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 endedSeptember 30, 2005  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.  YesxNo o  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o Nox  State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 23,353,689 Common shares, par value $0.001, as at November 17, 2005.  Transitional Small Business Disclosure Format (check one):  Yes o  Nox  Index to Exhibits on Page 30   1     Braintech, Inc.



Form 10-QSB



TABLE OF CONTENTS



Page #

PART I.  FINANCIAL INFORMATION




Item 1. Financial Statements
        3


Item 2. Management's Discussion and Analysis
        16


Item 3. Controls and Procedures
        29



PART II.  OTHER INFORMATION




Item 1. Legal Proceedings
        29


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
        29


Item 3. Defaults upon Senior Securities
        29


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


Item 5. Other Information
        30


Item 6. Exhibits
        30





2



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 September 30, 2005 (unaudited) and December 31, 2004;



(ii) Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2004 and 2005;



(iii) Condensed Consolidated Statement of Stockholders' Deficiency (unaudited) for the nine months ended September 30, 2005;



(iv) Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2004 and 2005; and



(v) Notes to Condensed Consolidated Financial Statements (unaudited) for the nine months ended September 30, 2004 and 2005.




3



Condensed Consolidated Financial Statements of(Expressed in United States dollars)
BRAINTECH, INC.Nine months ended September 30, 2005 and 2004Three months ended September 30, 2005 and 2004(Unaudited  Prepared by Management)






4



BRAINTECH, INC.Condensed Consolidated Balance Sheets(Expressed in United States dollars)September 30,
        December 31,2005
        2004(unaudited)AssetsCurrent assets:Cash and cash equivalents
        $
        142,383
        $
        196,012Accounts receivable
        331,476
        84,643Inventory
        19,877
        6,569Prepaid expenses
        61,712
        53,550555,448
        340,774Fixed assets
        48,866
        60,638$
        604,314
        $
        401,412Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
        $
        52,922
        $
        123,210Accrued liabilities
        187,370
        222,600Deferred leasehold inducements (note 3)
        52,550
        64,226Deferred revenue
        88,163
        35,133Convertible debentures (note 4)
        1,658,964
        -2,039,969
        445,169Non-current liabilities:Convertible debentures (note 4)
        -
        982,895Total liabilities
        2,039,969
        1,428,064Stockholders deficiency:Common stockAuthorized: 200,000,000 shares, with $0.001 par valueIssued: 22,845,989 shares
        22,846
        20,294Additional paid-in capital
        17,893,035
        16,299,521Accumulated deficit
        (19,351,536)
        (17,346,467)(1,435,655)
        (1,026,652)$
        604,314
        $
        401,412

See accompanying notes to condensed consolidated financial statements.






5



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


Nine Months EndedSeptember 30
        Three Months EndedSeptember 302005
        2004
        2005
        2004Sales
        
        $
        904,981
        $
        703,769
        $
        262,112
        $
        399,498Cost of sales
        47,492
        75,130
        18,570
        56,489Gross margin
        857,489
        628,639
        243,542
        343,009Operating expenses:Research and development
        442,979
        377,022
        157,526
        130,442Selling, general and administration
        1,708,036
        1,269,603
        607,394
        441,279Software license settlement
        -
        103,883
        -
        -2,151,015
        1,750,508
        764,920
        571,721Operating loss
        (1,293,526)
        (1,121,869)
        (521,378)
        (228,712)Non-operating:Interest income
        4
        46
        -
        26Interest on convertibledebentures (note 4)
        (122,431)
        (114,633)
        (41,083)
        (42,574)Accretion of convertibledebentures (note 4)
        (580,446)
        (643,818)
        (189,550)
        (249,184)Fair value of warrants issued onconversion of debentures (note 4)
        (8,670)
        (63,062)
        -
        (20,892)(711,543)
        (821,467)
        (230,633)
        (312,624)Loss for the period
        $
        (2,005,069)
        $
        (1,943,336)
        
        (752,011)
        $
        (541,336)Loss per share information:Basic and diluted
        $
        (0.09)
        $
        (0.11)
        
        (0.03)
        $
        (0.03)Weighted average number ofCommon shares outstanding
        21,654,019
        18,317,743
        22,545,989
        18,637,861

See accompanying notes to condensed consolidated financial statements.




6



BRAINTECH, INC.Condensed Consolidated Statement of Stockholders Deficiency(Unaudited  Prepared by Management)(Expressed in United States dollars)


Common stock
        
        
        TotalNumber
        
        Additional
        Accumulated
        stockholdersof shares
        Amount
        paid-in capital
        deficit
        deficiencyBalance, December 31, 2004
        20,294,257
        $
        20,294
        $
        16,299,521
        $
        (17,346,467)
        $
        (1,026,652)Common stock transactions:(net of share issue costs)Shares issued for cash
        2,351,250
        2,352
        1,591,648
        -
        1,594,000Shares issued for cash on exerciseof employee stock options
        25,000
        25
        4,975
        -
        5,000Shares issued on conversion ofconvertible debentures
        107,232
        107
        26,701
        -
        26,808Shares issued for finders fees
        68,250
        68
        (68)
        -
        -Cash paid for finders fees
        -
        -
        (53,000)
        -
        (53,000)Fair value of warrants issued onconversion of debentures
        -
        -
        8,670
        -
        8,670Fair value of stock options grantedto a contractor
        
        
        14,588
        
        14,588Loss for the period
        -
        -
        -
        (2,005,069)
        (2,005,069)Balance, September 30, 2005
        22,845,989
        $
        22,846
        $
        17,893,035
        $
        (19,351,536)
        $
        (1,435,655)

See accompanying notes to condensed consolidated financial statements.




7



BRAINTECH, INC.Condensed Consolidated Statements of Cash Flows(Unaudited  Prepared by Management)(Expressed in United States dollars)


Nine Months Ended September 302005
        2004Cash flows from operations:Loss for the period
        $
        (2,005,069)
        $
        (1,943,336)Items not involving cash:Amortization
        18,179
        21,172Shares issued for services rendered
        -
        48,000Compensatory benefit of warrants issued to contractors
        -
        33,038Compensatory benefit of stock options issued to contractors
        14,588
        -Accretion of convertible debentures
        580,446
        643,818Fair value of warrants issued on conversion of debentures
        8,670
        63,062Changes in non-cash operating working capital:Accounts receivable
        (246,833)
        (150,478)Inventory
        (13,308)
        14,865Prepaid expenses
        (8,162)
        (27,418)Accounts payable and accrued liabilities
        (105,518)
        46,837Accrued interest on convertible debentures
        122,431
        114,633Deferred leasehold inducements
        (11,676)
        15,459Deferred revenue
        53,030
        30,866Net cash used in operating activities
        (1,593,222)
        (1,089,482)Cash flows from investments:Purchase of fixed assets
        (6,407)
        (25,173)Net cash used in investing activities
        (6,407)
        (25,173)Cash flows from financing:Convertible debentures issued
        -
        525,000Debenture issue costs
        -
        (1,408)Common shares issued, net of issue costs
        1,546,000
        13,100Net cash provided by financing activities
        1,546,000
        536,692Decrease in cash and cash equivalents
        (53,629)
        (577,963)Cash and cash equivalents, beginning of period
        196,012
        741,474Cash and cash equivalents, end of period
        $
        142,383
        $
        163,511Supplemental information:Non-cash financing and investing activities:Shares and warrants issued on conversion ofconvertible debentures
        $
        35,478
        $
        258,060

See accompanying notes to condensed consolidated financial statements.




8



BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited  Prepared by Management)(Expressed in United States dollars)Nine months ended September 30, 2005 and 20041.
        Description of business and future operations:Braintech, Inc. (the Company) together with its wholly owned subsidiary, Braintech Canada, Inc. is a high tech development company, developing advanced software for the vision guidance of robotic systems.  All sales of its products and services are made in this industry segment.  In the nine months ended September 30, 2005, 86% of sales revenue (200479%) was generated from a single customer.These consolidated financial statements have been prepared on the going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the ordinary course of business.  The Company has generated only small amounts of revenues and is continuing to develop its business.  Operations to date have been primarily financed by equity transactions.  The Companys future operations and its continuation as a going concern are dependent upon its ability to raise additional capital, increase sales of its products by leveraging its Channel Partner Agreement and Sales and Marketing Agreement with a major supplier of robotic systems, generating positive cash flows from operations and ultimately attaining profitability.  It is the Companys intention to focus on developing
this partnership and continuing as their principal supplier of vision systems, raising financing and achieving profitable operations.  There can be no assurances that appropriate financings having favourable economic terms will be available as required.Based on its current financial position, the Company believes that its present and anticipated cash resources from operations and the equity financing discussed in note 8(e) will be sufficient to pay ongoing cash operating expenses until approximately December 31, 2006.  To continue as a going concern, the Company will either have to raise additional capital or increase sales revenue.  There can be no assurance that the Company can or will obtain sufficient funds from operations or that the financing discussed in note 8(e) will close as anticipated.  If the Company cannot do either, there is a risk that the business will fail.  The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the
Company be unable to continue as a going concern.2.
        Basis of presentation:(a)
        Unaudited financial InformationThese consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States and reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for fair presentation of the interim financial information.  The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2005. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited condensed consolidated financial statements and notes included herein have been prepared on a
basis consistent with and should be read in conjunction with the Companys audited consolidated financial statements and notes for the year ended December 31, 2004, as filed in its annual report on Form 10-KSB.



9










BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited  Prepared by Management)(Expressed in United States dollars)Nine months ended September 30, 2005 and 2004


2.
        Basis of presentation (continued):(b)
        Principles of consolidation:These consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary Braintech Canada, Inc., incorporated under the Company Act of British Columbia on March 30, 1994.  All material inter-company balances and transactions have been eliminated.(c)
        Use of estimates:The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual amounts may differ from these estimates.(d)
        Stock-based compensation:The Company has elected to apply the provision of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its stock options granted to employees.  Under APB 25, compensation expense is only recorded to the extent that the exercise price is less than fair value on the measurement date.  The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards 123 Accounting for Stock-Based Compensation (SFAS 123).  Non-employee options are recognized at the fair value of the options as determined by an option pricing model as the services are performed and the options earned.  Had compensation cost been determined based on the fair value of employee stock options at
their grant date, the Companys net loss and net loss per share would have been as follows:Nine Months Ended September 30,2005
        2004Net loss for the period, as reported
        $
        (2,005,069)
        $
        (1,943,336)Stock-based employee compensation if fair-valuebased method applied
        
        (394,116)
        
        (221,851)Pro forma net loss as if fair-value method had been applied
        $
        (2,399,185)
        $
        (2,165,187)Basic and diluted loss per share:As reported
        $
        (0.09)
        $
        (0.11)Pro forma
        $
        (0.11)
        $
        (0.12)



10






BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited  Prepared by Management)(Expressed in United States dollars)Nine months ended September 30, 2005 and 2004


2.
        Basis of presentation (continued)(d)
        Stock-based compensation (continued):The weighted average fair value of stock options granted during the nine months ended September 30, 2005 was $0.48 per option (2004 - $0.42per option).The fair value for the options granted during the nine-month period ended September 30, 2005 was estimated using the Black-Scholes option-pricing model and the following weighted-average assumptions:  dividend yield 0% (2004  0%), expected volatility 177% (2004  248%), risk-free interest rate 3.41% (2004  2.12%), and an expected term of 2 years (2004  2 years).(e)
        Deferred leasehold inducements:Leasehold inducements are deferred and amortized to reduce rent expense on a straight-line basis over the term of the lease.(f)
        Loss per share:Loss per share is calculated based on the weighted average number of shares outstanding.As the effect of all outstanding convertible debentures (note 4) options (note 5) and warrants (note 6) is anti-dilutive, diluted loss per share does not differ from basic loss per share.The number of shares used to calculate loss per share for the three and nine month periods ended September 30, 2005 and 2004 was reduced by 300,000 shares in each period for shares issued and held by the Company.3.
        Deferred leasehold inducements:Nine Months Ended September 30,2005
        
        2004Balance, beginning of period
        $
        64,226
        $
        49,629Leasehold inducements received during the period
        
        -
        
        25,410Amortization
        
        (12,927)
        
        (11,447)Gain on foreign exchange
        
        1,251
        
        1,496Balance, end of period
        $
        52,550
        $
        65,088



11



BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited  Prepared by Management)(Expressed in United States dollars)Nine months ended September 30, 2005 and 2004


4.
        Convertible debentures:On September 25, 2003, the Company executed a funding term sheet whereby investors agreed to provide up to $2,250,000 in exchange for convertible debentures.  A general security agreement covering all of the Companys real, personal and intangible property is pledged as security for the debentures.  The debentures are to mature on August 25, 2006 and bear interest at eight percent (8%) per annum.  All convertible debentures rankpari passuwith all convertible debentures to be issued pursuant to the term sheet.  The principal amount and accrued interest are convertible until maturity into units at a price of $0.25 per unit.  Each unit comprises one common share and one half-share (1/2) share purchase warrant.  Each whole warrant has a five (5) year term and is
exercisable at any time into one common share at a price of $0.25 per share.The debentures may be redeemed by repayment of all outstanding principal and accrued interest at any time on 7 days notice.  The debenture holders have a first right to convert all or any portion of the principal and accrued interest into units prior to redemption.The Company may at its discretion require the debenture holders to convert the outstanding principal and accrued interest into units if the closing trading price of the Companys shares on the OTCBB or other principal trading market is $1.00 or greater for any 30 consecutive trading days after the shares issuable pursuant to conversion of the debentures are registered under the Securities Act of 1933.Between September 5, 2003 and May 21, 2004, in accordance with the terms of Securities Purchase Agreements, the Company issued convertible debentures in the amount of $2,250,000.  Finders fees were paid to investors, persons related to investors, and independent third parties by way of cash payment of $26,250 and by way of issuance of 595,000 units at $0.25 per unit each unit comprised of one share and one-half (1/2) share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for five (5) years.  The fair value of the cash finders fees and the fair value of the units underlying the finders fees have been recognized as a cost of issuance and in stockholders equity.On conversion of the debentures into common shares and share purchase warrants, the fair value of the share purchase warrants will be assigned and recognized as an expense.  To date, $212,500 of principal and $9,306 of accrued interest has been converted into 887,224 common shares and 443,612 share purchase warrants.  Accordingly, the Company has expensed $71,732 as the fair value of the warrants issued.



12



BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited  Prepared by Management)(Expressed in United States dollars)Nine months ended September 30, 2005 and 2004


4.
        Convertible debentures (continued):Because the conversion price was less than the closing trading prices of the Companys shares on the commitment date, the convertible debentures contain a beneficial conversion feature.  In accordance with Emerging Issues Task Force (EITF) Issue 98-5, the embedded beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.  The intrinsic value of the beneficial conversion feature exceeds the face value of the debentures and is therefore limited to the face value.  Accordingly, the face value of the debt was allocated to additional paid-in capital on issuance and the convertible debentures are being accreted back to their face value over the term to maturity with a corresponding 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 September 30, 2005 has been calculated as follows:Face value of convertible debentures issued (cash received)
        $
        2,250,000Beneficial conversion feature allocated to additional paid-in capital
        
        (2,249,995)Accretion of convertible debentures
        
        1,572,165Accrued interest payable
        
        308,600Conversion of debentures
        
        (221,806)Convertible debentures at September 30, 2005
        $
        1,658,9645.
        Stock options:A summary of the Companys stock option activity is as follows:WeightedNumber
        averageof shares
        exercise priceBalance, December 31, 2004
        2,522,000
        $0.55Options granted
        1,186,000
        0.62Options exercised
        (25,000)
        0.20Options expired
        (97,000)
        0.57Options forfeited
        (65,000)
        0.66Balance, September 30, 2005
        3,521,000
        $0.58Of those outstanding at September 30, 2005, 2,481,000 are exercisable (December 31, 2004  1,867,000), having a weighted average exercise price of $0.58 (2004 - $0.56).



13



BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited  Prepared by Management)(Expressed in United States dollars)Nine months ended September 30, 2005 and 2004


6.
        Share purchase warrants:Between December 1, 2004 and March 4, 2005, in conjunction with private placements the Company issued 358,750 common share purchase warrants (the purchasers received one common share purchase warrant for each two common shares purchased).  Each common share purchase warrant entitles the holder to purchase one additional share for five (5) years at a price of $0.50 per share.  In conjunction with this private placement, the Company issued 15,750 common shares and 7,875 common share purchase warrants as a finders fee.  Each of these common share purchase warrants entitles the holder to purchase one additional share for five (5) years at a price of $0.50 per share.At the request of certain debenture holders (note 4), on April 5, 2005 the Company converted $25,000 of principal and $1,808 of accrued interest into 107,232 common shares and 53,616 share purchase warrants.  Each warrant is exercisable at $0.25 into one common share for five (5) years.  The fair value of the warrants ($8,670) has been recorded as an expense.On May 3, 2005, in conjunction with private placements the Company issued 816,875 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 three (3) years at a price of $1.00 per share.A summary of the Companys share purchase warrant activity is as follows:WeightedWeighted
        average remainingNumber
        average
        contractual lifeof shares
        exercise price
        (years)Balance, December 31, 2004
        5,226,470
        $0.38
        1.89Warrants grantedDebenture conversion
        53,616
        $0.25
        4.50Private placement
        1,175,625
        $0.85
        4.50Finders fee  private placements
        7,875
        $0.50
        4.25Warrants exercised
        -Warrants expired
        -Balance, September 30, 2005
        6,463,586
        $0.46
        2.35Of the warrants outstanding at September 30, 2005, 2,951,324 were held by the Companys Chief Executive Officer (September 30, 2004  2,941,324).



14



BRAINTECH, INC.Notes to Condensed Consolidated Financial Statements(Unaudited  Prepared by Management)(Expressed in United States dollars)Nine months ended September 30, 2005 and 20047.
        Commitments:Annual operating lease commitments are as follows:Period ending December 31:2005
        $
        46,4002006
        
        185,6032007
        
        183,1162008
        
        121,525$
        536,6448.
        Subsequent events:(a)
        Conversion of convertible debentures:At the request of a convertible debenture holder, on October 4, 2005, the Company converted $25,000 of principal and $2,806 of accrued interest into 111,224 units at the rate of $0.25 per unit.  Each unit consisted of one share of common stock and one-half share purchase warrant, with each whole warrant exercisable at $0.25 into one common share for a period of five years from the date of issue of the warrant.  The fair value of the warrants will be assigned and recognized as an expense in the fourth quarter of 2005.(b)
        Warrants exercised:On October 4, 2005 156,476 share purchase warrants were exercised at $0.25 per share generating $39,119.(c)
        Issuance of shares for servicesOn October 5, 2005, 100,000 common shares were issued for services rendered and on October 12, 2005 110,000 common shares were issued for services rendered.(d)
        Exercise of employee stock optionsOn October 17, 2005, 30,000 common shares were issued on the exercise of employee stock options at an exercise price of $0.20 per share.(e)
        Private placementOn October 5, 2005 the directors approved a private placement of up to $3,000,000.  The financing term sheet executed to implement the private placement offers 6,000,000 units at $0.50 per unit.  Each Unit comprises one common share and one share purchase warrant.  Each share purchase warrant entitles the holder to purchase one additional share for two (2) years at US$0.60 per share.




15



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS



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



In the 2ndquarter of 2001, at the request of Ford Motor Company, we completed the development of a 3D single camera (SC3D) vision guidance system for robots used in automotive manufacturing systems.  The SC3D system uses a single conventional CCD (Charge Coupled Device) camera.  Software algorithms use images from the camera mounted on the robot arm or stationary position to determine the position and orientation of an object of interest.  That information is used to guide the robot to operate on or manipulate the object.



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



16



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



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 the design of vision guided robotic systems.  We expect this type of revenue to continue especially in light of our amended Exclusive Channel Partner Agreement.



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



On November 4, 2004, Marubeni agreed to remove the exclusivity clauses on the condition that we repurchase from Marubeni one of the eVF development licenses and one of the run-time licenses for $20,000.  The June 24, 2002 agreement with Marubeni was for a period of three years and in accordance with the terms of the agreement, we gave notice to Marubeni and the agreement terminated on June 24, 2005.



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



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



Since 2002 we have continued to add functionality to eVF by developing additional components as follows:



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



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



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



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





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



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



On July 14, 2004 We filed another application in the United States Patent Office regarding theMethod And Apparatus For Multi Camera Surround 3D Vision Guided Robotics.



We generate the majority of our revenues from the sale of computer software that we have developed and that we believe constitutes intellectual property belonging to us.  Our software sales have principally involved computerized vision systems used for the guidance of industrial robots performing automated assembly, material handling, and part identification and inspection functions.  We have generated total revenues, from inception on January 3, 1994 to September 30, 2005, in the amount of $2,575,528.



We have incurred aggregate net losses of approximately $19.4 million during the period from our inception on January 3, 1994, to September 30, 2005.  We will likely continue to incur significant additional operating losses as our product development, research and development, and marketing efforts continue.  Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and revenue recognized.



Our strategic operating priorities for fiscal 2005 include the following:



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



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



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





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During the second quarter of 2005, we started to achieve our priority of growing revenues.  During the second and third quarters of 2005, we invoiced approximately $865,000 and, in accordance with the software revenue recognition rules, we recorded approximately $800,000 in revenues.  These numbers far exceed any quarterly results since inception.  We recognize that our revenue streams are still quite variable and, in the near term, these significant increases may not be repeatable.  However, we have already received purchase orders for installations during the fourth quarter of 2005 and the first quarter of 2006 in the amount of approximately $500,000.  Included in these purchase orders are purchase orders from ABB for VGR installations in Japan.



Our provision of vision guidance software for Nuclear Waste Handling systems for the Idaho National Laboratory and the receipt of a purchase order for the supply of a 3D vision guided solution for the US Governments new Joint Strike Fighter demonstrates our successful pursuit of United States Government contracts.



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



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



Another priority for 2005 is to increase the public and investor visibility of our company and our products.  In order to accomplish this, we have engaged a number of marketing and communications companies to assist us.  Our director, James Speros, is also engaged full time in public and investor relations activities.



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



Critical Accounting Policies and Changes to Existing Accounting Policies



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



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



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



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



Effects of Foreign Currency Exchange Rates and Inflation



While we record our financial statements in United States dollars, many of our expenses are incurred in Canadian dollars.  As a result, fluctuations in the Canadian dollar exchange rate can affect our expenses, and thus our profit or loss.  During the nine months ended September 30, 2005 we incurred a foreign exchange loss of $10,519.  The



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foreign exchange loss resulted principally from transactions recorded in United States dollars for reporting purposes, but actually carried out in Canadian dollars.  As at the date of this annual report, we have not engaged in exchange rate-hedging activities.  To the extent we implement such hedging activities in the future, we cannot assure that we will be successful.



In the years ended December 31, 2004 and the nine months ended September 30, 2005 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 September 30, 2005 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 September 30, 2005 approximate their carrying values.



To September 30, 2005, 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.



Nine-month period ended September 30, 2005 compared with the nine-month period ended September 30, 2004.



The weighted average exchange rate used to translate the Canadian Dollar into the United States Dollar for the nine-month period ended September 30, 2005 was 1.21720.  For the nine-month period ended September 30, 2004 the weighted average exchange was 1.33209.  The change in our operating expenses (net of software license settlement) illustrates the effect of fluctuating foreign exchange rates have on our reported results.  We reported an increase in operating expenses of $504,390 from $1,646,625 for the nine-month period ended September 30, 2004 to $2,151,015 for the nine-month period ended September 30, 2005.  However, when adjusted for the change in the foreign exchange rate (that is, by excluding the effect of the change in exchange rates from the comparative periods levels), the actual change in operating expense activity was an increase of approximately $330,625.  The foreign exchange
adjustment accounted for an increase of $173,765 in reported operating expenses.  We have isolated the effect the fluctuating foreign exchange rate had on our reported results in the discussion below.



Sales revenue from operations for the nine-month period ended September 30, 2005 was $904,981 (September 30, 2004 - $703,769).  The amount of our sales 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.  Additional details on how we apply SOP 97-2 is provided above.





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Sales revenue for the nine-month period ended September 30, 2005 included approximately $685,100 for 36 vision systems delivered to ABB for installation in automobile manufacturing plants, approximately $84,300 for software delivered to Idaho National Laboratory, approximately $62,000 previously recorded as deferred revenue and amortized during the period into revenue in accordance with SOP 97-2, approximately $34,500 for eVF license sales, approximately $11,200 for commissioning, and approximately $27,900 for training and other services.



Cost of sales revenue for the nine-month period ended September 30, 2005 was $47,492 or approximately 5.2%.



Sales revenue for the nine-month period ended September 30, 2004 was $703,769, including approximately $549,000 for 21 vision systems delivered to ABB and an independent integrator for installation in engine assembly plants, approximately $44,000 previously recorded as deferred revenue and now recognized as revenue, approximately $20,000 for engineering services, approximately $74,600 for commissioning, and approximately $16,200 for training and other services.



Cost of sales revenue for the nine-month period ended September 30, 2004 was $75,130 or approximately 10.7%.



Reported research and development expenses increased $65,957 from $377,022 for the nine-month period ended September 30, 2004 to $442,979 for the nine-month period ended September 30, 2005.  The foreign exchange differential accounted for an increase of approximately $35,800 indicating that actual research and development activity increased by approximately $30,200.  The increase is accounted for by an increase in wage and benefit costs.



Reported selling, general, and administrative expenses increased $438,433 from $1,269,603 for the nine-month period ended September 30, 2004 to $1,708,036 for the nine-month period ended September 30, 2005.  The foreign exchange differential accounted for an increase of approximately $138,000 indicating an actual increase in activity of approximately $300,400.  The principal factors contributing to the increase were as follows:





        Actual general and administrative salaries increased approximately $27,500 from $670,500 to $698,000.  The foreign exchange differential accounted for an increase of approximately $61,300 resulting in a net reported increase of approximately $88,800.  The actual increase resulted from minor salary increases, the increase of our staff by two employees.



        Actual amortization expenses decreased approximately $4,500 from $21,200 to $16,700 principally as a result of the diminishing value of our fixed assets and the full amortization of certain fixed assets.  The foreign exchange differential accounted for an increase of approximately $1,500 resulting in a net reported decrease of approximately $3,000.



        Actual legal expenses increased approximately $48,600 from $49,000 to $97,600 principally as a result of preparation of a registration statement for filing under the Securities Act of 1933, a general increase in corporate activities and a significant increase in patent application and registration expenses.  The foreign exchange differential accounted for an increase of approximately $8,600 resulting in a net reported increase of approximately $57,200.



        Actual accounting expenses increased approximately $66,900 from $32,900 to $99,800.  The foreign exchange differential accounted for an increase of approximately $8,800 resulting in a net reported increase of approximately $75,700.  The increase related to corporate income tax compliance expenses, an increase in fees relating audit of the December 31, 2004 financial statements, fees related to the preparation of a registration statement under the Securities Act of 1933, and fees relating to communications with the SEC.



        Actual travel and marketing expenditures increased approximately $179,900 from approximately $198,700 to approximately $378,600.  The foreign exchange differential accounted for an increase of approximately $33,300 resulting in a net reported increase of approximately $213,200.  The individual components of the actual increase are as follows: trade shows decreased from $38,200 to $35,000, investor relations increased from $110,000 to $189,100, travel increased from $13,800 to $39,100, and marketing materials increased from $5,400 to $78,100.  The increase in investor relations relates mainly to the engagement of Baldacci Communication, LLC for the provision of investor relations and market communications services.



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
        Actual rent and premises cost increased $2,800 from $139,900 to $142,700.  The foreign exchange differential accounted for an increase of approximately $12,500 resulting in a net reported increase of approximately $15,300.



Three-month period ended September 30, 2005 compared with the three-month period ended September 30, 2004.



The weighted average exchange rate used to translate the Canadian Dollar into the United States Dollar for the three-month period ended September 30, 2005 was 1.20873.  For the three-month period ended September 30, 2004 the weighted average exchange was 1.29390.  We reported an increase in operating expenses of $193,199 from $571,721 for the three-month period ended September 30, 2004 to $764,920 for the three-month period ended September 30, 2005.  However, when adjusted for the change in the foreign exchange rate (that is, by excluding the effect of the change in exchange rates from the comparative periods levels), the actual change in operating expense activity was an increase of approximately $140,000.  The foreign exchange adjustment accounted for an increase of $53,200 in reported operating expenses.  We have isolated the effect the fluctuating foreign exchange rate had on our reported results
in the discussion below.



Sales revenue from operations for the three-month period ended September 30, 2005 was $262,112 (September 30, 2004 - $399,498).



Sales revenue for the three-month period ended September 30, 2005 included approximately $214,300 for 13 vision systems delivered to ABB for installation in automobile manufacturing plants, approximately $24,200 previously recorded as deferred revenue and amortized during the period into revenue in accordance with SOP 97-2, approximately $10,100 for commissioning, and approximately $13,500 for training and other services.



Cost of sales revenue for the three-month period ended September 30, 2005 was $18,570 or approximately 7.1%.



Sales revenue for the three-month period ended September 30, 2004 was $399,498, including approximately $315,400 for 13 vision systems delivered to ABB and an independent integrator for installation in engine assembly plants, approximately $21,700 previously recorded as deferred revenue and now recognized as revenue, approximately $52,200 for commissioning, and approximately $10,200 for training and other services.



Cost of sales revenue for the three-month period ended September 31, 2004 was $56,498 or approximately 14.1%.



Reported research and development expenses increased $27,084 from $130,442 for the three-month period ended September 30, 2004 to $157,526 for the three-month period ended September 30, 2005.  The foreign exchange differential accounted for an increase of approximately $11,000 indicating that actual research and development activity increased by approximately $16,100.  The increase is accounted for by an increase in wage and benefit costs and the hiring of one additional vision scientist.



Reported selling, general, and administrative expenses increased $166,115 from $441,279 for the three-month period ended September 30, 2004 to $607,394 for the three-month period ended September 30, 2005.  The foreign exchange differential accounted for an increase of approximately $42,300 indicating an actual increase in activity of approximately $123,800.  The principal factors contributing to the increase were as follows:





        Actual general and administrative salaries increased approximately $7,500 from $212,700 to $220,200.  The foreign exchange differential accounted for an increase of approximately $16,500 resulting in a net reported increase of approximately $24,000.  The actual increase resulted from minor salary increases and the increase of our staff by one employee.



        Actual amortization expenses increased approximately $300 from $5,500 to $5,800 principally as a result computer hardware purchases and offset by the diminishing value of our fixed assets and the full

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amortization of certain fixed assets.  The foreign exchange differential accounted for an increase of approximately $400 resulting in a net reported increase of approximately $700.





        Actual legal expenses increased approximately $38,100 from $15,700 to $53,800 principally as a result of preparation of a registration statement for filing under the Securities Act of 1933, a general increase in corporate activities and a significant increase in patent application and registration expenses.  The foreign exchange differential accounted for an increase of approximately $4,000 resulting in a net reported increase of approximately $42,100.



        Actual accounting expenses increased approximately $27,300 from $8,300 to $35,600.  The foreign exchange differential accounted for an increase of approximately $2,700 resulting in a net reported increase of approximately $30,000.  The increase related to corporate income tax compliance expenses, fees related to the preparation of a registration statement for filing under the Securities Act of 1933, and fees relating to communications with the SEC.



        Actual travel and marketing expenditures increased approximately $50,500 from approximately $97,700 to approximately $148,200.  The foreign exchange differential accounted for an increase of approximately $11,100 resulting in a net reported increase of approximately $61,600.  The individual components of the actual increase are as follows: trade shows increased from $3,400 to $35,400, investor relations decreased from $75,300 to $53,500, travel increased from $5,200 to $8,300, and marketing materials increased from $nil to $36,800.  The decrease in investor relations relates mainly to the termination of the Baldacci Communication, LLC investor relations program in 2005 and the engagement of Elite Financial Communications in 2004.



        Actual rent and premises cost decreased $1,400 from $49,200 to $47,800.  The foreign exchange differential accounted for an increase of approximately $3,600 resulting in a net reported increase of approximately $2,200.



Liquidity and Capital Resources



Working Capital and Operations



Our accounts receivable as of November 17, 2005 is approximately $500,000 and our cash position is approximately $50,000.  In addition, we have outstanding purchase orders totalling approximately $360,000 and expect that the majority of these purchase orders will be completed in the fourth quarter of 2005 and the first quarter of 2006.



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



- As at November 17, 2005, we have 21 employees and our salary costs are approximately $125,000 per month.



- For the first nine months of 2005, our average monthly cash expenditures for general, overhead and administration, exclusive of salary costs, were approximately $100,000 per month.  We expect that our general overhead and administrative costs, exclusive of salary costs, will remain constant over the next six months.



- We do not expect to incur significant capital expenditures during the remainder of 2005 unless they result from an increase in our level of operation.



On October 5, 2005 the directors approved a private placement of up to $3,000,000.  The financing term sheet executed to implement the private placement offers 6,000,000 units at $0.50 per unit.  Each Unit comprises one common share and one share purchase warrant.  Each share purchase warrant entitles the holder to purchase one additional share for two (2) years at US$0.60 per share.  It is expected that this private placement will close by November 30, 2005.





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Based on its current financial position, the Company believes that its present and anticipated cash resources from operations and the equity financing discussed above will be sufficient to pay ongoing cash operating expenses until approximately December 31, 2006.  To continue as a going concern, the Company will either have to raise additional capital or increase sales revenue.  There can be no assurance that the Company can or will obtain sufficient funds from operations or that the financing discussed above will close as anticipated.  If the Company cannot do either, there is a risk that the business will fail.  The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.



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.  In the past twenty four months we have obtained financing as follows:



Convertible Debentures



On September 25, 2003, we executed a funding term sheet whereby investors agreed to provide up to $2,250,000 in exchange for convertible debentures.  A general security agreement covering all of our real, personal and intangible property is pledged as security for the debentures.  The debentures mature on August 25, 2006 and bear interest at eight percent (8%) per annum.  All convertible debentures rankpari passuwith all other convertible debentures issued pursuant to the term sheet.  The principal amount and accrued interest are convertible until maturity into units at a price of $0.25 per unit.  Each unit comprises one common share and one half-share (1/2) share purchase warrant.  Each whole warrant has a five (5) year term and is exercisable at any time into one common share at a price of $0.25 per share.  The debentures may be redeemed by repayment of all
outstanding principal and accrued interest at any time on 21 days notice.  The debenture holders have a first right to convert all or any portion of the principal and accrued interest into units prior to redemption.  We may at our discretion require the debenture holders to convert the outstanding principal and accrued interest into units if the closing trading price of our shares on the OTCBB or other principal trading market is $1.00 or greater for any 30 consecutive trading days after the shares issuable pursuant to conversion of the debentures are registered under the Securities Act of 1933.



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



Because the conversion price was less than the closing trading prices of our shares on the commitment date, the convertible debentures contain a beneficial conversion feature.  In accordance with Emerging Issues Task Force (EITF) Issue 98-5, the embedded beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.  The intrinsic value of the beneficial conversion feature exceeds the face value of the 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 September 30, 2005 has been calculated as follows:




Face value of convertible debentures issued (cash received)
        
        
        $
        2,250,000Beneficial conversion feature allocated to additional paid-in capital
        
        
        
        (2,249,995)Accretion of convertible debentures
        
        
        
        1,572,164Accrued interest payable
        
        
        
        308,600



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Conversion of debentures
        
        
        
        (221,805)Convertible debentures at September 30, 2005
        
        
        $
        1,658,964

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.  To September 30, 2005, $212,500 of principal and $9,305 of accrued interest has been converted into 887,224 common shares and 443,612 share purchase warrants.  Accordingly, we have expensed $71,732 as the fair value of the warrants issued.



Private Placements



At directors meetings held October 13, 2004 and December 21, 2004, approval was given to a private placement of 1,750,000 units at a price of $0.40 per unit for gross proceeds of $700,000.  Each unit comprises one share and one-half (1/2) share purchase warrant.  Each whole warrant has a five (5) year term and is exercisable at any time into one common share at a price of $0.50 per share.  The private placement closed on various dates between December 1, 2004 and March 4, 2005.  In conjunction with this private placement, we paid $32,880 and issued 24,500 units as finders fees.



At a directors meeting held March 10, 2005, approval was given to a private placement of 1,875,000 units at a price of $0.80 per unit for total proceeds of $1,500,000.  Each unit comprises one common share and one half-share (1/2) share purchase warrant.  Each whole warrant has a three (3) year term and is exercisable at any time into one common share at a price of $1.00 per share.  On May 3 we closed $1,307,000 of the private placement.  In conjunction with this portion of the private placement, we paid $39,210 and issued 52,500 shares as finders fees.



Employee Stock Options



The exercise of 130,000 employee stock options has generated $27,700 from January 1, 2004 to November 17, 2005.



Off-Balance Sheet Arrangements



Not Applicable



Going Concern Statement



Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on the consolidated audited financial statements for the period ended December 31, 2004, our independent registered public accounting firm 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.





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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 report before purchasing our common stock.



Because we have earned revenue of only $2,575,528 from inception to September 30, 2005, 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 November 30, 2005.  To continue operation beyond that we will have to raise additional capital, collect our outstanding accounts receivable and/or generate significant revenue.  If we are unable to do so, we face a risk of insolvency.



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



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



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



Because our Exclusive Channel Partner Agreement with ABB has only been entered into recently, we have no assurance that it will lead to additional sales.



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



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



Together we have been awarded contracts for 90 vision guided robotic systems to date.



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





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Because our Internet based service and support system is still under development, 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 under development.  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 21 people employed either as officers, employees or contractors, we are vulnerable to the loss of key people or to rapid expansion.



We employ only 21 people either as officers, employees or contractors.  We try to employ people with skill sets that match the specific fields important to our business.  As a result, the departure of a single person or a small number of people could materially adversely affect our business.  We do not have key man insurance on any of the people we employ.



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



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



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



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



We believe that the software code that we have written for eVisionFactory, the BrainTron processor, the Odysee Development Studio, and each of our custom vision guidance systems is protected by copyright law.  However,



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copyright law does not prevent other companies from developing their own software to perform the same functions as our products.



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



The market price of our common stock has experienced extreme fluctuations.  Since January 1, 2004 the market price of our common stock has varied between $0.32 and $0.99.  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 $2,575,528 from inception to September 30, 2005, and our business has not been profitable with accumulated losses of $19,351,536 from inception to September 30, 2005, 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 2003, 2004 and 2005.  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.

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



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



During 2001 and 2002, we issued approximately 6.1 million shares in private placements and other transactions.  In 2003 we issued 2,354,621 common shares and 1,177,310 share purchase warrants for settlement of promissory notes payable.  Those shares are now eligible for re-sale under Rule 144 to the Securities Act of 1933.   In addition, during 2003 and 2004 we issued $2,250,000 in convertible debentures bearing interest at 8% per annum.  The debenture principal and accrued interest are convertible into units at $0.25 per unit, each unit consisting of one common share and one-half share purchase warrant.  In conjunction with the convertible debentures, we issued 595,000 common shares and 297,500 share purchase warrants for finders fees.  During 2004 and 2005, we issued 3,383,750 shares and 1,691,875 share purchase warrants in private placement transactions.  We may register these shares and share
purchase warrants for resale.  The market price of our stock could drop significantly if the owners of these shares sell all or a large portion of the shares, or are perceived as intending to sell them.



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





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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 required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures as of the end of the period covered by this quarterly report, being September 30, 2005.  This evaluation was carried out under the supervision and with the participation of our company's management, including our company's Chief Executive Officer and Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our company's disclosure controls and procedures are effective.



Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Exchange Act is accumulated and communicated to management, including our company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.



Changes in Internal Controls Over Financial Reporting



During the quarter ended September 30, 2005, there were no changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



There was no sale of our unregistered equity securities that has not been disclosed in a current report on Form 8-K prior to the filing of this report.



ITEM 3.  DEFAULTS UPON SENIOR SECURITIES



Not applicable.



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



Not applicable.





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ITEM 5.  OTHER INFORMATION



At the Board of Directors meeting held immediately after our annual general meeting of shareholders on June 15, 2005, the Board determined that it would not populate the various committees until additional Board of Director members could be appointed.  As a consequence, the Form 10-QSB and related Financial Statements for the quarterly period ended June 30, 2005 were not reviewed by an Audit Committee.  However, at the Board of Directors meeting held August 10, 2005 the Board unanimously approved the Form 10-QSB and related Financial Statements for issuance.  By consent resolution dated August 24, 2005, the Board of Directors appointed Mr. Drew Miller and Mr. Richard Torre as directors of the Company and at a Directors meeting held October 5, 2005 it was resolved that the Committees of the Board be as follows:




Audit CommitteeDrew Miller (Chair)James Speros


Compensation CommitteeJames Speros (Chair)Drew MillerRichard Torre


Governance CommitteeRichard Torre (Chair)Drew Miller



ITEM 6.  EXHIBITS



INDEX TO EXHIBITS

Exhibits


Number
        Exhibit3.1(1)
        Articles of Incorporation, dated February 27, 19873.2(1)
        Articles of Amendment, dated July 14, 19983.3(1)
        Articles of Amendment, dated June 28, 19903.4(1)
        Articles Of Amendment of the Company, dated February 8, 19933.5(1)
        Articles of Amendment of the Company, dated April 6, 19933.6(1)
        Articles of Amendment of the Company, dated December 6, 19933.7(5)
        Restated Articles of Incorporation of the Company dated June 1, 20003.8(1)
        By-Laws of the Company3.9(6)
        Amendment to By-Laws of the Company4.1(1)
        Specimen Stock Certificate4.2(2)
        1997 Stock Option Plan4.3(2)
        2000 Stock Option Plan4.4(4)
        Amended 2000 Stock Option Plan dated November 1, 200010.1(4)
        Agreement for Escrow of Share Certificate & Promissory Note between Edward White and the Company dated February 27, 2001



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10.2(5)
        Agreement for Escrow of Share Certificate and Promissory Note between Babak Habibi and the Company dated June 21, 200110.3(7)
        License Agreement with Marubeni Corporation10.4(8)
        Certificate of Reverse Stock Split10.5(9)
        Corporate Governance Committee Charter10.6(9)
        Audit Committee Charter10.7(9)
        Compensation Committee Charter10.8(9)
        Code of Business Conduct and Ethics for Directors, Officers and Employees10.9(9)
        Corporate Governance Guidelines10.10(10)
        Loan Agreement10.11(10)
        General Security Agreement10.12(10)
        Service Agreement with Elite Financial Communications Group10.13(10)
        2003 Stock Option Plan10.14(11)
        Lease Agreement dated July 30, 2003 between Hoop Realty and Braintech Canada, Inc.10.15(12)
        ABB Exclusive Channel Partner Agreement for Licensing of Braintechs Technologies10.16(13)
        ABB Exclusive Channel Partner Agreement for Licensing of Braintechs Technologies10.17(14)
        Marketing Communications Services Agreement with Baldacci Communications, LLC,11.1
        Computation of net loss per share31.1
        Certificate of Owen L.J. Jones pursuant to Sec 302 of the Sarbanes-Oxley Act of 200231.2
        Certificate of Edward A. White pursuant to Sec 302 of the Sarbanes-Oxley Act of 200232.1
        Certificate of Owen L.J. Jones pursuant to Sec 906 of the Sarbanes-Oxley Act of 200232.2
        Certificate of Edward A. White pursuant to Sec 906 of the Sarbanes-Oxley Act of 2002



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

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

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

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

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

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

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

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

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

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

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

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

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

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






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SIGNATURES



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






Signature
        Title
        Date


/s/ Owen L.J. Jones
        Chief Executive Officer,
        November 17, 2005Owen L.J. Jones
        Director(Principal Executive Officer)




/s/ Babak Habibi
        President, Director,
        November 17, 2005Babak Habibi




/s/ Edward A. White
        Chief Financial Officer,
        November 17, 2005Edward A. White
        Director(Principal Financial and AccountingOfficer)



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