##### Table of Contents



United States Securities And Exchange Commission
Washington, D.C. 20549

FORM 10-K

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|x |  | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
|  |  | For the fiscal year ended December 31, 2002.                                            
|  |  |                                                                                         
|o |  | 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)
|                                                               |  |                                        
|38700 Grand River Avenue,                                      |  |                                        
|Farmington Hills, Michigan                                     |  | 48335                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

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

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

None

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 2003:

Common Stock, No Par Value, Stated Value $.20 Per Share  $1,066,296

The number of shares outstanding on each of the issuers classes of common
stock, as of February 28, 2003:

Common Stock, No Par Value, Stated Value $.20 Per Share  9,429,901

1



---

TABLE OF CONTENTS



|                                                  |  |  |  |  |  |  |  | 
|------------------------------------------------- |  |  |  |  |  |  |  | 
|SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
|Part I                                           
|Part II                                          
|Part III                                         
|DIRECTORS                                        
|EXECUTIVE OFFICERS                               
|Compliance with Reporting Requirements           
|Year End Option Values                           
|Amount and Nature of Beneficial Ownership        
|PART IV                                          
|SIGNATURES                                       
|CERTIFICATION                                    
|ITEM 15(a)(1) and (2)                            
|Report of Independent Auditors                   
|Schedule II  Valuation And Qualifying Accounts  
|Consent to Modifications                         
|Letter Re. Change in Certifying Accountant       
|Subsidiary of the Registrant                     
|Consent of Moore Stephens Doeren Mayhew          
|906 Certification of CEO/CFO                     



---



##### Table of Contents






SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



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




Part I

ITEM 1. Business

General



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



| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of machine vision products are effected through Integral
Vision and through Integral Vision LTD., a wholly owned subsidiary
of the Company, located in Bedford, England. The Integral Vision
LTD office was closed at December 31, 2002 due to the sale of the
Companys packaging and disc inspection product lines.

Overview



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Machine vision has become a necessity for manufacturers who need
to continually improve production efficiency to meet the
increasing demand for high quality products. The Companys vision
systems automatically identify, gauge or inspect parts with speed
and accuracy. Quantitative information about each part is
evaluated for functional or cosmetic defects. Our systems can be
configured to statistically monitor the production process and
send data to other equipment in the manufacturing cell. Such data
could be used, for example, by a diverter to send defective parts
to a reject bin, or by process controllers to automatically adjust
process variables.



| |                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company markets its turnkey systems to the flat panel display
industry. Applications development software, such as our
Industrial Vision Controller (IVC) technology, can be applied to
an extensive array of applications in industries that run the
gamut from aerospace to medical to textiles, and everything in
between.

Products



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Flat Panel Display Inspection                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Integral Vision has over nine years of experience in the display
industry. Our initial product, LCI-Professional, is used for
inspection of LCD Displays as components or final assemblies.
Applications include cell phones, car radios, pagers, electronic
organizers and hand-held video games. Integral Visions display
inspection systems are designed to detect two classes of defects:
cosmetic and functional. Cosmetic defects do not affect the
functionality of the display, but they cause user annoyance and
reduce product value. Functional defects are flaws that cause the
device to be inoperable or have a significant effect on
functionality.

2



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Integral Visions SharpEye provides small Flat Panel Display (FPD)
inspection for reflective, emissive and transmissive display
technologies. SharpEye is designed for the detection of
functional and cosmetic defects in LCOS, OLED, Poly OLED, DMD, EL,
HTPS, LTPS, LCD and other emerging display technologies. These
technologies are applied to consumer products such as camcorders,
rear projection computer monitors, digital still cameras, HDTV,
projectors, video headsets and video telephones. The core
technology of SharpEye inspection algorithms is the ability to
quantize data to the level of a single display pixel. SharpEye
can be configured for production inspection or for display
evaluation in a laboratory based on the equipment configuration
selected.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Integral Visions ChromaSee, 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.

Production and Suppliers



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



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

Intellectual Property



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

Marketing



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

Product Development



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The market for Machine Vision is characterized by rapid and
continuous technological development and product innovation. The
Company believes that continued and timely development of new
products and enhancements to existing products is necessary to
maintain its competitive position. Accordingly, the Company
devotes a significant portion of its personnel and financial
resources to product development programs and seeks to maintain
close relationships with customers to remain responsive to their
needs. The Companys net engineering and development costs
amounted to $852,000, $1.6 million, and $2.7 million for the years
ended December 31, 2002, 2001, and 2000, respectively. The
Companys current product development efforts are primarily
directed to Small Flat Panel Display Inspection products.

3



---



##### Table of Contents



Environmental Factors



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

Competition



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

Export Sales



| |                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales outside of the United States accounted for 54%, 46% and 61%
of the Companys net sales in 2002, 2001 and 2000. Management
expects that such sales will continue to represent a significant
percentage of its net sales. Most of the Companys export
billings are denominated in US dollars. On occasion other export
billings are denominated in the currency of the customers
country.



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

Major Customers



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The nature of the Companys product offerings may produce sales to
one or a small number of customers in excess of 10% of total 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 result of operations. For the year ended December 31,
2002 sales to Ness Display Co., LTD and Uniax Corporation
represented 13.2% and 13.7% of consolidated sales, respectively.
Amounts due from these customers represented 2.6% of the
respective outstanding trade receivable balance at December 31,
2002. In 2001 the Company did not have sales to a single customer
that exceeded 10% of total sales. For the year ended December 31,
2000, sales to Machines Dubuit, Hanky America and Protronix Ltd
represented 33% of consolidated sales. Amounts due from these
customers represented 40% of the respective outstanding trade
receivable balance at December 31, 2000.

Backlog



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, the Company had an order backlog of
approximately $399,000 compared to $251,000 at December 31, 2001.
Management expects that the Company will ship products
representing this entire backlog in 2003.

Employees



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of February 28, 2003, the Company had approximately 13
permanent employees, as compared to 18 at February 28, 2002 and 67
at February 28, 2001. None of the Companys employees are
represented by a labor union.

ITEM 2. Properties



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

ITEM 3. Legal Proceedings



| |                                                                  
| | -----------------------------------------------------------------
| | The Company is not currently involved in any material litigation.

4



---



##### Table of Contents



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



| |      
| | -----
| | None.




Part II

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



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys common stock is traded on the Over the Counter
Bulletin Board (OTCBB) under the symbol INVI. As of February 28,
2003, there were approximately 3,200 stockholders of the Company
including individual participants in security position listings.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys common stock was moved to the Over the Counter
Bulletin Board (OTCBB) effective with its delisting from The
Nasdaq SmallCap Market with the open of business August 16, 2001.
The Company was informed by Nasdaq that the delisting was decided
by the Nasdaq Listing Qualifications panel which approved the
Nasdaqs staff decision to delist the stock due to its failing to
maintain a minimum bid price of $1.00 for 30 consecutive trading
days as required by Marketplace Rule 4450(a)(5) for continued
listing.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Information on the current quotes on the stock, which will
continue to use the ticker symbol INVI, are available at the
OTCBBs website, www.otcbb.com and most financial information
portals, such as that provided at http://finance.yahoo.com or
http://quote.bloomberg.com. Integral Vision will continue to
provide information through filings with the Securities and
Exchange Commission (SEC) as required for continued listing on the
OTCBB. These filings can be found at the SECs website at
www.sec.gov.



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The table below shows the high and low sales prices for the
Companys common stock for each quarter in the past two years.
The closing sales price for the Companys common stock on February
28, 2003 was $0.17 per share.

|     |  |        |       |  |        |   |       |         |  |   |        |  |  |   |       | 
|---- |  | ------ | ----- |  | ------ | - | ----- | ------- |  | - | ------ |  |  | - | ----- | 
|     |  | 2002   |      
|     |  |        |      
|     |  | Mar 31 |       |  | Jun 30 |   |       | Sept 30 |  |   | Dec 31 | 
|     |  |        |       |  |        |   |       |         |  |   |        | 
|High |  | $      | 0.690 |  |        | $ | 0.680 |         |  | $ | 0.350  |  |  | $ | 0.170 | 
|Low  |  |        | 0.090 |  |        |   | 0.340 |         |  |   | 0.140  |  |  |   | 0.070 | 
|     |  |        |       |  |        |   |       |         |  |   |        | 

|     |  |      |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|     |  | 2001 |      
|     |  |      |      
|High |  | $    | 0.703 |  |  | $ | 0.280 |  |  | $ | 0.330 |  |  | $ | 0.230 | 
|Low  |  |      | 0.219 |  |  |   | 0.094 |  |  |   | 0.110 |  |  |   | 0.090 | 
|     |  |      |       |  |  |   |       |  |  |   |       | 



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

5



---



##### Table of Contents



ITEM 6. Selected Financial Data

|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |        |       |   |   |            |       |  
|-------------------------------------------------- | ------------------------------------ | - | ------------------------------------- | ----- | - | ---- | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | - | - | ---------- | ----- | -
|                                                   |                                      |   | Year ended December 31                |      
|                                                   |                                      |   |                                       |      
|                                                   |                                      |   | 2002                                  |       |   | 2001 |        |       | 2000 |   |        | 1999  |   |   | 1998   |      
|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |        |      
|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |        |       |   |   | (restated) |      
|                                                   |                                      |   |                                       |      
|                                                   |                                      |   | (in thousands, except per share data) |      
|                                                   |                                      |   |                                       |      
|Net revenues                                       |                                      | $ | 1,579                                 |       |   | $    | 2,633  |       |      | $ | 5,956  |       |   | $ | 10,743 |       |   | $ | 9,434      |      
|Gross margin                                       |                                      |   | 402                                   |       |   |      | (2,763 | )(g)  |      |   | (534   | )(f)  |   |   | (105   | )(a)  |   |   | 1,265 (c   | )(d) 
|Loss from continuing
operations                    |                                      |   | (2,203                                | )     |   |      | (8,135 | )     |      |   | (7,124 | )     |   |   | (5,671 | )     |   |   | (11,203    | )(e) 
|Income(loss) from
discontinued operations (h)      |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   | 1,030  |       |   |   | 19         |      
|Gain on disposal of
Welding division               |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   | 8,749  |       |   |   |            |      
|Extraordinary charge from
early retirement of debt |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   | (583   | )     |   |   |            |      
|Net income(loss)                                   |                                      |   | (2,203                                | )     |   |      | (8,135 | )     |      |   | (7,124 | )     |   |   | 3,525  | (b)   |   |   | (11,184    | )(e) 
|Basic and diluted earnings
(loss) per share:       |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |        |       |   |   |            |      
|                                                   | Continuing operations                |   |                                       | (0.23 | ) |      |        | (0.89 | )    |   |        | (0.79 | ) |   |        | (0.63 | ) |   |            | (1.24 | )
|                                                   | Discontinued Welding
operations      |   |                                       |      |   |      |        |      |      |   |        |      |   |   |        | 0.11  |   |   |            |      |  
|                                                   | Gain on disposal of
Welding division |   |                                       |      |   |      |        |      |      |   |        |      |   |   |        | 0.97  |   |   |            |      |  
|                                                   | Extraordinary charge                 |   |                                       |      |   |      |        |      |      |   |        |      |   |   |        | (0.06 | ) |   |            |      |  
|                                                   | Net income (loss)                    |   |                                       | (0.23 | ) |      |        | (0.89 | )    |   |        | (0.79 | ) |   |        | 0.39  |   |   |            | (1.24 | )
|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |       
|Weighted average shares                            |                                      |   | 9,430                                 |       |   |      | 9,198  |       |      |   | 9,028  |       |   |   | 9,025  |       |   |   | 9,025      |      
|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |       
|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |        |       |   |   |            |      
|                                                   |                                      |   | At December 31                        |      
|                                                   |                                      |   |                                       |      
|                                                   |                                      |   | 2002                                  |       |   | 2001 |        |       | 2000 |   |        | 1999  |   |   | 1998   |      
|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |        |      
|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |        |       |   |   | (restated) |      
|                                                   |                                      |   |                                       |      
|                                                   |                                      |   | (in thousands)                        |      
|                                                   |                                      |   |                                       |      
|Working capital                                    |                                      | $ | (2,006                                | )     |   | $    | (1,472 | )     |      | $ | 964    |       |   | $ | 5,810  |       |   | $ | 2,641      |      
|Total assets                                       |                                      |   | 1,308                                 |       |   |      | 1,964  |       |      |   | 11,164 |       |   |   | 19,058 |       |   |   | 34,320     |      
|Long-term debt,
net of current portion and OID     |                                      |   | 962                                   |       |   |      | 337    |       |      |   | 1,967  |       |   |   | 2,000  |       |   |   | 20,123     |      
|Stockholders equity                               |                                      |   | (2,303                                | )     |   |      | (672   | )     |      |   | 6,936  |       |   |   | 14,325 |       |   |   | 10,861     |      
|                                                   |                                      |   |                                       |       |   |      |        |       |      |   |        |       |   |   |       



| | (a) |  | In 1999, the Company charged-off inventory of $1.5
million resulting from a review of the marketability of
inventory related to a previously discontinued product line.  
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Includes an $8.7 million after tax gain on disposal of
the Welding Controls division and a $583,000 charge, net of
tax credit, for the early retirement of debt.         
|
| | (c) |  | In 1998, the Company charged-off inventory of $1.4
million as a result of Managements decision to no longer
pursue the sale of certain products for the audio CD market.
|
| | (d) |  | Net revenues included $1.5 million from the sale of
patent technology in 1998 which resulted in lower direct cost
of sales as a percentage of sales.                     
|
| | (e) |  | Includes a $4.2 million write-off of capitalized
software development costs.                                                                                             
|
| | (f) |  | In 2000, Management made a change in estimate,
primarily related to inventory, that resulted in a $666,000
charge to direct costs of sales.                              

6



---



##### Table of Contents





| | (g) |  | In 2001, Management made a change in estimate that
resulted in a $1.9 million charge to direct costs of sales to
write down inventory and capitalized software to estimated
net realizable values. The amount of the charge applicable
to inventory was $540,000 with the remaining $1.3 million
applicable to capitalized software.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (h) |  | See Note B to Notes to Consolidated Financial
Statements.                                                                                                                                                                                                                                                                         



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The above selected financial data should be read in conjunction
with Consolidated Financial Statements, including the notes
thereto (Part II  ITEM 8) and Managements Discussion and
Analysis of Financial Condition and Results of Operations (Part II
- ITEM 7). The Company has never paid a dividend and does not
anticipate doing so in the foreseeable future. The Company
expects to retain earnings to finance the expansion and its
development of business.

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

Overview



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

7



---



##### Table of Contents



Results of Operations



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

|                                         |                                                            |  |                        |      |  |      |        |        |      |  |        |       |  
|---------------------------------------- | ---------------------------------------------------------- |  | ---------------------- | ---- |  | ---- | ------ | ------ | ---- |  | ------ | ----- | -
|                                         |                                                            |  | Year ended December 31 |     
|                                         |                                                            |  |                        |     
|                                         |                                                            |  | 2002                   |      |  | 2001 |        |        | 2000 | 
|                                         |                                                            |  |                        |      |  |      |        |        |      | 
|Net revenues                             |                                                            |  | 100.0                  | %    |  |      | 100.0  | %      |      |  | 100.0  | %    
|Direct cost of sales (c)                 |                                                            |  | 74.5                   |      |  |      | 184.4  |        |      |  | 97.8   |      
|Specific inventory adjustment (a) (b)    |                                                            |  |                        |      |  |      | 20.5   |        |      |  | 11.2   |      
|                                         |                                                            |  |                        |      |  |      |        |        |     
|                                         | Gross margin                                               |  |                        | 25.5 |  |      |        | (104.9 | )    |  |        | (9.0  | )
|Other costs and expenses:                |                                                            |  |                        |      |  |      |        |        |      |  |        |      
|                                         | Marketing                                                  |  |                        | 35.3 |  |      |        | 56.3   |      |  |        | 39.2  |  
|                                         | General and administrative                                 |  |                        | 66.8 |  |      |        | 64.7   |      |  |        | 29.1  |  
|                                         | Engineering and development:                               |  |                        |      |  |      |        |        |      |  |        |       |  
|                                         | Expenditures                                               |  |                        | 53.9 |  |      |        | 73.9   |      |  |        | 55.9  |  
|                                         | Allocated to capitalized software and direct
cost of sales |  |                        |      |  |      |        | (14.6  | )    |  |        | (10.7 | )
|                                         |                                                            |  |                        |      |  |      |        |        |     
|Net engineering and development expenses |                                                            |  | 53.9                   |      |  |      | 59.3   |        |      |  | 45.2   |      
|                                         |                                                            |  |                        |      |  |      |        |        |     
|Total other costs and expenses           |                                                            |  | 156.0                  |      |  |      | 180.3  |        |      |  | 113.5  |      
|                                         |                                                            |  |                        |      |  |      |        |        |     
|Loss from operations                     |                                                            |  | (130.5                 | )    |  |      | (285.2 | )      |      |  | (122.5 | )    
|Gain on sales of assets                  |                                                            |  | 9.5                    |      |  |      | (4.2   | )      |      |  | 0.2    |      
|Other income(expense) (d)                |                                                            |  | 3.7                    |      |  |      | (16.6  | )      |      |  |       |      
|Interest income                          |                                                            |  | 0.7                    |      |  |      | 3.6    |        |      |  | 5.6    |      
|Interest expense                         |                                                            |  | (15.9                  | )    |  |      | (6.5   | )      |      |  | (3.0   | )    
|Foreign currency translation loss        |                                                            |  | (12.7                  | )    |  |      |        |        |      |  |        |      
|                                         |                                                            |  |                        |      |  |      |        |        |     
|Loss from operations before income taxes |                                                            |  | (145.2                 | )    |  |      | (308.9 | )      |      |  | (119.7 | )    
|Provision (credit) for income taxes      |                                                            |  | (5.7                   | )    |  |      |        |        |      |  |        |      
|                                         |                                                            |  |                        |      |  |      |        |        |     
|Net income(loss)                         |                                                            |  | (139.5                 | )%   |  |      | (308.9 | )%     |      |  | (119.7 | )%   
|                                         |                                                            |  |                        |      |  |      |        |        |     



| | (a) |  | In 2000, Management made a change in estimate, primarily related to
inventory, that resulted in a $666,000 charge to direct costs of sales.                                                                                                                                                                                         
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | In 2001, Management made a change in estimate that resulted in a
$1.9 million charge to direct costs of sales to write down inventory
and capitalized software to estimated net realizable values. The
amount of the charge applicable to inventory was $540,000 with the
remaining $1.3 million applicable to capitalized software.
|
| | (c) |  | Direct cost of sales includes capitalized software amortization as
a percentage of sales of 11.1%, 100% and 27.9% in 2002, 2001 and 2000,
respectively.                                                                                                                                                                             
|
| | (d) |  | In 2001, other income(expense) includes a loss on the sale of a
note receivable of $441,000 (see Note B of the notes to consolidated
financial statements).                                                                                                                                                                         

8



---



##### Table of Contents



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net revenues decreased $1.1 million (40.0%) to $1.6 million in
2002 from $2.6 million in 2001. Net revenue is reported net of
sales commission expense of approximately $83,000 in 2002 compared
to $84,000 in 2001. The decrease in net revenue was partially
attributable to the fact that the Company sold its packaging
product line in 2001 (see Note K to consolidated financial
statements). Sales from the Companys packaging product line
accounted for $516,000 of the net revenue in the 2001 period.
Additionally, sales of the Companys disc identification/print
inspection (CDiD/CDiP) products were lower in the 2002 period.
The Company sold its disc identification/print inspection product
line in early September 2002 (see Note K to consolidated financial
statements). Sales from the disc inspection product line
accounted for approximately $743,000 and $1.1 million of the
Companys net revenue for the years ended December 31, 2002 and
2001, respectively. The Companys revenue from service activities
was approximately $398,000 and $511,000 in 2002 and 2001,
respectively. These decreases were partially offset by increased
sales of the Companys flat panel display inspection product.
Sales from the flat panel display inspection product line
accounted for approximately $447,000 and $413,000 of the Companys
net revenue for the years ended December 31, 2002 and 2001,
respectively.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Direct costs of sales decreased $4.2 million (78.2%) to $1.2
million (approximately 74.5% of sales) in 2002 from $5.4 million
(approximately 205% of sales) in 2001. This was primarily
attributable to the lower sales volume and lower depreciation and
amortization expense in the 2002 period. Depreciation and
amortization expense was lower in 2002 primarily due to the 2001
sale of the Companys building (see Note J to consolidated
financial statements) and the write-off of capitalized software
costs in 2001. Management periodically performs an analysis of
the net realizable value of capitalized software costs. In 2001,
based on market conditions and the direction of the Company,
Management determined that capitalized software development costs
exceeded the estimated net realizable value of amounts capitalized
and a write-down was necessary. For the year ended December 31,
2001, $1.3 million of additional amortization was included in
costs of sales as a result of these analyses. Additionally, as a
result of the analyses, direct costs of sales for the year ended
December 31, 2001 includes a $540,000 charge for the write-down of
inventory. In the 2002 period, Management determined that
capitalized patent costs exceeded the estimated net realizable
value of amounts capitalized and a write-down was necessary. In
the year ended December 31, 2002, $74,000 of additional
amortization was included in costs of sales as a result of this
determination. The gross margin in the 2001 period was negative
due to the fact that the sales volume was not sufficient to cover
the fixed charges, depreciation and amortization, included in
direct cost of sales.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marketing costs decreased 62.4%, or $926,000, to $557,000 in 2002
compared to $1.5 million in 2001. This decrease is primarily
attributable to workforce reductions resulting from the
implementation of a cost reduction plan by Management in late 2000
and throughout 2001. Employee related costs in the marketing
division were $828,000 lower in 2002 compared to 2001 levels. The
plan also called for workforce reductions in both the general and
administrative department and the engineering department, as
evidenced by the figures below. Advertising costs were $106,000
lower in 2002 compared to 2001 levels.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General and administrative costs decreased 38.1%, or $649,000, to
$1.1 million in 2002 compared to $1.7 million in 2001. Messrs.
Charles Drake and Mark Doede each had loans from the Company. In
August 2001, the Compensation Committee of the Companys Board of
Directors resolved to forgive $100,000 of the outstanding balance
on each of their loans from the Company, which resulted in a
$200,000 charge to compensation expense. Additionally, Mr.
Charles Drake was provided with 400,000 shares of unregistered
stock of the Company, subject to certain sale restrictions. An
additional $56,000 of compensation expense was charged to general
and administrative expense in 2001 as a result of the issuance of
these shares. Exclusive of these infrequent charges, general and
administrative costs decreased 27.2% or $393,000 in 2002.
Employee related costs in the general and administrative division
were $398,000 lower in 2002 compared to 2001 levels.
Additionally, general and administrative costs included charges
for bad debts of approximately $99,000 in 2002 and $109,000 in
2001.

9



---



##### Table of Contents





| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Engineering and development expenditures decreased 56.2%, or $1.1
million, to $852,000 in 2002 compared to $1.9 million in 2001.
Employee related costs in the engineering and development division
were $947,000 lower in 2002 compared to 2001 levels.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of
global test equipment manufacturer DaTARIUS Technologies GmbH,
purchased Integral Visions assets related to inspection systems
for the optical disc industry, including the names Automatic
Inspection Systems and AID. The sale included Integral Visions
optical disc scanner products as well as its range of print and
identification code products used to inspect the printing stage of
disc manufacture. The consideration the Company received for the
technology consisted of a non-refundable $100,000 advanced minimum
royalty payment in addition to future royalties. The Company
expects to receive additional royalties in excess of $100,000 a
year for the three years following the sale. Additionally, the
Company received $25,000 from the sale of equipment to DaTARIUS.
The Company recognized a gain on the transaction of approximately
$112,000, which is included in gain on sale of assets in 2002,
primarily attributable to the advanced minimum royalty payment
received. The proceeds from the transaction were used primarily
to fund current operations.



| |                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included with the transaction was a Transition Services Agreement
whereby Integral Vision provides assembly and agreed upon
technical support services for the product line for up to twelve
months after the closing date at an agreed upon rate. Revenue
generated under this agreement was $24,000 in 2002 and is not
expected to be significant in the future.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 24, 2001, the Company completed the sale of certain of
its packaging applications software and most of the fixed assets
of its subsidiary, Integral Vision Ltd., to n.v. DIMACO, s.a. for
$500,000 in cash and future royalties (see Note K to consolidated
financial statements). Included in the transaction was the sale of
the worldwide exclusive rights to Integral Visions Full Bottle
Inspection System (FBIS), a product that performs certain
inspections on bottles at the end of a filling line. Integral
Vision will receive a royalty on each FBIS sold for the three
years following the sale. The proceeds from the transaction were
used primarily to fund current operations and to pay down existing
trade payables.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Also included with the transaction was a manufacturing agreement
whereby DIMACO will manufacture products for Integral Visions
Optical Disc and Display Inspection customers in Europe.



| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the terms of the sale, most of Integral Vision Ltd.s
personnel and costs transferred to DIMACO. However, Integral
Vision Ltd. maintained sales and service staff to support its
Optical Disc and Display Inspection customers in Europe.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2001, the Company recognized a gain on the transaction of
approximately $114,000, which is included in gain(loss) on sales
of assets, primarily attributable to the software included in the
sale.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This gain was offset by a $22,000 loss on the sale of the
Companys building in Farmington Hills, MI in July 2001 and a
$210,000 charge to write-down the carrying value of the Companys
fixed assets in 2001. On July 27, 2001, the Company completed a
transaction to sell the 50,000 square foot building it occupied in
Farmington Hills, MI for $2.45 million, at which time the existing
mortgages were retired. The Company continued to occupy a portion
of the building under a five-year lease agreement with the new
owner. Effective April 1, 2002, the Company entered into a new
lease agreement whereby it moved into a smaller space, 5,000
square feet, in exchange for a reduced lease rate. Given the
reduction in square footage, the Company disposed of a significant
portion of its equipment in 2002, which was written-down to its
estimated net realizable value in 2001. Net proceeds from the
sale was approximately $200,000 of which $186,000 was used to
prepay nine months of rent, a requirement of the lease agreement.

10



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 30, 1999, the Company completed an agreement to sell
substantially all the assets of its Welding Controls division for
$25.7 million, net of costs of the sale, for cash, the assumption
of certain liabilities, and a subordinated note (WTC note). The
interest bearing portion of the note, approximately $1.9 million,
carried an interest rate approximating prime plus 1% and required
quarterly payments beginning on February 15, 2000, with a February
15, 2001 maturity date. The non-interest bearing portion of the
note, $1.5 million, was discounted using an imputed interest rate
of 9% and matured on February 15, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2001, the Company sold 19.9% of the $1.7 million then
outstanding under the note agreement to third party investors in
exchange for consideration of $300,000. In May 2001, the Company
completed a transaction whereby it repurchased the portion of the
note previously sold to the investors and then sold the entire
note receivable, which had an outstanding balance of $1.1 million
at April 30, 2001, to a third party for $750,000. The Company
recognized a loss on sale of the note receivable of $441,000 in
the quarter ended March 31, 2001, which is included in other
income(expense) in 2001.



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other income(expense) in 2002 includes $18,000 of royalty income
from the Companys VisionBlox software. Additionally, the Company
received $24,000 for engineering fees and $19,000 for royalties in
connection with the DaTARIUS Technologies transaction.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest income decreased $85,000 to $11,000 in 2002 compared to
$96,000 in 2001. The income in the 2002 period is primarily
attributable to interest charged on the officers notes
receivable. The income in the 2001 period is primarily
attributable to $62,000 of interest charged on the officers notes
receivable and $34,000 of interest charged on the note receivable
that resulted from the sale of the Companys Welding Controls
division (see Note B to consolidated financial statements). The
decrease in interest income from the prior year period is
primarily attributable to the sale of the Companys note
receivable in May 2001 and the receipt of principal payments on
the outstanding balance of the note throughout the year.
Reductions to the officers notes receivable throughout 2001 also
contributed to the decrease in interest income in the 2002 period
(see Note M to consolidated financial statements).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest expense increased $79,000 to $251,000 in 2002 compared to
$172,000 in 2001. The increase is primarily attributable to the
debentures and Class 2 notes that were sold under the 2001 Note
and Warrant Purchase Agreement (see Note C to consolidated
financial statements). The increase was partially offset by a
reduction in mortgage interest as the Companys mortgages were
paid in full when the sale of its building closed on July 27, 2001
(see Note J to consolidated financial statements). Additionally,
the Company used proceeds from the sale of its note receivable in
May 2001 (see Note B to consolidated financial statements) to pay
in full its revolving line of credit at which time that agreement
was terminated.



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

Year Ended December 31, 2001, compared to the year ended December 31, 2000



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net revenues decreased $3.3 million (55.8%) to $2.6 million in
2001 from $6.0 million in 2000. Net revenue is reported net of
sales commission expense of approximately $84,000 in 2001 compared
to $142,000 in 2000. Sales from the Companys flat panel display
inspection product line decreased to $413,000 in 2001 compared to
$1.2 million in 2000. Sales from the Companys disc inspection
product line decreased to $1.1 million in 2001 compared to $3.1
million in 2000. Additionally, the decrease was partially
attributable to the fact that the Company sold its packaging
applications software in August 2001 (see Note K to consolidated
financial statements). Sales from the Companys packaging product
line accounted for $516,000 of the net revenue in 2001

11



---



##### Table of Contents





| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | compared to $115,000 in 2000. The Companys revenue from service
activities was approximately $511,000 and $635,000 in 2001 and
2000, respectively.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Direct costs of sales decreased $1.1 million (16.9%) to $5.4
million in 2001 from $6.5 million in 2000. Direct costs of sales
as a percentage of sales increased to 205% in 2001 compared to
109% in 2000. Management periodically performs an analysis of the
net realizable value of capitalized software costs. Based on
current market conditions and the direction of the Company,
Management determined that capitalized software development costs
exceeded the estimated net realizable value of amounts capitalized
and a write-down was necessary. For the year ended December 31,
2001, $1.3 million of additional amortization is included in costs
of sales as a result of these analyses. Additionally, as a result
of the analyses, direct costs of sales includes a $540,000 charge
for the write-down of inventory. In 2000, management made a
change in estimate, primarily related to inventory, that resulted
in a $666,000 charge to direct costs of sales. The Company was in
the process of liquidating the inventory related to previously
discontinued product lines, however, due to disappointing results
of the inventory liquidation effort, management decided that a
change in estimate was necessary. Exclusive of the aforementioned
adjustments, direct costs of sales as a percentage of sales would
have been 134% in 2001 compared to 97.8% in 2000. The gross
margin in both periods was negatively impacted by the low sales
volume as the fixed charges, depreciation and amortization,
included in costs of sales make up a significant portion of the
total costs of sales.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marketing costs decreased 36.5%, or $851,000, to $1.5 million in
2001 compared to $2.3 million in 2000. This decrease is primarily
attributable to workforce reductions resulting from the
implementation of a cost reduction plan by Management in late 2000
and throughout 2001. Employee related costs in the marketing
division were $477,000 lower in 2001 compared to 2000 levels. The
plan also called for workforce reductions in both the general and
administrative department and the engineering department, as
evidenced by the figures below. Advertising costs were $124,000
lower in 2001 compared to 2000 levels.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General and administrative costs decreased 1.7%, or $30,000, to
$1.7 million in 2001 compared to $1.7 million in 2000. Messrs.
Charles Drake and Mark Doede each had loans from the Company. In
August 2001, the Compensation Committee of the Companys Board of
Directors resolved to forgive $100,000 of the outstanding balance
on each of their loans from the Company, which resulted in a
$200,000 charge to compensation expense. Additionally, Mr.
Charles Drake was provided with 400,000 shares of unregistered
stock of the Company, subject to certain sale restrictions. An
additional $56,000 of compensation expense was charged to general
and administrative expense in 2001 as a result of the issuance of
these shares. General and administrative costs for 2001 also
includes a $109,000 charge for bad debts as certain of the
Companys debtors financial conditions have worsened over the
last several months. Exclusive of these infrequent charges,
general and administrative costs decreased 22.8% or $395,000 in
2001. Employee related costs in the general and administrative
division were $141,000 lower in 2001 compared to 2000 levels.
Reductions in expenditures for stockholder relations, facilities,
communications and other general overhead costs also contributed
to the decrease in general and administrative costs in 2001
compared to 2000 levels.



| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Engineering and development expenditures decreased 41.5%, or $1.4
million, to $1.9 million in 2001 compared to $3.3 million in 2000.
Employee related costs in the engineering and development
division were $1.1 million lower in 2001 compared to 2000 levels.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 24, 2001, the Company completed the sale of certain of
its packaging applications software and most of the fixed assets
of its subsidiary, Integral Vision Ltd., to n.v. DIMACO, s.a. for
$500,000 in cash and future royalties (see Note K to consolidated
financial statements). Included in the transaction was the sale of
the worldwide exclusive rights to Integral Visions Full Bottle
Inspection System (FBIS), a product that performs certain
inspections on bottles at the end of a filling line. Integral
Vision will receive a royalty on each FBIS sold for the three
years following the sale. The proceeds from the transaction were
used primarily to fund current operations and to pay down existing
trade payables.

12



---



##### Table of Contents





| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Also included with the transaction was a manufacturing agreement
whereby DIMACO will manufacture products for Integral Visions
Optical Disc and Display Inspection customers in Europe.



| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the terms of the sale, most of Integral Vision Ltd.s
personnel and costs transferred to DIMACO. However, Integral
Vision Ltd. maintained sales and service staff to support its
Optical Disc and Display Inspection customers in Europe.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2001, the Company recognized a gain on the transaction of
approximately $114,000, which is included in gain(loss) on sales
of assets, primarily attributable to the software included in the
sale.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This gain was offset by a $22,000 loss on the sale of the
Companys building in Farmington Hills, MI in July 2001 and a
$210,000 charge to write-down the carrying value of the Companys
fixed assets in 2001. On July 27, 2001, the Company completed a
transaction to sell the 50,000 square foot building it occupied in
Farmington Hills, MI for $2.45 million, at which time the existing
mortgages were retired. The Company continued to occupy a portion
of the building under a five-year lease agreement with the new
owner. Effective April 1, 2002, the Company entered into a new
lease agreement whereby it moved into a smaller space, 5,000
square feet, in exchange for a reduced lease rate. Given the
reduction in square footage, the Company disposed of a significant
portion of its equipment in 2002, which was written-down to its
estimated net realizable value in 2001. Net proceeds from the
sale was approximately $200,000 of which $186,000 was used to
prepay nine months of rent, a requirement of the lease agreement.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 30, 1999, the Company completed an agreement to sell
substantially all the assets of its Welding Controls division for
$25.7 million, net of costs of the sale, for cash, the assumption
of certain liabilities, and a subordinated note (WTC note). The
interest bearing portion of the note, approximately $1.9 million,
carried an interest rate approximating prime plus 1% and required
quarterly payments beginning on February 15, 2000, with a February
15, 2001 maturity date. The non-interest bearing portion of the
note, $1.5 million, was discounted using an imputed interest rate
of 9% and matured on February 15, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2001, the Company sold 19.9% of the $1.7 million then
outstanding under the note agreement to third party investors in
exchange for consideration of $300,000. In May 2001, the Company
completed a transaction whereby it repurchased the portion of the
note previously sold to the investors and then sold the entire
note receivable, which had an outstanding balance of $1.1 million
at April 30, 2001, to a third party for $750,000. The Company
recognized a loss on sale of the note receivable of $441,000 in
the quarter ended March 31, 2001, which is included in other
income(expense) in 2001.



| |                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest income decreased $234,000 to $96,000 in 2001 compared to
$330,000 in 2000. This decrease is primarily attributable to the
sale of the Companys note receivable in May 2001 and the receipt
of principal payments on the outstanding balance of the note
throughout the year (see Note B to consolidated financial
statements).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest expense was $172,000 in 2001 compared to $177,000 in
2000. Interest expense decreased due to the fact that the
Companys mortgages were paid in full when the sale of its
building closed on July 27, 2001 (see Note C to consolidated
financial statements). Additionally, the Company used proceeds
from the sale of its note receivable in May 2001 (see Note B to
consolidated financial statements) to pay in full its revolving
line of credit at which time that agreement was terminated.
However, these decreases were offset by additional interest
expense attributable to the debentures that were sold in 2001 (see
Note C to consolidated financial statements).

13



---



##### Table of Contents



Quarterly Information



| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table sets forth Consolidated Statements of
Operations data for each of the eight quarters in the two-year
period ended December 31, 2002. The unaudited quarterly
information has been prepared on the same basis as the annual
information and, in managements opinion, includes all adjustments
necessary for a fair presentation of the information for the
quarters presented.

|                                             |                    |   |               |       |   |        |      |       |        |   |                                      |        |   |   |        |       |   |        |        |       |        |   |        |        |   |   |        |       |   |   |        |       |  
|-------------------------------------------- | ------------------ | - | ------------- | ----- | - | ------ | ---- | ----- | ------ | - | ------------------------------------ | ------ | - | - | ------ | ----- | - | ------ | ------ | ----- | ------ | - | ------ | ------ | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                             |                    |   | Quarter Ended |      
|                                             |                    |   | 2002          |       |   | 2001   |     
|                                             |                    |   |               |       |   |        |     
|                                             |                    |   | Dec 31        |       |   | Sep 30 |      |       | Jun 30 |   |                                      | Mar 31 |   |   | Dec 31 |       |   | Sep 30 |        |       | Jun 30 |   |        | Mar 31 |  
|                                             |                    |   |               |       |   |        |      |       |        |   |                                      |        |   |   |        |       |   |        |        |       |        |   |        |        |  
|                                             |                    |   |               |       |   |        |      |       |        |   | (in thousands except per share data) |        |   |   |        |       |   |        |        |      
|Net revenues                                 |                    | $ | 197           |       |   | $      | 556  |       |        | $ | 503                                  |        |   | $ | 323    |       |   | $      | 476    |       |        | $ | 506    |        |   | $ | 669    |       |   | $ | 982    |      
|Gross margin                                 |                    |   | 115           |       |   |        | 116  |       |        |   | 158                                  |        |   |   | 13     |       |   |        | (1,189 | )     |        |   | (1,209 | )      |   |   | (328   | )     |   |   | (37    | )    
|Net income (loss)                            |                    |   | (365          | )     |   |        | (353 | )     |        |   | (850                                 | )      |   |   | (635   | )     |   |        | (2,061 | )     |        |   | (2,507 | )      |   |   | (1,608 | )     |   |   | (1,959 | )    
|                                             |                    |   |               |       |   |        |      |       |        |   |                                      |        |   |   |        |       |   |        |        |       |        |   |        |       
|Basic and diluted earnings
(loss) per share: |                    |   |               |       |   |        |      |       |        |   |                                      |        |   |   |        |       |   |        |        |       |        |   |        |        |   |   |        |       |   |   |        |      
|                                             | Net income (loss)* |   | $             | (0.04 | ) |        | $    | (0.04 | )      |   | $                                    | (0.09  | ) |   | $      | (0.07 | ) |        | $      | (0.22 | )      |   | $      | (0.27  | ) |   | $      | (0.18 | ) |   | $      | (0.22 | )
|                                             |                    |   |               |       |   |        |      |       |        |   |                                      |        |   |   |        |       |   |        |        |       |        |   |        |       



|* |  | The sum of the quarterly net income per share amounts may not equal the annual amounts reported. Net income
per share is computed independently for each quarter and the full year and is based on the respective weighted
average common shares outstanding.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | See MD&A for additional discussion                                                                                                                                                                                                                           

Seasonality and Quarterly Fluctuations



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys revenues and operating results have varied
substantially from quarter to quarter. Net revenues and earnings
are typically lower in the first and fourth quarters. The most
significant factors affecting these fluctuations are the seasonal
buying patterns of the Companys customers. The end users of the
Companys optical inspection products typically add manufacturing
capacity in the second and third quarters in anticipation of
higher production requirements in the fourth quarter. The Company
expects its net revenues and earnings to continue to fluctuate
from quarter to quarter.

Liquidity and Capital Resources



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating activities for 2002 used cash of approximately $1.5
million primarily due to the Companys loss from operations of
$2.2 million. The cash used in operating activities was partially
offset by a net decrease of $243,000 in certain working capital
items. Decreases in accounts receivable and prepaid expenses and
other current assets were partially offset by decreases in
accounts payable and other current liabilities and an increase in
inventory.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of
global test equipment manufacturer DaTARIUS Technologies GmbH,
purchased Integral Visions assets related to inspection systems
for the optical disc industry, including the names Automatic
Inspection Systems and AID. The sale included Integral Visions
optical disc scanner products as well as its range of print and
identification code products used to inspect the printing stage of
disc manufacture. The consideration the Company received for the
technology consisted of a non-refundable $100,000 advanced minimum
royalty payment in addition to future royalties. The Company
expects to receive additional royalties in excess of $100,000 a
year for the three years following the sale. Additionally, the
Company received $25,000 from the sale of equipment to DaTARIUS.
The Company recognized a gain on the transaction of approximately
$112,000, which was included in gain on sale of assets in the
third quarter of 2002, primarily attributable to the advanced
minimum royalty payment received. The proceeds from the
transaction were used primarily to fund current operations.

14



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included with the transaction was a Transition Services Agreement
whereby Integral Vision provides assembly and agreed upon
technical support services for the product line for up to twelve
months after the closing date at an agreed upon rate. Revenue
generated under this agreement was $24,000 in 2002 and is not
expected to be significant in the future.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys financing activities included the receipt of
$590,000 from the sale of the Companys senior debentures and the
receipt of $907,000 from the sale of the Companys Class 2 Notes.
The Company made principal payments of approximately $396,000 on
its Class 2 Notes in the period. The Company also received a
$70,000 short term advance from Max A. Coon, an officer of the
Company. The advance from Mr. Coon was repaid in 2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as
may be required, and ultimately to attain profitability. The
Companys anticipated cash provided by operating activities will
not be sufficient to support the Companys cash flow needs over
the next twelve months. Additionally, at December 31, 2002,
substantially all of the Companys $678,000 in trade accounts
payable was overdue, of which $221,000 was paid subsequent to
December 31, 2002. The Company also has an estimated $425,000 in
amounts owed to certain regulatory agencies for which no payment
arrangements have been made to date. In March 2001, the Companys
board of directors approved the issuance of up to $1.5 million of
senior debentures (increased to $2.5 million in March 2003), which
could provide additional financing to the Company. Additionally,
effective May 1, 2002, the Companys Note and Warrant Purchase
Agreement was amended to provide for Class 2 Notes and Class 2
Warrants which are subordinated to the prior purchasers. Class 2
Notes are working capital notes which are secured by accounts
receivable of the Company. At December 31, 2002, there was
approximately $215,000 in principal and interest due to the Class
1 Note holders under the terms of the agreement. Subsequent to
December 31, 2002, the holders of those Notes agreed to a
modification to the Note and Warrant Purchase Agreement which
extends the due dates, increases the maximum amount of Notes
outstanding to $2.5 million and changes the conversion price on
previously issued warrants to $.25 per share. The terms of the
Class 1 Notes were changed such that all accrued interest will be
due on December 31, 2003, which is projected to be approximately
$310,000. Additionally, the first principal payments on the Class
1 Notes will be due on March 31, 2004 and the maturity dates
extended to February 2007. The principal and interest due on
March 31, 2004 is projected to be approximately $204,000. The
Class 2 Notes were modified to have a due date, both principal and
accrued interest, of September 30, 2003. Principal and interest
due on the Class 2 notes on September 30, 2003 is projected to be
approximately $390,000. A principal payment of approximately
$154,000 was paid to a Class 2 Note holder in January 2003.
Management is projecting a cash shortfall over the next twelve
months of approximately $1.8 million, $360,000 of which was raised
subsequent to December 31, 2002, through placements of the
Companys Class 1 debentures. Charles J. Drake, the Companys
chairman, acquired $150,000 of these debentures. Management plans
to seek out additional investors for an additional $1.0 million of
its debentures to cover a portion of the anticipated shortfall,
which would bring the amount of debentures outstanding to the
maximum allowable of $2.5 million. The Company is currrently
assessing its options relative to the remaining $400,000 projected
shortfall. Management anticipates that it could be covered
through a combination of short term advances and further deferrals
of debt repayments from certain of its debt holders.
Additionally, if necessary, Management would attempt to obtain any
additional cash needed to enable the Company to continue as a
going concern through possible joint ventures and other strategic
alliances. Additional financing may or may not be available
through banks. There can be no assurance that Management will be
able to successfully execute these plans before the Company has
exhausted all of its resources. These uncertainties raise
substantial doubt about the Companys ability to continue as a
going concern.

15



---



##### Table of Contents



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.

Recently Issued Accounting Standards



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the FASB issued SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 are to be accounted for using the
purchase method and specifies the criteria for the recognition and
measurement of goodwill and other intangible assets acquired in a
business combination. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives are to no longer be
amortized but rather be tested at least annually for impairment.
SFAS No. 142 also requires that intangible assets with definite
useful lives will continue to be amortized over their respective
useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (which supersedes
SFAS No. 121). The Company adopted the provisions of SFAS No. 141
immediately and adopted SFAS No. 142 effective January 1, 2002.
There was no material impact resulting from the application of
SFAS No. 141 and SFAS No. 142.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Statement of Financial Accounting Standard No. 143, Accounting
for Asset Retirement Obligations (SFAS 143), which was released
in August 2001, addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and their associated asset retirement costs. SFAS 143
requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of
intangible long-lived assets that result from the acquisition,
construction, development, or normal use of the asset. The
enterprise is also required to record a corresponding increase to
the carrying amount of the related long-lived asset (i.e. the
associated asset retirement cost) and to depreciate that cost over
the life of the asset. The liability is changed at the end of each
period to reflect the passage of time (i.e. accretion expense) and
changes in the estimated future cash flows underlying the initial
fair value measurement. Because of the extensive use of estimates,
most enterprises will record a gain or loss when they settle the
obligation. We are required to adopt SFAS 143 for our fiscal year
beginning January 1, 2003; we do not expect the adoption of SFAS
143 to have a material impact on our financial position or results
of operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 also extends the reporting
requirements to report separately as discontinued operations,
components of an entity that have either been disposed of or
classified as held-for-sale. The Company adopted the provisions of
SFAS No. 144 effective January 1, 2002. There was no material
impact resulting from the application of SFAS No. 144.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 amends existing guidance on reporting gains
and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, as the use of
such extinguishments have become part of the risk management
strategy of many companies. SFAS 145 also amends SFAS 13 to
require sale-leaseback accounting for certain lease modifications
that have economic effects similar to sale-leaseback transactions.
The provisions of the Statement related to the

16



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | rescission of Statement No. 4 are applied in fiscal years
beginning after May 15, 2002. Earlier application of these
provisions is encouraged. The provisions of the Statement related
to Statement No. 13 were effective for transactions occurring
after May 15, 2002, with early application encouraged. The
adoption of SFAS 145 is not expected to have a material effect on
our financial statements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 146, Accounting
for Exit or Disposal Activities (SFAS 146). SFAS 146 addresses
significant issues regarding the recognition, measurement and
reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS 146 also addresses
recognition of certain costs related to terminating a contract
that is not a capital lease, costs to consolidate facilities or
relocate employees and termination of benefits provided to
employees that are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS
146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Adoption of SFAS 146 is not
expected to have a material impact on our financial position or
results of operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB Statements No. 5, 57 and 107 and
a rescission of FASB Interpretation No. 34. This Interpretation
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified
after December 31, 2002, and are not expected to have a material
effect on our financial statements. The disclosure requirements
are effective for financial statements of interim and annual
periods ending after December 31, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December 2002, the FASB issued SFAS 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures
in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending
after December 15, 2002, and are included in the notes to the
financial statements included in this Form 10-K.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in
the Interpretation. The Interpretation applies immediately to
variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest
entities obtained after January 31, 2003. Because we have no
involvement with any variable interest entities, the application
of this Interpretation is not expected to have a material effect
on our financial statements.

Managements Discussion of Critical Accounting Policies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys consolidated 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 period. The accounting policies discussed
below are considered by management to be the most important to an
understanding of our financial statements, because their
application places the most significant demands on managements
judgment and estimates about the effect of matters that are
inherently

17



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | uncertain. Our assumptions and estimates were based on the facts
and circumstances known at December 31, 2002, future events rarely
develop exactly as forecast, and the best estimates routinely
require adjustment. These policies are also discussed in Note 1 of
the Notes to Consolidated Financial Statements included in Item 8
of this report.



| |                    
| | -------------------
| | Revenue Recognition



| |                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recognizes revenue in accordance with SOP 97-2,
Software Revenue Recognition and Staff Accounting Bulletin No. 101
(SAB 101), 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.



| |            
| | -----------
| | Inventories



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inventories are stated at the lower of first-in, first-out cost or
market. Cost is computed using currently adjusted standards which
approximates actual costs on a first-in, first-out basis. The
Company assesses the recoverability of all inventory to determine
whether adjustments for impairment are required.



| |                                
| | -------------------------------
| | 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,
2002.

18



---



##### Table of Contents



ITEM 7a. Quantitative and Qualitative Disclosures about Market Risks



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is exposed to market risk stemming from changes in
foreign exchange rates, interest rates and prices of inventory
purchased for assembly into finished products. Changes in these
factors could cause fluctuations in earnings and cash flows. In
the normal course of business, exposure to interest rates is
managed by fixing the interest rates on the Companys long-term
debt whenever possible. The Company does not generally enter into
long-term purchase contracts but instead purchases inventory to
fill specific sales contracts thereby minimizing risks with
respect to inventory price fluctuations.



| |                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Foreign Exchange Rates  The Companys location outside the US is
in the United Kingdom. This is a sales office with net
non-current assets that are not significant. This office was
closed at December 31, 2002 due to the sales of the Companys
packaging and disc inspection product lines. On a consolidated
basis the Company denominates sales in the following currencies:



| |  |  | US Dollars    
| | - |  | --------------
|
| |  |  | Pound Sterling
|
| |  |  | Euros         
|
| |  |  | Yen           



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In managements opinion, as the currencies of Western Europe and
the UK are generally stable, there is no significant exposure to
losses due to currency fluctuations. However, because the Yen has
not been stable over the past several years, the Company does
enter into forward sales contracts equal to the future amount of
Yen to be received at the time the order is accepted. These
hedging transactions are on an order by order basis and at no time
are they speculative in nature. At December 31, 2002, the Company
had no open positions.

ITEM 8. Financial Statements and Supplementary Data



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Financial statements and quarterly results of operations are
submitted in separate sections of this report.

ITEM 9. Changes in and Disagreements with Accountants and Financial Disclosure



| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Moore Stephens Doeren Mayhew, the Companys independent auditors,
(Doeren) has informed the Company that it will resign following
completion of its audit of the Companys financial statements for
the year ended December 31, 2002. Doerens resignation is based
on its decision to terminate its engagements with any publicly
owned companies.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Doerens report on the Companys financial statements for the
current and prior year was qualified as to uncertainty regarding
the Companys ability to continue as a going concern. The reports
did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to any other uncertainty or as
to audit scope, or accounting principles. In connection with the
audits of the Companys financial statements for each of the years
in the two-year period ended December 31, 2002, there have been no
disagreements between the Company and Doeren on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved
to the satisfaction of Doeren, would have caused Doeren to make
reference to the matter in its report. The Company has provided
Doeren with a copy of this disclosure and has requested Doeren to
furnish it a letter addressed to the Commission stating whether it
agrees with the above statements. A copy of that letter, dated
March 19, 2003, is filed as Exhibit 16 to this Form 10-K.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consistent with Section 10A(i)(2) of the Securities Exchange Act
of 1934, as added by Section 202 of the Sarbanes-Oxley Act of
2002, the Company is responsible for listing the non-audit
services approved by the Companys Audit Committee to be performed
by

19



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Moore Stephens Doeren Mayhew, the Companys external auditor.
Non-audit services are defined as services other than those
provided in connection with an audit or a review of the financial
statements of the Company. In the period covered by this filing,
the Audit Committee approved the following non-audit services
currently being rendered to the Company by Moore Stephens Doeren
Mayhew, or to be rendered to the Company by Moore Stephens Doeren
Mayhew:



| |  |  | preparation of tax returns, and tax advice in
preparing for and in connection therewith;                                                                                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | all work required to be performed by Ernst &
Young LLP in connection with preparing and giving consents
required to be given in connection with the Companys
filings with the Securities and Exchange Commission;
|
| |  |  | accounting advice on the proper recording of
various transactions entered into, or to be entered into,
by the Company.                                                                                            




Part III

ITEM 10. Directors and Executive Officers of the Registrant



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following information is furnished concerning the nominees,
all of whom have been nominated by the Board of Directors and are
presently Directors of the Company.




DIRECTORS

|                   |  |                                                                                                                                                          |  |     |    |  |                |           |      | 
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- | -- |  | -------------- | --------- | ---- | 
|                   |  | Present Position with the Company                                                                                                                        |  |     |    |  |                | Served as |     
|Name               |  | and Principal Occupation                                                                                                                                 |  | Age |    |  | Director Since |          
|                   |  |                                                                                                                                                          |  |     |    |  |                |          
|Craig A. Black     |  | Director of Integral Vision,
Inc.; Vice President and Chief
Technology Officer of Eaton
Corporation, an Ohio-based,
diversified, industrial manufacturer |  |     | 51 |  |                |           | 2001 | 
|                  
|Max A. Coon        |  | Secretary  and
Vice Chairman of the
Board of Integral Vision, Inc.;
President and Chairman
of the Board of Maxco, Inc.                                   |  |     | 68 |  |                |           | 1978 | 
|                  
|Charles J. Drake   |  | Chairman of the Board
and Chief Executive Officer
of Integral Vision, Inc.                                                                               |  |     | 62 |  |                |           | 1978 | 
|                  
|Samuel O. Mallory  |  | Director of Integral Vision,
Inc.; Investor                                                                                                              |  |     | 70 |  |                |           | 2001 | 
|                  
|Vincent Shunsky    |  | Treasurer and Director
of Integral Vision, Inc.
Director, Treasurer and
Vice President of Finance
of Maxco, Inc.                                         |  |     | 54 |  |                |           | 1978 | 
|                  
|William B. Wallace |  | Director of Integral Vision,
Inc.; Senior Managing Director
of Equity Partners, Ltd.,
a Troy, Michigan based
private investment banking firm             |  |     | 58 |  |                |           | 1990 | 



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | All of the foregoing Directors and nominees have been engaged in
the principal occupation specified for the previous five years.

20



---



##### Table of Contents





| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Messrs. Coon, Drake and Shunsky are also Directors of Maxco, Inc.,
the stock of which is traded on the Over the Counter Bulletin
Board.



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2002, there were a total of
four meetings of the Board of Directors. Craig A. Black and
Samuel O. Mallory were the only nominees who attended fewer than
75% of the meetings held during the period.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Board of Directors has established a Compensation Committee
whose members are Max A. Coon and Vincent Shunsky. The
Compensation Committee is responsible for establishing
compensation for the Companys Chief Executive Officer, approving
executive compensation levels of all other executives and
authorizing the levels and timing of bonus payments. In addition,
this committee is responsible for administering the Companys
Stock Option Plans, including designating the recipients and terms
of specific option grants. The Compensation Committee met one
time during the period ended December 31, 2002 to establish
compensation criteria and levels and to grant options. The
Company does not have a standing nominating committee.




EXECUTIVE OFFICERS



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | The following table sets forth information concerning the
Executive Officers of the Company.

|                    |  |                                                                                                                       |  |     |    |  |               |           |      | 
|------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --- | -- |  | ------------- | --------- | ---- | 
|                    |  | Present Position with the Company                                                                                     |  |     |    |  |               | Served as |     
|Name                |  | and Principal Occupation                                                                                              |  | Age |    |  | Officer Since |          
|                    |  |                                                                                                                       |  |     |    |  |               |          
|Charles J. Drake    |  | Chairman of the Board
and Chief Executive Officer
of Integral Vision, Inc.                                            |  |     | 62 |  |               |           | 1978 | 
|                   
|Mark R. Doede       |  | President, Chief Operating
Officer and Chief Financial Officer
of Integral Vision, Inc.                               |  |     | 45 |  |               |           | 1989 | 
|                   
|Arthur D. Harmala   |  | Vice President of Marketing
of Integral Vision, Inc.                                                                  |  |     | 59 |  |               |           | 1995 | 
|                   
|Andrew Blowers      |  | Chief Technical Officer
of Integral Vision, Inc.                                                                      |  |     | 35 |  |               |           | 2002 | 
|                   
|Mark A. Michniewicz |  | Vice President of Engineering
of Integral Vision, Inc.                                                                |  |     | 35 |  |               |           | 2002 | 
|                   
|Max A. Coon         |  | Secretary and
Vice Chairman of the
Board of Integral Vision, Inc.;
President and Chairman
of the Board of Maxco, Inc. |  |     | 68 |  |               |           | 1978 | 
|                   
|Vincent Shunsky     |  | Treasurer and Director of
Integral Vision, Inc.
Treasurer, Vice President of
Finance and Director of Maxco, Inc.      |  |     | 54 |  |               |           | 1978 | 



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of the foregoing officers of the Company have been engaged in
the principal occupations specified above for the previous five
years except as follows:



| |                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mark R. Doede was appointed as President and Chief Operating
Officer of the Company in February 1998 and was appointed Chief
Financial Officer in September 2002. Prior to that time, Mr.
Doede served as Vice President and Chief Operating Officer of the
Welding Products Division of the Company since 1996 and served the
Company in various other capacities since 1980.

21



---



##### Table of Contents





| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Andrew Blowers was appointed as Chief Technical Officer in May
2002. Prior to that time, Mr. Blowers served as Manager of
Advanced Product Development for the Company since 1998 and as an
Application Engineer from 1996 to 1998.



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mark A. Michniewicz was appointed as Vice President of Engineering
in May 2002. Prior to that time, Mr. Michniewicz served as
Director of Engineering since 2000, Manager of Optical/Mechanical
Engineering from January 2000 to May 2000 and Optical/Mechanical
Engineer from 1994 to 2000.




Compliance with Reporting Requirements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Section 16(a) of the Securities Exchange Act of 1934 requires the
Companys Directors and Executive Officers or beneficial owners of
over 10% of any class of the Companys equity securities to file
certain reports regarding their ownership of the Companys
securities or any changes in such ownership. Reports on Form 3
were not timely filed on behalf of Messrs. Blowers and Michniewicz
upon their appointment as officers of the Company. Messrs. Doede
and Harmala failed to file timely reports on Form 4 to report the
expiration of employee stock options. Messrs. Drake and Coon
failed to file timely reports on Form 4 to report warrants that
were received in connection with the purchase of the Companys
debentures. All reports required to be filed to report the
aforementioned events were filed as of March 31, 2003.

ITEM 11. Executive Compensation



| |                                                            
| | -----------------------------------------------------------
| | Compensation Committee Interlocks and Insider Participation



| |                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Compensation Committee of the Board of Directors (the
Committee) consists of Max A. Coon and Vincent Shunsky. Messrs.
Coon and Shunsky, although officers of the Company, are also
officers and directors of Maxco, Inc., are paid by Maxco, Inc. and
receive no compensation from the Company. Mr. Charles J. Drake,
the Companys Chief Executive Officer, is a director of Maxco,
Inc.



| |                        
| | -----------------------
| | Overview and Philosophy



| |                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Committee is responsible for developing and making
recommendations to the Board with respect to the Companys
executive compensation policies. In addition, the Compensation
Committee, pursuant to authority delegated by the Board,
determines on an annual basis the compensation to be paid to the
Chief Executive Officer and each of the other executive officers
of the Company.



| |                                                                       
| | ----------------------------------------------------------------------
| | The objectives of the Companys executive compensation program are
to:



| |  |  | Support the achievement of desired Company performance.                                                                                                                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Provide compensation that will attract and retain
superior talent and reward performance.                                                                                                                
|
| |  |  | Align the executive officers interests with the
success of the Company by placing a portion of pay at risk,
with payout dependent upon corporate performance, and through
the granting of stock options.



| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The executive compensation program provides an overall level of
compensation opportunity that is competitive with companies of
comparable size and complexity. The Compensation Committee will
use its discretion to set executive compensation where, in its
judgment, external, internal or an individuals circumstances
warrant it.



| |                                       
| | --------------------------------------
| | Executive Officer Compensation Program



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys executive officer compensation program is comprised
of base salary, long-term incentive compensation in the form of
stock options, and various benefits, including medical and
deferred compensation plans, generally available to employees of
the Company.

22



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Base Salary                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | Due to the Companys circumstances, base salary levels for the
Companys executive officers were unchanged from the prior year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Stock Option Program                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The stock option program is the Companys long-term incentive plan
for executive officers and key employees. The objectives of the
program are to align executive and shareholder long-term interests
by creating a strong and direct link between executive pay and
shareholder return, and to enable executives to develop and
maintain a significant, long-term stock ownership position in the
Companys common stock.                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | In June 1999 a stock option plan allowing the issuance of options
on up to 500,000 shares of the Companys common stock was approved
by the Shareholders. This stock option plan provides for the
grant of both options intended to qualify as incentive stock
options within the meaning of Section 422A of the Internal
Revenue Code, as amended, and nonstatutory stock options which do
not qualify for such treatment.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | The stock option plan authorizes a committee of directors to award
executive and key employee stock options, as well as options to
directors and nonemployees who are in a position to materially
benefit the Company. Stock options are granted at an option price
equal to the fair market value of the Companys common stock on
the date of grant, have ten year terms and can have exercise
restrictions established by the committee.                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | A stock option plan authorizing options on 500,000 shares of
common stock of the Company on substantially the same terms was
approved by the Shareholders in 1995.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Deferred Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Effective July 1, 1986, the Company adopted a 401(k) Employee
Savings Plan. The 401(k) is a cash or deferred plan under which
employees may elect to contribute a certain portion of their
compensation which they would otherwise be eligible to receive in
cash. The Company has agreed to make a matching contribution of
20% of the employees contributions of up to 6% of their
compensation. In addition, the Company may make a profit sharing
contribution at the discretion of the Board. All full time
employees of the Company who have completed six months of service
are eligible to participate in the plan. Participants are
immediately 100% vested in all contributions. The plan does not
contain an established termination date and it is not anticipated
that it will be terminated at any time in the foreseeable future.
|
| | Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | The Company provides medical benefits to the executive officers
that are generally available to Company employees. In addition,
executive officers may be provided with other benefits, such as
life insurance and automobiles. The amount of perquisites, as
determined in accordance with the rules of the Securities and
Exchange Commission relating to executive compensation, did not
exceed 10% of salary for any executive officer for fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                        
|
| | Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Charles J. Drake has served as the Companys Chief Executive
Officer since 1978. His base salary for the 2002 year was
$160,000. No bonus was paid to Mr. Drake for 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Due to the Companys circumstances, Mr. Drakes salary was
unchanged from the prior year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | The Compensation Committee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |                            
| | ---------------------------
| | Max A. Coon
Vincent Shunsky

23



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Director Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Mr. Wallace earns $200 per meeting and $800 per month for his
responsibilities as the Audit Committee Chairperson.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Audit Committee Report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | For the year ended December 31, 2002 the board of directors
appointed an Audit Committee whose members were William B.
Wallace, Craig A. Black and Samuel O. Mallory. The Audit
Committee oversees the Companys financial reporting process on
behalf of the board of directors. Management has the primary
responsibility for the financial statements and the reporting
process including the systems of internal controls. In fulfilling
its oversight responsibilities, the committee reviewed the audited
financial statements to be included in the Companys Annual
Report with management including a discussion of the quality, not
just the acceptability, of the accounting principles, the
reasonableness of significant judgments, and the clarity of
disclosures in the financial statements.
|
| | The committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those
audited financial statements with generally accepted accounting
principles, their judgments as to the quality, not just the
acceptability, of the Companys accounting principles and such
other matters as are required to be discussed with the committee
under generally accepted auditing standards. In addition, the
committee has discussed with the independent auditors the
auditors independence from management and the Company including
the matters in the written disclosures required by the
Independence Standards Board.                                                                                                                                    
|
| | The committee discussed with the Companys independent auditors
the overall scope and plans for their respective audits. The
committee meets with the independent auditors, with and without
management present, to discuss the results of the examinations,
their evaluations of the Companys internal controls, and the
overall quality of the Companys financial reporting. The
committee held five meetings during the year ended December 31,
2002.                                                                                                                                                                                                                                                                                                                                                  
|
| | In reliance on the reviews and discussions referred to above, the
committee recommended to the board of directors (and the board has
approved) that the audited financial statements be included in the
Annual Report on Form 10-K for the year ended December 31, 2002
for filing with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | William B. Wallace
Craig A. Black
Samuel O. Mallory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

24



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Summary Compensation Table                                                                                                                                                                                                                                             
|
| | The following table sets forth the cash and noncash compensation
for each of the last three fiscal years awarded to or earned by
the Chief Executive Officer of the Company and to the other
executive officers whose compensation for the 2002 year exceeded
$100,000:

|                              |  |      |      |  |     |              |         |     |              |  |        |         |  |     |         |  |  |           |         |  
|----------------------------- |  | ---- | ---- |  | --- | ------------ | ------- | --- | ------------ |  | ------ | ------- |  | --- | ------- |  |  | --------- | ------- | -
|                              |  |      |      |  |     | Annual       |         |     | Long Term    | 
|                              |  |      |      |  |     | Compensation |         |     | Compensation | 
|                              |  |      |      |  |     |              |         |     |              | 
|                              |  |      |      |  |     |              |         |     |              |  |        |         |  |     |         |  |  | All Other |        
|                              |  |      |      |  |     | Salary       |         |     | Bonus        |  |        | Options |  |     | Comp1   | 
|Name and Principal Position   |  | Year |      |  | ($) |              |         | ($) |              |  | (#)    |         |  | ($) |        
|                              |  |      |      |  |     |              |         |     |              |  |        |         |  |     |        
|Charles J. Drake              |  |      | 2002 |  |     |              | 160,000 |     |              |  | 0      |         |  |     | 0       |  |  |           | 0       |  
|Chief Executive Officer       |  |      | 2001 |  |     |              | 160,000 |     |              |  | 0      |         |  |     | 0       |  |  |           | 156,000 | 2
|                              |  |      | 2000 |  |     |              | 160,000 |     |              |  | 0      |         |  |     | 0       |  |  |           | 520     |  
|Mark R. Doede                 |  |      | 2002 |  |     |              | 120,000 | 5   |              |  | 0      |         |  |     | 50,000  |  |  |           | 0       |  
|President, Chief              |  |      | 2001 |  |     |              | 120,000 | 3   |              |  | 0      |         |  |     | 100,000 |  |  |           | 100,000 | 4
|Operating Officer, and        |  |      | 2000 |  |     |              | 120,000 |     |              |  | 0      |         |  |     | 0       |  |  |           | 520     |  
|Chief Financial Officer       |  |      |      |  |     |              |         |     |              |  |        |         |  |     |         |  |  |           |         |  
|Arthur D. Harmala             |  |      | 2002 |  |     |              | 100,000 |     |              |  | 0      |         |  |     | 50,000  |  |  |           | 1,109   |  
|Vice President of Marketing   |  |      | 2001 |  |     |              | 100,000 | 5   |              |  | 0      |         |  |     | 40,000  |  |  |           | 1,200   |  
|                              |  |      | 2000 |  |     |              | 100,000 |     |              |  | 0      |         |  |     | 0       |  |  |           | 1,266   |  
|Andrew Blowers                |  |      | 2002 |  |     |              | 90,000  |     |              |  | 41,000 |         |  |     | 55,000  |  |  |           | 1,568   |  
|Chief Technical Officer       |  |      | 2001 |  |     |              | 80,354  |     |              |  | 0      |         |  |     | 30,000  |  |  |           | 1,853   |  
|                              |  |      | 2000 |  |     |              | 77,668  |     |              |  | 0      |         |  |     | 0       |  |  |           | 932     |  
|Mark A. Michniewicz           |  |      | 2002 |  |     |              | 97,750  |     |              |  | 0      |         |  |     | 55,000  |  |  |           | 1,268   |  
|Vice President of Engineering |  |      | 2001 |  |     |              | 105,269 |     |              |  | 0      |         |  |     | 30,000  |  |  |           | 1,263   |  
|                              |  |      | 2000 |  |     |              | 109,297 |     |              |  | 13,000 |         |  |     | 0       |  |  |           | 1,468   |  



| |    
| | ---
| | (1)
|
| | (2)
|
| | (3)
|
| | (4)
|
| | (5)
|
| | (6)

25



---



##### Table of Contents



Options

The following table summarizes option grants during 2002 to the executive
officers named in the Summary Compensation Table above, and the potential
realizable value of such options at assumed rates of appreciation.

|                    |  |                           |        |  |                                    |            |      |         |          |   |            |  |  |                               |          |  |         |  |        |  |  |  |        | 
|------------------- |  | ------------------------- | ------ |  | ---------------------------------- | ---------- | ---- | ------- | -------- | - | ---------- |  |  | ----------------------------- | -------- |  | ------- |  | ------ |  |  |  | ------ | 
|                    |  |                           |        |  |                                    |            |      |         |          |   |            |  |  | Potential Realizable Value at |         
|                    |  | Option Grants During 2002 |        |  | Assumed Annual Rates of Stock      |           
|                    |  | Individual Grants         |        |  | Price Appreciation for Option Term |           
|                    |  |                           |        |  |                                    |           
|                    |  |                           |        |  |                                    | % of Total |      |         |          |   |            |  |  |                               |          |  |         |  |        |  |  |  |       
|                    |  |                           |        |  |                                    | Options    |      |         | Exercise |   |            |  |  |                               |          |  |         |  |        |  |  | 
|                    |  | Options                   |        |  | Granted to                         |            |      | or Base |          |   |            |  |  |                               |          |  |         |  |        |  | 
|                    |  | Granted                   |        |  | Employees in                       |            |      | Price   |          |   | Expiration |  |  |                               |          |  |         |  |        | 
|Name                |  | (#)                       |        |  | Fiscal Year                        |            |      | ($/Sh)  |          |   | Date       |  |  | 5% ($)                        |          |  | 10% ($) | 
|                    |  |                           |        |  |                                    |            |      |         |          |   |            |  |  |                               |          |  |         | 
|Charles J. Drake    |  |                           | 01     |  |                                    |            |      |         |          |   |            |  |  |                               |          |  |         |  |        |  |  |  |        | 
|Mark R. Doede       |  |                           | 50,000 |  |                                    |            | 16.7 | %       |          | $ | 0.24       |  |  |                               | 03-12-12 |  |         |  | 19,547 |  |  |  | 31,125 | 
|Arthur D. Harmala   |  |                           | 50,000 |  |                                    |            | 16.7 | %       |          | $ | 0.10       |  |  |                               | 01-14-12 |  |         |  | 8,144  |  |  |  | 12,969 | 
|Andrew Blowers      |  |                           | 55,000 |  |                                    |            | 18.3 | %       |          | $ | 0.10       |  |  |                               | 01-14-12 |  |         |  | 8,959  |  |  |  | 14,266 | 
|Mark A. Michniewicz |  |                           | 55,000 |  |                                    |            | 18.3 | %       |          | $ | 0.10       |  |  |                               | 01-14-12 |  |         |  | 8,959  |  |  |  | 14,266 | 



---

|(1) |  | Mr. Drake relinquished options to purchase 144,000 shares to permit
options to be granted to other employees.
|--- |  | -------------------------------------------------------------------------------------------------------------

The following table summarizes the value of the options held by the executive
officers named in the Summary Compensation Table above as of December 31, 2002.
No options were exercised by such persons during 2002.




Year End Option Values

|                    |  |                 |  |  |               |          |  | 
|------------------- |  | --------------- |  |  | ------------- | -------- |  | 
|                    |  |                 |  |  |               | Value of | 
|                    |  | Number of       |  |  | Unexercised   |         
|                    |  | Unexercised     |  |  | In-the-Money  |         
|                    |  | Options at      |  |  | Options at    |         
|                    |  | FY-End          |  |  | FY-End        |         
|                    |  |                 |  |  |               |         
|                    |  | Exercisable/    |  |  | Exercisable/  |         
|Name                |  | Unexercisable   |  |  | Unexercisable |         
|                    |  |                 |  |  |               |         
|Charles J. Drake    |  | 150,000/56,0001 |  |  | $             | 0/0      | 
|Mark R. Doede       |  | 268,000/0       |  |  | $             | 0/0      | 
|Arthur D. Harmala   |  | 153,000/0       |  |  | $             | 0/0      | 
|Andrew Blowers      |  | 100,000/0       |  |  | $             | 0/0      | 
|Mark A. Michniewicz |  | 110,000/0       |  |  | $             | 0/0      | 



---



| | (1) |  | These options are not exercisable until Integral Vision common
stock reaches certain stated levels, as follows:
| | --- |  | ---------------------------------------------------------------------------------------------------------------

|            |  |                              |  | 
|----------- |  | ---------------------------- |  | 
|Stock Price |  | Number of Shares Exercisable | 
|            |  |                              | 
|$6          |  | 56,000                       | 



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2002, Mr. Drake relinquished the options to acquire 100,000
shares which would have become exercisable at $8 and 44,000 of the
remaining options which would have become exercisable at $6.

26



---



##### Table of Contents



ITEM 12. Security Ownership of Certain Beneficial Owners and Management

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of March 21, 2003 regarding the
beneficial ownership of the Companys Common Stock by (i) the Principal
Shareholder (Maxco, Inc.), (ii) the only other beneficial owners of more than
5% of the Companys outstanding stock that are known to the Company, (iii) each
of the Companys Directors, (iv) each of the Companys Executive Officers
listed in the Summary Compensation Table, above, and (v) all Officers and
Directors of the Company as a group.




Amount and Nature of Beneficial Ownership

|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  |  |  |  |  |  | 
|------------------------------------------ | ---------------------- |  | ---------------- | -- |  |  |  | ------- | - | ----------------- |  |  | ----- | - |  | ----- | ------- |  |  |  |  |  |  |  | 
|                                           |                        |  | Sole Voting and  |    |  |  |  |         |   | Shared Voting and |  |  |       |   |  |       |         |  |  |  |  |  | 
|                                           |                        |  | Investment Power |    |  |  |  |         |   | Investment Power  |  |  |       |   |  |       | Percent |  |  |  |  | 
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  |  |  | 
|Maxco, Inc.                                |                        |  | 2,699,959        | 1  |  |  |  |         |   |                   |  |  |       |   |  | 27.30 | %      
|                                           | 1118 Centennial Way    |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  |  | 
|                                           | Lansing, MI 48917      |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  |  | 
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|State Street Bank and Trust Company        |                        |  | 1,462,360        | 2  |  |  |  |         |   |                   |  |  |       |   |  | 13.43 | %      
|as Trustee of the Textron Master Trust    
|                                           | One Enterprise Drive   |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  |  | 
|                                           | North Quincy, MA 02171 |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  |  | 
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|J.N. Hunter                                |                        |  | 230,000          | 3  |  |  |  | 802,218 | 3 |                   |  |  | 10.00 | %
|Industrial Boxboard Corporation            |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|2249 Davis Court                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Hayward, California 94545                  |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|John R. Kiely, III                         |                        |  | 978,943          | 4  |  |  |  | 10,200  |   |                   |  |  |       |   |  | 9.54  | %      
|17817 Davis Road                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Dundee, MI 48131                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Charles J. Drake                           |                        |  | 2,291,125        | 5  |  |  |  |         |   |                   |  |  |       |   |  | 20.40 | %      
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Max A. Coon                                |                        |  | 477,259          | 6  |  |  |  |         |   |                   |  |  |       |   |  | 4.98  | %      
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Mark R. Doede                              |                        |  | 297,136          | 7  |  |  |  |         |   |                   |  |  |       |   |  | 3.06  | %      
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Arthur D. Harmala                          |                        |  | 155,000          | 8  |  |  |  |         |   |                   |  |  |       |   |  | 1.62  | %      
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Andrew Blowers                             |                        |  | 104,162          | 9  |  |  |  |         |   |                   |  |  |       |   |  | 1.09  | %      
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Mark A. Michniewicz                        |                        |  | 110,100          | 10 |  |  |  |         |   |                   |  |  |       |   |  | 1.15  | %      
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Vincent Shunsky                            |                        |  | 21,183           | 6  |  |  |  | 2,000   |   |                   |  |  |       |   |  | *     |        
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Craig A. Black                             |                        |  | 20,000           | 11 |  |  |  |         |   |                   |  |  |       |   |  | *     |        
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|Samuel O. Mallory                          |                        |  | 28,000           | 12 |  |  |  |         |   |                   |  |  |       |   |  | *     |        
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|William B. Wallace                         |                        |  | 21,000           | 13 |  |  |  | 3,000   |   |                   |  |  |       |   |  | *     |        
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|All Directors and Officers                 |                        |  | 3,524,965        | 14 |  |  |  | 5,000   |   |                   |  |  |       |   |  | 29.31 | %      
|as a Group (8 persons)                     |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |        
|                                           |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 
|* Beneficial ownership does not exceed 1%. |                        |  |                  |    |  |  |  |         |   |                   |  |  |       |   |  |       |         |  |  | 



| | (1) |  | Includes warrants for the purchase of 459,354 shares of Integral
Vision Common Stock.                                                                                                        
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Represents warrants for the purchase of Integral Vision Common
Stock.                                                                                                                        
|
| | (3) |  | Includes warrants for the purchase of 897,218 shares of Integral
Vision Common Stock, including warrants for the purchase of 150,000
shares held by Industrial Boxboard Corporation, of which

27



---



##### Table of Contents





| |      |  | Mr. Hunter and his spouse are the sole shareholders, and warrants for the
purchase of 597,218 shares held by the corporations Employee Profit
Sharing Plan, of which Mr. and Mrs. Hunter are the sole trustees. In
addition, the corporation holds 4,000 shares of the Integral Vision
common stock and 51,000 shares are held by the Employee Profit Sharing
Plan. The balance of the shares and warrants are held by Mr. Hunter in
his IRA.           
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (4)  |  | Includes warrants for the purchase of 940,343 shares of Integral
Vision Common Stock, including warrants for the purchase of 92,603
shares held by a trust of which Mr. Kiely is the sole trustee.                                                                                                                                                                                                                                                       
|
| | (5)  |  | Includes 150,000 shares on which Mr. Drake holds options which he
is eligible to exercise and warrants for the purchase of 1,650,000
shares of Integral Vision Common Stock.                                                                                                                                                                                                                                                                             
|
| | (6)  |  | Includes warrants for the purchase of 150,000 shares of Integral
Vision stock held by Mr. Coon as custodian under the Uniform Transfers
to Minors Act. Does not include shares of the Company held by Maxco,
Inc., of which Mr. Coon is the President and Chairman of the Board and
the owner of 31.3% of its common stock, or shares of the Company held
by the Maxco, Inc. Employee Profit Sharing Plan of which Messrs. Coon
and Shunsky are trustees.
|
| | (7)  |  | Includes 268,000 shares on which Mr. Doede holds options which he
is eligible to exercise.                                                                                                                                                                                                                                                                                                                                                               
|
| | (8)  |  | Includes 153,000 shares on which Mr. Harmala holds options which he
is eligible to exercise.                                                                                                                                                                                                                                                                                                                                                             
|
| | (9)  |  | Includes 100,000 shares on which Mr. Blowers holds options which he
is eligible to exercise.                                                                                                                                                                                                                                                                                                                                                             
|
| | (10) |  | Includes 110,000 shares on which Mr. Michniewicz holds options
which he is eligible to exercise.                                                                                                                                                                                                                                                                                                                                                         
|
| | (11) |  | Represents 20,000 shares on which Mr. Black holds options which he
is eligible to exercise.                                                                                                                                                                                                                                                                                                                                                              
|
| | (12) |  | Includes 10,000 shares on which Dr. Mallory holds options which he
is eligible to exercise.                                                                                                                                                                                                                                                                                                                                                              
|
| | (13) |  | Includes 2,000 shares on which Mr. Wallace holds options which he
is eligible to exercise.                                                                                                                                                                                                                                                                                                                                                               
|
| | (14) |  | Includes 813,000 shares on which eight officers or directors hold
options which they are eligible to exercise and warrants for the
purchase of 1,800,000 shares of Integral Vision Common Stock held by
two officers.                                                                                                                                                                                                                                    

ITEM 13. Certain Relationships and Related Transactions



| |                                        
| | ---------------------------------------
| | Transactions With Management and Others



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2001, Messrs. Charles Drake (Chairman and CEO of the Company)
and Mark Doede (President and COO of the Company) each had loans
from the Company, the outstanding balances of which were included
in the stockholders equity section of the consolidated balance
sheet. In August 2001, the Compensation Committee of the
Companys Board of Directors resolved to forgive $100,000 of the
outstanding balance on each of their loans from the Company. The
$200,000 charge for the write-down of the notes was included in
general and administrative expenses in the consolidated statement
of operations in 2001. Mr. Drake also made approximately $250,000
in principal payments on his note in 2001. Mr. Drake paid off the
remaining $63,000 principal balance of this note in 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At June 30, 2002, Mr. Drake had received other short-term advances
from the company of approximately $83,000. This debt was incurred
by Mr. Drake in order to satisfy certain personal obligations and
was evidenced by a note bearing interest at 5.5% per annum with a
December 31, 2002 maturity date. At December 31, 2002,
approximately $30,000 was still outstanding on the note. In March
2003, this debt obligation, including accrued interest, was paid
in full. Mr. Drake received no new advances from the Company
subsequent to June 30, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2002, Mr. Doede paid off the remaining principal balance of his
note, approximately $188,000. This debt was incurred by Mr. Doede
in order to satisfy certain personal obligations and was evidenced
by a promissory note bearing interest at 9%. Mr. Doede received
no new advances from the Company subsequent to June 30, 2002. Mr.
Doede has also voluntarily deferred approximately $49,000 of his
wages.



| |                                                                         
| | ------------------------------------------------------------------------
| | Mr. Harmala has voluntarily deferred approximately $19,000 of his
wages.

28



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Maxco, Inc., the Companys principal shareholder, advanced the
Company $138,855 in 2001 to permit the Company to meet its
obligations. This loan is evidenced by a written document and
provides for interest at the rate of prime plus 0.5%. The Company
believes that the terms of this transaction are at least as
favorable as it could obtain from outside sources.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Max A. Coon, Secretary and Vice Chairman of the Board of Integral
Vision, advanced the Company $70,000 to address short term capital
needs. The advance from Mr. Coon was repaid in 2003.

ITEM 14. Controls and Procedures

Controls and Procedures



| | a) |  | Evaluation of disclosure controls and procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Our chief executive officer and chief financial officer have each
reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Securities Exchange Act of
1934 Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days
before the filling date of this report. Based on that evaluation,
our chief executive officer and chief financial officer have each
concluded that our current disclosure controls and procedures are
effective to ensure that information required to be disclosed in
our 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.
|
| | b) |  | Changes in internal controls                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |    |  | There have not been any significant changes in our internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weakness, and therefore no
corrective actions were taken.                                                                                                                                                                                                                                                                                                                                                                                                                            




PART IV

ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) and (2) The response to this portion of ITEM 15 is submitted as a separate section of this report.



|(3) |  | Listing of exhibits.
|--- |  | --------------------

|        |  |                                                                                                                                                                                                                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                         
|Number  |  | Description of Document                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                         
|3.1     |  | 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     |  | Note and Warrant Purchase Agreement (filed as Exhibit 4.1 to the
registrants Form 8-K dated July 15, 1997, SEC file 0-12728, and
incorporated herein by reference).                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                         
|4.3     |  | Form of Integral Vision, Inc. Common Stock Purchase Warrant Certificate
(filed as Exhibit 4.3 to registrants Form 8-K dated July 15, 1997, SEC
file 0-12728, and incorporated herein by reference).                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                         
|4.4     |  | Note and Warrant Purchase Agreement dated March 29, 2001 including Form
of Integral Vision, Inc. 15% Senior Subordinated Secured Note and Integral
Vision, Inc. Common Stock Purchase Warrant Certificate (filed as Exhibit
4.4 to registrants Form 10-K for the year ended December 31, 2000, SEC
file 0-12728, and incorporated herein by reference).
|        |  |                                                                                                                                                                                                                                                                                                                                                         
|4.5     |  | Form of amended Note and Warrant Purchase Agreement including Form of
Integral Vision, Inc. 10% Secured Note and Integral Vision, Inc. Common
Stock Purchase Warrant Certificate (filed as Exhibit 4.5 to registrants
Form 10-Q for the quarter ended June 30, 2001, SEC file 0-12728, and
incorporated herein by reference).                          

29



---



##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.6   |  | Form of Second Amended Note and Warrant Purchase Agreement including
Form of Integral Vision, Inc. Class 2 Note and Integral Vision, Inc.
Class 2 Common Stock Purchase Warrant Certificate (filed as Exhibit 4.6
to registrants Form 10-Q for the quarter ended March 31, 2002, SEC file
0-12728, and incorporated herein by reference).
|      |  |                                                                                                                                                                                                                                                                                                                                           
|4.7   |  | Consent to Modifications dated March 17, 2003 modifying the terms of the
Second 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).                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                           
|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* |  | Patent License Agreement dated October 4, 1995 by and between Integral
Vision, Inc. and Square D Company (filed as Exhibit 10.24 to the
registrants Form 10-Q for the quarter ended September 30, 1995, SEC File
0-12728, and incorporated herein by reference).                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                           
|10.9  |  | Asset Sale Purchase Agreement between the registrant and n.v. DIMACO,
s.a. (filed as exhibit 10.12 to the registrants Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by reference).                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                           
|10.10 |  | Asset Sale Purchase Agreement between the registrant and DaTARIUS
Technologies, Inc. (filed as exhibit 10.13 to the registrants Form 10-Q
for the quarter ended September 30, 2002 and incorporated herein by
reference).                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                           
|16    |  | Letter regarding change in certifying accountant.                                                                                                                                                                                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                           
|99.1  |  | Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
§1350, as adopted).                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                                                                                                           
|21    |  | Subsidiary of the registrant.                                                                                                                                                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                                                                                                           
|23    |  | Consent of Moore Stephens Doeren Mayhew, independent auditors.                                                                                                                                                                                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                                           
|(b)   |  | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                      

| |  |     |  |                                                                                                                                                    
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  |     |  |                                                                                                                                                    
| |  | (1) |  | On September 11, 2002, a Form 8-K was filed to report
an event under Item 5. No financial statements were included in
the report.                  
| |  |     |  |                                                                                                                                                    
| |  | (2) |  | On March 18, 2003, a Form 8-K was filed to report the
resignation of the Companys certifying accountant.                                          
| |  |     |  |                                                                                                                                                    
| |  | (3) |  | On March 24, 2003, a Form 8-K/A was filed to amend an
8-K filed on March 18, 2003 reporting the resignation of the
Companys certifying accountant.

|    |  |                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------
|(c) |  | Exhibits  The response to this portion of ITEM 15 is submitted as a
separate section of this report.                     
|    |  |                                                                                                                           
|(d) |  | Financial statement schedules  The response to this portion of ITEM 15
is submitted as a separate section of this report.

*     The Company has been granted confidential treatment with respect to certain
portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended.

30



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  |                                                                              |                     
|-------------------- |  | ---------------------------------------------------------------------------- | --------------------
|Date: March 29, 2003 |  | INTEGRAL VISION, INC.                                                       
|                     |  |                                                                             
|                     |  | By:                                                                          | /S/ CHARLES J. DRAKE
|                     |  | Charles J. Drake, Chairman of
the Boardand Chief Executive
Officer          
|                     |  |                                                                             
|                     |  | By:                                                                          | /S/ MARK R. DOEDE   
|                     |  | Mark R. Doede, President, Chief
OperatingOfficer and Chief Financial
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, 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

Charles J. Drake |  | Chairman of the Board, Chief
Executive Officer, and Director
|                                       |  |                                                             
|/S/ MAX A. COON                        |  | Vice Chairman, Secretary and Director                       
|                                       |  |                                                             
|Max A. Coon                            |  |                                                             
|                                       |  |                                                             
|/S/ VINCENT SHUNSKY                    |  | Treasurer and Director                                      
|                                       |  |                                                             
|Vincent Shunsky                        |  |                                                             
|                                       |  |                                                             
|/S/ WILLIAM B. WALLACE                 |  | Director                                                    
|                                       |  |                                                             
|William B. Wallace                     |  |                                                             
|                                       |  |                                                             
|/S/ CRAIG A. BLACK                     |  | Director                                                    
|                                       |  |                                                             
|Craig A. Black                         |  |                                                             
|                                       |  |                                                             
|/S/ SAMUEL O. MALLORY                  |  | Director                                                    
|                                       |  |                                                             
|Samuel O. Mallory                      |  |                                                             

31



---



##### Table of Contents






CERTIFICATION

I, Charles J. Drake, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Integral Vision,
Inc.;                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 29, 2003



| | /S/ Charles J. Drake
Charles J. Drake
Chief Executive Officer
| | -------------------------------------------------------------

32



---



##### Table of Contents



CERTIFICATION

I, Mark R. Doede, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Integral Vision,
Inc.;                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 29, 2003



| | /S/ Mark R. Doede
Mark R. Doede
Chief Financial Officer
| | -------------------------------------------------------

33



---



##### Table of Contents



Annual Report on Form 10K

ITEM 15(a)(1) and (2), (c) and (d)

List of Financial Statements and Financial Statement Schedules

Certain Exhibits

Financial Statement Schedules

Year Ended December 31, 2002

INTEGRAL VISION, INC.

Farmington Hills, MI

34



---



##### Table of Contents






Form 10-K  ITEM 15(a)(1) and (2)
Integral Vision, Inc. and Subsidiary

List of Financial Statements and Financial Statement Schedules

| |  |        |  |                                                                                                                       
| |  | ------ |  | ----------------------------------------------------------------------------------------------------------------------
| |  | (a)(1) |  | The following consolidated financial statements of Integral
Vision, Inc. and subsidiary are included in ITEM 8:       
| |  |        |  |                                                                                                                       
| |  |        |  | Report of Moore Stephens Doeren Mayhew, Independent Auditors                                                          
| |  |        |  | Consolidated Balance Sheets-December 31, 2002 and 2001                                                                
| |  |        |  | Consolidated Statements of Operations-Years ended December
31, 2002, 2001 and 2000                                    
| |  |        |  | Consolidated Statements of Stockholders Equity (Deficit)
-Years ended December 31, 2002, 2001, and 2000              
| |  |        |  | Consolidated Statements of Cash Flows-Years ended December
31, 2002, 2001 and 2000                                    
| |  |        |  | Notes to Consolidated Financial Statements-December 31, 2002                                                          
| |  |        |  |                                                                                                                       
| |  | (2)    |  | The following Consolidated Financial Statement
schedule of Integral Vision, Inc. and subsidiary is submitted
herewith:
| |  |        |  |                                                                                                                       
| |  |        |  | Schedule II  Valuation and qualifying accounts                                                                        



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.

35



---



##### Table of Contents






Report of Independent Auditors

To the Board of Directors and Stockholders
Integral Vision, Inc.
Farmington Hills, MI

We have audited the accompanying consolidated balance sheets of Integral
Vision, Inc. and subsidiary as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 2002.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules for 2002, 2001 and 2000 as
listed in the accompanying index at ITEM 15(a). These consolidated financial
statements and the financial statement schedules are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedules based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Integral Vision, Inc. and subsidiary as of December 31, 2002 and 2001 and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement schedule for 2002, 2001
and 2000, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

The accompanying consolidated financial statements and the financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note O to the consolidated financial statements, the
Company is suffering recurring losses from operations and its difficulties in
generating sufficient cash flow to meet its obligations raise substantial doubt
about its ability to continue as a going concern. Managements plans in regard
to this matter are also described in Note O. The consolidated financial
statements and the financial statement schedule do not include any adjustments
that might result from the outcome of this uncertainty.

/S/ Moore Stephens Doeren Mayhew
Troy, Michigan
March 19, 2003

36



---



##### Table of Contents



Consolidated Balance Sheets
Integral Vision, Inc. and Subsidiary

|                                                                |                                                                                                                                              |   |                |         |   |      |       |         |  
|--------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | ------- | - | ---- | ----- | ------- | -
|                                                                |                                                                                                                                              |   | December 31    |        
|                                                                |                                                                                                                                              |   |                |        
|                                                                |                                                                                                                                              |   | 2002           |         |   | 2001 |      
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|                                                                |                                                                                                                                              |   | (in thousands) |        
|Assets                                                          |                                                                                                                                              |   |                |         |   |      |       |        
|Current assets                                                  |                                                                                                                                              |   |                |         |   |      |       |        
|                                                                | Cash                                                                                                                                         |   | $              | 81      |   |      | $     | 125     |  
|                                                                | Accounts receivable, less allowance of $170,000 ($179,000 in 2001)                                                                           |   |                | 153     |   |      |       | 332     |  
|                                                                | Inventories  Note A                                                                                                                         |   |                | 328     |   |      |       | 208     |  
|                                                                | Prepaid Rent  Note J                                                                                                                        |   |                |        |   |      |       | 91      |  
|                                                                | Note Receivable  Note M                                                                                                                     |   |                | 30      |   |      |       |        |  
|                                                                | Other current assets                                                                                                                         |   |                | 51      |   |      |       | 71      |  
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|Total current assets                                            |                                                                                                                                              |   | 643            |         |   |      | 827   |        
|Property and equipment  Note J                                 |                                                                                                                                              |   |                |         |   |      |       |        
|                                                                | Leasehold Improvements                                                                                                                       |   |                | 43      |   |      |       |         |  
|                                                                | Production and engineering equipment                                                                                                         |   |                | 153     |   |      |       | 704     |  
|                                                                | Furniture and fixtures                                                                                                                       |   |                | 73      |   |      |       | 457     |  
|                                                                | Vehicles                                                                                                                                     |   |                | 18      |   |      |       | 47      |  
|                                                                | Computer equipment                                                                                                                           |   |                | 203     |   |      |       | 1,153   |  
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|                                                                |                                                                                                                                              |   | 490            |         |   |      | 2,361 |        
|                                                                | Less accumulated depreciation                                                                                                                |   |                | 431     |   |      |       | 2,202   |  
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|                                                                |                                                                                                                                              |   | 59             |         |   |      | 159   |        
|Other assets                                                    |                                                                                                                                              |   |                |         |   |      |       |        
|                                                                | Capitalized computer software development costs, less accumulated amortization
of $7,301,000 ($7,837,000 in 2001)  Notes A, K and L         |   |                | 516     |   |      |       | 710     |  
|                                                                | Patents, less accumulated amortization of $382,000 ($485,000 in 2001)  Note A                                                               |   |                | 90      |   |      |       | 268     |  
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|                                                                |                                                                                                                                              |   | 606            |         |   |      | 978   |        
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|                                                                |                                                                                                                                              | $ | 1,308          |         |   | $    | 1,964 |        
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|Liabilities and Stockholders Equity(Deficit)                   |                                                                                                                                              |   |                |         |   |      |       |        
|Current liabilities                                             |                                                                                                                                              |   |                |         |   |      |       |        
|                                                                | Notes payable  Note C                                                                                                                       |   | $              | 967     |   |      | $     | 358     |  
|                                                                | Accounts payable                                                                                                                             |   |                | 678     |   |      |       | 993     |  
|                                                                | Accrued compensation and related costs  Note M                                                                                              |   |                | 331     |   |      |       | 427     |  
|                                                                | Accrued state income taxes  Note B                                                                                                          |   |                | 204     |   |      |       | 195     |  
|                                                                | Accrued interest  Note C                                                                                                                    |   |                | 170     |   |      |       | 30      |  
|                                                                | Other accrued liabilities                                                                                                                    |   |                | 95      |   |      |       | 206     |  
|                                                                | Customer deposits                                                                                                                            |   |                | 204     |   |      |       |        |  
|                                                                | Current maturities of long-term debt  Note C                                                                                                |   |                |        |   |      |       | 90      |  
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|Total current liabilities                                       |                                                                                                                                              |   | 2,649          |         |   |      | 2,299 |        
|Long-term debt, less current maturities and OID  Notes C and J |                                                                                                                                              |   | 962            |         |   |      | 337   |        
|Stockholders equity (deficit)                                  |                                                                                                                                              |   |                |         |   |      |       |        
|                                                                | Common stock, without par value, stated value $.20 per share; 20,000,000 shares authorized; 9,429,901 shares issued and outstanding  Note H |   |                | 1,886   |   |      |       | 1,886   |  
|                                                                | Additional paid-in capital  Note C                                                                                                          |   |                | 31,376  |   |      |       | 31,265  |  
|                                                                | Retained-earnings deficit                                                                                                                    |   |                | (35,565 | ) |      |       | (33,362 | )
|                                                                | Notes receivable from officers  Note M                                                                                                      |   |                |        |   |      |       | (250    | )
|                                                                | Accumulated translation adjustment  Note P                                                                                                  |   |                |        |   |      |       | (211    | )
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|Total stockholders equity (deficit)                            |                                                                                                                                              |   | (2,303         | )       |   |      | (672  | )      
|                                                                |                                                                                                                                              |   |                |         |   |      |      
|                                                                |                                                                                                                                              | $ | 1,308          |         |   | $    | 1,964 |        
|                                                                |                                                                                                                                              |   |                |         |   |      |      

See accompanying notes

37



---



##### Table of Contents



Consolidated Statements of Operations
Integral Vision, Inc. and Subsidiary

|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |       |      |        |       |       |  
|------------------------------------------------------------------------------------------ | ---------------------------------------------- | ------------------------------------------------------------------- | ------ | ------------------------------------- | --- | - | ------ | ----- | ----- | ---- | ------ | ----- | ----- | -
|                                                                                           |                                                |                                                                     |        | Year Ended December 31                |    
|                                                                                           |                                                |                                                                     |        |                                       |    
|                                                                                           |                                                |                                                                     |        | 2002                                  |     |   | 2001   |       |       | 2000 |       
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |       |      |       
|                                                                                           |                                                |                                                                     |        | (in thousands, except per share data) |    
|Net revenues                                                                               |                                                | $                                                                   | 1,579  |                                       |     | $ | 2,633  |       |       | $    | 5,956  |      
|Costs of sales:                                                                            |                                                |                                                                     |        |                                       |     |   |        |       |       |      |        |      
|                                                                                           | Direct costs of sales  Note L                 |                                                                     |        | 770                                   |     |   |        | 2,453 |       |      |        | 4,432 |      
|                                                                                           | Depreciation and amortization  Notes J, K & L |                                                                     |        | 407                                   |     |   |        | 2,943 |       |      |        | 2,058 |      
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|Total costs of sales                                                                       |                                                |                                                                     | 1,177  |                                       |     |   | 5,396  |       |       |      | 6,490  |      
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|Gross margin  Note A                                                                      |                                                |                                                                     | 402    |                                       |     |   | (2,763 | )     |       |      | (534   | )    
|Other costs and expenses:                                                                  |                                                |                                                                     |        |                                       |     |   |        |       |       |      |        |      
|                                                                                           | Marketing                                      |                                                                     |        | 557                                   |     |   |        | 1,483 |       |      |        | 2,334 |      
|                                                                                           | General and administrative  Note M            |                                                                     |        | 1,054                                 |     |   |        | 1,703 |       |      |        | 1,733 |      
|                                                                                           | Engineering and development:                   |                                                                     |        |                                       |     |   |        |       |       |      |        |       |      
|                                                                                           |                                                | Expenditures                                                        |        |                                       | 852 |   |        |       | 1,946 |      |        |       | 3,328 |  
|                                                                                           |                                                | Allocated to capitalized software and direct cost of sales  Note A |        |                                       |    |   |        |       | (384  | )    |        |       | (635  | )
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|                                                                                           | Net engineering and development expense        |                                                                     |        | 852                                   |     |   |        | 1,562 |       |      |        | 2,693 |      
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|Total other costs and expenses                                                             |                                                |                                                                     | 2,463  |                                       |     |   | 4,748  |       |       |      | 6,760  |      
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|Operating loss                                                                             |                                                |                                                                     | (2,061 | )                                     |     |   | (7,511 | )     |       |      | (7,294 | )    
|Gain(loss) on sales of assets  Notes J & K                                                |                                                |                                                                     | 150    |                                       |     |   | (111   | )     |       |      | 15     |      
|Other income(expense)  Note B                                                             |                                                |                                                                     | 59     |                                       |     |   | (437   | )     |       |      | 2      |      
|Interest income  Notes B & M                                                              |                                                |                                                                     | 11     |                                       |     |   | 96     |       |       |      | 330    |      
|Interest expense  Note C                                                                  |                                                |                                                                     | (251   | )                                     |     |   | (172   | )     |       |      | (177   | )    
|Foreign currency translation loss  Note P                                                 |                                                |                                                                     | (201   | )                                     |     |   |        |       |       |      |        |      
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|Loss from operations before income taxes                                                   |                                                |                                                                     | (2,293 | )                                     |     |   | (8,135 | )     |       |      | (7,124 | )    
|Provision (credit) for income taxes  Note D                                               |                                                |                                                                     | (90    | )                                     |     |   |        |       |       |      |        |      
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|Net loss                                                                                   |                                                | $                                                                   | (2,203 | )                                     |     | $ | (8,135 | )     |       | $    | (7,124 | )    
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|Basic and diluted earnings per share:                                                      |                                                |                                                                     |        |                                       |     |   |        |       |       |      |        |      
|                                                                                           | Net loss                                       |                                                                     | $      | (0.23                                 | )   |   | $      | (0.89 | )     |      | $      | (0.79 | )    
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      
|Weighted average number of shares of common stock and
common stock equivalents outstanding |                                                |                                                                     | 9,430  |                                       |     |   | 9,198  |       |       |      | 9,028  |      
|                                                                                           |                                                |                                                                     |        |                                       |     |   |        |       |      

See accompanying notes

38



---



##### Table of Contents



Consolidated Statements of Stockholders Equity (Deficit)
Integral Vision, Inc. and Subsidiary

|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |        |        |        |        |  
|----------------------------- | ----------------------- | -------------------------------------------- | ------------------ |  | ---------------------------------------------------------- | - | ----- | ------ | -- | - | ---------------- |  | --- | --------- | ------- | -------- | ------- | - | ---- | ------------- | --- | - | ----- | ----------- | ---- | - | ------ | ------ | ------ | ------ | -
|                              |                         |                                              |                    |  | Number of                                                  |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       | Accumulated |      |   |        |        |       
|                              |                         |                                              |                    |  | Common                                                     |   |       |        |    |   |                  |  |     |           |         | Retained |         |   |      |               |     |   | Other |             |      |   |        |       
|                              |                         |                                              |                    |  | Shares                                                     |   |       | Common |    |   | Additional Paid- |  |     | Earnings  |         |          | Officer |   |      | Comprehensive |     |   |       |             |     
|                              |                         |                                              |                    |  | Outstanding                                                |   |       | Stock  |    |   | In Capital       |  |     | (Deficit) |         |          | Notes   |   |      | Income(Loss)  |     |   | Total |            
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |            
|                              |                         |                                              |                    |  | (in thousands, except number of common shares outstanding) |  
|Balances at January 1, 2000   |                         |                                              | 9,024,901          |  |                                                            | $ | 1,805 |        |    | $ | 31,187           |  |     | $         | (18,103 | )        |         | $ | (602 | )             |     | $ | 38    |             |      | $ | 14,325 |       
|                              |                         | Net income for the year                      |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          | (7,124  | ) |      |               |     |   |       |             |      |   |        |        | (7,124 | )     
|                              |                         | Translation adjustments                      |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             | (195 | ) |        |        | (195   | )     
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |       
|                              |                         |                                              | Comprehensive loss |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |        |        |        | (7,319 | )
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |       
|                              |                         | Exercise of options to purchase 5,000
shares |                    |  | 5,000                                                      |   |       |        | 1  |   |                  |  | 8   |           |         |          |         |   |      |               |     |   |       |             |      |   |        |        | 9      |       
|                              |                         | Loans to Officers                            |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               | (79 | ) |       |             |      |   |        |        | (79    | )     
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |    
|Balances at December 31, 2000 |                         |                                              | 9,029,901          |  |                                                            |   | 1,806 |        |    |   | 31,195           |  |     |           | (25,227 | )        |         |   | (681 | )             |     |   | (157  | )           |      |   | 6,936  |       
|                              | Net loss for the year   |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         | (8,135   | )       |   |      |               |     |   |       |             |      |   |        | (8,135 | )     
|                              | Translation adjustments |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       | (54         | )    |   |        | (54    | )     
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |       
|                              |                         |                                              | Comprehensive loss |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |        |        |        | (8,189 | )
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |       
|                              |                         | Net officer note reductions                  |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               | 431 |   |       |             |      |   |        |        | 431    |       
|                              |                         | Issuance of 400,000 shares of common
stock   |                    |  | 400,000                                                    |   |       |        | 80 |   |                  |  | (24 | )         |         |          |         |   |      |               |     |   |       |             |      |   |        |        | 56     |       
|                              |                         | Issuance of warrants                         |                    |  |                                                            |   |       |        |    |   |                  |  | 94  |           |         |          |         |   |      |               |     |   |       |             |      |   |        |        | 94     |       
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |    
|Balances at December 31, 2001 |                         |                                              | 9,429,901          |  |                                                            |   | 1,886 |        |    |   | 31,265           |  |     |           | (33,362 | )        |         |   | (250 | )             |     |   | (211  | )           |      |   | (672   | )     
|                              |                         | Net loss for the year                        |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          | (2,203  | ) |      |               |     |   |       |             |      |   |        |        | (2,203 | )     
|                              |                         | Translation adjustments                      |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             | 211  |   |        |        | 211    |       
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |       
|                              |                         |                                              | Comprehensive loss |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |        |        |        | (1,992 | )
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |     |   |       |             |      |   |       
|                              |                         | Net officer note reductions                  |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               | 250 |   |       |             |      |   |        |        | 250    |       
|                              |                         | Issuance of warrants                         |                    |  |                                                            |   |       |        |    |   |                  |  | 111 |           |         |          |         |   |      |               |     |   |       |             |      |   |        |        | 111    |       
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |    
|Balance at December 31, 2002  |                         |                                              | 9,429,901          |  |                                                            | $ | 1,886 |        |    | $ | 31,376           |  |     | $         | (35,565 | )        |         | $ |     |               |     | $ |      |             |      | $ | (2,303 | )     
|                              |                         |                                              |                    |  |                                                            |   |       |        |    |   |                  |  |     |           |         |          |         |   |      |               |    

See accompanying notes

39



---



##### Table of Contents



Consolidated Statements of Cash Flows
Integral Vision, Inc. and Subsidiary

|                                                                                              |                                                                    |   |                        |      |   |      |        |       |      |   |        |       |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | - | ---------------------- | ---- | - | ---- | ------ | ----- | ---- | - | ------ | ----- | -
|                                                                                              |                                                                    |   | Year Ended December 31 |     
|                                                                                              |                                                                    |   |                        |     
|                                                                                              |                                                                    |   | 2002                   |      |   | 2001 |        |       | 2000 |  
|                                                                                              |                                                                    |   |                        |      |   |      |        |       |      |  
|                                                                                              |                                                                    |   | (in thousands)         |     
|Operating Activities                                                                          |                                                                    |   |                        |      |   |      |        |       |      |   |        |      
|Net loss                                                                                      |                                                                    | $ | (2,203                 | )    |   | $    | (8,135 | )     |      | $ | (7,124 | )    
|Adjustments to reconcile net loss to net cash used in operating activities:                   |                                                                    |   |                        |      |   |      |        |       |      |   |        |      
|                                                                                              | Depreciation                                                       |   |                        | 145  |   |      |        | 539   |      |   |        | 886   |  
|                                                                                              | Amortization                                                       |   |                        | 417  |   |      |        | 2,772 |      |   |        | 1,596 |  
|                                                                                              | Net (gain)loss on disposal of assets                               |   |                        | (150 | ) |      |        | 111   |      |   |        |       |  
|                                                                                              | Loss on sale of note receivable                                    |   |                        |      |   |      |        | 441   |      |   |        |       |  
|                                                                                              | Deemed compensation                                                |   |                        |      |   |      |        | 256   |      |   |        |       |  
|                                                                                              | Value assigned to warrants issued in connection with Class 2 Notes |   |                        | 11   |   |      |        |       |      |   |        |       |  
|Changes in operating assets and liabilities of continuing operations:                         |                                                                    |   |                        |      |   |      |        |       |      |   |        |      
|                                                                                              | Accounts receivable                                                |   |                        | 179  |   |      |        | 572   |      |   |        | 2,979 |  
|                                                                                              | Inventories                                                        |   |                        | (120 | ) |      |        | 1,019 |      |   |        | 755   |  
|                                                                                              | Prepaid and other                                                  |   |                        | 331  |   |      |        | 275   |      |   |        | 307   |  
|                                                                                              | Accounts payable and other current liabilities                     |   |                        | (141 | ) |      |        | 218   |      |   |        | (742  | )
|                                                                                              |                                                                    |   |                        |      |   |      |        |       |     
|Net cash used in operating activities                                                         |                                                                    |   | (1,531                 | )    |   |      | (1,932 | )     |      |   | (1,343 | )    
|Investing Activities                                                                          |                                                                    |   |                        |      |   |      |        |       |      |   |        |      
|Payments received on note receivable resulting from the sale of the
Welding Controls division |                                                                    |   |                        |      |   |      | 1,189  |       |      |   | 1,719  |      
|Proceeds from the sale of a portion of note receivable                                        |                                                                    |   |                        |      |   |      | 300    |       |      |   |        |      
|Repurchase of portion of note receivable                                                      |                                                                    |   |                        |      |   |      | (221   | )     |      |   |        |      
|Sale of property and equipment                                                                |                                                                    |   | 55                     |      |   |      | 2,362  |       |      |   |        |      
|Purchase of property and equipment                                                            |                                                                    |   | (43                    | )    |   |      |        |       |      |   | (149   | )    
|Investment in capitalized software                                                            |                                                                    |   |                        |      |   |      | (384   | )     |      |   | (635   | )    
|Proceeds from sale of packaging inspection technology                                         |                                                                    |   |                        |      |   |      | 500    |       |      |   |        |      
|Proceeds from sale of disc inspection technology                                              |                                                                    |   | 100                    |      |   |      |        |       |      |   |        |      
|Other                                                                                         |                                                                    |   | (7                     | )    |   |      | 14     |       |      |   | 44     |      
|                                                                                              |                                                                    |   |                        |      |   |      |        |       |     
|Net cash provided by investing activities                                                     |                                                                    |   | 105                    |      |   |      | 3,760  |       |      |   | 979    |      
|Financing Activities                                                                          |                                                                    |   |                        |      |   |      |        |       |      |   |        |      
|Proceeds from sale of Class 2 Notes                                                           |                                                                    |   | 907                    |      |   |      |        |       |      |   |        |      
|Repayments on Class 2 Notes                                                                   |                                                                    |   | (396                   | )    |   |      |        |       |      |   |        |      
|Proceeds from short term note receivable                                                      |                                                                    |   | 70                     |      |   |      |        |       |      |   |        |      
|Proceeds from (repayments on) revolving line of credit                                        |                                                                    |   |                        |      |   |      | (270   | )     |      |   | 270    |      
|Repayments on mortgage note payable                                                           |                                                                    |   |                        |      |   |      | (1,967 | )     |      |   | (33    | )    
|Proceeds from exercise of stock options                                                       |                                                                    |   |                        |      |   |      |        |       |      |   | 9      |      
|Proceeds from sales of debentures, net of discount                                            |                                                                    |   | 490                    |      |   |      | 416    |       |      |   |        |      
|Proceeds from sales of warrants in connection with Class 1 Notes                              |                                                                    |   | 100                    |      |   |      | 94     |       |      |   |        |      
|                                                                                              |                                                                    |   |                        |      |   |      |        |       |     
|Net cash provided by (used in) financing activities                                           |                                                                    |   | 1,171                  |      |   |      | (1,727 | )     |      |   | 246    |      
|                                                                                              |                                                                    |   |                        |      |   |      |        |       |     
|Effect of exchange rate changes                                                               |                                                                    |   | 211                    |      |   |      | (54    | )     |      |   | (195   | )    
|                                                                                              |                                                                    |   |                        |      |   |      |        |       |     
|Increase(decrease) in cash                                                                    |                                                                    |   | (44                    | )    |   |      | 47     |       |      |   | (313   | )    
|Cash at beginning of year                                                                     |                                                                    |   | 125                    |      |   |      | 78     |       |      |   | 391    |      
|                                                                                              |                                                                    |   |                        |      |   |      |        |       |     
|Cash at end of year                                                                           |                                                                    | $ | 81                     |      |   | $    | 125    |       |      | $ | 78     |      
|                                                                                              |                                                                    |   |                        |      |   |      |        |       |     
|Supplemental cash flow disclosure:                                                            |                                                                    |   |                        |      |   |      |        |       |      |   |        |      
|Interest paid                                                                                 |                                                                    | $ | 39                     |      |   | $    | 125    |       |      | $ | 178    |      

See accompanying notes

40



---



##### Table of Contents



Notes to Consolidated Financial Statements
Integral Vision, Inc. and Subsidiary

Note A  Significant Accounting Policies

Nature of Business



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Integral Vision, Inc. (or the Company) develops, manufactures
and markets microprocessor-based process monitoring and control
systems for use in industrial manufacturing environments. The
principle application for the Companys products is optical
display inspection (machine vision products). The Companys
product offerings include LCI-Professional, SharpEye and
ChromaSee. The Companys products are generally sold as capital
goods. Depending on the application, machine vision systems have
an indefinite life. Machine vision applications are more likely
to require replacement due to possible technological obsolescence
rather than physical wear.



| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of machine vision products are effected through Integral
Vision and through Integral Vision LTD., a wholly owned subsidiary
of the Company, located in Bedford, England. The Integral Vision
LTD office was closed at December 31, 2002 due to the sales of the
Companys packaging and disc inspection product lines.

Principles of Consolidation



| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements include the accounts of the
Company and its 100% owned subsidiary: Integral Vision LTD, United
Kingdom. Upon consolidation, all significant intercompany
accounts and transactions are eliminated.

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 period. Actual results could differ from those
estimates.

Translation of Foreign Currencies



| |                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The financial statements of Integral Vision LTD are translated
into United States dollar equivalents at exchange rates as
follows: balance sheet accounts at year-end rates; income
statement accounts at average exchange rates for the year.
Transaction gains and losses are reflected in net earnings and are
not significant.

Accounts Receivable



| |                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trade accounts receivable primarily represent amounts due from
equipment manufacturers and end-users in North America, Asia and
Europe. The Company 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.

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 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 result of operations. For the year ended December 31,
2002 sales to Ness Display Co., LTD and Uniax Corporation
represented 13.2%, and 13.7% of consolidated sales, respectively.
Amounts due from these customers represented 2.6% of the
respective outstanding trade

41



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | receivable balance at December 31, 2002. In 2001 the Company did
not have sales to a single customer that exceeded 10% of total
sales. For the year ended December 31, 2000, sales to Machines
Dubuit, Hanky America and Protronix Ltd represented 33% of
consolidated sales. Amounts due from these customers represented
40% of the respective outstanding trade receivable balance at
December 31, 2000.

Inventories



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inventories are stated at the lower of first-in, first-out cost or
market. Cost is computed using currently adjusted standards which
approximates actual costs on a first-in, first-out 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 (net of obsolescence
reserve of $561,000 in 2002 and $1,836,000 in 2001):

|                |  |                |     |  |      |   |     | 
|--------------- |  | -------------- | --- |  | ---- | - | --- | 
|                |  | 2002           |     |  | 2001 |  
|                |  |                |     |  |      |  
|                |  | (in thousands) |    
|Raw materials   |  | $              | 112 |  |      | $ | 43  | 
|Work in process |  |                | 216 |  |      |   | 81  | 
|Finished goods  |  |                |    |  |      |   | 84  | 
|                |  |                |     |  |      |  
|                |  | $              | 328 |  |      | $ | 208 | 
|                |  |                |     |  |      |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Due to
disappointing results of the inventory liquidation effort,
Management decided that a change in estimate was necessary. The
charge to direct costs of sales to write the inventory down to
estimated net realizable value was $540,000 in 2001 and $666,000
in 2000. Also included in direct costs of sales were non-cash
charges for depreciation, amortization and net realizable value
write downs related to capitalized software totalling $2.9 million
in 2001 and $1.9 million in 2000. A reconciliation of gross
margin as reported to gross margin from operations is presented in
the table below.

|                                                       |  |                |       |  |      |   |        |      |  |   |       |  
|------------------------------------------------------ |  | -------------- | ----- |  | ---- | - | ------ | ---- |  | - | ----- | -
|                                                       |  | 2002           |       |  | 2001 |   |        | 2000 | 
|                                                       |  |                |       |  |      |   |        |      | 
|                                                       |  | (in thousands) |      
|Net revenues                                           |  | $              | 1,579 |  |      | $ | 2,633  |      |  | $ | 5,956 |  
|Gross margin as reported                               |  |                | 402   |  |      |   | (2,763 | )    |  |   | (534  | )
|Adjustments to reconcile gross
margin from operations: |  |                |       |  |      |   |        |      |  |   |       |  
|Specific inventory adjustments                         |  |                |       |  |      |   | 540    |      |  |   | 666   |  
|Other non-cash charges                                 |  |                |       |  |      |   | 2,943  |      |  |   | 1,918 |  
|                                                       |  |                |       |  |      |   |        |      | 
|Gross margin from operations                           |  | $              | 402   |  |      | $ | 720    |      |  | $ | 2,050 |  
|                                                       |  |                |       |  |      |   |        |      | 

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.

42



---



##### Table of Contents



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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Total software development costs incurred internally by the
Company were $852,000, $1,946,000, and $3,328,000 in 2002, 2001
and 2000 respectively, of which $384,000 was capitalized in 2001
and $635,000 was capitalized in 2000. Amortization of the
capitalized costs amounted to $194,000, $2,639,000, and $1,661,000
in 2002, 2001, and 2000, respectively. Total accumulated
amortization at December 31, 2002 and 2001 was $7,301,000 and
$7,837,000, respectively.

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 (buildings-40 years, other
property and equipment-3 to 10 years).

Patents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Total patent costs incurred and capitalized by the Company were
$7,000, $50,000, and $137,000 in 2002, 2001 and 2000,
respectively. Patents are stated at cost less accumulated
amortization of $382,000 and $485,000 at December 31, 2002 and
2001, respectively. Amortization of the patents amounted to
$178,000, $112,000, and $54,000 in 2002, 2001, and 2000,
respectively. These costs are amortized on a straight-line basis
over the estimated useful lives of the assets (not to exceed 5
years).

Revenue Recognition



| |                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recognizes revenue in accordance with SOP 97-2,
Software Revenue Recognition and Staff Accounting Bulletin No. 101
(SAB 101), 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.

Concentrations of Credit and Other Risk



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Financial instruments which 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

43



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. The Company believes its credit
evaluation and monitoring mitigates its credit risk.

Advertising



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Advertising costs are expensed as incurred. Advertising costs
were approximately $75,000, $181,000, and $305,000 in 2002, 2001,
and 2000, respectively.

Income Taxes



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company accounts for income taxes in accordance with FASB
Statement No. 109, Accounting for Income Taxes(FAS 109), which
requires the use of the liability method in accounting for income
taxes. Under FAS 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.

Fair Value Disclosure



| |                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The carrying amounts of certain financial instruments such as
cash, accounts receivable, notes receivable, accounts payable and
long-term debt approximate their fair values. The fair value of
the long-term financial instruments is estimated using discounted
cash flow analysis and the Companys current incremental borrowing
rates for similar types of arrangements.

Comprehensive Income



| |                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company displays comprehensive income in the Consolidated
Statements of Stockholders Equity (Deficit). At December 31,
2001 and 2000, accumulated other comprehensive income (loss)
consisted of unrealized income (loss) resulting from foreign
currency translation adjustments. The accumulated unrealized
losses from foreign currency translation adjustments was
recognized in 2002.

Stock Options



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has elected to follow 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 has elected to
adopt only the disclosure provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, as amended by FASB
Statement No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. Pro forma information regarding net
income and earnings per share is required by FAS 123 and has been
determined as if the Company had accounted for its employee stock
options granted subsequent to September 30, 1995 under the fair
value method of FAS 123 (see Note H).

Reclassifications



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Certain amounts have been reclassified in prior periods
presentations to conform to the current years presentation.

44



---



##### Table of Contents



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,
2002.

Recently Issued Accounting Standards



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the FASB issued SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 are to be accounted for using the
purchase method and specifies the criteria for the recognition and
measurement of goodwill and other intangible assets acquired in a
business combination. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives are to no longer be
amortized but rather be tested at least annually for impairment.
SFAS No. 142 also requires that intangible assets with definite
useful lives will continue to be amortized over their respective
useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (which supersedes
SFAS No. 121). The Company adopted the provisions of SFAS No. 141
immediately and adopted SFAS No. 142 effective January 1, 2002.
There was no material impact resulting from the application of
SFAS No. 141 and SFAS No. 142.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Statement of Financial Accounting Standard No. 143, Accounting
for Asset Retirement Obligations (SFAS 143), which was released
in August 2001, addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and their associated asset retirement costs. SFAS 143
requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of
intangible long-lived assets that result from the acquisition,
construction, development, or normal use of the asset. The
enterprise is also required to record a corresponding increase to
the carrying amount of the related long-lived asset (i.e. the
associated asset retirement cost) and to depreciate that cost over
the life of the asset. The liability is changed at the end of each
period to reflect the passage of time (i.e. accretion expense) and
changes in the estimated future cash flows underlying the initial
fair value measurement. Because of the extensive use of estimates,
most enterprises will record a gain or loss when they settle the
obligation. We are required to adopt SFAS 143 for our fiscal year
beginning January 1, 2003; we do not expect the adoption of SFAS
143 to have a material impact on our financial position or results
of operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 also extends the reporting
requirements to report separately as discontinued operations,
components of an entity that have either been disposed of or
classified as held-for-sale. The Company adopted the provisions of
SFAS No. 144 effective January 1, 2002. There was no material
impact resulting from the application of SFAS No. 144.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 amends existing guidance on reporting gains
and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, as the use of
such extinguishments have become part of the risk management
strategy of many companies. SFAS 145 also amends SFAS 13 to
require sale-leaseback accounting for certain lease modifications
that have economic effects similar to sale-leaseback transactions.
The provisions of the Statement related to the rescission of
Statement No. 4 are applied in fiscal years beginning after May
15, 2002. Earlier application of these provisions is encouraged.
The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with
early application encouraged. The adoption of SFAS 145 is not
expected to have a

45



---



##### Table of Contents





| |                                             
| | --------------------------------------------
| | material effect on our financial statements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 146, Accounting
for Exit or Disposal Activities (SFAS 146). SFAS 146 addresses
significant issues regarding the recognition, measurement and
reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS 146 also addresses
recognition of certain costs related to terminating a contract
that is not a capital lease, costs to consolidate facilities or
relocate employees and termination of benefits provided to
employees that are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS
146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Adoption of SFAS 146 is not
expected to have a material impact on our financial position or
results of operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB Statements No. 5, 57 and 107 and
a rescission of FASB Interpretation No. 34. This Interpretation
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified
after December 31, 2002, and are not expected to have a material
effect on our financial statements. The disclosure requirements
are effective for financial statements of interim and annual
periods ending after December 31, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December 2002, the FASB issued SFAS 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures
in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending
after December 15, 2002, and are included in the notes to the
financial statements included in this Form 10-K.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in
the Interpretation. The Interpretation applies immediately to
variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest
entities obtained after January 31, 2003. Because we have no
involvement with any variable interest entities, the application
of this Interpretation is not expected to have a material effect
on our financial statements.

Note B  Sale of Welding Controls Division



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 30, 1999, the Company completed an agreement to sell
substantially all the assets of its Welding Controls division for
$25.7 million, net of costs of the sale, for cash, the assumption
of certain liabilities, and a subordinated note (WTC note). The
interest bearing portion of the note, approximately $1.9 million,
carried an interest rate approximating prime plus 1% and required
quarterly payments beginning on February 15, 2000, with a February
15, 2001 maturity date. The non-interest bearing portion of the
note, $1.5 million, was discounted using an imputed interest rate
of 9% and matured on February 15, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2001, the Company sold 19.9% of the $1.7 million then
outstanding under the note agreement to third party investors in
exchange for consideration of $300,000. In May 2001, the Company
completed a transaction whereby it repurchased the portion of the
note previously sold to the investors and then sold the entire
note receivable, which had an outstanding balance of $1.1 million
at April 30, 2001, to a third party for $750,000.

46



---



##### Table of Contents





| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recognized a loss on sale of the note receivable of
$441,000 in the quarter ended March 31, 2001, which is included in
other income(expense) in 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company incurred both Federal and State income tax liabilities
as a result of the sale of the assets of it Welding Controls
division. The Company paid approximately $90,000 for its 1999
alternative minimum tax liability, which resulted primarily from
the gain on the sale of the Welding Controls Division. This
amount was refunded to the Company in 2002 (see Note D to
consolidated financial statements). Additionally, the Company
incurred a Michigan Single Business Tax (SBT) liability of
approximately $120,000 for the 1999 tax year as a result of the
transaction. At December 31, 2002, this liability was not yet
paid and was included in accrued state income taxes in the
consolidated balance sheet. Approximately $84,000 for interest
and penalties on this obligation have also been accrued and
included in accrued state income taxes in the consolidated balance
sheet. No payment arrangements have been made with the taxing
authority.



| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The acquiring company also assumed a liability to Square D in the
amount of $1.8 million in accordance with the purchase agreement.
This liability resulted from the settlement of patent litigation
in 1994. The settlement required payments of $300,000 per year
for ten years. In the event the acquiring company fails to make
the required payments, Integral Vision may be obligated for those
amounts due.

Note C  Long-Term Debt and Other Financing Arrangements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2001, the Companys board of directors approved the
issuance of up to $1.5 million of senior debentures (increased to
$2.0 million in May 2002). At June 30, 2001, $120,000 of the
debentures had been placed of which $24,000 was deemed a discount
on the note based on a $.10 per share value assigned to the
warrants received by the purchaser. The value assigned to
warrants is included in additional paid-in capital and the
discount is amortized over the life of the note. The debentures
had maturities of up to four years and an interest rate of 15%.
The holders of the debentures received warrants for the purchase
of two Integral Vision shares for each $1 in principal value of
the debentures purchased. The warrants have a conversion rate of
$.50 per share. In July 2001, the Companys board of directors
and the holder of the previously outstanding debentures approved
an amendment to the terms of its debentures. As a result of the
amendment, the debentures, including the $120,000 placed prior to
the amendment, have an interest rate of 10% and continue to have
maturities of up to four years. The value assigned to warrants
issued subsequent to the amendment is $.06 per share.
Additionally, the directors will determine the conversion rate at
the date of issuance, subject to change in the event additional
shares are issued in the future. In 2002, an additional $590,000
of the debentures were placed, $350,000 of which were purchased by
the Companys chairman Charles J Drake. As part of the purchase,
Mr. Drake received warrants for the purchase of 1,050,000 shares
of Integral Vision common stock at a conversion price of $0.35 per
share. Additionally, $40,000 of these debentures were purchased
by Max A. Coon, the Companys vice chairman and secretary,
pursuant to an agreement between Mr. Coon and the Company on March
5, 2002. When given proper notice that the Company required cash
to meet its obligations, the agreement obligated Mr. Coon to
provide cash to the Company in exchange for debentures and
warrants, the terms of which were established on the date of the
agreement. As part of the purchase, Mr. Coon received warrants
for the purchase of 120,000 shares of Integral Vision common stock
at a conversion price of $0.35 per share. At December 31, 2002, a
total of $1,100,000 of the debentures had been placed. The
purchasers of these debentures received warrants for the purchase
of 240,000 shares of the Companys common stock at a conversion
price of $.50 per share, 2,790,000 shares at a conversion price of
$.35 per share and 50,000 shares at a conversion price of $.80 per
share. At December 31, 2002, there was approximately $215,000 in
principal and interest due to the Class 1 Note holders under the
terms of the agreement. Subsequent to December 31, 2002, the
holders of those Notes agreed to a modification to the Note and
Warrant Purchase Agreement which extends the due dates and
increases the maximum amount of Notes outstanding to $2.5 million.
The terms of the Class 1 Notes were changed such that all accrued
interest will be due on December 31, 2003, which is projected to
be approximately $310,000. Additionally, the first principal
payments on the Class 1 Notes

47



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | will be due on March 31, 2004 and the maturity dates extended to
February 2007. The principal and interest due on March 31, 2004
is projected to be approximately $204,000. The Class 2 Notes were
modified to have a due date, both principal and accrued interest,
of September 30, 2003. Principal and interest due on the Class 2
notes on September 30, 2003 is projected to be approximately
$390,000. A principal payment of approximately $154,000 was paid
to a Class 2 Note holder in January 2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Subsequent to December 31, 2002, the Company placed an additional
$360,000 of its Class 1 debentures. The purchasers of these
debentures received warrants for the purchase of 1,440,000 shares
of the Companys common stock with an exercise price of $.25 per
share. Mr. Drake purchased $150,000 of these debentures and, in
connection with this purchase, received warrants for the purchase
of 600,000 shares of the Companys common stock.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective May 1, 2002, the Note and Warrant Purchase Agreement was
amended to provide for Class 2 Notes and Class 2 Warrants
which are subordinated to the prior purchasers. Class 2 Notes are
working capital notes which are secured by accounts receivable of
the Company. The number of Class 2 Warrants to be obtained is
based on the length of time the related Class 2 Note is
outstanding. In 2002, $907,000 of the Class 2 Notes were
purchased by the prior note purchasers. The outstanding principal
balance on the Class 2 Notes was $511,000 at December 31, 2002.
The purchasers of these notes received warrants for the purchase
of 109,041 shares of the Companys common stock at a conversion
price of $.80 per share and 74,100 shares at a conversion price of
$.35 per share.



| |                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2002, the Companys board of directors approved an increase
to the amount of debentures that can be issued under the 2001
debenture plan from $1.5 million to $2.0 million. The increase
gives the Company added flexibility in its efforts to meet its
working capital needs.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Maturities of long-term debt are $367,000 in 2004; $367,000 in
2005; and $366,000 in 2006. There are no principal payments due
in 2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2002, the Company had short-term notes payable to
related parties of approximately $456,000. The Companys notes to
related parties included the following: a $139,000 obligation to
Maxco, Inc. (a 25% owner of the Company); a $168,000 obligation to
Warren, Cameron, Faust & Asciutto, P.C. (the Companys corporate
counsel); a $79,000 obligation to 2161 Limited Partnership (a
partnership in which J. Michael Warren of Warren, Cameron, Faust &
Asciutto, P.C. is a partner); and a $70,000 obligation to Max A.
Coon (a director of the Company). The advance from Mr. Coon was
repaid in 2003. These notes have interest rates ranging from 5.5%
to 8.0% and are due on demand.



| |                                                           
| | ----------------------------------------------------------
| | A summary of the Companys debt obligations is as follows:

|                      |                              |                |       |   |      |     |     |  
|--------------------- | ---------------------------- | -------------- | ----- | - | ---- | --- | --- | -
|                      |                              | 2002           |       |   | 2001 |    
|                      |                              |                |       |   |      |    
|                      |                              | (in thousands) |      
|Long Term Debt:       |                              |                |       |   |      |     |    
|                      | Face value Class 1 Notes     | $              | 1,100 |   |      | $   | 510 |  
|                      | Less Original Issue Discount |                | (138  | ) |      |     | (83 | )
|                      | Less Current Maturities      |                |      |   |      |     | (90 | )
|                      |                              |                |       |   |      |    
|Net Long Term Debt    | $                            | 962            |       |   | $    | 337 |    
|                      |                              |                |       |   |      |    
|Short Term Debt:      |                              |                |       |   |      |     |    
|                      | Class 2 Notes                | $              | 511   |   |      | $   |    |  
|                      | Other Short Term Debt        |                | 456   |   |      |     | 358 |  
|                      |                              |                |       |   |      |    
|Total Short Term Debt | $                            | 967            |       |   | $    | 358 |    
|                      |                              |                |       |   |      |    

48



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2000, the Company had two mortgage notes payable.
The Company had a mortgage with a bank and another with a director
of the Company that carried interest rates of 8.9% and prime plus
0.5%, respectively. The total outstanding mortgage balance was
$2,007,000 at December 31, 2000. On July 27, 2001, the Company
completed a transaction to sell the building it currently occupies
in Farmington Hills, MI for $2.45 million, at which time the
existing mortgages were retired. The Company continues to occupy
a portion of the building under a five-year lease agreement with
the new owner. Net proceeds from the sale was approximately
$200,000 of which $186,000 was used to prepay nine months of rent,
a requirement of the lease agreement.



| |                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2000, the Company had a revolving line of credit
under which it could borrow up to $1.0 million on certain eligible
accounts receivable. The Company used proceeds from the sale of
its note receivable in May 2001 to pay in full its revolving line
of credit, at which time that agreement was terminated.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest paid in 2002 was approximately $39,000 compared to
interest expensed of $251,000. The $212,000 difference primarily
represents amounts accrued for interest on the debentures and the
amount of discount on the debentures amortized in 2002. Interest
paid in 2001 was approximately $125,000 compared to interest
expensed of $172,000. The $47,000 difference primarily represents
amounts accrued for interest on the debentures and the amount of
discount on the debentures amortized in 2001. Interest paid
approximates interest expensed for 2000.

Note D  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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2002, Congress enacted what is known as the Job Creation
and Worker Assistance Act of 2002 to provide tax incentives for
economic recovery. One of the provisions of the Act was to extend
the carryback period for net operating losses incurred in tax
years ending in 2001 or 2002 to five years versus the three years
previously allowed. Additionally, any net operating losses as
computed for alternative minimum tax purposes for tax years ending
in 2001 or 2002 can also be carried back five years and can be
used to offset up to 100% of alternative minimum taxable income.
Previously, alternative minimum tax net operating losses could
only be used to offset up to 90% of alternative minimum taxable
income. As a result of this Act, the Company was able to
carryback its 2001 net operating loss as computed for alternative
minimum tax purposes to 1999, which reduced its tax liability in
that year to zero. In the quarter ended September 30, 2002, the
Company received a refund of taxes previously paid of
approximately $90,000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, the Company has cumulative net operating
loss carryforwards approximating $31.0 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, and
$5.7 million in 2022) for 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 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
$1.6 million in 2002, $2.2 million in 2001, and $2.3 million in
2000.

49



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:

|                                            |                                                            |                |        |  |      |       |       | 
|------------------------------------------- | ---------------------------------------------------------- | -------------- | ------ |  | ---- | ----- | ----- | 
|                                            |                                                            | 2002           |        |  | 2001 |      
|                                            |                                                            |                |        |  |      |      
|                                            |                                                            | (in thousands) |       
|Deferred tax liabilities:                   |                                                            |                |        |  |      |       |       | 
|                                            | Deductible software development costs, net of amortization | $              | 175    |  |      | $     | 241   | 
|                                            | Tax over book depreciation                                 |                |        |  |      |       | 21    | 
|                                            | Percentage of completion                                   |                |        |  |      |       |      | 
|                                            |                                                            |                |        |  |      |      
|Total deferred tax liabilities              |                                                            | 175            |        |  |      | 262   |      
|                                           
|Deferred tax assets:                        |                                                            |                |        |  |      |       |      
|                                            | Net operating loss carryforwards                           |                | 10,604 |  |      |       | 8,668 | 
|                                            | Credit carryforwards                                       |                | 331    |  |      |       | 331   | 
|                                            | Inventory reserve                                          |                | 193    |  |      |       | 574   | 
|                                            | Bad debt reserve                                           |                | 56     |  |      |       | 57    | 
|                                            | Reserve for warranty                                       |                | 9      |  |      |       | 9     | 
|                                            | Other                                                      |                | 100    |  |      |       | 112   | 
|                                            |                                                            |                |        |  |      |      
|Total deferred tax assets                   |                                                            | 11,293         |        |  |      | 9,751 |      
|Valuation allowance for deferred tax assets |                                                            | 11,118         |        |  |      | 9,489 |      
|                                            |                                                            |                |        |  |      |      
|Net deferred tax assets                     |                                                            | 175            |        |  |      | 262   |      
|                                            |                                                            |                |        |  |      |      
|Net deferred tax                            | $                                                          |               |        |  | $    |      |      
|                                            |                                                            |                |        |  |      |      



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | The reconciliation of income taxes computed at the U.S. federal
statutory tax rates to income tax expense (credit) is as follows:

|                                               |  |                |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                               |  | 2002           |        |   | 2001 |   |        | 2000 | 
|                                               |  |                |        |   |      |   |        |      | 
|                                               |  | (in thousands) |       
|Consolidated net income (loss)                 |  | $              | (2,203 | ) |      | $ | (8,135 | )    |  | $ | (7,124 | )
|Foreign net income (loss)                      |  |                | 2,648  |   |      |   | (1,620 | )    |  |   | (664   | )
|                                               |  |                |        |   |      |   |        |      | 
|U.S. net income (loss)                         |  | $              | (4,851 | ) |      | $ | (6,515 | )    |  | $ | (6,460 | )
|                                               |  |                |        |   |      |   |        |      | 
|Tax provision (credit) at U.S. statutory rates |  | $              | (1,649 | ) |      | $ | (2,215 | )    |  | $ | (2,196 | )
|Change in valuation allowance                  |  |                | 1,629  |   |      |   | 2,181  |      |  |   | 2,318  |  
|Nondeductible expenses                         |  |                | 20     |   |      |   | 34     |      |  |   | 25     |  
|Other                                          |  |                |       |   |      |   |       |      |  |   | (147   | )
|                                               |  |                |        |   |      |   |        |      | 
|                                               |  | $              |       |   |      | $ |       |      |  | $ |       |  
|                                               |  |                |        |   |      |   |        |      | 



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2000, the Company paid $100,000 for its 1999 alternative
minimum tax liability, which was refunded to the Company in 2002
(see the Job Creation and Worker Assistance Act of 2002
discussion above). There were no income tax payments in 2002 or
2001.

50



---



##### Table of Contents



Note E  Earnings per Share



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | The following table sets forth the computation of basic and
diluted earnings per share:

|                                                                                                    |                   |  |                                       |        |   |      |       |        |      |  |       |        |  
|--------------------------------------------------------------------------------------------------- | ----------------- |  | ------------------------------------- | ------ | - | ---- | ----- | ------ | ---- |  | ----- | ------ | -
|                                                                                                    |                   |  | 2002                                  |        |   | 2001 |       |        | 2000 | 
|                                                                                                    |                   |  |                                       |        |   |      |       |        |      | 
|                                                                                                    |                   |  | (in thousands, except per share data) |       
|Numerator for basic and diluted earnings per share 
Income (loss) available to common stockholders |                   |  |                                       |        |   |      |       |        |      |  |       |       
|                                                                                                    | Net income (loss) |  | $                                     | (2,203 | ) |      | $     | (8,135 | )    |  | $     | (7,124 | )
|                                                                                                    |                   |  |                                       |        |   |      |       |        |      | 
|* there was no effect of dilutive securities, see below                                             |                   |  |                                       |        |   |      |       |        |      |  |       |       
|                                                                                                   
|Denominator for basic and diluted earnings pershare 
weighted average shares                       |                   |  | 9,430                                 |        |   |      | 9,198 |        |      |  | 9,028 |       
|                                                                                                    |                   |  |                                       |        |   |      |       |        |      | 
|*there was no effect of dilutive securities, see below                                              |                   |  |                                       |        |   |      |       |        |      |  |       |       
|                                                                                                   
|Basic and diluted earnings per share:                                                               |                   |  |                                       |        |   |      |       |        |      |  |       |       
|                                                                                                    | Net income (loss) |  | $                                     | (0.23  | ) |      | $     | (0.89  | )    |  | $     | (0.79  | )
|                                                                                                    |                   |  |                                       |        |   |      |       |        |      | 



| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Warrants and options outstanding were not included in the
computation of diluted earnings per share because the inclusion of
these options would have an antidilutive effect. For additional
disclosures regarding stock options and warrants see Note H.

Note F  Employee Savings Plan



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has an Employee Savings Plan covering substantially
all United States 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 $7,000, $15,000, and $24,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.

Note G  Lease Commitments and Contingencies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company uses equipment and office space under long-term
operating lease agreements requiring rental payments approximating
$138,000 in 2003, $92,000 in 2004, and $2,000 in 2005. Rent
expense charged to operations approximated $128,000, $154,000, and
$72,000 in 2002, 2001 and 2000, respectively. On July 27, 2001,
the Company completed a transaction to sell the building it
currently occupies in Farmington Hills, MI for $2.45 million. The
Company continues to occupy a portion of the building under a
five-year lease agreement with the new owner. In 2002, the
Company entered into a new lease agreement whereby it will occupy
less square footage in exchange for a reduced lease rate. This
agreement was effective April 1, 2002 and is reflected in the
future lease payments previously discussed.

Note H  Stock Options and Warrants



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has elected to follow 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 has elected to
adopt only the disclosure provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, as amended by FASB
Statement No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure.



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pro forma information regarding net income and earnings per share
is required by FAS 123 and has been determined as if the Company
had accounted for its employee stock

51



---



##### Table of Contents





| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | options granted subsequent to September 30, 1995 under the fair
value method of FAS 123. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:

|                                 |  |      |       |   |      |  |       |      |  |  |     | 
|-------------------------------- |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | --- | 
|                                 |  | 2002 |       |   | 2001 |  |       | 2000 | 
|                                 |  |      |       |   |      |  |       |      | 
|Expected stock price volatility  |  |      | 0.833 |   |      |  | 0.768 |      |  |  | N/A | 
|Risk free interest rate          |  |      | 3.0   | % |      |  | 5.5   | %    |  |  | N/A | 
|Expected life of options (years) |  |      | 7.4   |   |      |  | 7.7   |      |  |  | N/A | 



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options vesting
period. The Companys pro forma information for the years ended
December 31, 2002, 2001 and 2000 is as follows:

|                          |                   |                                       |       |   |      |        |       |      |   |        |       |  
|------------------------- | ----------------- | ------------------------------------- | ----- | - | ---- | ------ | ----- | ---- | - | ------ | ----- | -
|                          |                   | Year ended December 31,               |      
|                          |                   |                                       |      
|                          |                   | 2002                                  |       |   | 2001 |        |       | 2000 |  
|                          |                   |                                       |       |   |      |        |       |      |  
|                          |                   | (in thousands, except per share data) |      
|Pro forma net loss        | $                 | (2,235                                | )     |   | $    | (8,172 | )     |      | $ | (7,124 | )    
|Pro forma loss per share: |                   |                                       |       |   |      |        |       |      |   |        |      
|                          | Basic and Diluted | $                                     | (0.24 | ) |      | $      | (0.89 | )    |   | $      | (0.79 | )



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because
the Companys employee stock option plan has characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in Managements opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of such Company options. These pro forma results
reflect only stock options granted in 1995 through 2002 (no
options were issued during 2000) and may not be comparable with
the results of applying the fair market value methodology to all
stock options granted prior to the initial adoption of this
statement.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 1, 2001, the Compensation Committee of the Companys
Board of Directors resolved to grant qualified stock options for
the purchase of 335,000 shares with an exercise price equal to the
market price at the close of trading on the grant date, $.14 per
share. In order to facilitate this grant, Mr. Charles Drake, the
Companys Chairman, agreed to forfeit options on 150,000 shares so
that they could be distributed to other key people. Additionally,
Mr. Drake was provided with 400,000 shares of unregistered stock
of the Company, subject to certain sale restrictions. An
additional $56,000 of compensation expense was charged to general
and administrative expense as a result of the issuance of these
shares. At December 31, 2002, there were options outstanding to
purchase 1,038,000 shares of common stock at prices ranging from
$.10 to $9.25 per share.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2002, the Compensation Committee of the Companys Board
of Directors resolved to grant 225,000 qualified stock options for
the purchase of common shares with an exercise price equal to the
market price at the close of trading on the grant date, $.10 per
share. In order to facilitate this grant, Mr. Charles Drake, the
Companys Chairman, agreed to forfeit options on 144,000 shares so
that they could be distributed to other key people. Additionally,
in March 2002, the Compensation Committee resolved to grant 55,000
qualified and 20,000 non-qualified stock options for the purchase
of common shares with an exercise price equal to the market price
at the close of trading on the grant date, $.24 per share.

52



---



##### Table of Contents





| |                                                                                
| | -------------------------------------------------------------------------------
| | A summary of the status of the Option Plans at December 31, 2002 is as
follows:

|                            |      |  |                 |   |  |              |               |   |           |  |     |           |  |  |     |     | 
|--------------------------- | ---- |  | --------------- | - |  | ------------ | ------------- | - | --------- |  | --- | --------- |  |  | --- | --- | 
|                            |      |  |                 |   |  |              | Non-Qualified |   |           |  |     |           |  |  |     |    
|                            |      |  | Qualified ISO   |   |  | Stock Option |               |   |           |  |     |           |  |  |    
|                            |      |  | Plan            |   |  | Plan         |               |   | 1999 Plan |  |     | 1995 Plan | 
|                            |      |  |                 |   |  |              |               |   |           |  |     |           | 
|                            |      |  | (in thousands)} |  
|                            |      |  |                 |  
|Options outstanding         |      |  | 58              |   |  |              | 9             |   |           |  | 476 |           |  |  | 495 |    
|Options exercisable         |      |  | 58              |   |  |              | 9             |   |           |  | 420 |           |  |  | 495 |    
|Options granted during:     |      |  |                 |   |  |              |               |   |           |  |     |           |  |  |     |    
|                            | 2002 |  |                 | 0 |  |              |               | 0 |           |  |     | 202       |  |  |     | 98  | 
|                            | 2001 |  |                 | 0 |  |              |               | 0 |           |  |     | 120       |  |  |     | 215 | 
|                            | 2000 |  |                 | 0 |  |              |               | 0 |           |  |     | 0         |  |  |     | 0   | 
|                            | 1999 |  |                 | 0 |  |              |               | 0 |           |  |     | 400       |  |  |     | 206 | 
|                            | 1998 |  |                 | 0 |  |              |               | 0 |           |  |     | 0         |  |  |     | 0   | 
|                            | 1997 |  |                 | 0 |  |              |               | 0 |           |  |     | 0         |  |  |     | 267 | 
|                            | 1996 |  |                 | 0 |  |              |               | 0 |           |  |     | 0         |  |  |     | 132 | 
|Options available for grant |      |  | 0               |   |  |              | 0             |   |           |  | 5   |           |  |  | 22  |    
|                            |      |  |                 |   |  |              |               |   |           |  |     |          



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Compensation Committee of the Board of Directors approves
option grants. The option price is the market price on the date
of the grant, and vesting generally occurs after one year and the
expiration occurs ten years from the date of the grant.



| |                                                      
| | -----------------------------------------------------
| | A summary of option activity under all plans follows:

|                                                     |  |                                 |       |   |                |                  |      |        |  |  |                |   |                  |        |      |  |                |  |       |                  |  |   |      | 
|---------------------------------------------------- |  | ------------------------------- | ----- | - | -------------- | ---------------- | ---- | ------ |  |  | -------------- | - | ---------------- | ------ | ---- |  | -------------- |  | ----- | ---------------- |  | - | ---- | 
|                                                     |  | 2002                            |       |   | 2001           |                  |      | 2000   | 
|                                                     |  |                                 |       |   |                |                  |      |        | 
|                                                     |  |                                 |       |   |                | Weighted Average |      |        |  |  |                |   | Weighted Average |        |      |  |                |  |       | Weighted Average | 
|                                                     |  | Shares                          |       |   | Exercise Price |                  |      | Shares |  |  | Exercise Price |   |                  | Shares |      |  | Exercise Price | 
|                                                     |  |                                 |       |   |                |                  |      |        |  |  |                |   |                  |        |      |  |                | 
|                                                     |  | (number of shares in thousands) |      
|Outstanding at beginning of year                     |  |                                 | 991   |   |                | $                | 1.52 |        |  |  | 982            |   |                  | $      | 2.82 |  |                |  | 1,077 |                  |  | $ | 3.02 | 
|Granted                                              |  |                                 | 300   |   |                |                  | 0.14 |        |  |  | 335            |   |                  |        | 0.14 |  |                |  | 0     |                  |  |   | 0.00 | 
|Exercised                                            |  |                                 | 0     |   |                |                  | 0.00 |        |  |  | 0              |   |                  |        | 0.00 |  |                |  | (5    | )                |  |   | 1.75 | 
|Canceled                                             |  |                                 | (253  | ) |                |                  | 1.40 |        |  |  | (326           | ) |                  |        | 4.01 |  |                |  | (90   | )                |  |   | 5.32 | 
|                                                     |  |                                 |       |   |                |                  |      |        |  |  |                |   |                  |        |      |  |                | 
|Outstanding at end of year
($.10 to $9.25 per share) |  |                                 | 1,038 |   |                |                  | 1.15 |        |  |  | 991            |   |                  |        | 1.52 |  |                |  | 982   |                  |  |   | 2.82 | 
|                                                     |  |                                 |       |   |                |                  |      |        |  |  |                |   |                  |        |      |  |                | 
|Exercisable ($.10 to $9.25 per share)                |  |                                 | 982   |   |                | $                | 1.16 |        |  |  | 791            |   |                  | $      | 1.64 |  |                |  | 585   |                  |  | $ | 4.01 | 
|                                                     |  |                                 |       |   |                |                  |      |        |  |  |                |   |                  |        |      |  |                | 



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Additional information regarding the range of exercise prices and
weighted average remaining life of options outstanding at December
31, 2002 follows:

|                |  |             |                                 |       |                |  |          |             |  |  |  |     | 
|--------------- |  | ----------- | ------------------------------- | ----- | -------------- |  | -------- | ----------- |  |  |  | --- | 
|                |  |             |                                 |       |                |  | Weighted |             |  |  |  |    
|Range of        |  | Number      |                                 |       | Average        |  |          | Number      | 
|Exercise Prices |  | Outstanding |                                 |       | Remaining Life |  |          | Exercisable | 
|                |  |             |                                 |       |                |  |          |             | 
|                |  |             | (number of shares in thousands) |      
|$.10 to $1.07   |  |             |                                 | 914   |                |  |          | 8.0         |  |  |  | 858 | 
|$4.75 to $4.88  |  |             |                                 | 34    |                |  |          | 4.2         |  |  |  | 34  | 
|$5.63 to $6.25  |  |             |                                 | 77    |                |  |          | 1.5         |  |  |  | 77  | 
|$8.50 to $9.25  |  |             |                                 | 13    |                |  |          | 1.9         |  |  |  | 13  | 
|                |  |             |                                 |       |                |  |          |             |  | 
|$.10 to $9.25   |  |             |                                 | 1,038 |                |  |          | 7.4         |  |  |  | 982 | 
|                |  |             |                                 |       |                |  |          |             |  | 

53



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2001, the Companys board of directors approved the
issuance of up to $1.5 million (increased to $2.5 million in March
2003) of senior subordinated debentures. At December 31, 2002, in
connection with placements of debt under this plan, there were
warrants outstanding to purchase 240,000 shares of the Companys
common stock at a conversion price of $.50 per share, 2,864,100
shares at a conversion price of $.35 per share and 159,041 shares
at a conversion price of $.80 per share. The Companys chairman,
Charles J. Drake, invested $350,000 in the Companys debentures
and in connection with this purchase received warrants for the
purchase of 1,050,000 shares of the Companys common stock.
Subsequent to December 31, 2002, the holders of those warrants
agreed to a modification to the Note and Warrant Purchase
Agreement which extends the due dates of the notes, increases the
maximum amount of notes outstanding to $2.5 million and changes
the conversion price on previously issued warrants to $.25 per
share. Additionally, subsequent to December 31, 2002, in
connection with additional placements of the Companys debentures,
warrants were issued for the purchase of 1,440,000 shares of the
Companys common stock at a conversion price of $.25 per share.
Charles J. Drake, the Companys chairman, was one of the
purchasers subsequent to December 31, 2002, and in connection with
his purchase he received warrants for the purchase of 600,000
shares of the Companys common stock.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In connection with the private placement of $7.0 million of
debentures in 1997, which were retired in 1999, the company issued
warrants for the purchase of 1,400,000 Integral Vision common
shares at $6.86 per share through June 30, 2004, all of which were
outstanding at December 31, 2002. Pursuant to the 1997 Note and
Warrant Purchase agreement, these warrants have been re-priced
based on subsequent warrant issues. At December 31, 2002, the
holders of these warrants had the right to purchase up to
1,848,745 shares of the Companys common stock at $5.19 per share.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | A summary of the outstanding warrants and options at December 31, 2002 is
as follows:

|                                         |  |                                 |      |  |                 |  |       |                |          |  |                 |  |  |  |       | 
|---------------------------------------- |  | ------------------------------- | ---- |  | --------------- |  | ----- | -------------- | -------- |  | --------------- |  |  |  | ----- | 
|                                         |  | Weighted                        |      |  |                 |  |       |                | Weighted |  |                 |  |  | 
|                                         |  | Average                         |      |  | Number          |  |       | Average        |          |  | Number          | 
|                                         |  | Exercise Price                  |      |  | Outstanding (1) |  |       | Remaining Life |          |  | Exercisable (1) | 
|                                         |  |                                 |      |  |                 |  |       |                |          |  |                 | 
|                                         |  | (number of shares in thousands) |     
|1997 Note and Warrant Purchase Agreement |  | $                               | 5.19 |  |                 |  | 1,849 |                |          |  | 4.5             |  |  |  | 1,849 | 
|2001 Note and Warrant Purchase Agreement |  | $                               | 0.38 |  |                 |  | 3,263 |                |          |  | 2.9             |  |  |  | 3,263 | 
|Qualified ISO Plan                       |  | $                               | 6.55 |  |                 |  | 58    |                |          |  | 0.7             |  |  |  | 58    | 
|Non-Qualified Stock Option Plan          |  | $                               | 5.92 |  |                 |  | 9     |                |          |  | 1.7             |  |  |  | 9     | 
|1995 Employee Stock Option Plan          |  | $                               | 1.06 |  |                 |  | 476   |                |          |  | 7.6             |  |  |  | 476   | 
|1999 Employee Stock Option Plan          |  | $                               | 0.52 |  |                 |  | 495   |                |          |  | 8.0             |  |  |  | 439   | 
|                                         |  |                                 |      |  |                 |  |       |                |          |  |                 | 
|                                         |  | $                               | 1.96 |  |                 |  | 6,150 |                |          |  | 4.1             |  |  |  | 6,094 | 
|                                         |  |                                 |      |  |                 |  |       |                |          |  |                 | 



| | (1) |  | Excludes warrants exercisable under outstanding Class 2 Notes.
The number of warrants available to holders of Class 2 Notes is
dependent on the length of time the principal balance is outstanding
and the agreed upon base exercise price. At December 31, 2002,
$511,000 of the Class 2 Notes were outstanding.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54



---



##### Table of Contents



Note I  Operations by Geographic Area



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company adopted Statement of Financial Accounting Standards
(SAFS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, for the year ended December 31, 1998. SFAS
No. 131 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 |       
|                                                                |                |   |                        |       
|                                                                |                |   | 2002                   |        |   | 2001 |        |        | 2000 |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                |   | (in thousands)         |       
|Net revenues from unaffiliated customers:                       |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | 944    |   |      | $      | 1,436  |      |   | $      | 2,814  |  
|                                                                | United Kingdom |   |                        | 635    |   |      |        | 1,197  |      |   |        | 3,142  |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 1,579                  |        |   | $    | 2,633  |        |      | $ | 5,956  |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Earnings (loss) from continuing operations before income taxes: |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | (1,747 | ) |      | $      | (6,514 | )    |   | $      | (6,460 | )
|                                                                | United Kingdom |   |                        | (456   | ) |      |        | (1,621 | )    |   |        | (664   | )
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | (2,203                 | )      |   | $    | (8,135 | )      |      | $ | (7,124 | )     
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Identifiable assets:                                            |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | 1,243  |   |      | $      | 1,631  |      |   | $      | 9,480  |  
|                                                                | United Kingdom |   |                        | 65     |   |      |        | 333    |      |   |        | 1,684  |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 1,308                  |        |   | $    | 1,964  |        |      | $ | 11,164 |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Long lived assets:                                              |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | 59     |   |      | $      | 139    |      |   | $      | 3,125  |  
|                                                                | United Kingdom |   |                        |       |   |      |        | 20     |      |   |        | 282    |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 59                     |        |   | $    | 159    |        |      | $ | 3,407  |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Capital expenditures:                                           |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | 43     |   |      | $      |       |      |   | $      | 57     |  
|                                                                | United Kingdom |   |                        |       |   |      |        |       |      |   |        | 92     |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 43                     |        |   | $    |       |        |      | $ | 149    |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Depreciation and amortization expense:                          |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | 542    |   |      | $      | 2,907  |      |   | $      | 2,167  |  
|                                                                | United Kingdom |   |                        | 20     |   |      |        | 404    |      |   |        | 315    |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 562                    |        |   | $    | 3,311  |        |      | $ | 2,482  |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Net revenues by geographic area:                                |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | North America  |   | $                      | 633    |   |      | $      | 1,412  |      |   | $      | 2,303  |  
|                                                                | Europe         |   |                        | 547    |   |      |        | 1,084  |      |   |        | 2,981  |  
|                                                                | Asia           |   |                        | 399    |   |      |        | 137    |      |   |        | 672    |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 1,579                  |        |   | $    | 2,633  |        |      | $ | 5,956  |       
|                                                                |                |   |                        |        |   |      |        |        |      |  



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * 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.

55



---



##### Table of Contents



Note J  Sale of Building



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On July 27, 2001, the Company completed a transaction to sell the
50,000 square foot building it occupied in Farmington Hills, MI
for $2.45 million, at which time the existing mortgages were
retired. The Company continued to occupy a portion of the
building under a five-year lease agreement with the new owner.
Effective April 1, 2002, the Company entered into a new lease
agreement whereby it moved into a smaller space, 5,000 square
feet, in exchange for a reduced lease rate. Given the reduction
in square footage, the Company disposed of a significant portion
of its equipment in 2002, which was written-down to its estimated
net realizable value in 2001. Net proceeds from the sale was
approximately $200,000 of which $186,000 was used to prepay nine
months of rent, a requirement of the lease agreement. The Company
recognized a loss on the sale of the building of approximately
$22,000 in addition to a $210,000 charge to write-down the
carrying value of the Companys fixed assets in 2001, both of
which are included in gain(loss) on sales of assets.

Note K  Sale of Technology



| |                                
| | -------------------------------
| | Packaging Inspection Technology



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 24, 2001, the Company completed the sale of certain of
its packaging applications software and most of the fixed assets
of its subsidiary, Integral Vision Ltd., to n.v. DIMACO, s.a. for
$500,000 in cash and future royalties. Included in the transaction
was the sale of the worldwide exclusive rights to Integral
Visions Full Bottle Inspection System (FBIS), a product that
performs certain inspections on bottles at the end of a filling
line. Integral Vision will receive a royalty on each FBIS sold for
the next three years. The proceeds from the transaction were used
primarily to fund current operations and to pay down existing
trade payables.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Also included with the transaction was a manufacturing agreement
whereby DIMACO will manufacture products for Integral Visions
Optical Disc and Display Inspection customers in Europe.



| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the terms of the sale, most of Integral Vision Ltd.s
personnel and costs will transfer to DIMACO. However, Integral
Vision Ltd. will maintain sales and service staff to support its
Optical Disc and Display Inspection customers in Europe.



| |                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The approximate net book values of the assets sold were $13,000
for inventory, $97,000 for fixed assets, and $276,000 for
capitalized software development costs. The Company recognized a
gain on the transaction of approximately $114,000, which is
included in gain(loss) on sales of assets in 2001, primarily
attributable to the software included in the sale.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The packaging applications included in the sale accounted for
approximately $516,000 and $115,000 of the Companys net revenue
for the years ended December 31, 2001 and 2000, respectively.



| |                                   
| | ----------------------------------
| | Optical Disc Inspection Technology



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of
global test equipment manufacturer DaTARIUS Technologies GmbH,
purchased Integral Visions assets related to inspection systems
for the optical disc industry, including the names Automatic
Inspection Systems and AID. The sale included Integral Visions
optical disc scanner products as well as its range of print and
identification code products used to inspect the printing stage of
disc manufacture. The consideration the Company received for the
technology consisted of a non-refundable $100,000 advanced minimum
royalty payment in addition to future royalties. The Company
expects to receive additional royalties in excess of $100,000 a
year for the three years following the sale. Additionally, the
Company received $25,000 from the sale of equipment to DaTARIUS.
The Company

56



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | recognized a gain on the transaction of approximately $112,000,
which is included in gain(loss) on sales of assets in 2002,
primarily attributable to the advanced minimum royalty payment
received. The proceeds from the transaction were used primarily
to fund current operations.



| |                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included with the transaction was a Transition Services Agreement
whereby Integral Vision provides assembly and agreed upon
technical support services for the product line for up to twelve
months after the closing date at an agreed upon rate. Revenue
generated under this agreement was $24,000 in 2002 and is not
expected to be significant in the future.



| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The optical disc inspection technology included in the sale
accounted for approximately $743,000, $1.1 million, and $3.1
million of the Companys net revenue for the years ended December
31, 2002, 2001 and 2000, respectively.

Note L  Change in Estimate



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management has focused its development, sales and marketing
efforts on the Companys inspection systems for the flat panel
display (SFPD) 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 SFPD industry including liquid crystal on silicon (LCOS),
organic light emitting diodes (OLED), liquid crystal display
(LCD), and microelectromechanical systems (MEMS).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management periodically performs an analysis of the net realizable
value of capitalized software costs. Based on current market
conditions and the direction of the Company, Management determined
that capitalized software development costs exceeded the estimated
net realizable value of amounts capitalized and a write-down was
necessary. For the year ended December 31, 2001, $1.3 million of
additional amortization is included in costs of sales as a result
of these analyses. Additionally, as a result of the analyses,
direct costs of sales includes a $540,000 charge for the
write-down of inventory.



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2002, Management determined that capitalized patent costs
exceeded the estimated net realizable value of amounts capitalized
and a write-down was necessary. In 2002, $74,000 of additional
amortization was included in costs of sales as a result of this
determination.

Note M  Officers Notes Receivable



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2001, Messrs. Charles Drake and Mark Doede each had loans from
the Company, the outstanding balances of which were included in
the stockholders equity section of the consolidated balance
sheet. In August 2001, the Compensation Committee of the
Companys Board of Directors resolved to forgive $100,000 of the
outstanding balance on each of their loans from the Company. The
$200,000 charge for the write-down of the notes was included in
general and administrative expenses in the consolidated statement
of operations in 2001. Mr. Drake also made approximately $250,000
in principal payments on his note in 2001. Mr. Drake paid off the
remaining $63,000 principal balance of this note in 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At June 30, 2002, Mr. Drake had received other short-term advances
from the company of approximately $83,000. This debt was incurred
by Mr. Drake in order to satisfy certain personal obligations and
was evidenced by a note bearing interest at 5.5% per annum with a
December 31, 2002 maturity date. At December 31, 2002,
approximately $30,000 was still outstanding on the note. In March
2003, this debt obligation, including accrued interest, was paid
in full. Mr. Drake received no new advances from the Company
subsequent to June 30, 2002.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2002, Mr. Doede paid off the remaining principal balance of his
note, approximately $188,000. This debt was incurred by Mr. Doede
in order to satisfy certain personal

57



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | obligations and was evidenced by a promissory note bearing
interest at 9%. Mr. Doede received no new advances from the
Company subsequent to June 30, 2002. Mr. Doede has also
voluntarily deferred approximately $49,000 of his wages. This
amount is included in accrued compensation and related costs in
the consolidated balance sheet.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Max A. Coon, Secretary and Vice Chairman of the Board of Integral
Vision, advanced the Company $70,000 to address short term capital
needs. The advance from Mr. Coon was repaid in 2003.

Note N  Market for the Companys Common Stock



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys common stock was moved to the Over the Counter
Bulletin Board (OTCBB) effective with its delisting from The
Nasdaq SmallCap Market with the open of business August 16, 2001.
The Company was informed by Nasdaq that the delisting was decided
by the Nasdaq Listing Qualifications panel which approved the
Nasdaqs staff decision to delist the stock due to its failing to
maintain a minimum bid price of $1.00 for 30 consecutive trading
days as required by Marketplace Rule 4450(a)(5) for continued
listing.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Information on the current quotes on the stock, which will
continue to use the ticker symbol INVI, are available at the
OTCBBs website, www.otcbb.com and most financial information
portals, such as that provided at http://finance.yahoo.com or
http://quote.bloomberg.com. Integral Vision will continue to
provide information through filings with the Securities and
Exchange Commission (SEC) as required for continued listing on the
OTCBB. These filings can be found at the SECs website at
www.sec.gov.

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 during the years
ended December 31, 2002, 2001 and 2000, the Company incurred
losses from operations of $2.2 million, $8.1 million, and $7.1
million, respectively. The continuing losses, in addition to
working capital deficiencies, recurring reductions in product
sales, and cash flow deficiencies, among other factors, may
indicate that the Company will be unable to continue as a going
concern.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going
concern. The Companys continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to obtain additional
financing as may be required, and ultimately to attain
profitability. The Companys anticipated cash provided by
operating activities will not be sufficient to support the
Companys cash flow needs over the next twelve months.
Additionally, at December 31, 2002, substantially all of the
Companys $678,000 in trade accounts payable was overdue, of which
$221,000 was paid subsequent to December 31, 2002. The Company
also has an estimated $425,000 in amounts owed to certain
regulatory agencies for which no payment arrangements have been
made to date. In March 2001, the Companys board of directors
approved the issuance of up to $1.5 million of senior debentures
(increased to $2.5 million in March 2003), which could provide
additional financing to the Company. Additionally, effective May
1, 2002, the Companys Note and Warrant Purchase Agreement was
amended to provide for Class 2 Notes and Class 2 Warrants
which are subordinated to the prior purchasers. Class 2 Notes are
working capital notes which are secured by accounts receivable of
the Company. At December 31, 2002, there was approximately
$215,000 in principal and interest due to the Class 1 Note holders
under the terms of the agreement. Subsequent to December 31,
2002, the holders of those Notes agreed to a modification to the
Note and Warrant Purchase Agreement which extends the due dates,
increases the maximum amount of Notes outstanding to $2.5 million
and changes the conversion price on previously issued warrants to
$.25 per share. The terms of the Class 1 Notes were changed such
that all accrued interest will be due on December 31, 2003, which
is projected to be approximately $310,000. Additionally, the
first principal payments on the

58



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Class 1 Notes will be due on March 31, 2004 and the maturity dates
extended to February 2007. The principal and interest due on
March 31, 2004 is projected to be approximately $204,000. The
Class 2 Notes were modified to have a due date, both principal and
accrued interest, of September 30, 2003. Principal and interest
due on the Class 2 notes on September 30, 2003 is projected to be
approximately $390,000. A principal payment of approximately
$154,000 was paid to a Class 2 Note holder in January 2003.
Management is projecting a cash shortfall over the next twelve
months of approximately $1.8 million, $360,000 of which was raised
subsequent to December 31, 2002, through placements of the
Companys Class 1 debentures. Charles J. Drake, the Companys
chairman, acquired $150,000 of these debentures. Management plans
to seek out additional investors for an additional $1.0 million of
its debentures to cover a portion of the anticipated shortfall,
which would bring the amount of debentures outstanding to the
maximum allowable of $2.5 million. The Company is currrently
assessing its options relative to the remaining $400,000 projected
shortfall. Management anticipates that it could be covered
through a combination of short term advances and further deferrals
of debt repayments from certain of its debt holders.
Additionally, if necessary, Management would attempt to obtain any
additional cash needed to enable the Company to continue as a
going concern through possible joint ventures and other strategic
alliances. Additional financing may or may not be available
through banks. There can be no assurance that Management will be
able to successfully execute these plans before the Company has
exhausted all of its resources. These uncertainties raise
substantial doubt about the Companys ability to continue as a
going concern.

Note P  Foreign Currency Translation Adjustment



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

Note Q  Off Balance Sheet Risk



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A claim has been made against the Company citing unpaid royalties
totaling $107,000. Management is still researching the claim but
does not believe that the Company will ultimately be found to be
liable to the claimant.

Note R  Subsequent Events



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Subsequent to December 31, 2002, the holders of those Notes agreed
to a modification to the Note and Warrant Purchase Agreement which
extends the due dates, increases the maximum amount of Notes
outstanding to $2.5 million and changes the conversion price on
previously issued warrants to $.25 per share. The terms of the
Class 1 Notes were changed such that all accrued interest will be
due on December 31, 2003, which is projected to be approximately
$310,000. Additionally, the first principal payments on the Class
1 Notes will be due on March 31, 2004 and the maturity dates
extended to February 2007. The principal and interest due on
March 31, 2004 is projected to be approximately $204,000. The
Class 2 Notes were modified to have a due date, both principal and
accrued interest, of September 30, 2003. Principal and interest
due on the Class 2 notes on September 30, 2003 is projected to be
approximately $390,000. A principal payment of approximately
$154,000 was paid to a Class 2 Note holder in January 2003.
Additionally, subsequent to December 31, 2002, the Company placed
$360,000 of its Class 1 debentures. The purchasers of these
debentures received warrants for the purchase of 1,440,000 shares
of the Companys common stock with an exercise price of $.25 per
share. Mr. Drake purchased $150,000 of these debentures and, in
connection with this purchase, received warrants for the purchase
of 600,000 shares of the Companys common stock.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Subsequent to December 31, 2002, reports on Form 8-K and Form
8-K/A were filed to report the resignation of the Companys
certifying accountant.

59



---



##### Table of Contents






Schedule II  Valuation And Qualifying Accounts

Integral Vision, Inc. And Subsidiary

(in thousands)

|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |           |     |   |        |        | 
|----------------------------- | -------------------------------- | -------- | ------------ | ----- | -------- | ---------- | --------- | -------- | --------- | - | --------------------- |  |  | ------ | ----- | --------- | --- | - | ------ | ------ | 
|Column A                      |                                  | Column B |              |       | Column C |            |           | Column D |           |   | Column E              | 
|                              |                                  |          |              |       |          |            |           |          |           |   |                       | 
|                              |                                  |          |              |       |          |            | Additions |          |           |   |                       |  |  |        |       |          
|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |          
|                              |                                  |          |              |       |          |            |           |          |           |   | Charged to            |  |  |        |       |           |     |   |        |       
|                              |                                  |          | Balance at   |       |          | Charged to |           |          | Other     |   |                       |  |  |        |       | Balance   |    
|                              |                                  |          | Beginning of |       |          | Costs and  |           |          | Accounts- |   |                       |  |  |        |       | at End of |    
|Description                   |                                  | Period   |              |       | Expenses |            |           | Describe |           |   | Deductions - Describe |  |  | Period |      
|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |      
|Year ended December 31, 2002: |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |           |     |   |        |       
|                              | Accounts receivable allowance    |          | $            | 179   |          |            | $         | 99       |           |   |                       |  |  |        | $     | 108       | (3) |   | $      | 170    | 
|                              | Inventory obsolescence reserve   |          |              | 1,836 |          |            |           | (7       | )         |   |                       |  |  |        |       | 1,268     | (1) |   |        | 561    | 
|                              | Deferred tax valuation allowance |          |              | 9,489 |          |            |           | 1,629    |           |   |                       |  |  |        |       |           |     |   |        | 11,118 | 
|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |          
|                              |                                  | $        | 11,504       |       |          | $          | 1,721     |          |           | $ |                      |  |  | $      | 1,376 |           |     | $ | 11,849 |       
|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |          
|Year ended December 31, 2001: |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |           |     |   |        |       
|                              | Accounts receivable allowance    |          | $            | 82    |          |            | $         | 109      |           |   |                       |  |  |        | $     | 12        | (3) |   | $      | 179    | 
|                              | Inventory obsolescence reserve   |          |              | 1,484 |          |            |           | 352      |           |   |                       |  |  |        |       |           |     |   |        | 1,836  | 
|                              | Deferred tax valuation allowance |          |              | 7,308 |          |            |           | 2,181    |           |   |                       |  |  |        |       |           |     |   |        | 9,489  | 
|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |          
|                              |                                  | $        | 8,874        |       |          | $          | 2,642     |          |           | $ |                      |  |  | $      | 12    |           |     | $ | 11,504 |       
|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |          
|Year ended December 31, 2000: |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |           |     |   |        |       
|                              | Accounts receivable allowance    |          | $            | 820   |          |            | $         | 12       |           |   |                       |  |  |        | $     | 750       | (3) |   | $      | 82     | 
|                              | Inventory obsolescence reserve   |          |              | 2,100 |          |            |           | 1,134    |           |   |                       |  |  |        |       | 1,750     | (1) |   |        | 1,484  | 
|                              | Deferred tax valuation allowance |          |              | 4,990 |          |            |           | 2,318    |           |   |                       |  |  |        |       |           |     |   |        | 7,308  | 
|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |          
|                              |                                  | $        | 7,910        |       |          | $          | 3,464     |          |           | $ |                      |  |  | $      | 2,500 |           |     | $ | 8,874  |       
|                              |                                  |          |              |       |          |            |           |          |           |   |                       |  |  |        |       |          



| | 1) |  | Write-off obsolete inventory                  
| | -- |  | ----------------------------------------------
|
| | 2) |  | Net change in deferred tax valuation allowance
|
| | 3) |  | Net accounts receivable write-offs            

60



---



##### Table of Contents



Exhibits to Form 10K

Integral Vision, Inc.

Year Ended December 31, 2002

Commission File Number 0-12728

61



---



##### Table of Contents



|        |  |                                                                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                              
|Number  |  | Exhibit Index Description                                                                                                                                    
|        |  |                                                                                                                                                              
|4.7     |  | Consent to Modifications dated March 17, 2003 modifying the terms
of the Second Amended Note and Warrant Purchase Agreement.                                 
|        |  |                                                                                                                                                              
|16      |  | Letter regarding change in certifying accountant.                                                                                                            
|        |  |                                                                                                                                                              
|21      |  | Subsidiary of the Registrant                                                                                                                                 
|        |  |                                                                                                                                                              
|23      |  | Consent of Moore Stephens Doeren Mayhew, independent auditors.                                                                                               
|        |  |                                                                                                                                                              
|99.1    |  | Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. §1350, as adopted).

62