United States Securities And Exchange Commission

FORM 10-K

Commission File Number 0-12728

INTEGRAL VISION, INC.

Registrant’s telephone number, including area code: (248) 471-2660

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

None

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

Common Stock, No Par Value, Stated Value $.20 Per Share
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days. YES þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o  NO þ

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 16, 2004:

Common Stock, No Par Value, Stated Value $.20 Per Share - $11,657,351

The number of shares outstanding on each of the issuer’s classes of common stock, as of March 16, 2004:

Common Stock, No Par Value, Stated Value $.20 Per Share – 12,778,901

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Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties. Generally, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions identify forward-looking statements. The information included in this Form 10-K is as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements.

Part I

ITEM 1. Business

General

Integral Vision, Inc. (or the “Company”) develops, manufactures and markets microprocessor-based process monitoring and inspection systems for use in industrial manufacturing environments. The principle application for the Company’s products is optical display inspection (“machine vision products”). The Company’s products are generally sold as capital goods. Depending on the application, machine vision systems have an indefinite life. Machine vision applications are more likely to require replacement due to possible technological obsolescence than physical wear.

Overview

Integral Vision is a supplier of machine vision systems used to ensure product quality during the manufacturing process.

		Machine vision has become a necessity for manufacturers who need to continually improve production efficiency to meet the increasing demand for high quality products. The Company’s vision systems automatically identify, gauge or inspect parts with speed and accuracy. Quantitative information about each part is evaluated for functional or cosmetic defects. Our systems can be configured to statistically monitor the production process and send data to other equipment in the manufacturing cell. Such data could be used, for example, by a diverter to send defective parts to a reject bin, or by process controllers to automatically adjust process variables.
		The Company markets its turnkey systems to the flat panel display industry. Applications development software, such as our Industrial Vision Controller (IVC) technology, can be applied to an extensive array of applications in industries that run the gamut from aerospace to medical to textiles.

Products

		Flat Panel Display Inspection
		Integral Vision has over nine years of experience in the display industry. Our initial product, LCI-Professional, is used for inspection of LCD Displays as components or final assemblies. Applications include cell phones, car radios, pagers, electronic organizers and hand-held video games. Integral Vision’s display inspection systems are designed to detect two classes of defects: cosmetic and functional. Cosmetic defects do not affect the functionality of the display, but they cause user annoyance and reduce product value. Functional defects are flaws that cause the device to be inoperable or have a significant effect on functionality.
		Integral Vision’s SharpEye provides Flat Panel Display (FPD) inspection for reflective, emissive and transmissive display technologies. SharpEye is designed for the detection of functional and cosmetic defects in LCOS, OLED, Poly OLED, DMD, EL, HTPS, LTPS, LCD and other emerging display technologies. These technologies are applied to

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		consumer products such as camcorders, rear projection computer monitors, digital still cameras, HDTV, projectors, video headsets and video telephones. The core technology of SharpEye inspection algorithms is the ability to quantize data to the level of a single display pixel. SharpEye can be configured for production inspection or for display evaluation in a laboratory based on the equipment configuration selected.
		Integral Vision’s ChromaSee, introduced in 2003, provides luminance, color matching and defect inspections for FPD displays. Defect detection includes functional (e.g. failed pixels, icons) and cosmetic (e.g. scratches) defects. ChromaSee integrates with production equipment to allow inline or offline testing. A configuration interface (Task Sequencer) uses a familiar “Tree View” representation of the inspection sequence flow. For deployment into production, the operator’s interface provides essential views of results, images and statistics for production floor personnel.

Production and Suppliers

The Company’s production process consists principally of assembling standard electrical, electronic and optical components and hardware subassemblies purchased from suppliers into finished products. When proprietary circuit boards are needed, the Company generally contracts for outside vendors to build the boards based on internal company designs.

The Company generally does not rely on a single source for parts and subassemblies, although certain components and subassemblies included in the Company’s products may only be obtained from a limited number of suppliers. Management believes alternative sources or designs could be developed for any of the components used in its products thereby mitigating any exposure to product interruption from shortages of parts or limited suppliers.

Intellectual Property

Management believes that the technology incorporated in its products gives it advantages over its competitors and prospective competitors. Protection of technology is attempted through a combination of patents, applied for patents, confidentiality agreements and trade secrets. The Company presently has 14 patents. There can be no assurance that the Company will have the resources to defend its patents or that patents the Company holds will be considered valid if challenged. In addition, it is possible that some patents will be rendered worthless as the result of technological obsolescence.

Marketing

The Company generally markets its vision products to end users, but the Company has had success integrating its products with OEM’s in certain circumstances. Although sales are made worldwide, the Company’s strongest presence is maintained in the US (through Company employees), and in Europe and Asia (through sales representatives).

Product Development

The market for Machine Vision is characterized by rapid and continuous technological development and product innovation. The Company believes that continued and timely development of new products and enhancements to existing products is necessary to maintain its competitive position. Accordingly, the Company devotes a significant portion of its personnel and financial resources to product development programs and seeks to maintain close relationships with customers to remain responsive to their needs. The Company’s net engineering and development costs amounted to $663,000, $852,000, and $1.6 million for the years ended December 31, 2003, 2002, and 2001, respectively. The Company’s current product development efforts are primarily directed to Flat Panel Display Inspection products.

Environmental Factors

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The costs to the Company of complying with federal, state and local provisions regulating protection of the environment are not material.

Competition

The Company experiences competition in all areas in which it operates. Competition for Flat Panel Display Inspection comes primarily from Westar Display Technologies, Inc. Cognex Corp. competes either directly or indirectly via systems integrators in certain general vision application work, as do numerous niche producers of machine vision solutions.

Export Sales

Sales outside of the United States accounted for 13%, 54% and 46% of the Company’s net sales in 2003, 2002 and 2001, respectively. Management expects that such sales will continue to represent a significant percentage of its net sales. Most of the Company’s export billings are denominated in US dollars. On occasion other export billings are denominated in the currency of the customer’s country.

See Note I to the Consolidated Financial Statements Part II – ITEM 8 for details of geographic area information.

Major Customers

The nature of the Company’s product offerings may produce sales to one or a limited number of customers in excess of 10% of total consolidated sales in any one year. It is possible that the specific customers reaching this threshold may change from year to year. Loss of any one of these customers could have a material impact on the Company’s results of operations. For the year ended December 31, 2003 sales to Intel Corporation, Owens Brockway and Toyo Corporation represented 63%, 14%, and 11% of consolidated sales, respectively. Amounts due from these customers represented 0% of the respective outstanding trade receivable balance at December 31, 2003. For the year ended December 31, 2002 sales to Ness Display Co., LTD and Uniax Corporation represented 13% and 14% of consolidated sales, respectively. Amounts due from these customers represented 3% of the respective outstanding trade receivable balance at December 31, 2002. In 2001 the Company did not have sales to any single customer that exceeded 10% of total consolidated sales.

Backlog

As of December 31, 2003, the Company had an order backlog of approximately $1.6 million compared to $399,000 at December 31, 2002. Management expects that the Company will ship products representing this entire backlog in 2004.

Employees

As of February 28, 2004, the Company had approximately 12 permanent employees, as compared to 13 at February 28, 2003 and 18 at February 28, 2002. None of the Company’s employees are represented by a labor union.

ITEM 2. Properties

Manufacturing, engineering and administrative functions of Integral Vision are performed at an approximately 5,000 square foot facility leased by the Company in Farmington Hills, Michigan.

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ITEM 3. Legal Proceedings

The Company is not currently involved in any material litigation.

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

None.

Part II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters

		The Company’s common stock is traded on the Over the Counter Bulletin Board (OTCBB) under the symbol INVI. As of March 15, 2004, there were approximately 3,000 stockholders of the Company including individual participants in security position listings.
		The Company’s common stock was moved to the Over the Counter Bulletin Board (OTCBB) effective with its delisting from The Nasdaq SmallCap Market with the open of business August 16, 2001. The Company was informed by Nasdaq that the delisting was decided by the Nasdaq Listing Qualifications panel which approved the Nasdaq’s staff decision to delist the stock due to its failing to maintain a minimum bid price of $1.00 for 30 consecutive trading days as required by Marketplace Rule 4450(a)(5) for continued listing.
		Information on the current quotes on the stock, which will continue to use the ticker symbol INVI, are available at the OTCBB’s website, www.otcbb.com and most financial information portals, such as that provided at http://finance.yahoo.com or http://quote.bloomberg.com. Integral Vision will continue to provide information through filings with the Securities and Exchange Commission (SEC) as required for continued listing on the OTCBB. These filings can be found at the SEC’s website at www.sec.gov.
		The table below shows the high and low sales prices for the Company’s common stock for each quarter in the past two years. The closing sales price for the Company’s common stock on March 16, 2004 was $1.50 per share.

The market for securities of small market-capitalization companies has been highly volatile in recent years, often for reasons unrelated to a company’s results of operations. Management believes that factors such as quarterly fluctuations in financial results, failure of new products to develop as expected, sales of common stock by existing shareholders, and substantial product orders may contribute to the volatility of the price of the Company’s common stock. General economic trends such as recessionary cycles and changing interest rates may also adversely affect the market price of the Company’s common stock. No cash dividends on common stock have been paid during any period.

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ITEM 6. Summary of Selected Financial Data

(a)		In 1999, the Company charged-off inventory of $1.5 million resulting from a review of the marketability of inventory related to a previously discontinued product line.
(b)		Includes an $8.7 million after tax gain on disposal of the Welding Controls division and a $583,000 charge, net of tax credit, for the early retirement of debt.
(c)		In 2000, Management made a change in estimate, primarily related to inventory, that resulted in a $666,000 charge to direct costs of sales.
(d)		In 2001, Management made a change in estimate that resulted in a $1.9 million charge to direct costs of sales to write down inventory and capitalized software to estimated net realizable values. The amount of the charge applicable to inventory was $540,000 with the remaining $1.3 million applicable to capitalized software.
(e)		See Note B to “Notes to Consolidated Financial Statements.”

The above selected financial data should be read in conjunction with Consolidated Financial Statements, including the notes thereto (Part II - ITEM 8) and Management’s

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Discussion and Analysis of Financial Condition and Results of Operations (Part II — ITEM 7). The Company has never paid a dividend and does not anticipate doing so in the foreseeable future. The Company expects to retain earnings, if any, to finance the expansion and its development of business.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Integral Vision, Inc. develops, manufactures and markets microprocessor-based process monitoring and inspection products for use in industrial manufacturing environments. The Company’s revenues are primarily derived from the sale of flat panel display inspection equipment. Except for the historical information contained herein, the matters discussed in this document are forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such factors and uncertainties include, but are not limited to: the impact of the level of the Company’s indebtedness; the Company’s ability to obtain the cash needed to allow it to continue as a going concern; general economic conditions and conditions in the specific industries in which the Company has significant customers; price fluctuations in the materials purchased by the Company for assembly into final products; competitive conditions in the Company’s markets and the effect of competitive products and pricing; and technological development by the Company, its customers and its competition. As a result, the Company’s results may fluctuate. Additional information concerning risk factors that could cause actual results to differ materially from those projected in the forward-looking statements is contained in the Company’s filings with the Securities and Exchange Commission. These forward-looking statements represent the Company’s best estimates as of the date of this document. The Company assumes no obligation to update such estimates except as required by the rules and regulations of the Securities and Exchange Commission.

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Results of Operations

The following table sets forth for the periods indicated certain items from the Company’s Statements of Operations as a percentage of net revenues. The impact of inflation for the periods presented was not significant.

(a)		In 2001, Management made a change in estimate that resulted in a $1.9 million charge to direct costs of sales to write down inventory and capitalized software to estimated net realizable values. The amount of the charge applicable to inventory was $540,000 with the remaining $1.3 million applicable to capitalized software.
(b)		Direct cost of sales includes capitalized software amortization as a percentage of sales of 30.2%, 11.1%, and 100% in 2003, 2002 and 2001, respectively.
(c)		In 2001, other income (expense) includes a loss on the sale of a note receivable of $441,000 (see Note B of the notes to consolidated financial statements).

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Year Ended December 31, 2003, compared to the year ended December 31, 2002

		Net revenues decreased $938,000 (59%) to $641,000 in 2003 from $1.6 million in 2002. Net revenue is reported net of sales commission expense of approximately $11,000 in 2003 compared to $83,000 in 2002. The decrease in net revenue was partially attributable to the fact that the Company sold its disc identification/print inspection (CDiD/CDiP) product line in 2002 (see Note K to consolidated financial statements). Sales from the Company’s disc identification/print inspection (CDiD/CDiP) product line accounted for $743,000 of the net revenue in the 2002 period. This decrease was partially offset by increased sales of the Company’s flat panel display inspection product. Sales from the flat panel display inspection product line accounted for approximately $497,000 and $447,000 of the Company’s net revenue for the years ended December 31, 2003 and 2002, respectively. The Company’s revenue from other applications was approximately $85,000 and $139,000 in 2003 and 2002, respectively. The Company’s revenue from software was approximately $43,000 and $62,000 in 2003 and 2002, respectively. The Company’s revenue from service activities was approximately $18,000 and $398,000 in 2003 and 2002, respectively.
		Direct costs of sales decreased $572,000 (49%) to $604,000 (approximately 94.2% of sales) in 2002 from $1.2 million (approximately 74.5% of sales) in 2002. This was primarily attributable to the lower sales volume and smaller structure required to support it as well as lower patent amortization expense in the 2003 period. Management periodically performs an analysis of the net realizable value of capitalized patent costs. In the 2002 period, Management determined that capitalized patent costs exceeded the estimated net realizable value of amounts capitalized and a write-down was necessary. In the year ended December 31, 2002, $74,000 of additional amortization was included in costs of sales as a result of this determination.
		Marketing costs decreased 60.0%, or $334,000, to $223,000 in 2003 compared to $557,000 in 2002. This decrease is primarily attributable to workforce reductions resulting from the implementation of a cost reduction plan by Management in late 2000 and throughout 2001. Employee related costs in the marketing division were $143,000 lower in 2003 compared to 2002 levels. The plan also called for workforce reductions in both the general and administrative department and the engineering department, as evidenced by the figures below. Advertising costs were $62,000 lower in 2003 compared to 2002 levels.
		General and administrative costs decreased 23.4%, or $252,000, to $802,000 in 2003 compared to $1.1 million in 2002. The costs for outside services were $107,000 lower in 2003 compared to 2002 levels. Legal expenses were $33,000 lower in 2003 compared to 2002. Additionally bad debts expense in the general and administrative division decreased 98.1% or $97,000 in 2003.
		Engineering and development expenditures decreased 22.1%, or $189,000, to $663,000 in 2003 compared to $852,000 in 2002. Facilities expenses were $123,000 lower in 2003 compared to 2002. The costs for outside services were $64,000 lower in 2003 compared to 2002 levels.
		On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global test equipment manufacturer DaTARIUS Technologies GmbH, purchased Integral Vision’s assets related to inspection systems for the optical disc industry, including the names “Automatic Inspection Systems” and “AID.” The sale included Integral Vision’s optical disc scanner products as well as its range of print and identification code products used to inspect the printing stage of disc manufacture. The consideration the Company received for the technology consisted of a non-refundable $100,000 advanced minimum royalty payment in addition to future royalties. The Company received approxmiately $54,000 in royalties in 2003 and expects to receive additional royalties in excess of $60,000 a year for the next two years. Additionally, the Company received $25,000 from the sale of equipment to DaTARIUS. The Company recognized a gain on the transaction of approximately $112,000, which is included in gain on sale of assets in 2002, primarily attributable to the advanced minimum royalty payment received. The proceeds from the transaction were used primarily to fund current operations.

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		Other income(expense) in 2003 includes approximately $54,000 of royalty income and $18,000 for engineering fees in connection with the DaTARIUS Technologies transaction.
		Interest income decreased to $320 in 2003 compared to $11,000 in 2002. The income in the 2002 period is primarily attributable to interest charged on the officers’ notes receivable. The decrease in interest income from the prior year period is primarily attributable to the of the officers’ notes receivable in 2003.
		Interest expense increased $119,000 to $370,000 in 2003 compared to $251,000 in 2002. The increase is primarily attributable to the interest on the debentures and Class 2 notes that were sold under the 2001 Note and Warrant Purchase Agreement (see Note C to consolidated financial statements) and the discount on the debentures amortized in 2003.
		In June 2002, Integral Vision, Inc. wrote-off an inter-company receivable due from Integral Vision Ltd., its subsidiary in the United Kingdom. As the consolidated financial statements include the accounts of both entities, upon consolidation, the charge recorded by Integral Vision, Inc., approximately $3.1 million, was eliminated against the gain recorded by Integral Vision Ltd. However, previously unrecognized losses that resulted from foreign currency translation adjustments were recognized in the June 30, 2002 quarter and totaled approximately $208,000.

Year Ended December 31, 2002, compared to the year ended December 31, 2001

		Net revenues decreased $1.1 million (40.0%) to $1.6 million in 2002 from $2.6 million in 2001. Net revenue is reported net of sales commission expense of approximately $83,000 in 2002 compared to $84,000 in 2001. The decrease in net revenue was partially attributable to the fact that the Company sold its packaging product line in 2001 (see Note K to consolidated financial statements). Sales from the Company’s packaging product line accounted for $516,000 of the net revenue in the 2001 period. Additionally, sales of the Company’s disc identification/print inspection (CDiD/CDiP) products were lower in the 2002 period. The Company sold its disc identification/print inspection product line in early September 2002 (see Note K to consolidated financial statements). Sales from the disc inspection product line accounted for approximately $743,000 and $1.1 million of the Company’s net revenue for the years ended December 31, 2002 and 2001, respectively. The Company’s revenue from service activities was approximately $398,000 and $511,000 in 2002 and 2001, respectively. These decreases were partially offset by increased sales of the Company’s flat panel display inspection product. Sales from the flat panel display inspection product line accounted for approximately $447,000 and $413,000 of the Company’s net revenue for the years ended December 31, 2002 and 2001, respectively.
		Direct costs of sales decreased $4.2 million (78.2%) to $1.2 million (approximately 74.5% of sales) in 2002 from $5.4 million (approximately 205% of sales) in 2001. This was primarily attributable to the lower sales volume and lower depreciation and amortization expense in the 2002 period. Depreciation and amortization expense was lower in 2002 primarily due to the 2001 sale of the Company’s building (see Note J to consolidated financial statements) and the write-off of capitalized software costs in 2001. Management periodically performs an analysis of the net realizable value of capitalized software costs. In 2001, based on market conditions and the direction of the Company, Management determined that capitalized software development costs exceeded the estimated net realizable value of amounts capitalized and a write-down was necessary. For the year ended December 31, 2001, $1.3 million of additional amortization was included in costs of sales as a result of these analyses. Additionally, as a result of the analyses, direct costs of sales for the year ended December 31, 2001 includes a $540,000 charge for the write-down of inventory. In the 2002 period, Management determined that capitalized patent costs exceeded the estimated net realizable value of amounts capitalized and a write-down was necessary. In the year ended December 31, 2002, $74,000 of additional amortization was included in costs of sales as a result of this determination. The gross margin in the 2001 period was negative due to the fact that the sales volume was not sufficient to cover the fixed charges, depreciation and amortization, included in direct cost of sales.

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		Marketing costs decreased 62.4%, or $926,000, to $557,000 in 2002 compared to $1.5 million in 2001. This decrease is primarily attributable to workforce reductions resulting from the implementation of a cost reduction plan by Management in late 2000 and throughout 2001. Employee related costs in the marketing division were $828,000 lower in 2002 compared to 2001 levels. The plan also called for workforce reductions in both the general and administrative department and the engineering department, as evidenced by the figures below. Advertising costs were $106,000 lower in 2002 compared to 2001 levels.
		General and administrative costs decreased 38.1%, or $649,000, to $1.1 million in 2002 compared to $1.7 million in 2001. Messrs. Charles Drake and Mark Doede each had loans from the Company. In August 2001, the Compensation Committee of the Company’s Board of Directors resolved to forgive $100,000 of the outstanding balance on each of their loans from the Company, which resulted in a $200,000 charge to compensation expense. Additionally, Mr. Charles Drake was provided with 400,000 shares of unregistered stock of the Company, subject to certain sale restrictions. An additional $56,000 of compensation expense was charged to general and administrative expense in 2001 as a result of the issuance of these shares. Exclusive of these infrequent charges, general and administrative costs decreased 27.2% or $393,000 in 2002. Employee related costs in the general and administrative division were $398,000 lower in 2002 compared to 2001 levels. Additionally, general and administrative costs included charges for bad debts of approximately $99,000 in 2002 and $109,000 in 2001.
		Engineering and development expenditures decreased 56.2%, or $1.1 million, to $852,000 in 2002 compared to $1.9 million in 2001. Employee related costs in the engineering and development division were $947,000 lower in 2002 compared to 2001 levels.
		On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global test equipment manufacturer DaTARIUS Technologies GmbH, purchased Integral Vision’s assets related to inspection systems for the optical disc industry, including the names “Automatic Inspection Systems” and “AID.” The sale included Integral Vision’s optical disc scanner products as well as its range of print and identification code products used to inspect the printing stage of disc manufacture. The consideration the Company received for the technology consisted of a non-refundable $100,000 advanced minimum royalty payment in addition to future royalties. The Company received approxmiately $54,000 in royalties in 2003 and expects to receive additional royalties in excess of $60,000 a year in 2004 and 2005. Additionally, the Company received $25,000 from the sale of equipment to DaTARIUS. The Company recognized a gain on the transaction of approximately $112,000, which is included in gain on sale of assets in 2002, primarily attributable to the advanced minimum royalty payment received. The proceeds from the transaction were used primarily to fund current operations.
		Included with the transaction was a Transition Services Agreement whereby Integral Vision provides assembly and agreed upon technical support services for the product line for up to twelve months after the closing date at an agreed upon rate. Revenue generated under this agreement was $24,000 in 2002 and is not expected to be significant in the future.
		On August 24, 2001, the Company completed the sale of certain of its packaging applications software and most of the fixed assets of its subsidiary, Integral Vision Ltd., to n.v. DIMACO, s.a. for $500,000 in cash and future royalties (see Note K to consolidated financial statements). Included in the transaction was the sale of the worldwide exclusive rights to Integral Vision’s “Full Bottle Inspection System” (FBIS), a product that performs certain inspections on bottles at the end of a filling line. Integral Vision will receive a royalty on each FBIS sold for the three years following the sale. The proceeds from the transaction were used primarily to fund current operations and to pay down existing trade payables.
		Also included with the transaction was a manufacturing agreement whereby DIMACO will manufacture products for Integral Vision’s Optical Disc and Display Inspection customers in Europe.

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		Under the terms of the sale, most of Integral Vision Ltd.’s personnel and costs transferred to DIMACO. However, Integral Vision Ltd. maintained sales and service staff to support its Optical Disc and Display Inspection customers in Europe.
		In 2001, the Company recognized a gain on the transaction of approximately $114,000, which is included in gain(loss) on sales of assets, primarily attributable to the software included in the sale.
		This gain was offset by a $22,000 loss on the sale of the Company’s building in Farmington Hills, MI in July 2001 and a $210,000 charge to write-down the carrying value of the Company’s fixed assets in 2001. On July 27, 2001, the Company completed a transaction to sell the 50,000 square foot building it occupied in Farmington Hills, MI for $2.45 million, at which time the existing mortgages were retired. The Company continued to occupy a portion of the building under a five-year lease agreement with the new owner. Effective April1, 2002, the Company entered into a new lease agreement whereby it moved into a smaller space, 5,000 square feet, in exchange for a reduced lease rate. Given the reduction in square footage, the Company disposed of a significant portion of its equipment in 2002, which was written-down to its estimated net realizable value in 2001. Net proceeds from the sale was approximately $200,000 of which $186,000 was used to prepay nine months of rent, a requirement of the lease agreement.
		On June 30, 1999, the Company completed an agreement to sell substantially all the assets of its Welding Controls division for $25.7 million, net of costs of the sale, for cash, the assumption of certain liabilities, and a subordinated note (WTC note). The interest bearing portion of the note, approximately $1.9 million, carried an interest rate approximating prime plus 1% and required quarterly payments beginning on February 15, 2000, with a February 15, 2001 maturity date. The non-interest bearing portion of the note, $1.5 million, was discounted using an imputed interest rate of 9% and matured on February 15, 2001.
		In January 2001, the Company sold 19.9% of the $1.7 million then outstanding under the note agreement to third party investors in exchange for consideration of $300,000. In May 2001, the Company completed a transaction whereby it repurchased the portion of the note previously sold to the investors and then sold the entire note receivable, which had an outstanding balance of $1.1 million at April 30, 2001, to a third party for $750,000. The Company recognized a loss on sale of the note receivable of $441,000 in the quarter ended March 31, 2001, which is included in other income(expense) in 2001.
		Other income(expense) in 2002 includes $18,000 of royalty income from the Company’s VisionBlox software. Additionally, the Company received $24,000 for engineering fees and $19,000 for royalties in connection with the DaTARIUS Technologies transaction.
		Interest income decreased $85,000 to $11,000 in 2002 compared to $96,000 in 2001. The income in the 2002 period is primarily attributable to interest charged on the officers’ notes receivable. The income in the 2001 period is primarily attributable to $62,000 of interest charged on the officers’ notes receivable and $34,000 of interest charged on the note receivable that resulted from the sale of the Company’s Welding Controls division (see Note B to consolidated financial statements). The decrease in interest income from the prior year period is primarily attributable to the sale of the Company’s note receivable in May 2001 and the receipt of principal payments on the outstanding balance of the note throughout the year. Reductions to the officers’ notes receivable throughout 2001 also contributed to the decrease in interest income in the 2002 period (see Note M to consolidated financial statements).
		Interest expense increased $79,000 to $251,000 in 2002 compared to $172,000 in 2001. The increase is primarily attributable to the debentures and Class 2 notes that were sold under the 2001 Note and Warrant Purchase Agreement (see Note C to consolidated financial statements). The increase was partially offset by a reduction in mortgage interest as the Company’s mortgages were paid in full when the sale of its building closed on July 27, 2001 (see Note J to consolidated financial statements). Additionally, the Company used proceeds from the sale of its note receivable in May 2001 (see Note B to consolidated financial statements) to pay in full its revolving line of credit at which time that agreement was terminated.

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In June 2002, Integral Vision, Inc. wrote-off an inter-company receivable due from Integral Vision Ltd., its subsidiary in the United Kingdom. As the consolidated financial statements include the accounts of both entities, upon consolidation, the charge recorded by Integral Vision, Inc., approximately $3.1 million, was eliminated against the gain recorded by Integral Vision Ltd. However, previously unrecognized losses that resulted from foreign currency translation adjustments were recognized in the June 30, 2002 quarter and totaled approximately $208,000.

Quarterly Information

The following table sets forth Consolidated Statements of Operations data for each of the eight quarters in the two-year period ended December 31, 2003. The unaudited quarterly information has been prepared on the same basis as the annual information and, in management’s opinion, includes all adjustments necessary for a fair presentation of the information for the quarters presented.

Seasonality and Quarterly Fluctuations

The Company’s revenues and operating results have varied substantially from quarter to quarter and management believes these fluctuations may continue. The Company’s reliance on large orders has contributed to the variability of the Company’s operating results.

Liquidity and Capital Resources

Operating activities for 2003 used cash of approximately $1.5 million primarily due to the Company’s loss from operations. Net loss, after non-cash adjustments of $372,000, was $1.6 million. The cash used in operating activities was partially offset by a net decrease of $40,000 in certain working capital items. Decreases in accounts receivable, inventory, and prepaid expenses and other current assets were partially offset by decreases in accounts payable and other current liabilities.

The Company’s financing activities included the receipt of $901,000 from the sale of the Company’s senior debentures and the receipt of $920,000 from the sale of the Company’s Class 2 Notes. The Company made principal payments of approximately $254,000 on its Class 2 Notes in the period. The Company also repaid a $70,000 short term advance from Max A. Coon, an officer of the Company.

The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability. The Company’s anticipated cash provided by operating activities will not be sufficient to support the Company’s cash flow needs over the next twelve months. Additionally, at December 31, 2003, substantially all

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of the Company’s $412,000 in trade accounts payable was overdue, of which $62,000 was paid subsequent to December 31, 2003. The Company also has an estimated $386,000 in amounts owed to certain regulatory agencies. The Company is making monthly payments of approximately $6,300 to one of the regulatory agencies. At December 31, 2003, under the terms of the Company’s Note and Warrant Purchase Agreement, as amended, the Company could issue up to $4.0 million of senior debentures, which consists of Class 1 and Class 2 Notes. Class 2 Notes are working capital notes, are secured by accounts receivable of the Company, and are subordinated to the Class 1 Notes issued prior to April 16, 2002. In September 2003, the holders of all of the then outstanding Class 2 Notes agreed to modify the maturity dates of those Notes to April 30, 2004. In December 2003, certain of the Class 2 Notes were amended to have maturity dates of May 31, 2004. The purchasers of the Class 2 Notes receive warrants for the purchase of the Company’s common stock when the Note is repaid. Class 2 Warrants entitle the holder to purchase one share of Common Stock for each $1 in value of the Class 2 Note multiplied by a fraction, the numerator of which is the number of days such Class 2 note is outstanding and the denominator of which is 365, at a specified price which shall be approximately 150% of the recent fair market value of the Common Stock as of the date of the issuance of the Class 2 Note. Based on their respective maturity dates, the number of common shares that could be purchased with Class 2 warrants is estimated to be 486,000. There was approximately $2.8 million in principal and interest due to the Class 1 Note holders at December 31, 2003. In August 2003, the holders of those Notes agreed to a modification to the Note and Warrant Purchase Agreement that increased the maximum amount of the Notes outstanding to $4.0 million and created a new Class 3 Note which is convertible into Integral Vision, Inc. common stock at a conversion rate set by the Company’s board of directors at the date of issuance. No Class 3 Notes were issued, however. Class 1 Notes issued have maturities of up to four years, an interest rate of 10%, and the purchasers of the Notes receive warrants for the purchase of the Company’s common stock (see Note A to consolidated financial statements). The value assigned to warrants is included in additional paid-in capital and the discount is amortized over the life of the note. Additionally, the directors will determine the conversion rate at the date of issuance, subject to change in the event additional shares are issued in the future. In March 2004, the holders of the Class 1 and Class 2 Notes agreed to an additional modification to the Note and Warrant Purchase Agreement. The maturity date on substantially all of the outstanding Class 2 Notes was extended to December 31, 2005. Principal and interest due on the Class 2 notes on December 31, 2005 is projected to be approximately $1.2 million. The terms of the Class 1 Notes were changed such that all accrued interest (projected to be approximately $425,000) would be due on June 30, 2004. Additionally, the first principal payments (projected to be approximately $176,000) on the Class 1 Notes would be due on June 30, 2004. However, the amended Note and Warrant Purchase Agreement provides that, if the Company’s shareholders approve management’s proposal to increase the Company’s authorized stock to 31,000,000 at the Company’s annual meeting of its shareholders to be held on May 6, 2004, the following will occur:

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The accrued interest on outstanding Class 1 Notes as of December 31, 2003 in the amount of approximately $313,418 will be exchanged for new Class 3 Notes due July 3, 2006 with interest at 8% payable semi-annually beginning April 1, 2005 and convertible into shares of the Company&