10QSB 1 file001.htm QUARTERLY REPORT

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB
(Mark One)

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

For the quarterly period ended September 30, 2005

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

For the transition period from ___________ to ___________

Commission file number 0-26206

Orthometrix, Inc.
------------------
(Exact name of small business issuer as specified in its charter)

Delaware 06-1387931
-------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

106 Corporate Park Drive, Suite 102, White Plains, NY 10604
------------------------------------------------------- ----------
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code (914) 694-2285
----------------

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

There were 43,732,368 shares of common stock outstanding as of October 27, 2005.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Balance Sheet (Unaudited)

Assets
SEPTEMBER 30, 2005
-------------------------
Current assets:

Cash $ 14,429
Accounts receivable - trade 36,494
Inventories 264,006
Prepaid expenses and other current assets 126,063
-------------------------

Total current assets 440,992

Property and equipment, net 15,500
Other 11,658
-------------------------

Total Assets $ 468,150
=========================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable - trade $ 442,230
Accrued expenses 65,210
Related party loans 65,000
Unearned service revenue 26,122
-------------------------

Total current liabilities 598,562
-------------------------

Stockholders' equity:

Common stock - par value $.0005 per share,
75,000,000 shares authorized, and 43,732,368
shares issued and outstanding 21,865
Additional paid-in capital 42,845,221
Accumulated deficit (42,997,498)
-------------------------
Total stockholders' equity (130,412)
-------------------------
Total Liabilities and Stockholders' Equity $ 468,150
=========================

See notes to financial statements.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

Statements of Operations (Unaudited)

FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------------- ---------------------

Revenue $ 1,165,445 $ 834,081
Cost of revenue 479,744 326,020
--------------------- ---------------------
Gross profit 685,701 508,061

Sales and marketing expense 889,712 477,209
General and administrative expense 969,436 716,178
Research and development expense 313,109 270,162
--------------------- ---------------------

Operating loss (1,486,556) (955,488)
--------------------- ---------------------

Interest expense (40,340) (139,151)
Interest income 3,648 570
--------------------- ---------------------

Net loss $ (1,523,248) $ (1,094,069)
===================== =====================

Basic and diluted weighted average shares 41,472,122 29,732,512
===================== =====================

Basic and diluted loss per share:
Net loss $ (0.04) $ (0.04)
===================== =====================

See notes to financial statements.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

Statements of Operations (Unaudited)

FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
--------------------- ---------------------

Revenue $ 302,981 $ 391,226
Cost of revenue 135,762 163,487
--------------------- ---------------------
Gross profit 167,219 227,739

Sales and marketing expense 343,938 166,861
General and administrative expense 303,226 233,900
Research and development expense 84,905 124,905
--------------------- ---------------------

Operating loss (564,850) (297,927)

Interest expense (11) (63,124)
Interest income 212 234
--------------------- ---------------------

Net loss $ (564,649) $ (360,817)
===================== =====================

Basic and diluted weighted average shares 43,470,248 29,825,944
===================== =====================

Basic and diluted loss per share:
Net loss $ (0.01) $ (0.01)
===================== =====================

See notes to financial statements.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
-------------------- --------------------

Cash Flows From Operating Activities:

Net loss $ (1,523,248) $ (1,094,069)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock options and warrants issued to non-employees 203,709 7,980
Non cash compensation 72,000 -
Amortization expense 33,597 88,754
Depreciation expense 4,210 4,131
Changes in assets and liabilities:
Decrease in accounts receivable 113,281 163,129
Increase in inventories (143,546) (31,928)
Increase in prepaid expenses and other current (18,267) (4,163)
assets
(Decrease) increase in accounts payable (85,596) 206,792
Decrease in accrued expenses (78,519) (4,203)
Increase (decrease) in unearned service revenue 18,612 (2,026)
------------------- --------------------

Net cash used in operating activities (1,403,767) (665,603)
------------------- --------------------

Cash Flows From Investing Activities:

Purchases of property and equipment (1,954) (742)
------------------- --------------------

Cash used in investing activities (1,954) (742)
------------------- --------------------

Cash Flows From Financing Activities:

Repayment of borrowings from related parties (500,000) (350,000)
Proceeds of borrowings from related parties 65,000 1,025,000
Proceeds for issuance of common stock 1,740,000 -
Exercise of stock options and warrants 115,150 22,656
------------------- --------------------

Net cash provided by financing activities 1,420,150 697,656
------------------- --------------------

Net increase in cash 14,429 31,311

Cash at beginning of period - 44,121
------------------- -------------------

Cash at end of period $ 14,429 $ 75,432
=================== ===================

See notes to financial statements.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND GOING CONCERN

The financial statements of Orthometrix, Inc. presented herein, have been
prepared pursuant to the rules of the Securities and Exchange Commission
for quarterly reports on Form 10-QSB and do not include all of the
information and footnote disclosures required by accounting principles
generally accepted in the United States of America. These statements should
be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 2004, and included in the Company's
Report on Form 10-KSB as filed with the Securities and Exchange Commission
on March 25, 2005. In the opinion of management, the accompanying interim
unaudited financial statements contain all adjustments (consisting of
normal, recurring accruals) necessary for a fair presentation of the
financial position, results of operations and cash flows for these interim
periods.

The Company's continued existence is dependent upon several factors
including increased sales volume and the ability to achieve profitability
on the sale of some of the Company's remaining product lines. The Company
is pursuing initiatives to increase liquidity, including external
investments and obtaining a line of credit. The Company completed a
$1,740,000 share issuance in the first quarter of 2005. Subsequent to
September 30, 2005, the company obtained a $350,000 line of credit from
HSBC Bank USA, N.A. The line of credit has been guaranteed by certain
officers of the Company and in connection with this guarantee they have
been granted warrants to purchase up to 350,000 shares of Common Stock at
$.25 per share. In order to increase its cash flow, the Company is
continuing its efforts to stimulate sales. The Company has implemented high
credit standards for its customers and is emphasizing the receipt of down
payments from customers at the time their purchase orders are received. The
Company is also requesting prepayment from customers and attempting to more
closely coordinate the timing of purchases.

The results of operations for the nine months ended September 30, 2005 are
not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 2005.

2. INVENTORIES

As of September 30, 2005, inventories consisted of $264,006 of
sub-assemblies, parts and spare parts.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

3. CASH FLOWS

The Company paid $37,064 and $36,450 for interest during the nine months
ended September 30, 2005 and 2004, respectively.

4. INCOME TAXES

The Company accounts for deferred income taxes by recognizing the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. The effect of a change in tax rates on deferred taxes is
recognized in income in the period that includes the enactment date. The
Company realizes an income tax benefit from the exercise of certain stock
options or the early disposition of stock acquired upon exercise of certain
options. This benefit results in an increase in additional paid in capital.
Realization of the deferred tax asset is dependent on the Company's ability
to generate sufficient taxable income in future periods. Based on the
Company's existing financial condition, the Company determined that it was
more likely than not that the deferred tax assets would not be realized.
Accordingly, the Company recorded a valuation allowance to reduce the
deferred tax assets to zero.

5. CONTINGENCY

The Company leases its corporate office space located in White Plains, New
York. Effective August 1, 2003, the Company amended its lease for office
space expiring on July 31, 2008. Minimum future rental commitments with
regard to the original and amended lease are payable as follows:

2005 $ 29,500
2006 30,816
2007 31,584
2008 18,424
-----------------------
$ 110,324
=======================

6. RELATED PARTY TRANSACTIONS

During the nine months ended September 30, 2005, there were $65,000
borrowings from officers and directors of the Company, as compared to the
$995,000 borrowed from several officers and directors of the Company and
$405,000 borrowed from unaffiliated individuals in 2004. The borrowings in
2005 were short term, non-interest bearing loans from certain officers
pending the completion of the line of credit facility discussed in Note 1.
The Company issued notes in 2004 bearing interest at prime plus one (6% as
of December 31, 2004) which mature one year from the date of issuance and
have all been repaid as of March 4, 2005.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

6. RELATED PARTY TRANSACTIONS (CONTINUED)

In December 2004, the Board of Directors authorized the Company to offer to
the holders of certain promissory notes issued by the Company the right to
convert such notes into shares of Common Stock. Holders of such notes
elected to convert $1,545,000 of notes (the "Total Conversion Amount") into
5,492,995 shares of Common Stock at $0.28 per share. Of the Total
Conversion Amount, $1,300,000 were notes held by Michael W. Huber
($350,000), Neil H. Koenig ($120,000), Reynald G. Bonmati ($660,000),
Andre-Jacques Neusy (120,000), and Albert S. Waxman ($50,000), officers and
directors of the Company. The notes that were converted did not have a
beneficial conversion feature.

On February 25, 2005, the Company entered into a Securities Purchase
Agreement with Rock Creek Investment Partners, L.P. Pursuant to such
agreement, the Company sold 2,321,429 shares of Common Stock at $0.28 per
share for an aggregate purchase price of $650,000 to Rock Creek Investment
Partners, L.P. The market price of the Common Stock on February 25, 2005
was $0.33.

On March 3, 2005 the Company entered into a Securities Purchase Agreement
with Psilos Group Partners II SBIC L.P ("Psilos") and Reynald Bonmati.
Pursuant to such agreement, the Company sold 4,000,000 shares of Common
Stock at $0.25 per share for a purchase price of $1,000,000 to Psilos, of
which Dr. Waxman, a director of the Company, is Senior Managing Member, and
sold 400,000 shares of Common Stock at $0.25 per share, for a purchase
price of $100,000 to Reynald G. Bonmati, an officer and director of the
Company. The $100,000 purchase price was deemed paid by Mr. Bonmati as a
result of the cancellation of the aggregate amount of $100,000 of
promissory notes issued by the Company in favor of Mr. Bonmati. On December
15, 2004, the Company's Board of Directors ("the Board") authorized the
commencement of negotiations with Psilos and other parties regarding the
private sale of shares of the Company's Common Stock. The Board determined
that a sale price equal to the average closing price over the 30-day period
preceding the closing date, less 20%, would be appropriate. When
negotiations with Psilos began on December 15, 2004, such discounted
average price was approximately $0.28 per share. When Psilos was ready to
close the transaction on March 3, 2005, such discounted average price had
decreased to approximately $0.24 per share. The parties agreed to price the
deal at $0.25 per share, with Psilos being issued 4,000,000 shares. At the
request of Psilos, Mr. Bonmati accepted to purchase 400,000 shares on the
same terms. The Board unanimously authorized and ratified the transaction,
with the related parties abstaining from the vote. The Company sold an
additional 360,000 shares of Common Stock for $90,000 in conjunction with
this offering. None of the investors of the 360,000 shares were employees
or officers of the Company. The market price of the Common Stock on March
3, 2005 was $0.43. The discount on the 4,000,000 shares issued to Psilos
did not relate, in any part, to compensation for director services for Dr.
Waxman. The $72,000 discount on the 400,000 shares issued to Mr. Bonmati
was recorded as compensation expense and as additional paid-in capital.

On March 4, 2005, the Company repaid the remaining $500,000 loan balance to
Reynald G. Bonmati ($305,000), William Orr ($50,000), David E. Baines
($50,000), Ralph G Theodore and Ellen H Theodore JTWROS ($25,000), John
Utzinger ($20,000), and Farooq Kathwari ($50,000), officers, directors, and
affiliates of the Company.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

6. RELATED PARTY TRANSACTIONS (CONTINUED)

On March 11, 2005, the Company granted to a consultant a warrant to
purchase up to 500,000 shares of Common Stock at $0.33 per share in
consideration for the assistance with the financial structuring of the
Company. The value of the warrants were based on the application of the
Black-Scholes option pricing model and valued at $144,600. The value of the
warrants was recorded as consulting expense and as additional paid-in
capital.

During September 2005 there were $65,000 borrowings from certain officers
of the Company. These non-interest bearing loans were borrowed to cover
immediate cash needs prior to securing the credit facility and all but
$25,000 were repaid by the filing of this report. The Company anticipates
full repayment of the loans from the proceeds of their next sale.

Subsequent to September 30, 2005, certain officers guaranteed a line of
credit for the Company for $350,000 from HSBC Bank USA, N.A. In connection
with the guarantee, the Company granted these officers warrants to purchase
up to 350,000 shares of Common Stock at $.25 per share.

7. STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Options Issued to Employees." The Company accounts for
stock-based compensation to employees using the intrinsic value method,
whereby compensation cost is recognized when the exercise price at the date
of grant is less than the fair market value of the Company's common stock.
The Company discloses the proforma effect of compensation cost based on the
fair value method for determining compensation cost. The value of
stock-based compensation awarded to non-employees is determined using the
fair value method. Compensation cost is recognized over the service or
vesting period. Had the compensation cost for stock options granted to
employees been determined using the fair value method, consistent with SFAS
123 "Accounting for Stock-Based Compensation", the Company's net loss and
loss per common share for the nine months ended September 30, 2005 and 2004
would approximate the pro forma amounts as follows:

FOR THE NINE MONTHS ENDED
---------------------------------------------------
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------------- -----------------------
Net loss, as reported $ (1,523,248) $ (1,094,069)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effect (29,302) (33,562)
------------------------- -----------------------

Pro forma net loss $ (1,552,550) $ (1,127,631)
========================= =======================

Basic and diluted loss per share
As reported $ (.04) $ (.04)
========================= =======================

Pro forma $ (.04)$ (.04)
========================= =======================

During the nine months ended September 30, 2005, the Company's board of
directors approved a grant of stock options to employees and directors to
purchase an aggregate of 1,110,000 shares of its common stock with exercise
prices equal to the market price of stock on the date of grant. The options
are 10-year options (with the exception of Mr. Bonmati, a 10% shareholder)
and vest over 4 years.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

7. STOCK-BASED COMPENSATION (CONTINUED)

During the nine months ended September 30, 2005, the Company's board of
directors approved a grant of stock options to independent consultants to
purchase an aggregate of 245,000 shares of its common stock. The value of
these issuances was based on the application of the Black-Scholes option
pricing model and valued at $59,109. The value of options was recorded as
consulting expense and additional paid-in capital.

At the 2005 annual meeting of stockholders on June 14, 2005, the
shareholders approved an amendment to the Company's Amended and Restated
1994 Stock Option and Incentive Plan for Employees, and the Amended and
Restated 2000 Stock Option and Incentive Plan for Non Employee Directors
and Consultants, to increase the authorized number of shares reserved for
stock options from 3 million to 5 million and from 1 million to 1.5
million, respectively.

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

The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosure contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Company from time to time.
The discussion of the Company's liquidity, capital resources and results of
operations, including forward-looking statements pertaining to such
matters, does not take into account the effects of any changes to the
Company's operations. Accordingly, actual results could differ materially
from those projected in the forward-looking statements as a result of a
number of factors, including those identified herein. This item should be
read in conjunction with the financial statements and other items contained
elsewhere in the report.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities.

The Company believes the following critical accounting policies involve
additional management judgment due to the sensitivity of the methods,
assumptions and estimates necessary in determining the related asset and
liability amounts. The Company recognizes revenues in accordance with
invoice terms, typically when products are shipped. Products are covered by
warranties provided by the Company's vendors. Therefore, no warranty
reserve is required on products sold by the Company. The Company provides
estimated inventory allowances for slow-moving and obsolete inventory based
on current assessments about future demands, market conditions and related
management initiatives. If market conditions are less favorable than those
projected by management, additional inventory allowances may be required.
The Company provides allowances for uncollectable receivable amounts based
on current assessment of collectability. If collectability is less
favorable than those projected by management, additional allowances for
uncollectability may be required. The Company has recorded a valuation
allowance to reduce its deferred tax assets. The Company limited the amount
of tax benefits recognizable from these assets based on an evaluation of
the amount of the assets that are expected to be ultimately realized.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources

During the past two fiscal years ended December 31, 2004 and 2003, the
Company has experienced aggregate losses from operations of $3,293,341 and
has incurred total negative cash flow from operations of $2,180,729 for the
same two-year period. During the nine months ended September 30, 2005 the
Company experienced a net loss of $1,523,248 and a negative cash flow from
operating activities of $1,403,767. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
continued existence is dependent upon several factors including increased
sales volume and the ability to achieve profitability on the sale of some
of the Company's remaining product lines. The Company is pursuing
initiatives to increase liquidity, including external investments and
obtaining a line of credit. The Company completed a $1,740,000 share
issuance in the first quarter of 2005. Subsequent to September 30, 2005,
the company obtained a $350,000 line of credit from HSBC Bank USA, N.A. The
line of credit has been guaranteed by certain officers of the Company and
in connection with this guarantee they have been granted warrants to
purchase up to 350,000 shares of Common Stock at $.25 per share. In order
to increase its cash flow, the Company is continuing its efforts to
stimulate sales. The Company has implemented high credit standards for its
customers and is emphasizing the receipt of down payments from customers at
the time their purchase orders are received. The Company is also requesting
prepayment from customers and attempting to more closely coordinate the
timing of purchases.

The level of liquidity based on cash experienced a $14,429 increase at
September 30, 2005, as compared to December 31, 2004. The Company's
$1,403,767 used in operating activities and $1,954 used in investing
activities was offset by $1,420,150 of cash provided by financing
activities. Financing activities consisted of $500,000 repayment of
borrowings from directors and officers of the Company, $65,000 related
party loans, $1,740,000 proceeds for issuance of common stock, and $115,150
exercise of stock options and warrants.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)

During the nine months ended September 30, 2005, the Company's board of
directors approved a grant of stock options to employees and directors to
purchase an aggregate of 1,110,000 shares of its common stock with exercise
prices equal to the market price of stock on the date of grant. The options
are 10 year options (with the exception of Mr. Bonmati, a 10% shareholder)
and vest over 4 years.

At the 2005 annual meeting of Stockholders on June 14, 2005, the
shareholders approved an amendment to the Company's Amended and Restated
1994 Stock Option and Incentive Plan for Employees, and the Amended and
Restated 2000 Stock Option and Incentive Plan for Non Employee Directors
and Consultants, to increase the authorized number of shares reserved for
stock options from 3 million to 5 million and from 1 million to 1.5
million, respectively. Copies of the amended stock option plans are set
forth as exhibits to this 10-QSB.

The Company markets, sells and services a wide range of proprietary
non-invasive musculoskeletal and other devices through two divisions, a
healthcare division and a sports & fitness division. The healthcare
division markets, sells and services (1) pQCT(R) (peripheral Quantitative
Computed Tomography) bone and muscle measurement systems used for
musculoskeletal research and clinical applications (including for bone
disorders and human performance)- the XCT(TM) product line; (2) patented
exercise systems used for physical therapy, sports medicine and
rehabilitative medicine - the Galileo(TM) and Leonardo(TM) product lines,
as well as the Mini VibraFlex(R); and (3) the Orbasone(TM) pain management
system (ESWT or Extracorporal Shock Wave Therapy), used for the treatment
of plantar fasciitis, was added to its product line upon successful
completion of the study and market approval of the system by the United
States Food and Drug Administration (the "FDA") in the third quarter of
2005. In the first quarter of 2005, the Company also received approval from
Health Canada to market and sell the Orbasone(TM) in Canada. The sports &
fitness division markets, sells and services patented exercise systems to
fitness centers, gyms, sports clubs and associations and to the general
public - the VibraFlex(R) product line. The sports & fitness division's
product line includes the Mini VibraFlex(R), the Mini VibraFlex(R) Plus and
the VibraFlex(R) 500.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)

The Company introduced the VibraFlex(R) Rx in the second quarter of 2005 to
replace the Galileo 2000 in the physical therapy, sports medicine and
rehabilitation markets. The VibraFlex(R) products are based on the same
patented technology as the Galileo products and offer a novel approach to
muscle strength development given that such products are based on short and
intense stimulations of the muscles.

The Company has no current backlog of orders as of September 30, 2005.
There are no material commitments for capital expenditures as of September
30, 2005.

The nature of the Company's business is such that it is subject to changes
in technology, government approval and regulation, and changes in
third-party reimbursement in the United States and numerous foreign
markets. Significant changes in one or more of these factors in a major
market for the Company's products could significantly affect the Company's
cash needs. If the Company experiences significant demand for any of its
products, additional third party debt or equity financing will be required.

Results of Operations

The Company had a net loss of $1,523,248 ($0.04 per share based on
41,472,122 weighted average shares) for the nine months ended September 30,
2005 compared to a net loss of $1,094,069 ($0.04 per share based on
29,732,512 weighted average shares) for the nine months ended September 30,
2004.

Revenue for the nine months ended September 30, 2005 increased $331,364 (or
39.7%) to $1,165,445 from $834,081 for the nine months ended September 30,
2004. The increase in sales was primarily due to an increase in
VibraFlex(R), XCT(TM), and Orbasone(TM) sales for the nine months ended
September 30, 2005.

Cost of revenue as a percentage of revenue was 41.2% and 39.1% for the nine
months ended September 30, 2005 and 2004, respectively, resulting in a
gross margin of 58.8% for the nine months ended September 30, 2005 compared
to 60.9% for the nine months ended September 30, 2004. The decrease in
gross margin was due to increased costs during the nine months ended
September 30, 2005.

Sales and marketing expense for the nine months ended September 30, 2005
increased $412,503 or (86.4%) to $889,712 from $477,209 for the nine months
ended September 30, 2004. The increase is due to the Company's increased
commission, consulting, payroll and trade show expenses.

General and administrative expense for the nine months ended September 30,
2005 increased $253,258 (or 35.4%) to $969,436 from $716,178 for the nine
months ended September 30, 2004. The increase was primarily due to an
increase in legal fees and non cash compensation expense associated with
the Company's financing transactions.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)

Results of Operations (Continued)

Research and development expense for the nine months ended September 30,
2005 increased $42,947 (or 15.9%) to $313,109 from $270,162 for the nine
months ended September 30, 2004. The increase was primarily due to
increased expenses incurred for the development of the Orbasone(TM).

Interest expense decreased $98,811 (or 71.0%) to $40,340 for the nine
months ended September 30, 2005 from $139,151 for the nine ended September
30, 2004. Interest expense decreased as a result of the repayment of all
outstanding principal balances of loans payable in March 2005.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). The
revised accounting standard eliminates the ability to account for
share-based compensation transactions using the intrinsic value method in
accordance with APB Opinion No. 25 and requires instead that such
transactions be accounted for using a fair-value-based method. SFAS No.
123R requires public entities to record noncash compensation expense
related to payment for employee services by an equity award, such as stock
options, in their financial statements over the requisite service period.
SFAS No. 123R is effective as of the beginning of the first interim or
annual period that begins after December 15, 2005 for small business
issuers. The Company does not plan to adopt SFAS No. 123R prior to its
first quarter of fiscal 2006. The Company expects that the adoption of SFAS
No. 123R will have a negative impact on the Company's consolidated results
of operations. The company has historically provided pro forma disclosures
pursuant to SFAS No. 123 and SFAS No. 148 as if the fair value method of
accounting for stock options had been applied, assuming use of the
Black-Scholes options-pricing model. Although not currently anticipated,
other assumptions may be utilized when SFAS No. 123R is adopted.

Quantitative and Qualitative Disclosures of Market Risk

The Company does not have any financial instruments that would expose it to
market risk associated with the risk of loss arising from adverse changes
in market rates and prices.

ITEM 3. CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by
this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures are
effective.

There has been no change in the Company internal controls over financial
reporting during the Company's first, second, and third quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

PART II - OTHER INFORMATION

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

At the 2005 annual meeting of stockholders on June 14, 2005, the
shareholders of the Company approved an amendment to the Company's Articles
of Incorporation to increase the authorized number of shares of Common
Stock from 45 million to 75 million. A copy of the Certificate of Amendment
of Restated Certificate of Incorporation filed with the state of Delaware
is set forth as an exhibit to this 10-QSB.

ITEM 6. EXHIBITS

(a) Exhibits:

10.11 Securities Purchase Agreement, dated February 25, 2005, between
Orthometrix, Inc. and Rock Creek Investment Partners, L.P. (A)

10.12 Securities Purchase Agreement, dated March 3, 2005, between
Orthometrix, Inc. and Psilos Group Partners II SBIC, L.P. and
Reynald G. Bonmati. (A)

10.13 Amended and Restated 1994 Stock Option and Incentive Plan for
Employees. (B)

10.14 Amended and Restated 2000 Stock Option and Incentive Plan for Non
Employee Directors and Consultants. (B)

10.15 Certificate of Amendment of Restated Certificate of
Incorporation. (B)

Exhibits required by Item 601 of Regulation S-B are filed
herewith:

31.1 Chief Executive Officer's Certification, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

31.2 Chief Financial Officer's Certification, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

32 Certification of Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

(A) This Exhibit was previously filed as an Exhibit to the
Company's Report on Form 10-KSB dated March 24, 2005 and is
incorporated herein by reference.

(B) This Exhibit was previously filed as an Exhibit to the
Company's Report on Form 10QSB dated August 2, 2005 and is
incorporated herein by reference.

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ORTHOMETRIX, INC.
FORM 10-QSB SEPTEMBER 30, 2005

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

ORTHOMETRIX, INC.

BY: /s/ Reynald G. Bonmati
------------------------------
Reynald G. Bonmati
President

BY: /s/ Neil H. Koenig
------------------------------
Neil H. Koenig
Chief Financial Officer
(Principal Financial Officer)

Dated: November 9, 2005

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