2003 and July 29, 2003, the Chief Executive Officer advanced a further CAD $833,000 ($594,355). These additional financings bear interest at 8% per annum and are repayable on demand. A general security agreement covering all of our real, personal and intangible property was pledged as security for the additional advances. The agreements governing the issuance of the convertible debentures (see below) provide that the general security agreement pledged as security for the promissory notes issued to the Chief Executive Officer be discharged, provided that $250,000 of the proceeds from the convertible debentures be used to repay the notes, and further provided that the unpaid balance of the notes be repaid by issuing units at a deemed price of $0.25 per unit. We considered the value of $0.25 per unit to be the fair market of the shares and share purchase warrants which form the units, because that was the value we negotiated with independent third parties to be the conversion price of the convertible debentures that were assuming a position similar to the promissory notes being repaid. A partial repayment of $50,000 was made on September 22, 2003 and on November 3, 2003 a further $200,000 was repaid. All of the promissory notes were repayable in Canadian Dollars and as such as at November 3, 2003 a foreign exchange loss of $58,855 and interest of $29,607 was accrued. On November 3, 2003, the unpaid balance of the promissory notes was repaid by the issuance of 2,354,621 common shares and 1,177,310 share purchase warrants. Each share purchase warrant has a five year term and is exercisable into one common share at a price of $0.25 per share. Since the promissory notes did not have terms for conversion into equity, the transaction is considered a settlement of debt for accounting purposes. A gain or loss for accounting purposes was recognizable on settlement to the extent that the carrying value of the debt plus accrued interest is compared to the fair value of the cash and equity, based on the trading price on the date the Company committed to the issuance of the convertible debentures, received by the Chief Executive Officer. Accordingly we have recorded a loss on settlement of debt in the amount of $741,705 in the year ended December 31, 2003.

Convertible Debentures

On September 25, 2003, we executed a funding term sheet whereby investors agreed to provide up to $2,250,000 in exchange for convertible debentures. A general security agreement covering all of our real, personal and intangible property is pledged as security for the debentures. The debentures mature on August 25, 2006 and bear interest at eight percent (8%) per annum. All convertible debentures rank pari passu with all other convertible debentures issued pursuant to the term sheet. The principal amount and accrued interest are convertible until maturity into units

-27-

at a price of $0.25 per unit. Each unit comprises one common share and one half-share (1/2) share purchase warrant. Each whole warrant has a five (5) year term and is exercisable at any time into one common share at a price of $0.25 per share. The debentures may be redeemed by repayment of all outstanding principal and accrued interest at any time on 7 days notice. The debenture holders have a first right to convert all or any portion of the principal and accrued interest into units prior to redemption. We may at our discretion require the debenture holders to convert the outstanding principal and accrued interest into units if the closing trading price of our shares on the OTCBB or other principal trading market is $1.00 or greater for any 30 consecutive trading days after the shares issuable pursuant to conversion of the debentures are registered under the Securities Act of 1933.

On September 5, 2003, in accordance with the terms of a Securities Purchase Agreement, we issued a convertible debenture in the amount of $750,000. A finder's fee was paid to a person related to the investor by way of issuance of 150,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finder's fee has been recognized as a transaction cost in stockholders' equity. An additional finder's fee was paid to an unrelated third party by payment of $26,250 cash and the issuance of 105,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the additional finder's fees has also been recognized as a transaction cost in stockholders' equity.

On October 1, 2003, in accordance with the terms of Securities Purchase Agreements, we issued convertible debentures in the amount of $400,000. A finder's fee was paid to one of the investors by way of issuance of 112,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finder's fee has been recognized as a transaction cost in stockholders' equity.

On December 10, 2003, in accordance with the terms of Securities Purchase Agreements, we issued convertible debentures in the amount of $575,000. A finder's fee was paid to one of the investors by way of issuance of 115,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finder's fee has been recognized as a transaction cost in stockholders' equity.

On May 10, 2004, in accordance with the terms of Securities Purchase Agreements, the Company issued convertible debentures in the amount of $337,500. Finders' fees were paid to two of the investors by way of issuance of 75,500 units at $0.25 per unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finders' fees has been recognized in stockholders' equity.

On May 21, 2004, in accordance with the terms of Securities Purchase Agreements, the Company issued convertible debentures in the amount of $187,500. A finder's fee was paid to one of the investors by way of issuance of 37,500 units at $0.25 per unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years. The fair value of the units underlying the finder's fee has been recognized in stockholders' equity.

Because the conversion price was less than the closing trading prices of our shares on the dates of issuance, the convertible debentures contain a beneficial conversion feature. In accordance with Emerging Issues Task Force ("EITF") Issue 98-5, the embedded beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value of the beneficial conversion feature exceeds the face value of the debentures and is therefore limited to the face value. The face value of the debt was initially recorded at a nominal amount and is being accreted to the face value of the convertible debentures over the term of the debentures by a charge to interest expense. Accrued interest is also recorded based on the face value of the debentures at the stated interest rate (8%). The amount recorded on the balance sheet as at June 30, 2004 has been calculated as follows:

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|Face value of convertible debentures issued (cash received)           | $ | 2,250,000  
|--------------------------------------------------------------------- | - | -----------
|Beneficial conversion feature allocated to additional paid-in capital |   | (1,249,995)
|Beneficial conversion feature accreted to convertible debentures      |   | 529,677    
|Accrued interest payable                                              |   | 102,004    
|Conversion of debentures                                              |   | (130,397)  
|                                                                     
|Convertible debentures at June 30, 2004                               | $ | 501,289    
|                                                                     

On conversion of the debentures into common shares and share purchase warrants, the fair value of the share purchase warrants will be assigned and recognized as an expense. At the request of convertible debenture holders, on April 15, 2004, the Company converted $125,000 of principal and $5,397 of accrued interest into 521,588 common shares and 260,794 share purchase warrants. Accordingly, the Company expensed $42,170 as the fair value of the warrants issued.



Off-Balance Arrangements

Not Applicable

Going Concern Statement

Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on the consolidated audited financial statements for the period ended December 31, 2003, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our consolidated audited financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

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

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



RISK FACTORS

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

Because we have earned revenue of only $1,224,849 from inception to June 30, 2004, we face a risk of insolvency.

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

We have sufficient cash to pay ongoing operating expenses, at their current level, to approximately August 31, 2004. To continue operation beyond that we will have to realize on our outstanding accounts receivable, generate significant revenue and/or raise additional capital. If we are unable to do so, we face a risk of insolvency.

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The auditors' report on our December 31, 2003 consolidated financial statements includes an additional paragraph that identifies conditions which raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

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

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

We made our original alliance agreement with ABB in March 2000 and together we have been awarded contracts for more than 30 vision guided robotic systems to date. Our relationship with ABB has developed to the point where in February 2004 we entered into an exclusive channel partner agreement with ABB to try to make additional sales through that relationship. However, our channel partner agreement with ABB is new and our prospects for generating sales under the ABB agreement are uncertain. Furthermore, additional sales through ABB will be dependent upon our products and services meeting customer demands.

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

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

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

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

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

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

Because our work force is small, with only 22 people employed either as officers, employees or contractors, we are vulnerable to the loss of key people or to rapid expansion.

We employ only 22 people either as officers, employees or contractors. We try to employ people with skill sets that match the specific fields important to our business. As a result, the departure of a single person or a small number

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of people could materially adversely affect our business. We do not have key man insurance on any of the people we employ.

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

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

We do not hold any patents on any of our products. Accordingly, we have no legal means to prevent other companies from developing products that perform similar functions in a similar way. On January 31, 2002, we filed an application in the Canadian Patent Office regarding the Method And Apparatus For Single Camera 3D Vision Guided Robotics and on May 24, 2002 we filed an identical application in the United States Patent Office. On January 31, 2003 we filed an International Application according to the Patent Cooperation Treaty. The Patent Cooperation Treaty provides a procedure enabling applicants to obtain patents in many countries. This is the only instance in which we have applied for patent protection of our intellectual property.

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

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

The market price of our common stock has experienced extreme fluctuations. Since January 1, 2003 the market price of our common stock has varied between $0.11 and $0.91. As we have not announced any material changes to our operations, we believe that the fluctuations in our stock price have resulted primarily from market perceptions of the speculative value of our business opportunities. The susceptibility of our stock price to fluctuation exposes purchasers of our stock to a high degree of risk.

Because we have generated revenue of only $1,224,849 from inception to June 30, 2004, and our business has not been profitable with accumulated losses of $15,888,198 from inception to June 30, 2004, we may not be able to raise the additional capital we need.

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

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

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

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

To raise additional capital we may have to issue additional shares, which may dilute the interests of existing shareholders substantially. Alternatively, we may have to borrow large sums, and assume obligations to make

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substantial interest and capital payments. We may also have to sell significant interests in some or all of our products. If we are able to raise additional capital, we cannot assure that it will be on terms that enhance the value of our common shares.

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

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

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

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

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES

Recent Sales of Unregistered Securities

On May 27, 2004, we issued 113,000 unregistered common shares at a deemed price of $0.65 per share for finders' fees. We also issued 56,500 share purchase warrants. Each warrant has a five-year term and is exercisable into one common share at a price of $0.25 per share.

All of these securities were issued pursuant to exemptions from registration as set out in Rule 506 of Regulation D under the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

INDEX TO EXHIBITS

Exhibits

|Number    | Exhibit                                                                                                                 
|--------- | ------------------------------------------------------------------------------------------------------------------------
|3.1(1)    | Articles of Incorporation, dated February 27, 1987                                                                      
|3.2(1)    | Articles of Amendment, dated July 14, 1998                                                                              
|3.3(1)    | Articles of Amendment, dated June 28, 1990                                                                              
|3.4(1)    | Articles Of Amendment of the Company, dated February 8, 1993                                                            
|3.5(1)    | Articles of Amendment of the Company, dated April 6, 1993                                                               
|3.6(1)    | Articles of Amendment of the Company, dated December 6, 1993                                                            
|3.7(5)    | Restated Articles of Incorporation of the Company dated June 1, 2000                                                    
|3.8(1)    | By-Laws of the Company                                                                                                  
|3.9(6)    | Amendment to By-Laws of the Company                                                                                     
|3.10(13)  | Certificate of Amendment to Articles of Incorporation                                                                   
|4.1(1)    | Specimen Stock Certificate                                                                                              
|4.2(2)    | 1997 Stock Option Plan                                                                                                  
|4.3(2)    | 2000 Stock Option Plan                                                                                                  
|4.4(4)    | Amended 2000 Stock Option Plan dated November 1, 2000                                                                   
|10.1(4)   | Agreement for Escrow of Share Certificate & Promissory Note between Edward White and the Company dated February 27, 2001
|10.2(5)   | Agreement for Escrow of Share Certificate and Promissory Note between Babak Habibi and the Company dated June 21, 2001  
|10.3(7)   | License Agreement with Marubeni Corporation                                                                             
|10.4(8)   | Certificate of Reverse Stock Split                                                                                      
|10.5(9)   | Corporate Governance Committee Charter                                                                                  
|10.6(9)   | Audit Committee Charter                                                                                                 
|10.7(9)   | Compensation Committee Charter                                                                                          
|10.8(9)   | Code of Business Conduct and Ethics for Directors, Officers and Employees                                               
|10.9(9)   | Corporate Governance Guidelines                                                                                         
|10.10(10) | Loan Agreement                                                                                                          
|10.11(10) | General Security Agreement                                                                                              
|10.12(10) | Service Agreement with Elite Financial Communications Group                                                             
|10.13(10) | 2003 Stock Option Plan                                                                                                  
|10.14(11) | Lease Agreement dated July 30, 2003 between Hoop Realty and Braintech Canada, Inc.                                      
|10.15(12) | ABB Exclusive Channel Partner Agreement for Licensing of Braintech's Technologies                                       
|11.1      | Computation of net loss per share                                                                                       
|31.1      | Certificate of Owen L.J. Jones pursuant to Sec 302 of the Sarbanes-Oxley Act of 2002                                    
|31.2      | Certificate of Edward A. White pursuant to Sec 302 of the Sarbanes-Oxley Act of 2002                                    
|32.1      | Certificate of Owen L.J. Jones pursuant to Sec 906 of the Sarbanes-Oxley Act of 2002                                    
|32.2      | Certificate of Edward A. White pursuant to Sec 906 of the Sarbanes-Oxley Act of 2002                                    

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

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

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

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

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

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

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

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

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

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

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

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

(13) Exhibit already on file - exhibit to our Form 10QSB covering the quarter ended March 31, 2004.



REPORTS ON FORM 8-K

On May 21, we filed a Form 8-K with respect to the issuance of $525,000 of convertible debentures and the payment of finders' fees relating to the debenture issuance.

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SIGNATURES

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

|Signature                          | Title                                                                          | Date           
|---------------------------------- | ------------------------------------------------------------------------------ | ---------------
|/s/ Owen L.J. JonesOwen L.J. Jones | Chief Executive Officer,
Director
(Principal Executive Officer)                | August 11, 2004
|/s/ Babak HabibiBabak Habibi       | President, Director,                                                           | August 11, 2004
|/s/ Edward A. WhiteEdward A. White | Chief Financial Officer,
Director
(Principal Financial and Accounting Officer) | August 11, 2004