**United
        States Securities and Exchange Commission**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB**
 x
                Annual
                    report pursuant to Section 13 or 15(d) of the Securities Exchange
                    Act of
                    1934
                  *For
                    the fiscal year ended December 31, 2006.*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 0-12728
 
 **INTEGRAL
        VISION, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 Michigan
              38-2191935(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification Number)49113
                  Wixom Tech Drive, Wixom, Michigan
              48393(Address
                  of principal executive offices)
              (Zip
                  Code)Issuer's
                  telephone number, including area code:(248)
                  668-9230
 
 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)
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
        for
        such shorter period that the registrant was required to file such reports),
        and
        (2) has been subject to such filing requirements for the past 90
        days.
 Yes þ  No  ̈
 
 Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of registrant's knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB.  ̈
 
 Indicate
        by check mark whether the registrant is a shell company (as defined by
        Rule 12b-2 of the Exchange Act). Yes  ̈  No þ
 
 State
        issuer’s revenues for its most recent fiscal year: $859,000
 
 State
        the
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates computed by reference to the price at which the common equity
        was
        sold, or the average bid and asked price of such common equity, as of a
        specified date within the past 60 days. (See definition of affiliate in Rule
        12b-2 of the Exchange Act.) $5,249,492 as of March 17, 2007.
 
 Note:
        If
        determining whether a person is an affiliate will involve an unreasonable
        effort
        and expense, the issuer may calculate the aggregate market value of the common
        equity held by non-affiliates on the basis of reasonable assumptions, if
        the
        assumptions are stated.
 
 
 **(APPLICABLE
        ONLY TO CORPORATE REGISTRANTS)**
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date. Common
        Stock 29,511,409 shares as of March 17, 2007
  
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
 
 If
        the
        following documents are incorporated by reference, briefly describe them
        and
        identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which
        the document is incorporated: (1) any annual report to security holders;
        (2) any
        proxy or information statement; and (3) any prospectus filed pursuant to
        Rule
        424(b) or (c) of the Securities Act of 1933 (“Securities Act”). The listed
        documents should be clearly described for identification purposes (e.g.,
        annual
        report to security holders for fiscal year ended December 24, 1990). Portions
        of
        the annual proxy statement for the year ended December 31, 2006 are incorporated
        by reference into Part III.
 
 Transitional
        Small Business Format (check one): Yes  ̈  No þ
  
  
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
  This
        Annual Report on Form 10-KSB contains forward-looking statements within the
        meaning of Section 27A of the Securities Act of 1933, as amended and
        Section 21E of the Securities Exchange Act of 1934, as amended. 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-KSB 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. Description of Business**
  ***Overview***
  Integral
        Vision, Inc., a Michigan corporation (or the "Company"), was incorporated
        in
        1978. The Company develops, manufactures and markets flat panel display
        inspection systems to ensure product quality in the display manufacturing
        process. The Company primarily inspects microdisplays and small flat panel
        displays, though the technology used is scalable to allow inspection of full
        screen displays and components. Integral Vision’s products primarily use machine
        vision to evaluate operating displays for cosmetic and functional defects,
        but
        can also provide electrical testing if required for a given application.
        Integral Vision’s customers and potential customers are primarily large
        companies with significant investment in the manufacture of displays. Nearly
        all
        of the Company’s sales originate in the United States, Asia, or Europe. The
        Company's products are generally sold as capital goods. Depending on the
        application, display inspection systems have an indefinite life and are more
        likely to require replacement due to possible technological obsolescence
        than
        from physical wear.
  Automated
        inspection 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 automatic inspection systems can inspect parts at a
        lower cycle time and with greater repeatability than is possible with human
        inspectors. While the Company has several large companies as customers, these
        customers are working with new microdisplay technologies. Integral Vision’s
        success will be substantially dependant on these customers getting their
        emerging display technologies into high volume production.
  ***Products***
  **SharpEye
        -** Integral
        Vision’s SharpEye product 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, MEMS,
        3LCD/HTPS, LCD and other emerging display technologies. These technologies
        are
        applied to 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.
  **ChromaSee
        -** Integral
        Vision’s ChromaSee product, which was 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.
  **Lifetime
        Tester -** Integral
        Vision’s Lifetime Tester product evaluates changes in display luminance, color
        and other performance characteristics over time. The Lifetime Tester facilitates
        the process of comparing different display manufacturing processes and formulas
        by evaluating large numbers of samples side by side to determine their life
        characteristics. This allows design and process engineers to efficiently
        evaluate the effectiveness of proposed design and process changes off line
        prior
        to implementation .
  2
  **IVSee
        -** Integral
        Vision’s IVSee, introduced in 2005, provides FPD inspection for applications
        which still require manual handling. IVSee is designed for the detection
        of
        functional and cosmetic defects in LCOS, OLED, MEMS, 3LCD/HTPS, LCD and other
        emerging display technologies. IVSee is configured to be integrated into
        existing manual inspection stations allowing them to receive the benefits
        of
        computer aided optical inspection without the need to modify the manufacturing
        process to automate handling of the display. The operator’s interface provides
        essential views of results, images, and statistics for production floor
        personnel.
  **LCI
        Professional -** Applications
        formerly done with LCI-Professional are now primarily done with IVSee. See
        description above.
  ***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 Asia and Europe
        (through sales representatives).
  ***Competition***
  Presently,
        most final inspection of small flat panel displays is manual. Higher resolution,
        increased brightness, and increased contrast in newer versions of the displays
        are stretching human capabilities to do the inspections. Automated inspection
        offers a good return on investment as it uses less clean room space, requires
        fewer fixtures and hardware because of a faster cycle time, and reduces the
        labor required for inspection. Competition for machine vision based microdisplay
        and small flat panel display inspection comes primarily from Westar Display
        Technologies, Inc.
  ***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. 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.
  ***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 net 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 2006, sales to Qualcomm MEMS
        Technologies, Texas Instruments, Energy Conversion Devices, and DuPont
        represented 31%, 21%, 21% and 14% of net sales, respectively. There were
        no
        amounts due from these customers at December 31, 2006. For 2005, sales to
        Hewlett Packard and Texas Instruments represented 71% and 21% of net sales,
        respectively. Approximately $75,000 was due from one of these customers at
        December 31, 2005.
  ***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 U.S. 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.
  3
  ***Governmental
        Approvals and Regulations***
  The
        Company is not subject to government approvals for any of its primary products
        or services. Certain applications using laser technology require compliance
        with
        CDRH Section 21 CFR 1040.
  ***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. During the period ended March 31, 2006
        the
        Company began activity associated with a product development agreement with
        Energy Conversion Devices (ECD) where the Company is compensated for a portion
        of its costs for the development of online inspection for a continuous web
        of
        display material. This best efforts subcontract with ECD proceeds from a
        contract from the United States Display Consortium. The Company’s net
        engineering and product development costs amounted to $1.2 million and $960,000
        in 2006 and 2005, respectively. The Company’s current product development
        efforts are primarily directed to Flat Panel Display and Component Inspection
        products.
  ***Environmental
        Factors***
  The
        costs
        to the Company of complying with federal, state and local provisions regulating
        protection of the environment are not material.
  ***Employees***
  As
        of
        February 17, 2007, the Company had 18 permanent employees, all full time,
        compared to 21 at February 28, 2006 and 16 at February 28, 2005. None of
        the
        Company's employees are represented by a labor union.
  **ITEM** **2. Description of Properties**
  On
        October 19, 2005, the Company entered into a lease agreement to lease a light
        industrial building containing approximately 14,000 square feet at 49113
        Wixom
        Tech Drive, Wixom, Michigan. The five year lease commenced on January 1,
        2006.
        Manufacturing, engineering and administrative functions of Integral Vision
        are
        performed at this location.
  **ITEM** **3. Legal Proceedings**
  The
        Company is not currently involved in any litigation other than routine
        litigation that is incidental to the Company’s business.
  **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**
  ***Market
        Information***
  The
        Company's common stock is traded on the Over the Counter Bulletin Board (OTCBB)
        under the symbol INVI. The table below shows the high and low sales prices
        for
        the Company's common stock for each quarter in the past two years. These
        prices
        reflect inter-dealer prices and do not include allowance for retail mark-up
        or
        mark-down, commissions or other transaction costs and may not represent actual
        transactions.
  4
  **2005**
              
              **2006****Mar
                  31**
              
              **Jun
                  30**
              
              **Sept
                  30**
              
              **Dec
                  31**
              
              **Mar
                  31**
              
              **Jun
                  30**
              
              **Sept
                  30**
              
              **Dec
                  31**High
              
              $
              2.43
              
              $
              2.06
              
              $
              2.10
              
              $
              2.00
              
              $
              2.00
              
              $
              1.80
              
              $
              1.30
              
              $
              0.75Low
              
              
              1.30
              
              
              1.16
              
              
              1.32
              
              
              1.35
              
              
              1.56
              
              
              0.94
              
              
              0.49
              
              
              0.28
 
 ***Holders***
  As
        of
        March 17, 2007, there were approximately 310 holders of record of the Company’s
        Common Stock. This figure does not reflect the approximately 1,500 beneficial
        stockholders whose shares are in nominee names.
  ***Dividend
        Policy***
  The
        Company has never declared or paid any cash dividends on its Common Stock.
        The
        Company currently intends to retain any earnings for use in its operations
        and
        expansion of its business and therefore does not anticipate paying any cash
        dividends in the foreseeable future.
  ***Issuer
        Purchases***
  The
        Company did not repurchase any equity securities during the years ended December
        31, 2006 and 2005.
  ***Information
        Regarding Equity Compensation Plans***
  The
        following table sets forth information regarding our equity compensation
        plans
        in effect as of December 31, 2006.
  **Equity
                  Compensation Plan Information**Plan
                  Category
              
              Number
                  of Securities to issued upon exercise of outstanding options, warrants,
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants, and
                  rights
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans(a)
              
              (b)
              
              cEquity
                  compensation plans approved by security holders
              
              
              1,308,500
              
              $
              0.95
              
              
              409,000Equity
                  compensation plans not approved by security holders
              
              
              -
              
              
              -
              
              
              -Total
              
              
              1,308,500
              
              $
              0.95
              
              
              409,000
  The
        Company has three active equity compensation plans, all of which have been
        approved by its shareholders: 1995 Employee Stock Option Plan, 1999 Employee
        Stock Option Plan, and 2004 Employee Stock Option Plan.
  **ITEM** **6. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
  Overview
  Integral
        Vision, Inc. (or the "Company") develops, manufactures, and markets flat
        panel
        display inspection systems to ensure product quality in the display
        manufacturing process. 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, as ameded (The “Securities
        Act”) and Section
        21E of the Securities Exchange Act of 1934, as ameded (The “Securities
        Act”). 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 ability of the company
        to
        obtain volume orders from its larger customers; 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.
  5
  Results
        of Operations - Year Ended December 31, 2006, compared to the year ended
        December 31, 2005
  Net
        revenues for 2006 increased $149,000 (21.7%) to $835,000 from $686,000 in
        2005.
        Revenue is reported net of sales commission expense which was approximately
        $24,000 in 2006 compared to approximately$10,000 in 2005. Revenue for 2006
        includes $172,000 from Product Development Agreements while there was no
        Product
        Development Revenue in 2005. Sales from the flat panel display inspection
        product line were $649,000 in 2006, down slightly from $666,000 in 2005.
  Direct
        costs of sales for 2006 increased $123,000 (20.0%) to $741,000 (approximately
        88.7% of sales) from $618,000 (approximately 90.1% of sales) in 2005. This
        was
        primarily due to an increase of $200,000 in costs related to product development
        agreements, partially offset by lower costs for flat panel display inspection
        equipment. Costs of sales for product development agreements are recorded
        in
        amounts equal to the revenue recognized and therefore do not contribute
        significantly to gross margin. See Note A to the Financial Statements Revenue
        Recognition and Note A to the Financial Statements Allocations of General
        and
        Adminstrative Costs and Engineering Costs for further discussion of product
        development agreements.
  Marketing
        costs for 2006 were $653,000, a $124,00 (23.4%) increase over the $529,000
        spent
        in 2005. This is primarily attributable to increased staffing and related
        costs,
        the amortization of share-based compensation as required by SFAS 123R in
        the
        amount of $33,000, and increased shipping and import/export fees associate
        with
        placing demonstration equipment on customers sites in Asia.
  General
        and administrative costs for 2006 were essentially unchanged from 2005 at
        $1.25
        million. $38,000 of general and administrative costs were allocated to costs
        of
        sales for product development agreements. (For more information on the
        allocation of certain general and administrative costs to cost of goods sold
        see
        Note A to the Financial Statements.) Without this allocation, general and
        administrative costs would have increased slightly by $38,000 (3.1%) over
        2005
        to $1.28 million. Expense allocated to G&A for amortization of share based
        compensation as required by SFAS 123R for 2006 was approximately
        $43,000.
  Engineering
        and product development expenditures increased $254,000 (26.5%) to $1.21
        million
        in 2006 compared to $960,000 in 2005. $137,000
        of engineering costs were allocated to costs of sales for product development
        agreements. (For more information on the allocation of certain engineering
        costs
        to cost of goods sold see Note A to the Financial Statements.) Without this
        allocation, engineering costs would have increased by $391,000 (40.7%) over
        2005
        to $1.35 million. This is primarily attributable to increases for additional
        staffing and related costs, outside services, and the amortization of
        share-based compensation as required by SFAS 123R in the amount of $94,000
        in
        2006.
  Other
        income was $46,000 and $59,000 in 2006 and 2005, respectively. The
        Company received approximately $36,000 in royalties in 2006 compared to $17,000
        in 2005.
  Interest
        expense decreased $111,000 to $32,000 in 2006 compared to $143,000 in 2005.
        The
        decrease is primarily attributable to significantly reduced debt for all
        of 2006
        compared to the first half of 2005 (see Note C to financial
        statements).
  6
 
 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 2006 used cash of approximately $2.7 million primarily due
        to the
        Company’s loss from operations. Changes in working capital used cash of $25,000,
        which was primarily due to an increase in inventory of $172,000, a decrease
        in
        accounts receivable of $56,000, and an increase in accounts payable of $108,000.
  The
        Company’s investing activities included primarily the purchase of approximately
        $49,000 of equipment in 2006 and $12,000 for legal and patent office fees
        for
        new patent applications.
  The
        Company’s financing activities included net proceeds of $350,000 from the
        issuance of Class 2 Notes. The Company paid $30,000 of interest on Class
        3
        Notes.
  On
        April
        12, 2005, pursuant to a Securities Purchase Agreement, the Company issued
        7,000
        shares of Series A Convertible Preferred Stock at $1,000 per share, and as
        additional consideration under the Securities Purchase Agreement, issued
        Common
        Stock Warrants for the purchase of up to 3.5 million shares of common stock.
        Each share of the Series A Convertible Preferred Stock was converted into
        1,000
        shares of unregistered common stock upon the approval of an increase in the
        Company’s authorized shares of common stock at a meeting of the stockholders on
        May 26, 2005. The Common Stock Warrants for the purchase of up to 3.5 million
        shares of common stock are exercisable at $1.60 per share for a period of
        five
        years. The Company used the net proceeds of the Securities Purchase Agreement
        to
        reduce certain Company debt, and for working capital. The Company has repaid
        all
        of the outstanding principal and interest on the Class 1 and Class 2 Notes
        outstanding at that time. The note holders then exercised their warrants
        attached to the notes for which the exercise price of the warrant was $1.00
        or
        less. This resulted in the issuance of 6,195,014 shares of restricted common
        stock. The Class 3 note holders converted their notes for which the conversion
        price was $1.00 or less, resulting in the issuance of 1,269,757 shares of
        restricted common stock. The outstanding interest on the Class 3 notes was
        paid.
        Additionally, the Company has repaid other obligations totaling approximately
        $190,000.
  The
        following table outlines the source and (use) of proceeds from the sale (in
        thousands):
  Sale
                  of Series A Convertible Preferred Stock
              
              $
              7,000Class
                  1 and Class 2 warrants exercised
              
              
              1,865Class
                  1 Notes paid (principal and interest)
              
              
              (1,289
              )Class
                  2 Notes paid (principal and interest)
              
              
              (1,823
              )Class
                  3 accrued interest paid
              
              
              (106
              )Note
                  and accrued interest due Maxco, Inc.
              
              
              (111
              )Michigan
                  Single Business Tax liability
              
              
              (78
              )Fees
                  to raise capital
              
              
              (637
              )Legal
                  and other fees
              
              
              (100
              )Remaining
                  net cash proceeds
              
              $
              4,721
 
 Long
        term
        debt remaining at December 31, 2006 consists of $378,000 of convertible Class
        3
        Notes at a conversion price of $1.00. Interest on these Notes is paid
        semi-annually at a stated rate of 8.0%. The Class 3 Notes mature in April
        2008.
  Management
        has made arrangements to issue up to $500,000 of Class 2 Notes under the
        terms
        of the Company’s existing Note and Warrant Purchase Agreement as amended. The
        Class 2 Notes are working capital notes and are secured by accounts receivable,
        inventory, and intellectual property. The purchasers of Class 2 Notes receive
        10% interest and the option to receive either warrants for the purchase of
        the
        Company’s stock when the Note is repaid or an additional 2% interest. 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 specific price which shall be approximately 150% of the recent
        fair
        value of the Company’s Common Stock as agreed by the parties as of the date of
        issuance of the corresponding Class 2 Note or such other price as the Board
        of
        Directors shall determine is appropriate based on the circumstances at the
        time.
        The Board of Directors has approved a $1.60 strike price for the warrants.
        The
        Notes will mature May 31, 2007. As of December 31, 2006 the Company had issued
        $350,000 of the $500,000 of Class 2 Notes, $300,000 of which were purchased
        by
        related parties. Management anticipates issuing the balance of these notes
        during the first quarter of 2007. As of December 31, 2006, the noteholders
        have
        earned 19,710 warrants, none of which are issued. The Company’s present cash
        position requires it to secure additional funding for the immediate future
        as
        well as funding to provide working capital for anticipated orders. Refer
        to Note
        P - Subsequent Events for recent activity associated with Class 2 Notes.
        Management expects to refinance these notes as part of its plan to raise
        additional capital in the second or third quarter of 2007 to fund operations
        through at least the first quarter of 2008 and provide working capital for
        anticipated orders.
  7
  For
        further discussion regarding the Company’s obligations, see Note C—Long Term
        Debt and Other Financing Arrangements and Note P - Subsequent
        Events.
  Impact
        of
        Inflation
  The
        amounts presented in the financial statements do not provide for the effect
        of
        inflation on the Company’s operations or its financial position. Amounts shown
        for property, plant and equipment and for costs and expenses reflect historical
        cost and do not necessarily represent replacement cost or charges to operations
        based on replacement cost. The Company’s operations together with other sources
        are intended to provide funds to replace property, plant and equipment as
        necessary. Net income would be lower than reported if the effects of inflation
        were reflected either by charging operations with amounts that represent
        replacement costs or by using other inflation adjustments.
  Off-Balance
        Sheet Arrangements
  The
        Company has no significant off-balance sheet arragements that have or are
        reasonably likely to have a current or future effect on our financial condition,
        changes in financial condition, revenues or expenses, results of operations,
        liquidity, capital expenditures or capital resources that is material to
        investors.
  Recently
        Issued Accounting Standards
  In
        December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which
        replaces SFAS No. 123, “Accounting for Share-based Compensation”, and supersedes
        Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees” (APB No. 25). The Statement requires that the calculated cost
        resulting from all share-based payment transactions be recognized in the
        financial statements. The Statement also establishes fair value as the
        measurement objective in accounting for share-based payment arrangements
        and
        requires all entities to apply a fair-value-based measurement method in
        accounting for share-based payment transactions with employees, except for
        equity instruments held by employee share ownership plans. The Statement
        was
        effective for the Company beginning January 1, 2006. The “modified prospective”
method was required upon adoption; accordingly, results of prior periods
        have
        not been restated. Under the modified prospective method, the Statement applies
        to new awards and to awards modified, repurchased or cancelled after the
        effective date. Additionally, compensation cost for the unvested portion
        of
        awards as of the effective date is required to be recognized after the effective
        date as the awards vest. As of January 1, 2006, the Company implemented SFAS
        No.123(R), with share-based compensation expense now reflected in the Company’s
        statements of operations for the year ending December 31, 2006. See Note I
        in the Financial Statements for additional information regarding the adoption
        of
        SFAS No.123(R).
 
 In
        November 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), *Inventory
        Costs, an amendment of ARB No. 43, Chapter 4,* which
        clarifies the accounting for abnormal amounts of idle facility expense, freight,
        handling costs and wasted material and requires that such items be recognized
        as
        current-period charges regardless of whether they meet the “so abnormal”
criterion outlined in ARB No. 43. SFAS No. 151 also introduces the concept
        of
“normal capacity” and requires the allocation of fixed production overheads to
        inventory based on the normal capacity of the production facilities. Unallocated
        overheads must be recognized as an expense in the period incurred. SFAS No.
        151
        is effective for inventory costs incurred during fiscal years beginning after
        June 15, 2005. The Company adopted SFAS No. 151 effective January 1, 2006.
        The
        adoption of SFAS No. 151 did not have a material impact on the Company’s
        financial position, results of operations or cash flows.
  8
  In
        May
        2005, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standards (SFAS) No. 154, *Accounting
        Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement
        No. 3* (SFAS
        No. 154). SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless
        it is
        impracticable. APB Opinion No. 20 “Accounting Changes,” previously required that
        most voluntary changes in accounting principle be recognized by including
        in net
        income of the period of the change the cumulative effect of changing to the
        new
        accounting principle. This Statement is effective for the Company as of January
        1, 2006. The Company’s adoption of SFAS No. 154 did not have a significant
        impact on the Company’s results of operations, financial position, or cash
        flows.
 
 In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. 48 (“FIN 48”, “Accounting for Uncertainty in Income Taxes”). FIN 48
        prescribes detailed guidance for the financial statement recognition,
        measurement and disclosure of uncertain tax positions recognized in an
        enterprise’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not
        recognition threshold at the effective date to be recognized upon the adoption
        of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal
        years
        beginning after December 15, 2006 and the provisions of FIN 48 will be applied
        to all tax positions upon initial adoption of the Interpretation. The cumulative
        effect of applying the provisions of this Interpretation will be reported
        as an
        adjustment to the opening balance of retained earnings for that fiscal year.
        We
        are currently evaluating the impact of FIN 48 on our financial
        statements.
 
 On
        September 13, 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108
        on
        quantifying financial statement misstatements. In summary, SAB 108 states
        that
        registrants should use both a balance sheet (iron curtain) approach and an
        income statement (rollover) approach when quantifying and evaluating the
        materiality of a misstatement, and contains guidance on correcting errors
        under
        the dual approach.
 
 In
        addition, SAB 108 provides transition guidance for correcting errors existing
        in
        prior years. If prior-year errors that had been previously considered immaterial
        (based on the appropriate use of the registrants prior approach) now are
        considered material based on the approach of this SAB, the registrant need
        not
        restate prior period financial statements. SAB 108 is effective for Integral
        Vision’s annual financial statements covering our fiscal year ending December
        31, 2006. The adoption of SAB 108 did not have a material impact on Integral
        Vision’s financial position or results of operations for the year ended December
        31, 2006.
 
 On
        September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which provides for enhanced guidance for using fair value to measure assets
        and
        liabilities. SFAS No. 157 defines fair value, establishes a framework for
        measuring fair value in generally accepted accounting principles (“GAAP”), and
        expands disclosures about fair value measurements. SFAS No. 157 is applicable
        under other accounting pronouncements that either require or permit fair
        value
        measurements and does not require any new fair value measurements. SFAS No.
        157
        is effective for the Company’s financial statements issued for fiscal periods
        beginning January 1, 2008. Integral Vision is in the process of analyzing
        the
        implications of SFAS No. 157.
 
 Management’s
        Discussion of Critical Accounting Policies
  The
        Company’s financial statements are prepared in accordance with accounting
        principles generally accepted in the United States. The preparation of these
        financial statements requires Management to make estimates and judgments
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting year.
        The
        accounting policies discussed below are considered by Management to be the
        most
        important to an understanding of the Company’s financial statements, because
        their application places the most significant demands on Management's judgment
        and estimates about the effect of matters that are inherently uncertain.
        Management’s assumptions and estimates were based on the facts and circumstances
        known at December 31, 2006, future events rarely develop exactly as forecast,
        and the best estimates routinely require adjustment. These policies are also
        discussed in Note A of the Notes to Financial Statements included in Item
        7 of
        this report.
  9
  *Revenue
        Recognition*
  The
        Company recognizes revenue in accordance with SOP 97-2, Software Revenue
        Recognition, Staff Accounting Bulletin No. 101 (“SAB 101”), and Staff Accounting
        Bulletin No. 104 (“SAB 104”) Revenue Recognition in Financial Statements.
        Revenue is recognized when persuasive evidence of an arrangement exists,
        delivery has occurred or services have been rendered, the selling price is
        fixed
        or determinable and collectibility is reasonably assured.
  The
        Company accounts for certain product sales of its flat panel display inspection
        systems as multiple-element arrangements. If specific customer acceptance
        requirements are met, the Company recognizes revenue for a portion of the
        total
        contract price due and billable upon shipment, with the remainder recognized
        when it becomes due (generally upon acceptance). The Company recognizes all
        other product sales with customer acceptance provisions upon final customer
        acceptance. The Company recognizes revenue from the sale of spare parts upon
        shipment. Revenue from service contracts is recognized over the life of the
        contract. Revenue is reported net of sales commissions.
  Revenue
        is also derived through business agreements for product development. The
        Company
        conducts specified product development projects related to one of its principal
        technology specializations for an agreed-upon fee. Typically the agreements
        require “best efforts” with no specified performance criteria. Revenue from
        product development agreements, where there are no specific performance terms,
        are recognized in amounts equal to the amounts expended on the programs.
        Generally, the agreed-upon fees for product development agreements contemplate
        reimbursing the Company, after its agreed-upon cost share, if any, for costs
        considered associated with project activities including expenses for direct
        product development and research, operating, general and administrative expenses
        and depreciation. Accordingly, expenses related to product development
        agreements are recorded as cost of revenues from product development
        agreements.
  *Inventories*
  Inventories
        are stated at the lower of standard cost, which approximates actual cost
        determined on a first-in, first-out basis, or market. Inventories are recorded
        net of allowances for unsalable or obsolete raw materials, work-in-process
        and
        finished goods. The Company evaluates on a quarterly basis the status of
        its
        inventory to ensure the amount recorded in the financial statements reflects
        the
        lower of the Company’s cost or the value it expects to receive when the
        inventory is sold. This estimate is based on several factors, including the
        condition and salability of the inventory and the forecasted demand for the
        particular products incorporating these components. Based on current backlog
        and
        expected orders, the Company forecasts the upcoming usage of current stock.
        The
        Company records reserves for obsolete and slow-moving parts ranging from
        0% for
        active parts with sufficient forecasted demand up to 100% for excess parts
        with
        insufficient demand or obsolete parts. Amounts in work-in-process and finished
        goods inventory typically relate to firm orders and, therefore, are not subject
        to obsolescence risk.
 *Impairment
        of Long-lived Assets*
  The
        Company reviews its long-lived assets, including property, equipment and
        intangibles, for impairment whenever events or changes in business circumstances
        indicate that the carrying amount of the assets may not be fully recoverable.
        An
        impairment loss would be recognized when estimated undiscounted future cash
        flows expected to result from the use of the asset and its eventual disposition
        are less than the carrying amount of the asset.
  *Contingencies
        and Litigation*
  The
        Company makes an assessment of the probability of an adverse judgment resulting
        from current and threatened litigation. The Company accrues the cost of an
        adverse judgment if, in Management’s estimation, an adverse settlement is
        probable and Management can reasonably estimate the ultimate cost of such
        litigation. The Company has made no such accruals at December 31,
        2006.
  10
  **ITEM** **7. Financial Statements and Supplementary Data**
  The
        annual financial statements and results of operations are submitted in separate
        sections of this report.
  **ITEM** **8. Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure**
  None
  **ITEM** **8A. Controls and Procedures**
  Controls
        and Procedures
  a)
              Evaluation
                  of disclosure controls and
                  procedures
 The
        Company’s chief executive officer and chief financial officer have each reviewed
        and evaluated the effectiveness of the Company’s disclosure controls and
        procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
        the end of the period covered by this report. Based on that evaluation, the
        chief executive officer and chief financial officer have each concluded that
        the
        Company’s current disclosure controls and procedures are effective to ensure
        that information required to be disclosed in its periodic reports filed under
        the Exchange Act is recorded, processed, summarized, and reported, in each
        case,
        within the time period specified by the SEC’s rules and regulations. Disclosure
        controls and procedures include, without limitation, controls and procedures
        designed to ensure that information required to be disclosed by an issuer
        in the
        reports that it files or submits under the Exchange Act is accumulated and
        communicated to the issuer’s management, including its principal executive and
        principal financial officers, or persons performing similar functions, as
        appropriate to allow timely decisions regarding required
        disclosure.
 
 b)
              Changes
                  in internal controls
 There
        have been no changes in the Company’s internal controls over financial reporting
        that occurred during the Company’s fourth quarter of the fiscal year that
        materially affected, or are reasonably likely to materially affect, the
        Company’s internal controls over financial reporting.
 
 **ITEM** **8B. Other Information**
  None
  11
  Part
        III
  **ITEM** **9. Directors, Executive Officers, Promoters, Control Persons and Corporate
        Governance; Compliance with Section 16(a) of the Exchange
        Act**
  Item
        9 is
        hereby incorporated by reference from the Registrant’s definitive proxy
        statement to be filed within 120 days of December 31, 2006.
  **ITEM** **10. Executive Compensation**
  Item
        10
        is hereby incorporated by reference from the Registrant’s definitive proxy
        statement to be filed within 120 days of December 31, 2006.
  **ITEM** **11. Security Ownership of Certain Beneficial Owners and Management and Related
        Stockholder Matters**
  Item
        11
        is hereby incorporated by reference from the Registrant’s definitive proxy
        statement to be filed within 120 days of December 31, 2006.
  **ITEM** **12. Certain Relationships and Related Transactions, and Director
        Independence**
  Item
        12
        information is hereby incorporated by reference from the Registrant’s definitive
        proxy statement to be filed within 120 days of December 31, 2006.
  **ITEM
        13. Exhibits**
  ExhibitNumber
              Description
                  of Document3.1
              Articles
                  of Incorporation, as amended (filed as Exhibit 3.1 to the registrant's
                  Form 10-K for the year ended December 31, 1995, SEC file 0-12728,
                  and
                  incorporated herein by reference).3.2
              Bylaws
                  of the Registrant, as amended (filed as Exhibit 3.2 to the registrant's
                  Form 10-K for the year ended December 31, 1994, SEC file 0-12728,
                  and
                  incorporated herein by reference).4.1
              Form
                  of Fourth Amended Note and Warrant Purchase Agreement including
                  Form of
                  Integral Vision, Inc. Class 3 Note (filed as Exhibit 4.8 to registrant’s
                  Form 10-K for the year ended December 31, 2003, SEC file 0-12728,
                  and
                  incorporated herein by reference).4.2
              Form
                  of Consent to Modifications dated November 14, 2006 modifying the
                  terms of
                  the Fourth Amended Note and Warrant Purchase Agreement including
                  Form of
                  Integral Vision, Inc. Class 2 Warrant (filed as Exhibit 4.9 to
                  registrant’s Form 10-Q for the quarter ended September 30, 2006, SEC file
                  0-12728, and incorporated herein by reference).4.3
              Form
                  of Consent to Modifications dated March 6, 2007 modifying the terms
                  of the
                  Fourth Amended Note and Warrant Purchase Agreement.10.1
              Incentive
                  Stock Option Plan of the Registrant as amended (filed as Exhibit
                  10.4 to
                  the registrant's Form S-1 Registration Statement effective July
                  2, 1985,
                  SEC File 2-98085, and incorporated herein by
                  reference).10.2
              Second
                  Incentive Stock Option Plan (filed as Exhibit 10.2 to the registrant's
                  Form 10-K for the year ended December 31, 1992, SEC File 0-12728,
                  and
                  incorporated herein by reference).10.3
              Non-qualified
                  Stock Option Plan (filed as Exhibit 10.3 to the registrant's Form
                  10-K for
                  the year ended December 31, 1992, SEC File 0-12728, and incorporated
                  herein by reference).10.4
              Amendment
                  to Integral Vision, Inc. Incentive Stock Option Plan dated May
                  10, 1993
                  (filed as Exhibit 10.3 to the registrant's Form 10-K for the year
                  ended
                  December 31, 1993, SEC File 0-12728, and incorporated herein by
                  reference).
  12
  10.5
              Integral
                  Vision, Inc. Employee Stock Option Plan (filed as Exhibit 10.5
                  to the
                  registrant's Form 10-Q for the quarter ended September 30, 1995,
                  SEC file
                  0-12728, and incorporated herein by reference).10.6
              Form
                  of Confidentiality and Non-Compete Agreement Between the Registrant
                  and
                  its Employees (filed as Exhibit 10.4 to the registrant's Form 10-K
                  for the
                  year ended December 31, 1992, SEC File 0-12728, and incorporated
                  herein by
                  reference).10.7
              Integral
                  Vision, Inc. 1999 Employee Stock Option Plan (filed as exhibit
                  10.5 to the
                  registrant’s Form 10-Q for the quarter ended June 30, 1999 and
                  incorporated herein by reference).10.8
              Integral
                  Vision, Inc. 2004 Employee Stock Option Plan (filed as exhibit
                  10.11 to
                  the registrant’s Form 10-Q for the quarter ended June 30, 2004 and
                  incorporated herein by reference).16
              Letter
                  regarding change in certifying accountant (filed as Exhibit 16
                  to
                  registrant’s Form 10-K for the year ended December 31, 2002, SEC file
                  0-12728, and incorporated herein by reference).23.1
              Consent
                  of Rehmann Robson, independent registered public accounting
                  firm.31.1
              Certification
                  of Chief Executive Officer of periodic report pursuant to Rule
                  13a-15(e)
                  or Rule 15d-15(e).31.2
              Certification
                  of Chief Financial Officer of periodic report pursuant to Rule
                  13a-15(e)
                  or Rule 15d-15(e).32.1
              Certification
                  by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
                  Section 1350.32.2
              Certification
                  by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
                  Section 1350.
  **ITEM** **14. Principal Accountant Fees and Services**
  Item
        14
        is hereby incorporated by reference from the Registrant’s definitive proxy
        statement to be filed within 120 days of December 31, 2006.
  13
 
 SIGNATURES
  Pursuant
        to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant
        caused this report to be signed on its behalf by the undersigned, thereunto
        duly
        authorized.
  INTEGRAL
        VISION, INC **.**
   By:
              /S/
                  CHARLES J. DRAKECharles
                J. Drake, Chairman of the Board and Chief Executive OfficerDate:
                March 17, 2007By:
              /S/
                  MARK R. DOEDEMark
                R. Doede, President, Chief Operating Officer and Chief Financial
                OfficerDate:
                March 17, 2007
  Pursuant
        to the requirements of the Exchange Act, this report has been signed below
        by
        the following persons on behalf of the Registrant and in the capacities and
        on
        the dates indicated.
   /S/
                  CHARLES J. DRAKE
              Chairman
                  of the Board, ChiefCharles
                  J. Drake
              Executive
                  Officer, and DirectorDate:
                  March 17, 2007/S/
                  MAX A. COON
              Vice
                  Chairman, Secretary and DirectorMax
                  A. CoonDate:
                  March 17, 2007/S/
                  VINCENT SHUNSKY
              Treasurer
                  and DirectorVincent
                  ShunskyDate:
                  March 17, 2007/S/
                  WILLIAM B. WALLACE
              DirectorWilliam
                  B. WallaceDate:
                  March 17, 2007/S/
                  SAMUEL O. MALLORY
              DirectorSamuel
                  O. MalloryDate:
                  March 17, 2007
 14
  Report
        of
        Independent Registered Public Accounting Firm
 
 
 Stockholders
        and Board of Directors
 Integral
        Vision, Inc.
 Wixom,
        Michigan
 
 
 We
        have
        audited the accompanying balance sheet of Integral Vision, Inc. as of December
        31, 2006, and the related statements of operations, stockholders' equity
        (deficit) and cash flows for each of the years in the two-year period then
        ended. These financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (UnitedStates) Those standards require that we
        plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Integral Vision, Inc. of December
        31, 2006, and the results of its operations and its cash flows for each of
        the
        years in the two-year period then ended, in conformity with accounting
        principles generally accepted in the United States of America.
 
 The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. As described in Note O to the financial statements,
        the Company is sustaining recurring losses from operations and is having
        difficulties in achieving the necessary sales to attain profitability. These
        conditions raise substantial doubt about the Company's ability to continue
        as a
        going concern. Management's plans in regard to this matter are also described
        in
        Note O. The financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 /S/
        Rehmann Robson
 Troy,
        Michigan
 March
        17,
        2007
  15
 
 **Balance
        Sheet**
 **Integral
        Vision, Inc.**
 **December
                  31****2006****(in
                  thousands)****Assets****Current
                  assets**Cash
              
              $
              57Accounts
                  receivable
              
              
              21Inventories
                  - Note A
              
              
              381Other
                  current assets
              
              
              119**Total
                  current assets**
              
              
              578**Property
                  and equipment**Building
                  improvements
              
              
              4Production
                  and engineering equipment
              
              
              203Furniture
                  and fixtures
              
              
              80Computer
                  equipment
              
              
              188Marketing/demonstration
                  equipment
              
              
              161636Less
                  accumulated depreciation
              
              
              369**Net
                  property and equipment**
              
              
              267**Other
                  assets - net of accumulated amortization of
                  $1,483,000**
              
              
              3636$
              881**Liabilities
                  and Stockholders' Deficit****Current
                  liabilities**Notes
                  payable
              
              $
              350Accounts
                  payable
              
              
              170Accrued
                  compensation and related costs
              
              
              308Accrued
                  interest
              
              
              17Other
                  accrued liabilities
              
              
              78**Total
                  current liabilities**
              
              
              923**Long-term
                  debt**
              
              
              378**Total
                  liabilities**
              
              
              1,301**Stockholders'
                  deficit**Preferred
                  stock, 400,000 shares authorized; none issued
              
              
              -Common
                  stock, without par value, stated value $.20 per share; 41,000,000
                  shares
                  authorized; 29,491,409 shares issued and outstanding
              
              
              5,898Additional
                  paid-in capital
              
              
              39,296Accumulated
                  deficit
              
              
              (45,614
              )**Total
                  stockholders' deficit**
              
              
              (420
              )$
              881
 
 *The
        accompanying notes are an integral part of these financial
        statements.*
  16
  **Statements
        of Operations**
 **Integral
        Vision, Inc.**
  Year
                    Ended December 31,2006
                
                2005Revenues:*(In
                    thousands, except per share data)*Net
                    product sales
                
                $
                663
                
                $
                686Net
                    revenue from product development agreements
                
                
                172
                
                
                -Total
                    net revenues (See Note-B)
                
                
                835
                
                
                686Costs
                    of sales:Costs
                    of sales for products
                
                
                488
                
                
                488Cost
                    of sales for product development agreements
                
                
                199
                
                
                -Depreciation
                    and amortization
                
                
                54
                
                
                130Total
                    costs of sales
                
                
                741
                
                
                618Gross
                    margin
                
                
                94
                
                
                68Other
                    costs and expenses:Marketing
                
                
                653
                
                
                529General
                    and administrative - net
                
                
                1,250
                
                
                1,251Engineering
                    and development - net
                
                
                1,214
                
                
                960Total
                    other costs and expenses
                
                
                3,117
                
                
                2,740Operating
                    loss
                
                
                (3,023
                )
                
                (2,672
                )Other
                    income
                
                
                46
                
                
                59Interest
                    income
                
                
                42
                
                
                78Interest
                    expense
                
                
                (32
                )
                
                (143
                )Foreign
                    currency translation (loss)
                
                
                (7
                )
                
                (1
                )Loss
                    from operations before income taxes
                
                
                (2,974
                )
                
                (2,679
                )Income
                    taxes
                
                
                -
                
                
                -Net
                    loss
                
                $
                (2,974
                )
                $
                (2,679
                )Basic
                    and diluted loss per share:Net
                    loss
                
                $
                (0.10
                )
                $
                (0.11
                )Weighted
                    average number of shares outstanding of common stock and common
                    stock
                    equivalents, where applicable
                
                
                29,491
                
                
                24,531
 
 *The
        accompanying notes are an integral part of these financial
        statements.*
  17
  **Statements
        of Stockholders' Deficit**
 **Integral
        Vision, Inc.**
 
 **Number
                  of Common Shares Outstanding**
              
              **Common
                  Stock**
              
              **Preferred
                  Stock**
              
              **Additional**
                **Paid-In
                  Capital**
              
              **Accumulated
                  Deficit**
              
              **Total****(in
                  thousands, except number of common shares
                  outstanding)****Balances
                  at January 1, 2005**
              
              
              14,877,638
              
              $
              2,976
              
              $
              -
              
              $
              33,018
              
              $
              (39,961
              )
              $
              (3,967
              )Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,679
              )
              
              (2,679
              )Warrants
                  exercised
              
              
              6,195,014
              
              
              1,239
              
              
              
              
              
              503
              
              
              
              
              
              1,742Class
                  3 notes converted into shares of common stock
              
              
              1,269,757
              
              
              254
              
              
              
              
              
              724
              
              
              
              
              
              978Shares
                  sold and issued
              
              
              117,000
              
              
              23
              
              
              7,000
              
              
              (718
              )
              
              
              
              
              6,305Series
                  A Preferred Stock converted into shares of common stock
              
              
              7,000,000
              
              
              1,400
              
              
              (7,000
              )
              
              5,600
              
              
              
              
              
              -Common
                  stock options exercised
              
              
              32,000
              
              
              6
              
              
              
              
              
              (1
              )
              
              
              
              
              5**Balances
                  at December 31, 2005**
              
              
              29,491,409
              
              $
              5,898
              
              $
              -
              
              $
              39,126
              
              $
              (42,640
              )
              $
              2,384Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,974
              )
              
              (2,974
              )Share
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              170
              
              
              
              
              
              170**Balances
                  at December 31, 2006**
              
              
              29,491,409
              
              $
              5,898
              
              $
              -
              
              $
              39,296
              
              $
              (45,614
              )
              $
              (420
              )
 
 *The
        accompanying notes are an integral part of these financial
        statements.*
 18
  **Statements
        of Cash Flows**
 **Integral
        Vision, Inc.**
 
 **Year
                  Ended December 31****2006**
              
              **2005****(in
                  thousands)****Cash
                  Flows From Operating Activities:**Net
                  loss
              
              $
              (2,974
              )
              $
              (2,679
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              48
              
              
              11Amortization
              
              
              48
              
              
              147Share
                  based compensation
              
              
              170
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              56
              
              
              (32
              )Inventories
              
              
              (172
              )
              
              39Other
                  current assets
              
              
              (17
              )
              
              (59
              )Accounts
                  payable and other current liabilities
              
              
              108
              
              
              (193
              )Net
                  cash used in operating activities
              
              
              (2,733
              )
              
              (2,766
              )**Cash
                  Flows From Investing Activities:**Purchase
                  of property and equipment
              
              
              (49
              )
              
              (104
              )Additional
                  patent expenditures
              
              
              (12
              )
              
              (31
              )Net
                  cash used in investing activities
              
              
              (61
              )
              
              (135
              )**Cash
                  Flows From Financing Activities:**Issuance
                  of preferred stock
              
              
              -
              
              
              6,235Proceeds
                  from exercise of warrants
              
              
              -
              
              
              1,865Proceeds
                  from sale of Class 2 Notes
              
              
              350
              
              
              435Repayments
                  of principal and interest on Class 1 Notes
              
              
              -
              
              
              (1,289
              )Repayments
                  of principal and interest on Class 2 Notes
              
              
              -
              
              
              (1,823
              )Repayments
                  of interest on Class 3 Notes
              
              
              -
              
              
              (106
              )Repayments
                  of short term notes
              
              
              -
              
              
              (111
              )Proceeds
                  from exercise of stock options
              
              
              -
              
              
              5Net
                  cash provided by financing activities
              
              
              350
              
              
              5,211Increase
                  (decrease) in cash
              
              
              (2,444
              )
              
              2,310Cash
                  at beginning of year
              
              
              2,501
              
              
              191Cash
                  at end of year
              
              $
              57
              
              $
              2,501**Supplemental
                  cash flows information:**Interest
                  Paid
              
              $
              30
              
              $
              473**Supplemental
                  noncash investing activity:**Reclassification
                  of inventory to equipment
              
              $
              153
              
              $
              -
 
 *The
        accompanying notes are an integral part of these financial
        statements.*
  19
  **Notes
        to Financial Statements**
 **Integral
        Vision, Inc.**
 
 Note
        A -
        Nature of Business
  Integral
        Vision, Inc. (or the "Company") develops, manufactures, and markets flat
        panel
        display inspection systems to ensure product quality in the display
        manufacturing process. The Company primarily inspects Microdisplays and small
        flat panel displays, though the technology used is scalable to allow inspection
        of full screen displays and components. Integral Vision’s customers and
        potential customers are primarily large companies with significant investment
        in
        the manufacture of displays. Nearly all of the Company’s sales originate in the
        United States, Asia, or Europe. The Company's products are generally sold
        as
        capital goods. Depending on the application, display inspection systems have
        an
        indefinite life and are more likely to require replacement due to possible
        technological obsolescence than from physical wear.
  During
        the period ended March 31, 2006, the Company began activity associated with
        a
        product development agreement where the Company is compensated for a portion
        of
        its development costs for a certain best efforts product development. The
        Company may not be able to find future opportunities like this, but remains
        open
        to such development agreements where they facilitate the Company’s strategic
        goals.
 
 *Major
        Customers*
  The
        nature of the Company’s product offerings may produce sales to one or a small
        number of customers in excess of 10% of total net 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 2006, sales to Qualcomm MEMS
        Technologies, Texas Instruments, Energy Conversion Devices, and DuPont
        represented 31%, 21%, 21% and 14% of net sales, respectively. There were
        no
        amounts due from these customers at December 31, 2006. For 2005, sales to
        Hewlett Packard and Texas Instruments represented 71% and 21% of net sales,
        respectively. Approximately $75,000 was due from one of these customers at
        December 31, 2005.
  Note
        B -
        Summary of Significant Accounting Policies
  *Principles
        of Consolidation*
  The
        Company owns 100% of an inactive subsidiary: Integral Vision LTD, United
        Kingdom. The subsidiary was dissolved as of February 1, 2005. The subsidiary
        did
        not have any operations during the year ended December 31, 2005. Therefore
        nothing was required to be consolidated.
  *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 disclosure of
        contingent assets and liabilities at the date of the financial statements.
        Estimates also affect the reported amounts of revenues and expenses during
        the
        reporting year. Actual results could differ from those estimates.
  *Cash
        Equivalents*
 
 Cash
        and
        cash equivalents consist primarily of cash on deposit, certificates of deposit,
        money market accounts, and investment grade commercial paper that are readily
        convertible into cash and purchased with original maturities of three months
        or
        less.
  *Accounts
        Receivable*
  Trade
        accounts receivable, during the year, primarily represent amounts due from
        equipment manufacturers and end-users in North America, Asia and Europe.
        The
        Company at times maintains an allowance for the inability of our customers
        to
        make required payments. These estimates are based on historical data, the
        length
        of time the receivables are past due and other known factors. An allowance
        for
        doubtful accounts was not required at December 31, 2006.
  20
  *Inventories*
  Inventories
        are stated at the lower of first-in, first-out (“FIFO”) cost or market. Cost is
        computed using currently adjusted standards which approximates actual costs
        on a
        FIFO basis. The Company assesses the recoverability of all inventory to
        determine whether adjustments for impairment are required. At December 31,
        inventories consisted of the following amounts (net of an obsolescence allowance
        of $79,000 in 2006):
  **2006*****(in
                  thousands)***Raw
                  materials
              
              $
              214Work
                  in process
              
              
              167Finished
                  goods
              
              
              -$
              381
 
  Management
        periodically performs an analysis of the Company’s inventory to determine if its
        cost exceeds estimated net realizable value. Over the last several years,
        given
        the market conditions and the direction of the Company, management discontinued
        certain product lines and attempted to liquidate the remaining inventory
        related
        to those product lines.
  *Property
        and Equipment*
  Property
        and equipment is stated on the basis of cost. Expenditures for normal repairs
        and maintenance are charged to operations as incurred.
  Depreciation
        is computed by the straight-line method based on the estimated useful lives
        of
        the assets (building improvements-40 years, other property and equipment-3
        to 10
        years).
  *Capitalized
        Computer Software Development Costs*
  Computer
        software development costs are capitalized after the establishment of
        technological feasibility of the related technology. These costs are amortized
        following general release of products based on current and estimated future
        revenue for each product with an annual minimum equal to the straight-line
        amortization over the remaining estimated economic life of the product (not
        to
        exceed 5 years). Management continually reviews the net realizable value
        of
        capitalized software costs. At the time that a determination is made that
        capitalized software amounts exceed the estimated net realizable value of
        amounts capitalized, any amounts in excess of the estimated realizable amounts
        are written off.
  No
        software development costs were capitalized during 2006. Amortization of
        the
        costs capitalized prior to 2003 amounted to $38,000 and $113,000 in 2006
        and
        2005, respectively. These costs were primarily made up of payroll, fringe
        benefits, and other direct expenses such as facilities allocation. The software
        amortized over the period is the Company’s microdisplay inspection software
        toolbox including vision processing algorithms and the Company’s patented
        sequence development and execution software. These software components are
        used
        in the products sold by the Company.
  *Patents*
  Total
        patent costs incurred and capitalized by the Company were $12,000 and $30,000
        in
        2006  and
        2005,
        respectively. Patents are stated at cost less accumulated amortization.
        Amortization of the patents amounted to $9,000 and $18,000 in 2006 and 2005,
        respectively. These costs are amortized on a straight-line basis over the
        estimated useful lives of the assets (not to exceed 5 years).
 
 *Impairment
        of Long-lived Assets*
  The
        Company reviews its long-lived assets, including property, equipment and
        intangibles, for impairment whenever events or changes in business circumstances
        indicate that the carrying amount of the assets may not be fully recoverable.
        An
        impairment loss would be recognized when estimated undiscounted future cash
        flows expected to result from the use of the asset and its eventual disposition
        are less than the carrying amount of the asset.
 
 *Deferred
        Revenue*
 
 Deferred
        revenue represents amounts periodically invoiced for sales orders in excess
        of
        amounts recognized as revenues. At December 31, 2006 there was no deferred
        revenue.
  21
  *Fair
        Value of Financial Instruments*
 
 The
        Company’s financial instruments are cash and cash equivalents, accounts
        receivable, accounts payable, notes payable, and long-term debt. The recorded
        values of cash and cash equivalents, accounts receivable, and accounts payable
        approximate their fair values based on their short-term nature. The recorded
        values of notes payable and long-term debt approximate their fair values,
        as
        interest approximates market rates.
  *Revenue
        Recognition*
  The
        Company recognizes revenue in accordance with SOP 97-2, Software Revenue
        Recognition, Staff Accounting Bulletin No. 101 (“SAB 101”), and Staff Accounting
        Bulletin No. 104 (“SAB 104”) Revenue Recognition in Financial Statements.
        Revenue is recognized when persuasive evidence of an arrangement exists,
        delivery has occurred or services have been rendered, the selling price is
        fixed
        or determinable and collectibility is reasonably assured.
  The
        Company accounts for certain product sales of its flat panel display inspection
        systems as multiple-element arrangements. If specific customer acceptance
        requirements are met, the Company recognizes revenue for a portion of the
        total
        contract price due and billable upon shipment, with the remainder recognized
        when it becomes due (generally upon acceptance). The Company recognizes all
        other product sales with customer acceptance provisions upon final customer
        acceptance. The Company recognizes revenue from the sale of spare parts upon
        shipment. Revenue from service contracts is recognized over the life of the
        contract. Revenue is reported net of sales commissions of $24,000 and $10,000
        for the years ended 2006 and 2005 respectively.
  Revenue
        is also derived through business agreements for product development. The
        Company
        conducts specified product development projects related to one of its principal
        technology specializations for an agreed-upon fee. Typically the agreements
        require “best efforts” with no specified performance criteria. Revenue from
        product development agreements, where there are no specific performance terms,
        are recognized in amounts equal to the amounts expended on the programs.
        Generally, the agreed-upon fees for product development agreements contemplate
        reimbursing the Company, after its agreed-upon cost share, if any, for costs
        considered associated with project activities including expenses for direct
        product development and research, operating, general and administrative expenses
        and depreciation. Accordingly, expenses related to product development
        agreements are recorded as cost of revenues from product development
        agreements.
  *Allocations
        of General and Administrative Costs and Engineering Costs*
  The
        Company allocates a portion of general and administrative expense and a portion
        of engineering and product development expense to cost of sales from product
        development agreements based on a percentage of direct labor costs. These
        allocations are limited to the amount of revenues, after direct expenses,
        under
        the applicable agreements.
  The
        following is a summary of the allocations made for the twelve months ended
        December 31:
  **Twelve
                  Months****2006**
              
              **2005*****(in
                  thousands)***Gross
                  G&A Expense
              
              $
              1,288
              
              $
              1,251Less
                  allocation to cost of sales from product development
                  agreements
              
              
              (38
              )
              
              -Remaining
                  G&A Expense
              
              $
              1,250
              
              $
              1,251
  22
  
 **Twelve
                  Months****2006**
              
              **2005****(in
                  thousands)**Gross
                  Engineering and Development Expense
              
              $
              1,351
              
              $
              960Less
                  allocation to cost of sales from product development
                  agreements
              
              
              (137
              )
              
              -Remaining
                  Engineering and Development Expense
              
              $
              1,214
              
              $
              960
  *Concentrations
        of Credit and Other Risk*
  Financial
        instruments that potentially subject the Company to concentrations of credit
        risk consist principally of accounts receivable. A significant portion of
        the
        Company’s customers are located in Asia, primarily Japan, Taiwan, and Korea, and
        in Europe. Therefore, the Company’s sales to these countries may be adversely
        affected by the overall health of these economies, including the effects
        of
        currency exchange rate fluctuations and political risks. The Company generally
        does not require collateral for most of its trade accounts receivable. For
        sales
        to some of its customers in certain geographic regions, the Company requires
        letters of credit. Substantially all of the Company’s revenue is invoiced in
        U.S. dollars. For 2006, sales to four of the Company’s customers represented 85%
        of the Company’s total net revenue. The Company believes its credit evaluation
        and monitoring mitigates its credit risk.
  *Advertising*
  Advertising
        costs are expensed as incurred. Advertising costs were approximately $58,000
        and
        $56,000 in 2006 and 2005, respectively.
  *Shipping
        and Handling Costs*
  The
        Company’s shipping and handling costs are included in cost of sales for all
        periods presented.
  *Income
        Taxes*
  The
        Company accounts for income taxes in accordance with FASB Statement No. 109, *Accounting
        for Income Taxes* (“SFAS
        109”), which requires the use of the liability method in accounting for income
        taxes. Under SFAS 109, deferred tax assets and liabilities are measured based
        on
        differences between the financial reporting and tax bases of assets and
        liabilities using enacted tax rates and laws that will be in effect when
        differences are expected to reverse. The effect on deferred tax assets and
        liabilities of a change in tax rates is recognized in income in the period
        that
        includes the enactment date. A valuation allowance is provided for net deferred
        tax assets if it is more likely than not that these items will either expire
        before the Company is able to realize their benefit, or future deductibility
        is
        uncertain. All deferred tax assets are offset by a valuation
        allowance.
  *Common
        Stock Options*
  Prior
        to
        2006, the Company followed APB No. 25 “Accounting for Stock Issued to Employees”
and related interpretations in accounting for its employee stock options.
        Under
        APB 25, because the exercise price of the Company’s employee stock options
        equals the market price of the underlying stock on the date of grant, no
        compensation expense is recognized. The Company adopted SFAS No. 123R, under
        the
        modified prospective transition method on January 1, 2006 (see Recently Issued
        Accounting Standards and Note I below).
  *Translation
        of Foreign Currencies*
  Most
        sales are made in US dollars. Occasionally a sale may be made in Euros or
        Japanese Yen. Any transaction gains and losses are reflected in operating
        results and are generally not significant
  23
  *Reclassifications*
  Certain
        amounts have been reclassified in prior periods’ presentations to conform to the
        current year's presentation.
  *Contingencies
        and Litigation*
  The
        Company makes an assessment of the probability of an adverse judgment resulting
        from current and threatened litigation. The Company accrues the cost of an
        adverse judgment if, in management’s estimation, an adverse settlement is
        probable and management can reasonably estimate the ultimate cost of such
        litigation. The Company had no such accruals at December 31, 2006.
  *Recently
        Issued Accounting Standards*
  In
        December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which
        replaces SFAS No. 123, “Accounting for Share-based Compensation”, and supersedes
        Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees” (APB No. 25). The Statement requires that the calculated cost
        resulting from all share-based payment transactions be recognized in the
        financial statements. The Statement also establishes fair value as the
        measurement objective in accounting for share-based payment arrangements
        and
        requires all entities to apply a fair-value-based measurement method in
        accounting for share-based payment transactions with employees, except for
        equity instruments held by employee share ownership plans. The Statement
        was
        effective for the Company beginning January 1, 2006. The “modified prospective”
method was required upon adoption; accordingly, results of prior periods
        have
        not been restated. Under the modified prospective method, the Statement applies
        to new awards and to awards modified, repurchased or cancelled after the
        effective date. Additionally, compensation cost for the unvested portion
        of
        awards as of the effective date is required to be recognized after the effective
        date as the awards vest. As of January 1, 2006, the Company implemented SFAS
        No.123(R), with share-based compensation expense now fully reflected in the
        Company’s statements of operations for the year ended December 31,
        2006.
 
 In
        November 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), *Inventory
        Costs, an amendment of ARB No. 43, Chapter 4,* which
        clarifies the accounting for abnormal amounts of idle facility expense, freight,
        handling costs and wasted material and requires that such items be recognized
        as
        current-period charges regardless of whether they meet the “so abnormal”
criterion outlined in ARB No. 43. SFAS No. 151 also introduces the concept
        of
“normal capacity” and requires the allocation of fixed production overheads to
        inventory based on the normal capacity of the production facilities. Unallocated
        overheads must be recognized as an expense in the period incurred. SFAS No.
        151
        is effective for inventory costs incurred during fiscal years beginning after
        June 15, 2005. The Company adopted SFAS No. 151 effective January 1, 2006.
        The
        adoption of SFAS No. 151 did not have a material impact on the Company’s
        financial position, results of operations or cash flows.
 
 In
        May
        2005, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standards (SFAS) No. 154, *Accounting
        Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement
        No. 3* (SFAS
        No. 154). SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless
        it is
        impracticable. APB Opinion No. 20 “Accounting Changes,” previously required that
        most voluntary changes in accounting principle be recognized by including
        in net
        income of the period of the change the cumulative effect of changing to the
        new
        accounting principle. This Statement is effective for the Company as of January
        1, 2006. The adoption of SFAS No. 154 did not impact the Company’s display of
        financial position, results of operations, or cash flows.
 
 In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. 48 (“FIN 48”, “Accounting for Uncertainty in Income Taxes”). FIN 48
        prescribes detailed guidance for the financial statement recognition,
        measurement and disclosure of uncertain tax positions recognized in an
        enterprise’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not
        recognition threshold at the effective date to be recognized upon the adoption
        of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal
        years
        beginning after December 15, 2006 and the provisions of FIN 48 will be applied
        to all tax positions upon initial adoption of the Interpretation. The cumulative
        effect of applying the provisions of this Interpretation will be reported
        as an
        adjustment to the opening balance of retained earnings for that fiscal year.
        We
        are currently evaluating the impact of FIN 48 on the Company’s financial
        statements.
  24
  On
        September 13, 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108
        on
        quantifying financial statement misstatements. In summary, SAB 108 states
        that
        registrants should use both a balance sheet (iron curtain) approach and an
        income statement (rollover) approach when quantifying and evaluating the
        materiality of a misstatement, and contains guidance on correcting errors
        under
        the dual approach.
 
 In
        addition, SAB 108 provides transition guidance for correcting errors existing
        in
        prior years. If prior-year errors that had been previously considered immaterial
        (based on the appropriate use of the registrants prior approach) now are
        considered material based on the approach of this SAB, the registrant need
        not
        restate prior period financial statements. SAB 108 is effective for Integral
        Vision’s annual financial statements covering the fiscal year ended December 31,
        2006.
 
 The
        Company adopted SAB 108 and its adoption did not have a material impact on
        Integral Vision’s financial position or results of operations for the year ended
        December 31, 2006.
 
 On
        September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which provides for enhanced guidance for using fair value to measure assets
        and
        liabilities. SFAS No. 157 defines fair value, establishes a framework for
        measuring fair value in generally accepted accounting principles (“GAAP”), and
        expands disclosures about fair value measurements. SFAS No. 157 is applicable
        under other accounting pronouncements that either require or permit fair
        value
        measurements and does not require any new fair value measurements. SFAS No.
        157
        is effective for the Company’s financial statements issued for fiscal periods
        beginning January 1, 2008. Integral Vision is in the process of analyzing
        the
        implications of SFAS No. 157.
 
 Note
        C -
        Long-Term Debt and Other Financing Arrangements
  On
        April
        12, 2005, pursuant to a Securities Purchase Agreement, the Company sold 7,000
        shares of Series A Convertible Preferred Stock at $1,000 per share, and as
        additional consideration under the Securities Purchase Agreement, issued
        Common
        Stock Warrants for the purchase of up to 3.5 million shares of common stock.
        Each share of the Series A Convertible Preferred Stock was converted into
        1,000
        shares of unregistered common stock upon the approval of an increase in the
        Company’s authorized shares of common stock at a meeting of the stockholders on
        May 26, 2005. The Common Stock Warrants for the purchase of up to 3.5 million
        shares of common stock are exercisable at $1.60 per share for a period of
        five
        years from April 12, 2005. The Company used the net proceeds of the Securities
        Purchase Agreement to reduce certain Company debt, and for working capital.
        The
        Company has repaid all of the outstanding principal and interest on the Class
        1
        and Class 2 Notes. The note holders then exercised their warrants attached
        to
        the notes for which the exercise price of the warrant was $1.00 or less.
        This
        exercise resulted in the issuance of 6,195,014 shares of restricted common
        stock. The Class 3 note holders converted their notes for which the conversion
        price was $1.00 or less, resulting in the issuance of 1,269,757 shares of
        restricted common stock. The outstanding interest on the Class 3 notes was
        paid.
        Additionally, the Company has repaid other obligations totaling approximately
        $190,000.
  The
        following table outlines the source and (use) of proceeds from the sale (in
        thousands):
  Sale
                  of Series A Convertible Preferred Stock
              
              $
              7,000Class
                  1 and Class 2 warrants exercised
              
              
              1,865Class
                  1 Notes paid (principal and interest)
              
              
              (1,289
              )Class
                  2 Notes paid (principal and interest)
              
              
              (1,823
              )Class
                  3 accrued interest paid
              
              
              (106
              )Note
                  and accrued interest due Maxco, Inc.
              
              
              (111
              )Michigan
                  Single Business Tax liability
              
              
              (78
              )Fees
                  to raise capital
              
              
              (637
              )Legal
                  and other costs
              
              
              (100
              )Remaining
                  net cash proceeds
              
              $
              4,721
  25
  Long
          term
          debt remaining from these financing arrangements at December 31, 2006 consists
          of $378,000 of convertible Class 3 Notes at a conversion price of $1.00.
          Interest on these Notes is paid semi-annually at a stated rate of 8.0%.
          The
          Class 3 Notes mature in April 2008.
 Management
        has made arrangements to issue up to $500,000 of Class 2 Notes under the
        terms
        of the Company’s existing Note and Warrant Purchase Agreement as amended. The
        Class 2 Notes are working capital notes and are secured by accounts receivable,
        inventory, and intellectual property. The purchasers of Class 2 Notes receive
        10% interest and the option to receive either warrants for the purchase of
        the
        Company’s stock when the Note is repaid or an additional 2% interest. 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 specific price which shall be approximately 150% of the recent
        fair
        value of the Company’s Common Stock as agreed by the parties as of the date of
        issuance of the corresponding Class 2 Note or such other price as the Board
        of
        Directors shall determine is appropriate based on the circumstances at the
        time.
        The Board of Directors has approved a $1.60 strike price for the warrants.
        The
        Notes will mature May 31, 2007. As of December 31, 2006, the note holders
        have
        earned 19,710 warrants, none of which are issued. Management anticipates
        issuing
        the balance of these notes during the first quarter of 2007. As of December
        31,
        2006 the Company had issued $350,000 of the $500,000 of Class 2 Notes, $300,000
        of which were purchased by related parties. Refer to Note P - Subsequent
        Events
        for recent activity associated with Class 2 Notes.
 
 A
        summary
        of the Company’s debt obligations is as follows as of December 31:
  **2006**
              
              **2005*****(in
                  thousands)***Long
                  Term Debt:Class
                  3 Notes
              
              $
              378
              
              $
              378Face
                  value Class 1 Notes
              
              
              -
              
              
              -Less
                  Original Issue Discount (OID)
              
              
              -
              
              
              -Net
                  Long Term Debt
              
              $
              378
              
              $
              378Short
                  Term Debt:Class
                  2 Notes
              
              $
              350
              
              $
              -Other
                  Short Term Debt
              
              
              -
              
              
              -Total
                  Short Term Debt
              
              $
              350
              
              $
              -
  Interest
        paid in 2006 was approximately $30,000 compared to interest expensed of $32,000.
        The $2,000 difference primarily represents amounts accrued and unpaid. Interest
        paid in 2005 was approximately $473,000 compared to interest expensed of
        $143,000. The $330,000 difference primarily represents amounts paid for interest
        on the Notes that was accrued as of December 31, 2004. Interest expense for
        related parties was approximately $1,600 and $60,000 in the years ended December
        31, 2006 and 2005, respectively.
  Note
        D -
        Related Party Transactions
  Maxco,
        Inc. provided consulting services to the Company through June of 2006. These
        services, which are no longer required, included assistance with financial
        statement preparation, compliance with governmental filing requirements,
        and
        assistance with certain financing arrangements. The Company and Maxco agreed
        on
        terms for payment for these services resulting in charges to operations of
        $6,960 and $107,000 in the years ended December 31, 2006 and 2005, respectively.
        Payment for services for the six months ended March 31, 2005 was satisfied
        by
        the issuance of 42,000 shares of unregistered common stock in the Company.
        The
        amount charged to operations in the first quarter of 2005 for these services
        amounted to $37,000, which is based on the average closing price of the
        Company’s common stock over that period.
  Note
        E -
        Income Taxes
  The
        Company establishes valuation allowances in accordance with the provisions
        of
        FASB Statement No. 109, “Accounting for Income Taxes.” The Company continually
        reviews realizability of deferred tax assets and recognizes these benefits
        only
        as reassessment indicates that it is more likely than not that the benefits
        will
        be realized.
  26
  As
        of
        December 31, 2006, the Company has cumulative net operating loss carryforwards
        approximating $45.0 million (expiring: $6.9 million in 2010, $3.9 million
        in
        2011, $3.8 million in 2012, $2.3 million in 2018, $6.6 million in 2020, $1.9
        million in 2021, $5.7 million in 2022, $5.5 million in 2023, $2.7 million
        in
        2024, $2.7 million in 2025, and $2.9 million in 2026) for federal income
        tax
        purposes available to reduce taxable income of future periods and unused
        investment, alternative minimum tax, and research and development tax credits
        approximating $331,000. Additionally, the Company’s inactive subsidiary in the
        United Kingdom has cumulative net operating loss carryforwards approximating
        $3.8 million that do not expire. For financial reporting purposes, the net
        operating losses and credits have been offset against net deferred tax
        liabilities based upon their expected amortization during the loss carryforward
        period. The remaining valuation allowance is necessary due to the uncertainty
        of
        future income estimates. The valuation allowance increased $957,000 in 2006
        and
        $904,000 in 2005.
  Deferred
        income taxes reflect the net tax effects of temporary differences between
        the
        carrying amounts of assets and liabilities for financial reporting purposes
        and
        the amounts used for income tax purposes. Significant components of the
        Company's deferred tax liabilities and assets as of December 31 are as
        follows:
  **2006**
              
              **2005*****(in
                  thousands)***Deferred
                  tax liabilities:Deductible
                  software development costs, net of amortization
              
              $
              -
              
              $
              13Total
                  deferred tax liabilities
              
              
              -
              
              
              13Deferred
                  tax assets:Net
                  operating loss carryforwards
              
              
              15,294
              
              
              14,309Credit
                  carryforwards
              
              
              331
              
              
              331Inventory
                  reserve
              
              
              27
              
              
              72Other
              
              
              130
              
              
              126Total
                  deferred tax assets
              
              
              15,782
              
              
              14,838Valuation
                  allowance for deferred tax assets
              
              
              15,782
              
              
              14,825Net
                  deferred tax assets
              
              
              -
              
              
              13Net
                  deferred taxes
              
              $
              -
              
              $
              -
  The
        reconciliation of income taxes computed at the U.S. federal statutory tax
        rates
        to income tax expense (credit) is as follows for the years ended December
        31:
  **2006**
              
              **2005*****(in
                  thousands)***Consolidated
                  net income (loss)
              
              $
              (2,974
              )
              $
              (2,679
              )Foreign
                  net income (loss)
              
              
              -
              
              
              -U.S.
                  net income (loss)
              
              $
              (2,974
              )
              $
              (2,679
              )Tax
                  provision (benefit) at U.S. statutory rates
              
              $
              (1,011
              )
              $
              (911
              )Change
                  in valuation allowance
              
              
              957
              
              
              904Nondeductible
                  expenses
              
              
              54
              
              
              7Other
              
              
              -
              
              
              -$
              -
              
              $
              -
  There
        were no income tax payments made in 2006 or 2005.
  Note
        F -
        Loss per Share
  Basic
        net
        loss per common share is computed by dividing net loss applicable to common
        shareholders by the weighted-average number of common shares outstanding
        during
        the year. Diluted net loss per common share is determined using the
        weighted-average number of common shares outstanding during the year, adjusted
        for the dilutive effect of common stock equivalents, consisting of shares
        that
        might be issued upon the exercise of common stock options and
        warrants.
 
 The
        following table sets forth the computation of basic and diluted loss per
        share:
  **2006**
              
              **2005*****(in
                  thousands, except per share data)*****Numerator
                  for basic and diluted loss per share - loss available to common
                  stockholders**Net
                  loss
              
              $
              (2,974
              )
              $
              (2,679
              )*there
                  was no effect of dilutive securities, see below**Denominator
                  for basic and diluted loss per share - weighted average
                  shares**
              
              
              29,491
              
              
              24,531*there
                  was no effect of dilutive securities, see below**Basic
                  and diluted loss per share:**Net
                  loss
              
              $
              (0.10
              )
              $
              (0.11
              )
 27
  Warrants
        and options outstanding were not included in the computation of diluted earnings
        per share because the inclusion of these instruments would have an anti-dilutive
        effect. For additional disclosures regarding stock options and warrants see
        Note
        I.
  Note
        G -
        Employee Savings Plan
  The
        Company has an Employee Savings Plan covering substantially all employees.
        The
        Company contributes $.20 to the Plan for every dollar contributed by the
        employees up to 6% of their compensation. The Plan also provides for
        discretionary contributions by the Company as determined annually by the
        Board
        of Directors. Company contributions charged to operations under the Plan
        were
        approximately $13,000 and $10,000 for 2006 and 2005, respectively.
  Note
        H -
        Lease Commitments and Contingencies
  The
        Company uses equipment and office space under operating lease agreements
        requiring rental payments approximating $104,000 in 2007, $104,000 in 2008,
        $102,000 in 2009, and $103,000 in 2010. Included in the above numbers is
        the
        rent to be paid as a result of the lease agreement entered into on October
        19,
        2005 in connection with the Company’s relocation to its Wixom facilities. Rent
        expense charged to operations approximated $99,000 and $85,000 in 2006 and
        2005,
        respectively.
  Note
        I -
        Stock Options, Warrants, and Preferred Stock
  The
        Company adopted SFAS No. 123R, under the modified prospective transition
        method
        on January 1, 2006. SFAS No. 123R requires companies to measure and recognize
        the cost of employee services received in exchange for an award of equity
        instruments based on the grant-date fair value. Share-based compensation
        recognized under the modified-prospective transition method of SFAS No. 123R
        includes share-based compensation based on the grant-date fair value determined
        in accordance with the original provisions of SFAS No. 123, “ *Accounting
        for Stock-Based Compensation”,* for
        all
        share-based payments granted prior to and not yet vested as of January 1,
        2006
        and share-based compensation based on the grant-date fair-value determined
        in
        accordance with SFAS No. 123R for all share-based payments granted after
        January
        1, 2006. SFAS No. 123R eliminates the ability to account for the award of
        these
        instruments under the intrinsic value method prescribed by Accounting Principles
        Board (“APB”) Opinion No. 25, *Accounting
        for Stock Issued to Employees,* and
        allowed under the original provisions of SFAS No. 123. Prior to the adoption
        of
        SFAS No. 123R, the Company accounted for our stock option plans using the
        intrinsic value method in accordance with the provisions of APB Opinion No.
        25
        and related interpretations.
  Primarily
        as a result of adopting SFAS No. 123R, the Company recognized $170,000 in
        share-based compensation expense for the year ended December 31, 2006. The
        impact of this share-based compensation expense on the Company’s basic and
        diluted earnings per share was $0.00 per share for the year ended December
        31,  2006.
        No
        tax benefits were attributed to the stock-based compensation expense because
        a
        valuation allowance was maintained for all net deferred tax assets. The fair
        value of stock options was estimated using the Black-Scholes option pricing
        model with the following weighted-average assumptions for the year ended
        December 31, 2006:
  28
  Year
                  EndedDecember
                  31, 2006***(in
                  thousands)***Expected
                  Life (in years)
              6.0Expected
                  volatility
              82.87%Risk-free
                  interest rate
              4.90%Expected
                  dividend yield
              0%Expected
                  forefiture rate
              0%
 
 Valuation
        and Amortization Method. The fair value of share-based awards granted is
        estimated using the Black-Scholes option valuation model. The fair value
        of all
        awards is amortized on a straight-line basis over the requisite service periods,
        which are generally the vesting periods.
 
 Expected
        Life. The expected life of all awards granted represents the period of time
        that
        they are expected to be outstanding. The expected life is determined using
        historical and other information available at the time of grant.
 
 Expected
        Volatility. The volatility of our common stock at the date of grant is estimated
        using the Black-Scholes option valuation model based on the historical
        volatility of our common stock.
 
 Risk-Free
        Interest Rate. The risk-free interest rate used in the Black-Scholes option
        valuation model is based on the implied yield currently available on U.S.
        Treasury zero-coupon issues with an equivalent remaining term equal to the
        expected life of the award.
 
 Expected
        Dividend Yield. The Company has never paid any cash dividends on its common
        stock and the Company does not anticipate paying any cash dividends in the
        foreseeable future. Consequently, an expected dividend of zero is used in
        the
        Black-Scholes option valuation model.
 
 Expected
        Forfeitures. Historical data is used to estimate pre-vesting option forfitures.
        Stock-based compensation is recorded only for those awards that are expected
        to
        vest.
  The
        following table summarizes share-based compensation expense for the year
        ended
        December 31, 2006 related to share-based awards under SFAS No. 123R as recorded
        in the statement of operations in the following expense catagories:
 
 Year
                  EndedDecember
                  31, 2006***(in
                  thousands)***Marketing
              
              $
              33Engineering
                  and Development
              
              
              94General
                  and Administrative
              
              
              43Total
                  share based compensation expense
              
              $
              170
 
 The
        Compensation Committee of the Board of Directors modified the terms of the
        Company’s May 16, 2006 option award program. The modification which was
        effective October 24, 2006 changed the exercise/strike price from $1.50 to
        $.60
        per share and changed the vesting period from one year to two years.
 
 The
        financial statement impact of the modifications, which was determined in
        accordance with SFAS 123R increased the award program cost by $18,792. This
        amount added to the unrecognized cost of $144,910 from the original option
        award
        program is $163,702 and will be recognized ratably as compensation cost over
        the
        vesting period from October 24, 2006 through May 18, 2008.
 
 As
        of
        December 31, 2006, the Company has $131,060 of unrecognized expense related
        to
        un-vested share-based compensation which will be recognized ratably as
        compensation expense over the remaining vesting period from January 1, 2007
        through May 16, 2008.
 
 A
        summary
        of the status of the Company’s nonvested shares as of December 31, 2006, and
        changes during the year ended December 31, 2006, is presented
        below:
  29
  Shares
              
              Weighted
                  Average Grant-Date Fair ValueExercise PriceNonvested
                  at January 1, 2006
              
              
              160,000
              
              $
              1.27Granted
              
              
              210,000
              
              
              0.77Vested
              
              
              (160,000
              )
              
              1.27Nonvested
                  at December 31, 2006
              
              
              210,000
              
              $
              0.77
 
 The
        weighted-average grant-date fair value of options granted during the years
        2005
        and 2006 was $1.27 and $0.77 respectively,
  For
        periods presented prior to the adoption of SFAS No. 123R, pro forma information
        regarding net income and earnings per share as required by SFAS No. 123R
        has
        been determined as if employee stock options were accounted for under the
        original provisions of SFAS No. 123. The fair value of these options was
        estimated using the Black-Scholes option pricing model. For purposes of pro
        forma disclosure, the estimated fair value of the options is amortized to
        expense over the option’s vesting period. The fair value of each option grant
        was estimated with the following weighted-average assumptions for the year
        ended
        December 31, 2006.
 
 Year
                  EndedDecember
                  31, 2005***(in
                  thousands)***Expected
                  Life (in years)
              7.0Expected
                  volatility
              125.6%Risk-free
                  interest rate
              2.00%Expected
                  dividend yield
              0%Expected
                  forfiture rate
              0%
 
 
 The
        following table presents the pro forma net loss and basic and diluted loss
        per
        common share, had the Company elected to recognize compensation cost based
        on
        the fair value at the grant dates for stock options awards, consistent with
        the
        methods prescribed by SFAS 123, as amended by SFAS 148:
 
 Year
                  EndedDecember
                  31, 2005*(in
                  thousands, except per share data)*Net
                  loss:Net
                  loss, as reported
              
              $
              (2,679
              )Deduct:
                  Total stock-based compensation expense determined under fair value
                  method
                  for all awards, net of related tax effects
              
              
              (250
              )Pro
                  forma net loss
              
              $
              (2,929
              )Basic
                  and diluted earnings per share:Basic
                  and diluted - as reported
              
              $
              (0.12
              )Basic
                  and diluted - pro forma
              
              $
              (0.12
              )
 
 30
 
 A
        summary
        of option activity under all plans for the years ended December 31, 2006
        and
        2005 follows:
  2006
              
              2005Shares
              
              Weighted
                  Average Exercise Price
              
              Shares
              
              Weighted
                  Average Exercise Price(number
                  of shares in thousands)Outstanding
                  at December 31
              
              
              1,114
              
              $
              0.97
              
              
              991
              
              $
              0.92Granted
              
              
              210
              
              
              0.60
              
              
              160
              
              
              1.40Exercised
              
              
              0
              
              
              0.00
              
              
              (32
              )
              
              0.17Expired
              
              
              (15
              )
              
              6.25
              
              
              (5
              )
              
              8.50Outstanding
                  at December 31 ($.10 to $5.63 per share)
              
              
              1,309
              
              
              0.95
              
              
              1,114
              
              
              0.97Exercisable
                  ($.10 to $5.63 per share)
              
              
              1,099
              
              $
              0.90
              
              
              954
              
              $
              0.90
 
  Additional
        information regarding the range of exercise prices and weighted average
        remaining life of options outstanding at December 31, 2006 follows:
  **Range
                  of Exercise Prices**
              
              **Number
                  Outstanding**
              
              **Weighted
                  Average Remaining Life**
              
              **Number
                  Exercisable***(number
                  of shares in thousands)*$.10 to $0.60
              
              
              705
              
              
              6.6
              
              
              495$1.03
                  to $5.63
              
              
              604
              
              
              6.0
              
              
              604$.10 to $5.63
              
              
              1,309
              
              
              6.3
              
              
              1,099
  As
        of
        December 31, 2006, the Company had $378,000 in outstanding Class 3 Notes
        payable
        that are convertible into the Company’s common stock at $1.00 per share. The
        notes are due April 1, 2008 and interest is paid semi-annually at 8%.
  A
        summary
        of the outstanding warrants, options, and shares available upon the conversion
        of debt at December 31, 2006 is as follows:
  Weighted
                  Average Exercise Price
              
              Number
                  Outstanding
              
              Weighted
                  Average Remaining Life
              
              Number
                  Exercisable*(number
                  of shares in thousands)*Warrants
              
              $
              1.60
              
              
              3,500
              
              
              3.53
              
              
              3,500Class
                  2 Note (1)
              
              $
              1.00
              
              
              321
              
              
              2.48
              
              
              321Class
                  3 Notes
              
              $
              1.00
              
              
              378
              
              
              1.50
              
              
              3781995
                  Employee Stock Option Plan
              
              $
              0.99
              
              
              360
              
              
              3.96
              
              
              3601999
                  Employee Stock Option Plan
              
              $
              0.27
              
              
              355
              
              
              5.50
              
              
              3552004
                  Employee Stock Option Plan
              
              $
              1.34
              
              
              594
              
              
              8.42
              
              
              384$
              1.37
              
              
              5,508
              
              
              4.01
              
              
              5,298
  (1)
        The
        table has been corrected since the Company’s 10-K/A dated as of December 31,
        2005 to reflect warrants issued thru April 12 of 2005. These warrants do
        not
        have a dilutive effect on earnings.
  Note
        J -
        Contingencies and Litigation
  *Product
        Warranties*
 
 The
        Company provides standard warranty coverage for most of its products, generally
        for one year from the date of customer acceptance. We record a liability
        for
        estimated warranty claims based on historical claims and other factors.
        Management reviews these estimates on a regular basis and adjusts the warranty
        reserves as actual experience differs from historical estimates or other
        information becomes available. This warranty liability primarily includes
        the
        anticipated cost of materials, labor and travel, and shipping necessary to
        repair and service the equipment.
  31
  The
        following table illustrates the changes in our warranty liability for the
        years
        ended December 31, 2006 and 2005:
 
 **Amount**
              
              **Amount****2006**
              
              **2005*****(in
                  thousands)***Balance
                  as of January 1
              
              $
              77
              
              $
              155(Charges)/credits
                  to expense
              
              
              (12
              )
              
              (75
              )Utilization/payment
              
              
              (16
              )
              
              (3
              )Balance
                  as of December 31
              
              $
              49
              
              $
              77
 
 Note
        K -
        Operations by Geographic Area
  Statement
        of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments
        of an Enterprise and Related Information established standards for reporting
        information about operating segments in annual financial statements and requires
        selected information about operating segments in interim financial reports
        issued to stockholders. It also established standards for related disclosures
        about products and services, and geographic areas. Operating segments are
        defined as components of the enterprise about which separate financial
        information is available that is evaluated regularly by management in deciding
        how to allocate resources and in assessing performance.
  The
        Company is engaged in one business segment, vision-based inspection products.
        The following presents information by geographic area.
  **Year
                  Ended December 31****2005**
              
              **2005*****(in
                  thousands)***Net
                  revenues by geographic area:North
                  America
              
              $
              835
              
              $
              650Europe
              
              
              -
              
              
              17Asia
              
              
              -
              
              
              19$
              835
              
              $
              686
  *
        Geographic areas that are considered individually material are listed (more
        than
        10% of net revenues), all others are included in North America and in total
        are
        considered immaterial.
  Note
        L -
        Royalty Payments Received
  The
        Company received approximately $36,000 and $17,000 in royalties in 2006 and
        2005, respectively.
  Note
        M -
        Capitalized Software Costs
  Management
        has focused its development, sales and marketing efforts on the Company’s
        inspection systems for the flat panel display (FPD) industry. Industry sources
        indicate that this market will be substantial once fully developed. The Company
        has developed inspection solutions for the leading technologies used in the
        FPD
        industry including liquid crystal on silicon (LCOS), organic light emitting
        diodes (OLED and PolyOLED), electroluminescent (EL), high temperature
        polysilicon (HTPS), low temperature polysilicon (LTPS), liquid crystal display
        (LCD), and microelectromechanical systems (MEMS).
  Management
        periodically performs an analysis of the net realizable value of capitalized
        software costs.
  Note
        N -
        Market for the Company’s Common Stock
  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 expects to 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.
  32
 
 Note
        O -
        Going Concern Matters
  The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the satisfaction of liabilities
        in the normal course of business. As shown in the financial statements, the
        Company has incurred losses from operations in 2006 and 2005 of $3.0 million
        and
        $2.7 million, respectively. The continuing losses raise doubt about the
        Company's ability to continue as a going concern.The Company is currently
        working with a number of large customers who are evaluating the Company’s
        products for use in their manufacture of products using new microdisplay
        technologies. The Company expects that additional sales orders will be placed
        by
        these customers in the first half of 2007 provided that markets for these
        products continue to grow and the customers continue to have interest in
        the
        Company’s technology-assisted inspection systems. Ultimately, the Company’s
        ability to continue as a going concern will be dependent on these large
        companies getting their emerging display technology products into high volume
        production and placing sales orders with the Company for inspection products
        to
        support that production. However, there can be no assurance that the Company
        will be succesful in securing sales orders sufficient to continue operating
        as a
        going concern. The Company’s present cash position requires it to secure funding
        for the immediate future as well as funding to provide working capital for
        anticipated orders. From November 2006 through March 8, 2007, the Company
        issued
        $1,035,000 of the total $2,000,000 of Class 2 Notes authorized by the Board
        of
        Directors (See Note P). Management anticipates issuing the balance of the
        authorized notes in the first and second quarters of 2007. These notes become
        due July 31, 2007. Management expects to refinance these notes, as part of
        its
        plan to raise additional capital in the second or third quarter to fund
        operations through at least the first quarter of 2008 and provide working
        capital for the orders anticipated in the previous paragraph.
  The
        financial statements do not include any adjustments that might be necessary
        should the Company be unable to continue as a going concern.
  For
        further discussion regarding the Company’s obligations, see Note C - Long-Term
        Debt and Other Financing Arrangements.
  Note
        P -
        Subsequent Events
  **Class
        2 Notes**
 
 The
        Board
        of Directors, at their February 28, 2007 meeting, authorized the issuance
        of up
        to $2,000,000 of Class 2 Notes. Management has made arrangements to issue
        up to
        $1,500,000 of the notes under the terms of the Company’s existing Note and
        Warrant Purchase Agreement as amended. In connection with the foregoing,
        the
        Company entered into an amendment to the Class 2 Notes (i) extending the
        maturity date to July 31, 2007, and (ii) granting the holders of Class 2
        Notes
        the right to participate in future equity financings up to the face amount
        of
        their respective notes. The foregoing amendment was made to all Class 2 Notes
        except for one note for $50,000. As of March 8, 2007, $1,035,000 of these
        notes
        have been issued, primarily to related parties. Management anticipates issuing
        the balance of these notes during the first and second quarters of
        2007.
 
 The
        Class
        2 Notes are working capital notes and are secured by accounts receivable,
        inventory, and intellectual property. The purchasers of Class 2 Notes receive
        10% interest and the option to receive either warrants for the purchase of
        the
        Company’s stock when the Note is repaid or an additional 2% interest. 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 specific price which shall be approximately 150% of the recent
        fair
        value of the Company’s Common Stock as agreed by the parties as of the date of
        issuance of the corresponding Class 2 Note or such other price as the Board
        of
        Directors shall determine is appropriate based on the circumstances at the
        time.
        The Board of Directors has approved a $1.60 strike price for the warrants.
        The
        Notes will mature July 31, 2007.
 33
  **Corporate
                  Officers**
              **Corporate
                  Directory****Charles
                  J. Drake**,
                  66, is CEO and Chairman of the Board of Integral Vision, Inc. Mr.
                  Drake
                  founded the Company (originally known as Medar) in 1969 and has
                  served as
                  Chief Executive Officer since 1978.
              **Corporate
                  Headquarters**
                49113
                  Wixom Tech Drive
                Wixom,
                  MI 48393
                +1
                  (248) 668-9230
                +1
                  (248) 668-9384 fax**Mark
                  R. Doede**,
                  49, is President, Chief Operating Officer, and Chief Financial
                  Officer of
                  Integral Vision Inc. Mr. Doede has served as an officer since 1989.
              **Independent
                  Auditors**
                Rehmann
                  Robson
                Troy,
                  MI**General
                  Counsel****Arthur
                  R. Harmala**,
                  63, is Vice President of Sales and Marketing of Integral Vision,
                  Inc.
              J.M.
                  Warren Law Offices, P.C.
                Lansing,
                  MI**Andrew
                  Blowers**,
                  39, is Chief Technical Officer of Integral Vision, Inc.
              **Stock
                  Trading**
                Over
                  the Counter Bulletin Board (OTCBB)
                Symbol:
                  INVI**Mark
                  A. Michniewicz**,
                  39, is Vice President ofEngineering
                  of Integral Vision, Inc.
              **Stock
                  Registrar and Transfer Agent**
                Registrar
                  and Transfer Company
                Cranford,
                  NJ
                +1
                  (908) 497-2300**Board
                  of Directors****Form
                  10-KSB****Charles
                  J. Drake**
                Chairman
                  of the Board of Directors, Integral Vision,
              Interested
                  stockholders may obtain, without charge, a copy of the Company’s
                  AnnualInc.
                Chief
                  Executive Officer, Integral Vision, Inc.
              Report
                  on Form 10-KSB, as filed with the Securities and Exchange Commission,
                  upon
                  written request to:**Max
                  A. Coon**Vice
                  Chairman and Secretary of the Board of
              Investor
                  RelationsDirectors,
                  Integral Vision, Inc.
              Integral
                  Vision, Inc.President
                  and Chairman of the Board, Maxco, Inc.
              49113
                  Wixom Tech DriveWixom,
                  MI 48393**Vincent
                  Shunsky**Director,
                  Integral Vision, Inc.
              **Investor/Analyst
                  Information**Treasurer,
                  Integral Vision, Inc.
                Partner,
                  Gannon Group, P.C.
              Stockholder
                  and analyst inquiries concerning the Company should be addressed
                  to:**William
                  B. Wallace**
              Investor
                  RelationsDirector,
                  Integral Vision, Inc.
              Integral
                  Vision, Inc.Senior
                  Managing Director, Equity Partners, Ltd.
              49113
                  Wixom Tech DriveWixom,
                  MI 48393**Samuel
                  O. Mallory**Director,
                  Integral Vision, Inc.
              Guerrant
                  AssociatesInvestor
              Laura
                  Guerrant+1
                  (808) 882-1467**E-Mail
                  Investor Relations**cdrake@iv-usa.comlguerrant@guerrantir.com**On
                  the World Wide Web**www.iv-usa.com
 34
 
 Exhibits
        to Form 10-KSB
 
 Integral
        Vision, Inc.
 
 Year
        Ended December 31, 2006
 
 Commission
        File Number 0-12728
 35
  **Exhibit**
                **Number**
              **Exhibit
                  Index Description**4.3
              Consent
                  to Modifications dated March 6, 2007 modifying the terms of the
                  Fourth
                  Amended Note and Warrant Purchase Agreement.23.1
              Consent
                  of Rehmann Robson, independent registered public accounting
                  firm.31.1
              Certification
                  of Chief Executive Officer of periodic report pursuant to Rule
                  13a-15(e)
                  or Rule 15d-15(e).31.2
              Certification
                  of Chief Financial Officer of periodic report pursuant to Rule
                  13a-15(e)
                  or Rule 15d-15(e).32.1
              Certification
                  by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
                  Section 1350.32.2
              Certification
                  by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
                  Section 1350.






36