##### Table of Contents



United States Securities And Exchange Commission Washington, D.C. 20549
 FORM 10-K þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2003.
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from  to
_____.
 Commission File Number 0-12728 INTEGRAL VISION, INC.  Michigan
    
    38-2191935(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification Number)38700 Grand River Avenue,
Farmington Hills, Michigan
(Address of principal executive offices)
    
    48335
(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 þ NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.     o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES o 
NO þ The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 16, 2004: Common Stock, No Par Value,
Stated Value $.20 Per Share - $11,657,351 The number of shares outstanding on each of the issuers classes of common
stock, as of March 16, 2004: Common Stock, No Par Value, Stated Value $.20 Per Share  12,778,901 1




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TABLE OF CONTENTS  Part IITEM 1. BusinessITEM 2. PropertiesITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of Security HoldersPart IIITEM 5. Market for Registrants Common Equity and Related Stockholder MattersITEM 6. Summary of Selected Financial DataITEM 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 7a. Quantitative and Qualitative Disclosures about Market RisksITEM 8. Financial Statements and Supplementary DataITEM 9. Changes in and Disagreements with Accountants and Financial DisclosurePart IIIITEM 10. Directors and Executive Officers of the RegistrantITEM 11. Executive CompensationITEM 12. Security Ownership of Certain Beneficial Owners and ManagementITEM 13. Certain Relationships and Related TransactionsITEM 14. Controls and ProceduresPART IVITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSIGNATURESFourth Amended Note and Warrant Purchase AgreementSubsidiariesConsent of Rehmann Robson, Independent AuditorsConsent of Moore Stephens Doeren MayhewSec. 302 Certification of Chief Executive OfficerSec. 302 Certification of Chief Financial OfficerSec. 906 Certification of CEO and CFO    Table of Contents  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS  This Annual Report onForm 10-Kcontains 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 thisForm 10-Kis as of the filing date with the Securities and
Exchange Commission and future events or circumstances could differ
significantly from the forward-looking statements included herein.
Accordingly, we caution readers not to place undue reliance on such
statements. 
 Part I 
 ITEM 1. Business General  Integral Vision, Inc. (or the Company) develops, manufactures
and markets microprocessor-based process monitoring and inspection
systems for use in industrial manufacturing environments. The
principle application for the Companys products is optical
display inspection (machine vision products). The Companys
products are generally sold as capital goods. Depending on the
application, machine vision systems have an indefinite life.
Machine vision applications are more likely to require replacement
due to possible technological obsolescence than physical wear. Overview  Integral Vision is a supplier of machine vision systems used to
ensure product quality during the manufacturing process.  Machine vision has become a necessity for manufacturers who need
to continually improve production efficiency to meet the
increasing demand for high quality products. The Companys vision
systems automatically identify, gauge or inspect parts with speed
and accuracy. Quantitative information about each part is
evaluated for functional or cosmetic defects. Our systems can be
configured to statistically monitor the production process and
send data to other equipment in the manufacturing cell. Such data
could be used, for example, by a diverter to send defective parts
to a reject bin, or by process controllers to automatically adjust
process variables.The Company markets its turnkey systems to the flat panel display
industry. Applications development software, such as our
Industrial Vision Controller (IVC) technology, can be applied to
an extensive array of applications in industries that run the
gamut from aerospace to medical to textiles. Products  Flat Panel Display InspectionIntegral Vision has over nine years of experience in the display
industry. Our initial product, LCI-Professional, is used for
inspection of LCD Displays as components or final assemblies.
Applications include cell phones, car radios, pagers, electronic
organizers and hand-held video games. Integral Visions display
inspection systems are designed to detect two classes of defects:
cosmetic and functional. Cosmetic defects do not affect the
functionality of the display, but they cause user annoyance and
reduce product value. Functional defects are flaws that cause the
device to be inoperable or have a significant effect on
functionality.Integral Visions SharpEye provides Flat Panel Display (FPD)
inspection for reflective, emissive and transmissive display
technologies. SharpEye is designed for the detection of
functional and cosmetic defects in LCOS, OLED, Poly OLED, DMD, EL,
HTPS, LTPS, LCD and other emerging display technologies. These
technologies are applied to 2




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consumer products such as camcorders, rear projection computer
monitors, digital still cameras, HDTV, projectors, video headsets
and video telephones. The core technology of SharpEye inspection
algorithms is the ability to quantize data to the level of a
single display pixel. SharpEye can be configured for production
inspection or for display evaluation in a laboratory based on the
equipment configuration selected.Integral Visions ChromaSee, introduced in 2003, provides
luminance, color matching and defect inspections for FPD displays.
Defect detection includes functional (e.g. failed pixels, icons)
and cosmetic (e.g. scratches) defects. ChromaSee integrates with
production equipment to allow inline or offline testing. A
configuration interface (Task Sequencer) uses a familiar Tree
View representation of the inspection sequence flow. For
deployment into production, the operators interface provides
essential views of results, images and statistics for production
floor personnel. Production and Suppliers  The Companys production process consists principally of
assembling standard electrical, electronic and optical components
and hardware subassemblies purchased from suppliers into finished
products. When proprietary circuit boards are needed, the Company
generally contracts for outside vendors to build the boards based
on internal company designs.  The Company generally does not rely on a single source for parts
and subassemblies, although certain components and subassemblies
included in the Companys products may only be obtained from a
limited number of suppliers. Management believes alternative
sources or designs could be developed for any of the components
used in its products thereby mitigating any exposure to product
interruption from shortages of parts or limited suppliers. Intellectual Property  Management believes that the technology incorporated in its
products gives it advantages over its competitors and prospective
competitors. Protection of technology is attempted through a
combination of patents, applied for patents, confidentiality
agreements and trade secrets. The Company presently has 14
patents. There can be no assurance that the Company will have the
resources to defend its patents or that patents the Company holds
will be considered valid if challenged. In addition, it is
possible that some patents will be rendered worthless as the
result of technological obsolescence. Marketing  The Company generally markets its vision products to end users,
but the Company has had success integrating its products with
OEMs in certain circumstances. Although sales are made
worldwide, the Companys strongest presence is maintained in the
US (through Company employees), and in Europe and Asia (through
sales representatives). Product Development  The market for Machine Vision is characterized by rapid and
continuous technological development and product innovation. The
Company believes that continued and timely development of new
products and enhancements to existing products is necessary to
maintain its competitive position. Accordingly, the Company
devotes a significant portion of its personnel and financial
resources to product development programs and seeks to maintain
close relationships with customers to remain responsive to their
needs. The Companys net engineering and development costs
amounted to $663,000, $852,000, and $1.6 million for the years
ended December 31, 2003, 2002, and 2001, respectively. The
Companys current product development efforts are primarily
directed to Flat Panel Display Inspection products. Environmental Factors 3




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The costs to the Company of complying with federal, state and
local provisions regulating protection of the environment are not
material. Competition  The Company experiences competition in all areas in which it
operates. Competition for Flat Panel Display Inspection comes
primarily from Westar Display Technologies, Inc. Cognex Corp.
competes either directly or indirectly via systems integrators in
certain general vision application work, as do numerous niche
producers of machine vision solutions. Export Sales  Sales outside of the United States accounted for 13%, 54% and 46%
of the Companys net sales in 2003, 2002 and 2001, respectively.
Management expects that such sales will continue to represent a
significant percentage of its net sales. Most of the Companys
export billings are denominated in US dollars. On occasion other
export billings are denominated in the currency of the customers
country.  See Note I to the Consolidated Financial Statements Part II  ITEM
8 for details of geographic area information. Major Customers  The nature of the Companys product offerings may produce sales to
one or a limited number of customers in excess of 10% of total
consolidated sales in any one year. It is possible that the
specific customers reaching this threshold may change from year to
year. Loss of any one of these customers could have a material
impact on the Companys results of operations. For the year ended
December 31, 2003 sales to Intel Corporation, Owens Brockway and
Toyo Corporation represented 63%, 14%, and 11% of consolidated
sales, respectively. Amounts due from these customers represented
0% of the respective outstanding trade receivable balance at
December 31, 2003. For the year ended December 31, 2002 sales to
Ness Display Co., LTD and Uniax Corporation represented 13% and
14% of consolidated sales, respectively. Amounts due from these
customers represented 3% of the respective outstanding trade
receivable balance at December 31, 2002. In 2001 the Company did
not have sales to any single customer that exceeded 10% of total
consolidated sales. Backlog  As of December 31, 2003, the Company had an order backlog of
approximately $1.6 million compared to $399,000 at December 31,
2002. Management expects that the Company will ship products
representing this entire backlog in 2004. Employees  As of February 28, 2004, the Company had approximately 12
permanent employees, as compared to 13 at February 28, 2003 and 18
at February 28, 2002. None of the Companys employees are
represented by a labor union. 
 ITEM 2. Properties  Manufacturing, engineering and administrative functions of
Integral Vision are performed at an approximately 5,000 square
foot facility leased by the Company in Farmington Hills, Michigan. 4




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ITEM 3. Legal Proceedings  The Company is not currently involved in any material litigation. ITEM 4. Submission of Matters to a Vote of Security Holders  None. 
 Part II 
 ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters  The Companys common stock is traded on the Over the Counter
Bulletin Board (OTCBB) under the symbol INVI. As of March 15,
2004, there were approximately 3,000 stockholders of the Company
including individual participants in security position listings.The Companys common stock was moved to the Over the Counter
Bulletin Board (OTCBB) effective with its delisting from The
Nasdaq SmallCap Market with the open of business August 16, 2001.
The Company was informed by Nasdaq that the delisting was decided
by the Nasdaq Listing Qualifications panel which approved the
Nasdaqs staff decision to delist the stock due to its failing to
maintain a minimum bid price of $1.00 for 30 consecutive trading
days as required by Marketplace Rule 4450(a)(5) for continued
listing.Information on the current quotes on the stock, which will
continue to use the ticker symbol INVI, are available at the
OTCBBs website, www.otcbb.com and most financial information
portals, such as that provided at http://finance.yahoo.com or
http://quote.bloomberg.com. Integral Vision will continue to
provide information through filings with the Securities and
Exchange Commission (SEC) as required for continued listing on the
OTCBB. These filings can be found at the SECs website at
www.sec.gov.The table below shows the high and low sales prices for the
Companys common stock for each quarter in the past two years.
The closing sales price for the Companys common stock on March
16, 2004 was $1.50 per share. 2003Mar 31
    
    Jun 30
    
    Sept 30
    
    Dec 31High
    
    $
    0.300
    
    
    $
    0.290
    
    
    $
    0.400
    
    
    $
    0.650Low
    
    
    0.080
    
    
    
    0.150
    
    
    
    0.170
    
    
    
    0.120
 2002High
    
    $
    0.690
    
    
    $
    0.680
    
    
    $
    0.350
    
    
    $
    0.170Low
    
    
    0.090
    

    
    
    0.340
    
    
    
    0.140
    
    
    
    0.070
  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




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ITEM 6. Summary of Selected Financial Data Year ended December 312003
    
    2002
    
    2001
    
    
    
    
    
    2000
    
    
    
    
    
    1999(in thousands, except per share data)Net revenues
    
    $
    641
    
    
    $
    1,579
    
    
    $
    2,633
    
    
    
    
    
    
    $
    5,956
    
    
    
    
    
    
    $
    10,743Gross margin
    
    
    37
    
    
    
    402
    
    
    
    (2,763
    )(d)
    
    
    
    
    
    
    (534
    )(c)
    
    
    
    
    
    
    (105
    )(a)Loss from continuing
operations
    
    
    (1,937
    )
    
    
    (2,203
    )
    
    
    (8,135
    )
    
    
    
    
    
    
    (7,124
    )
    
    
    
    
    
    
    (5,671
    )Income from
discontinued operations (e)
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,030Gain on disposal of
Welding division
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,749Extraordinary charge from
early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (583
    )Net (loss) income
    
    
    (1,937
    )
    
    
    (2,203
    )
    
    
    (8,135
    )
    
    
    
    
    
    
    (7,124
    )
    
    
    
    
    
    
    3,525
    (b)Basic and diluted earnings
(loss) per share:Continuing operations
    
    
    (0.21
    )
    
    
    (0.23
    )
    
    
    (0.89
    )
    
    
    
    
    
    
    (0.79
    )
    
    
    
    
    
    
    (0.63
    )Discontinued Welding
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.11Gain on
disposal of Welding division
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.97Extraordinary charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.06
    )Net (loss) income
    
    
    (0.21
    )
    
    
    (0.23
    )
    
    
    (0.89
    )
    
    
    
    
    
    
    (0.79
    )
    
    
    
    
    
    
    0.39Weighted average shares
    
    
    9,430
    
    
    
    9,430
    
    
    
    9,198
    
    
    
    
    
    
    
    9,028
    
    
    
    
    
    
    
    9,025
 At December 312003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands)Working capital (deficit)
    
    $
    (2,892
    )
    
    $
    (2,006
    )
    
    $
    (1,472
    )
    
    $
    964
    
    
    $
    5,810Total assets
    
    
    735
    
    
    
    1,308
    
    
    
    1,964
    
    
    
    11,164
    
    
    
    19,058Long-term debt,
net of current portion and OID
    
    
    1,425
    
    
    
    962
    
    
    
    337
    
    
    
    1,967
    
    
    
    2,000Stockholders (deficit) equity
    
    
    (3,922
    )
    
    
    (2,303
    )
    
    
    (672
    )
    
    
    6,936
    
    
    
    14,325
  (a)
    
    In 1999, the Company charged-off inventory of $1.5
million resulting from a review of the marketability of
inventory related to a previously discontinued product line.(b)
    
    Includes an $8.7 million after tax gain on disposal of
the Welding Controls division and a $583,000 charge, net of
tax credit, for the early retirement of debt.(c)
    
    In 2000, Management made a change in estimate,
primarily related to inventory, that resulted in a $666,000
charge to direct costs of sales.(d)
    
    In 2001, Management made a change in estimate that
resulted in a $1.9 million charge to direct costs of sales to
write down inventory and capitalized software to estimated
net realizable values. The amount of the charge applicable
to inventory was $540,000 with the remaining $1.3 million
applicable to capitalized software.(e)
    
    See Note B to Notes to Consolidated Financial
Statements.  The above selected financial data should be read in conjunction
with Consolidated Financial Statements, including the notes
thereto (Part II - ITEM 8) and Managements 6




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Discussion and
Analysis of Financial Condition and Results of Operations (Part II
  ITEM 7). The Company has never paid a dividend and does not
anticipate doing so in the foreseeable future. The Company
expects to retain earnings, if any, to finance the expansion and
its development of business. 
 ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview  Integral Vision, Inc. develops, manufactures and markets
microprocessor-based process monitoring and inspection products
for use in industrial manufacturing environments. The Companys
revenues are primarily derived from the sale of flat panel display
inspection equipment. Except for the historical information
contained herein, the matters discussed in this document are
forward-looking statements made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934. Such statements are
based on managements current expectations and are subject to a
number of factors and uncertainties that could cause actual
results to differ materially from those described in the
forward-looking statements. Such factors and uncertainties
include, but are not limited to: the impact of the level of the
Companys indebtedness; the Companys ability to obtain the cash
needed to allow it to continue as a going concern; general
economic conditions and conditions in the specific industries in
which the Company has significant customers; price fluctuations in
the materials purchased by the Company for assembly into final
products; competitive conditions in the Companys markets and the
effect of competitive products and pricing; and technological
development by the Company, its customers and its competition. As
a result, the Companys results may fluctuate. Additional
information concerning risk factors that could cause actual
results to differ materially from those projected in the
forward-looking statements is contained in the Companys filings
with the Securities and Exchange Commission. These
forward-looking statements represent the Companys best estimates
as of the date of this document. The Company assumes no
obligation to update such estimates except as required by the
rules and regulations of the Securities and Exchange Commission. 7




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Results of Operations  The following table sets forth for the periods indicated certain
items from the Companys Statements of Operations as a percentage
of net revenues. The impact of inflation for the periods
presented was not significant. 2003
    
    2002
    
    2001Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Direct cost of sales (b)
    
    
    94.2
    
    
    
    74.5
    
    
    
    184.4Specific inventory adjustment (a)
    
    
    
    
    
    
    
    
    
    
    20.5Gross margin
    
    
    5.8
    
    
    
    25.5
    
    
    
    (104.9
    )Other costs and expenses:Marketing
    
    
    34.8
    
    
    
    35.3
    
    
    
    56.3General and administrative
    
    
    125.1
    
    
    
    66.8
    
    
    
    64.7Engineering
and development:Expenditures
    
    
    103.4
    
    
    
    53.9
    
    
    
    73.9Allocated to
capitalized software and direct
cost of sales
    
    
    
    
    
    
    
    
    
    
    (14.6
    )Net engineering and development expenses
    
    
    103.4
    
    
    
    53.9
    
    
    
    59.3Total other costs and expenses
    
    
    263.3
    
    
    
    156.0
    
    
    
    180.3Loss from operations
    
    
    (257.5
    )
    
    
    (130.5
    )
    
    
    (285.2
    )(Loss) gain on sales of assets
    
    
    (1.1
    )
    
    
    9.5
    
    
    
    (4.2
    )Other income
(expense) (c)
    
    
    13.6
    
    
    
    3.7
    
    
    
    (16.6
    )Interest income
    
    
    
    
    
    
    0.7
    
    
    
    3.6Interest expense
    
    
    (57.7
    )
    
    
    (15.9
    )
    
    
    (6.5
    )Foreign currency translation gain (loss)
    
    
    0.3
    
    
    
    (12.7
    )Loss from operations before income taxes
    
    
    (302.4
    )
    
    
    (145.2
    )
    
    
    (308.9
    )Credit for income taxes
    
    
    
    
    
    
    (5.7
    )Net loss
    
    
    (302.4)
    %
    
    
    (139.5)
    %
    
    
    (308.9)
    %
  (a)
    
    In 2001, Management made a change in estimate that resulted in a
$1.9 million charge to direct costs of sales to write down inventory
and capitalized software to estimated net realizable values. The
amount of the charge applicable to inventory was $540,000 with the
remaining $1.3 million applicable to capitalized software.(b)
    
    Direct cost of sales includes capitalized software amortization as
a percentage of sales of 30.2%, 11.1%, and 100% in 2003, 2002 and 2001,
respectively.(c)
    
    In 2001, other income (expense) includes a loss on the sale of a
note receivable of $441,000 (see Note B of the notes to consolidated
financial statements). 8




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




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Other income(expense) in 2003 includes approximately $54,000 of
royalty income and $18,000 for engineering fees in connection with
the DaTARIUS Technologies transaction.Interest income decreased to $320 in 2003 compared to $11,000 in
2002. The income in the 2002 period is primarily attributable to
interest charged on the officers notes receivable. The decrease
in interest income from the prior year period is primarily
attributable to the of the officers notes receivable in 2003.Interest expense increased $119,000 to $370,000 in 2003 compared
to $251,000 in 2002. The increase is primarily attributable to
the interest on the debentures and Class 2 notes that were sold
under the 2001 Note and Warrant Purchase Agreement (see Note C to
consolidated financial statements) and the discount on the
debentures amortized in 2003.In June 2002, Integral Vision, Inc. wrote-off an inter-company
receivable due from Integral Vision Ltd., its subsidiary in the
United Kingdom. As the consolidated financial statements include
the accounts of both entities, upon consolidation, the charge
recorded by Integral Vision, Inc., approximately $3.1 million, was
eliminated against the gain recorded by Integral Vision Ltd.
However, previously unrecognized losses that resulted from foreign
currency translation adjustments were recognized in the June 30,
2002 quarter and totaled approximately $208,000. Year Ended December 31, 2002, compared to the year ended December 31, 2001  Net revenues decreased $1.1 million (40.0%) to $1.6 million in
2002 from $2.6 million in 2001. Net revenue is reported net of
sales commission expense of approximately $83,000 in 2002 compared
to $84,000 in 2001. The decrease in net revenue was partially
attributable to the fact that the Company sold its packaging
product line in 2001 (see Note K to consolidated financial
statements). Sales from the Companys packaging product line
accounted for $516,000 of the net revenue in the 2001 period.
Additionally, sales of the Companys disc identification/print
inspection (CDiD/CDiP) products were lower in the 2002 period.
The Company sold its disc identification/print inspection product
line in early September 2002 (see Note K to consolidated financial
statements). Sales from the disc inspection product line
accounted for approximately $743,000 and $1.1 million of the
Companys net revenue for the years ended December 31, 2002 and
2001, respectively. The Companys revenue from service activities
was approximately $398,000 and $511,000 in 2002 and 2001,
respectively. These decreases were partially offset by increased
sales of the Companys flat panel display inspection product.
Sales from the flat panel display inspection product line
accounted for approximately $447,000 and $413,000 of the Companys
net revenue for the years ended December 31, 2002 and 2001,
respectively.Direct costs of sales decreased $4.2 million (78.2%) to $1.2
million (approximately 74.5% of sales) in 2002 from $5.4 million
(approximately 205% of sales) in 2001. This was primarily
attributable to the lower sales volume and lower depreciation and
amortization expense in the 2002 period. Depreciation and
amortization expense was lower in 2002 primarily due to the 2001
sale of the Companys building (see Note J to consolidated
financial statements) and the write-off of capitalized software
costs in 2001. Management periodically performs an analysis of
the net realizable value of capitalized software costs. In 2001,
based on market conditions and the direction of the Company,
Management determined that capitalized software development costs
exceeded the estimated net realizable value of amounts capitalized
and a write-down was necessary. For the year ended December 31,
2001, $1.3 million of additional amortization was included in
costs of sales as a result of these analyses. Additionally, as a
result of the analyses, direct costs of sales for the year ended
December 31, 2001 includes a $540,000 charge for the write-down of
inventory. In the 2002 period, Management determined that
capitalized patent costs exceeded the estimated net realizable
value of amounts capitalized and a write-down was necessary. In
the year ended December 31, 2002, $74,000 of additional
amortization was included in costs of sales as a result of this
determination. The gross margin in the 2001 period was negative
due to the fact that the sales volume was not sufficient to cover
the fixed charges, depreciation and amortization, included in
direct cost of sales. 10




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Marketing costs decreased 62.4%, or $926,000, to $557,000 in 2002
compared to $1.5 million in 2001. This decrease is primarily
attributable to workforce reductions resulting from the
implementation of a cost reduction plan by Management in late 2000
and throughout 2001. Employee related costs in the marketing
division were $828,000 lower in 2002 compared to 2001 levels. The
plan also called for workforce reductions in both the general and
administrative department and the engineering department, as
evidenced by the figures below. Advertising costs were $106,000
lower in 2002 compared to 2001 levels.General and administrative costs decreased 38.1%, or $649,000, to
$1.1 million in 2002 compared to $1.7 million in 2001. Messrs.
Charles Drake and Mark Doede each had loans from the Company. In
August 2001, the Compensation Committee of the Companys Board of
Directors resolved to forgive $100,000 of the outstanding balance
on each of their loans from the Company, which resulted in a
$200,000 charge to compensation expense. Additionally, Mr.
Charles Drake was provided with 400,000 shares of unregistered
stock of the Company, subject to certain sale restrictions. An
additional $56,000 of compensation expense was charged to general
and administrative expense in 2001 as a result of the issuance of
these shares. Exclusive of these infrequent charges, general and
administrative costs decreased 27.2% or $393,000 in 2002.
Employee related costs in the general and administrative division
were $398,000 lower in 2002 compared to 2001 levels.
Additionally, general and administrative costs included charges
for bad debts of approximately $99,000 in 2002 and $109,000 in
2001.Engineering and development expenditures decreased 56.2%, or $1.1
million, to $852,000 in 2002 compared to $1.9 million in 2001.
Employee related costs in the engineering and development division
were $947,000 lower in 2002 compared to 2001 levels.On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of
global test equipment manufacturer DaTARIUS Technologies GmbH,
purchased Integral Visions assets related to inspection systems
for the optical disc industry, including the names Automatic
Inspection Systems and AID. The sale included Integral Visions
optical disc scanner products as well as its range of print and
identification code products used to inspect the printing stage of
disc manufacture. The consideration the Company received for the
technology consisted of a non-refundable $100,000 advanced minimum
royalty payment in addition to future royalties. The Company
received approxmiately $54,000 in royalties in 2003 and expects to
receive additional royalties in excess of $60,000 a year in 2004
and 2005. Additionally, the Company received $25,000 from the
sale of equipment to DaTARIUS. The Company recognized a gain on
the transaction of approximately $112,000, which is included in
gain on sale of assets in 2002, primarily attributable to the
advanced minimum royalty payment received. The proceeds from the
transaction were used primarily to fund current operations.Included with the transaction was a Transition Services Agreement
whereby Integral Vision provides assembly and agreed upon
technical support services for the product line for up to twelve
months after the closing date at an agreed upon rate. Revenue
generated under this agreement was $24,000 in 2002 and is not
expected to be significant in the future.On August 24, 2001, the Company completed the sale of certain of
its packaging applications software and most of the fixed assets
of its subsidiary, Integral Vision Ltd., to n.v. DIMACO, s.a. for
$500,000 in cash and future royalties (see Note K to consolidated
financial statements). Included in the transaction was the sale of
the worldwide exclusive rights to Integral Visions Full Bottle
Inspection System (FBIS), a product that performs certain
inspections on bottles at the end of a filling line. Integral
Vision will receive a royalty on each FBIS sold for the three
years following the sale. The proceeds from the transaction were
used primarily to fund current operations and to pay down existing
trade payables.Also included with the transaction was a manufacturing agreement
whereby DIMACO will manufacture products for Integral Visions
Optical Disc and Display Inspection customers in Europe. 11




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Under the terms of the sale, most of Integral Vision Ltd.s
personnel and costs transferred to DIMACO. However, Integral
Vision Ltd. maintained sales and service staff to support its
Optical Disc and Display Inspection customers in Europe.In 2001, the Company recognized a gain on the transaction of
approximately $114,000, which is included in gain(loss) on sales
of assets, primarily attributable to the software included in the
sale.This gain was offset by a $22,000 loss on the sale of the
Companys building in Farmington Hills, MI in July 2001 and a
$210,000 charge to write-down the carrying value of the Companys
fixed assets in 2001. On July 27, 2001, the Company completed a
transaction to sell the 50,000 square foot building it occupied in
Farmington Hills, MI for $2.45 million, at which time the existing
mortgages were retired. The Company continued to occupy a portion
of the building under a five-year lease agreement with the new
owner. Effective April1, 2002, the Company entered into a new
lease agreement whereby it moved into a smaller space, 5,000
square feet, in exchange for a reduced lease rate. Given the
reduction in square footage, the Company disposed of a significant
portion of its equipment in 2002, which was written-down to its
estimated net realizable value in 2001. Net proceeds from the
sale was approximately $200,000 of which $186,000 was used to
prepay nine months of rent, a requirement of the lease agreement.On June 30, 1999, the Company completed an agreement to sell
substantially all the assets of its Welding Controls division for
$25.7 million, net of costs of the sale, for cash, the assumption
of certain liabilities, and a subordinated note (WTC note). The
interest bearing portion of the note, approximately $1.9 million,
carried an interest rate approximating prime plus 1% and required
quarterly payments beginning on February 15, 2000, with a February
15, 2001 maturity date. The non-interest bearing portion of the
note, $1.5 million, was discounted using an imputed interest rate
of 9% and matured on February 15, 2001.In January 2001, the Company sold 19.9% of the $1.7 million then
outstanding under the note agreement to third party investors in
exchange for consideration of $300,000. In May 2001, the Company
completed a transaction whereby it repurchased the portion of the
note previously sold to the investors and then sold the entire
note receivable, which had an outstanding balance of $1.1 million
at April 30, 2001, to a third party for $750,000. The Company
recognized a loss on sale of the note receivable of $441,000 in
the quarter ended March 31, 2001, which is included in other
income(expense) in 2001.Other income(expense) in 2002 includes $18,000 of royalty income
from the Companys VisionBlox software. Additionally, the Company
received $24,000 for engineering fees and $19,000 for royalties in
connection with the DaTARIUS Technologies transaction.Interest income decreased $85,000 to $11,000 in 2002 compared to
$96,000 in 2001. The income in the 2002 period is primarily
attributable to interest charged on the officers notes
receivable. The income in the 2001 period is primarily
attributable to $62,000 of interest charged on the officers notes
receivable and $34,000 of interest charged on the note receivable
that resulted from the sale of the Companys Welding Controls
division (see Note B to consolidated financial statements). The
decrease in interest income from the prior year period is
primarily attributable to the sale of the Companys note
receivable in May 2001 and the receipt of principal payments on
the outstanding balance of the note throughout the year.
Reductions to the officers notes receivable throughout 2001 also
contributed to the decrease in interest income in the 2002 period
(see Note M to consolidated financial statements).Interest expense increased $79,000 to $251,000 in 2002 compared to
$172,000 in 2001. The increase is primarily attributable to the
debentures and Class 2 notes that were sold under the 2001 Note
and Warrant Purchase Agreement (see Note C to consolidated
financial statements). The increase was partially offset by a
reduction in mortgage interest as the Companys mortgages were
paid in full when the sale of its building closed on July 27, 2001
(see Note J to consolidated financial statements). Additionally,
the Company used proceeds from the sale of its note receivable in
May 2001 (see Note B to consolidated financial statements) to pay
in full its revolving line of credit at which time that agreement
was terminated. 12




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In June 2002, Integral Vision, Inc. wrote-off an inter-company
receivable due from Integral Vision Ltd., its subsidiary in the
United Kingdom. As the consolidated financial statements include
the accounts of both entities, upon consolidation, the charge
recorded by Integral Vision, Inc., approximately $3.1 million, was
eliminated against the gain recorded by Integral Vision Ltd.
However, previously unrecognized losses that resulted from foreign
currency translation adjustments were recognized in the June 30,
2002 quarter and totaled approximately $208,000. Quarterly Information  The following table sets forth Consolidated Statements of
Operations data for each of the eight quarters in the two-year
period ended December 31, 2003. The unaudited quarterly
information has been prepared on the same basis as the annual
information and, in managements opinion, includes all adjustments
necessary for a fair presentation of the information for the
quarters presented. Quarter Ended2003
    
    2002Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31(in thousands except per share data)Net revenues
    
    $
    64
    
    
    $
    37
    
    
    $
    128
    
    
    $
    412
    
    
    $
    197
    
    
    $
    556
    
    
    $
    503
    
    
    $
    323Gross margin
    
    
    (58
    )
    
    
    (55
    )
    
    
    19
    
    
    
    131
    
    
    
    115
    
    
    
    116
    
    
    
    158
    
    
    
    13Net loss
    
    
    (547
    )
    
    
    (540
    )
    
    
    (498
    )
    
    
    (352
    )
    
    
    (365
    )
    
    
    (353
    )
    
    
    (850
    )
    
    
    (635
    )Basic and diluted loss
per share:Net loss*
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    (0.09
    )
    
    $
    (0.07
    )
   *
    The sum of the quarterly net loss per share amounts may not equal the annual amounts reported. Net loss
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 and management believes
these fluctuations may continue. The Companys reliance on large
orders has contributed to the variability of the Companys
operating results. Liquidity and Capital Resources  Operating activities for 2003 used cash of approximately $1.5
million primarily due to the Companys loss from operations. Net
loss, after non-cash adjustments of $372,000, was $1.6 million.
The cash used in operating activities was partially offset by a
net decrease of $40,000 in certain working capital items.
Decreases in accounts receivable, inventory, and prepaid expenses
and other current assets were partially offset by decreases in
accounts payable and other current liabilities.  The Companys financing activities included the receipt of
$901,000 from the sale of the Companys senior debentures and the
receipt of $920,000 from the sale of the Companys Class 2 Notes.
The Company made principal payments of approximately $254,000 on
its Class 2 Notes in the period. The Company also repaid a
$70,000 short term advance from Max A. Coon, an officer of the
Company.  The Companys continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as
may be required, and ultimately to attain profitability. The
Companys anticipated cash provided by operating activities will
not be sufficient to support the Companys cash flow needs over
the next twelve months. Additionally, at December 31, 2003,
substantially all 13




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of the Companys $412,000 in trade accounts payable was overdue,
of which $62,000 was paid subsequent to December 31, 2003. The
Company also has an estimated $386,000 in amounts owed to certain
regulatory agencies. The Company is making monthly payments of
approximately $6,300 to one of the regulatory agencies. At
December 31, 2003, under the terms of the Companys Note and
Warrant Purchase Agreement, as amended, the Company could issue up
to $4.0 million of senior debentures, which consists of Class 1
and Class 2 Notes. Class 2 Notes are working capital notes, are
secured by accounts receivable of the Company, and are
subordinated to the Class 1 Notes issued prior to April 16, 2002.
In September 2003, the holders of all of the then outstanding
Class 2 Notes agreed to modify the maturity dates of those Notes
to April 30, 2004. In December 2003, certain of the Class 2 Notes
were amended to have maturity dates of May 31, 2004. The
purchasers of the Class 2 Notes receive warrants for the purchase
of the Companys common stock when the Note is repaid. Class 2
Warrants entitle the holder to purchase one share of Common Stock
for each $1 in value of the Class 2 Note multiplied by a fraction,
the numerator of which is the number of days such Class 2 note is
outstanding and the denominator of which is 365, at a specified
price which shall be approximately 150% of the recent fair market
value of the Common Stock as of the date of the issuance of the
Class 2 Note. Based on their respective maturity dates, the
number of common shares that could be purchased with Class 2
warrants is estimated to be 486,000. There was approximately $2.8
million in principal and interest due to the Class 1 Note holders
at December 31, 2003. In August 2003, the holders of those Notes
agreed to a modification to the Note and Warrant Purchase
Agreement that increased the maximum amount of the Notes
outstanding to $4.0 million and created a new Class 3 Note which
is convertible into Integral Vision, Inc. common stock at a
conversion rate set by the Companys board of directors at the
date of issuance. No Class 3 Notes were issued, however. Class 1
Notes issued have maturities of up to four years, an interest rate
of 10%, and the purchasers of the Notes receive warrants for the
purchase of the Companys common stock (see Note A to consolidated
financial statements). The value assigned to warrants is included
in additional paid-in capital and the discount is amortized over
the life of the note. Additionally, the directors will determine
the conversion rate at the date of issuance, subject to change in
the event additional shares are issued in the future. In March
2004, the holders of the Class 1 and Class 2 Notes agreed to an
additional modification to the Note and Warrant Purchase
Agreement. The maturity date on substantially all of the
outstanding Class 2 Notes was extended to December 31, 2005.
Principal and interest due on the Class 2 notes on December 31,
2005 is projected to be approximately $1.2 million. The terms of
the Class 1 Notes were changed such that all accrued interest
(projected to be approximately $425,000) would be due on June 30,
2004. Additionally, the first principal payments (projected to be
approximately $176,000) on the Class 1 Notes would be due on June
30, 2004. However, the amended Note and Warrant Purchase
Agreement provides that, if the Companys shareholders approve
managements proposal to increase the Companys authorized stock
to 31,000,000 at the Companys annual meeting of its shareholders
to be held on May 6, 2004, the following will occur:  
    
    The accrued interest on outstanding Class 1
Notes as of December 31, 2003 in the amount of
approximately $313,418 will be exchanged for new Class 3
Notes due July 3, 2006 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.  
    
    The initial interest payment due on Class 1
Notes for interest accruing after December 31, 2003 will
be due April 1, 2005.  
    
    Quarterly principal payments on Class 1 Notes
would be eliminated, with all principal due at maturity.  
    
    $330,000 of principal on Class 1 Notes issued
prior to April 16, 2002 will be exchanged for Class 3
Notes due February 27, 2007 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.  
    
    Class 2 Notes outstanding at February 29, 2004,
plus interest then accrued, may be exchanged for Class 3
Notes due December 31, 2005 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share. 14




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Management is projecting a cash shortfall over the next twelve
months of approximately $70,000. Management plans to seek
additional investors of its debentures to cover the anticipated
shortfall, which would bring the amount of debentures outstanding
to $1.7 million. 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. 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 December 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 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. The Company has elected to adopt
only the disclosure provisions of FASB Statement No. 123, as
amended by FASB Statement No. 148.  In April 2003 the FASB issued SFAS No. 149 which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.
This statement clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of SFAS No. 133, clarifies when a
derivative contains a financing component, amends the definition
of an underlying to conform to language used in FASB
Interpretation No. 45, and amends certain other existing
pronouncements. This statement is effective for contracts entered
into or modified after June 30, 2003. The provisions of Statement
No. 149 did not have an impact on the financial position or
results of operations of the Company.  In May 2003 the FASB issued SFAS No. 150, which establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in
some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The provisions of Statement
No. 150 did not have an impact on the financial position of the
Company. 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 15




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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 uncertain. Our assumptions and estimates were
based on the facts and circumstances known at December 31, 2003,
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,
2003. 16




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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, 2003, 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) resigned following completion of its audit of the
Companys financial statements for the year ended December 31,
2002. Doerens resignation was based on its decision to terminate
its engagements with any publicly owned companies.  Doerens report on the Companys financial statements for each of
the two previous years 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
ended December 31, 2002 and 2001, there were 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.  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 Rehmann Robson, 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 17




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##### Table of Contents



approved the following non-audit services currently being rendered
to the Company by Rehmann Robson, or to be rendered to the Company
by Rehmann Robson:  
    
    preparation of tax returns, and tax advice in
preparing for and in connection therewith;  
    
    review of quarterly financial statements. 
 Part III 
 ITEM 10. Directors and Executive Officers of the Registrant  Item 10 is hereby incorporated by reference from the Registrants
definitive proxy statement to be filed within 120 days of December
31, 2003. 
 ITEM 11. Executive Compensation  Item 11 is hereby incorporated by reference from the Registrants
definitive proxy statement to be filed within 120 days of December
31, 2003. 
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management  Item 12 is hereby incorporated by reference from the Registrants
definitive proxy statement to be filed within 120 days of December
31, 2003. 
 ITEM 13. Certain Relationships and Related Transactions  Item 13 is hereby incorporated by reference from the Registrants
definitive proxy statement to be filed within 120 days of December
31, 2003. 
 ITEM 14. Controls and Procedures Controls and Procedures  a)
    
    Evaluation of disclosure controls and proceduresOur 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 controlsThere 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. 18




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##### Table of Contents



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. ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
registrants Form 10-K for the year ended December 31, 1995, SEC file
0-12728, and incorporated herein by reference).3.2
    
    Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the
registrants Form 10-K for the year ended December 31, 1994, SEC file
0-12728, and incorporated herein by reference).4.1
    
    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).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 (filed as Exhibit 4.7
to registrants Form 10-K for the year ended December 31, 2002, SEC file
0-12728, and incorporated herein by reference).4.8
    
    Form of Fourth Amended Note and Warrant Purchase Agreement including Form
of Integral Vision, Inc. Class 3 Note.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).
 19




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##### Table of Contents



ExhibitNumber
    
    Description of Document16
    
    Letter regarding change in certifying accountant (filed as Exhibit 16 to
registrants Form 10-K for the year ended December 31, 2002, SEC file
0-12728, and incorporated herein by reference).21
    
    Subsidiary of the registrant.23.1
    
    Consent of Rehmann Robson, independent auditors.23.2
    
    Consent of Moore Stephens Doeren Mayhew, independent auditors.31.1
    
    Certification of Chief Executive Officer of periodic report pursuant to
Rule 13a-15(e) or Rule 15d-15(e).31.2
    
    Certification of Chief Financial Officer of periodic report pursuant to
Rule 13a-15(e) or Rule 15d-15(e).32
    
    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).(b)
    
    Reports on Form 8-K:None(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. 20




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##### 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 26, 2004
    
    INTEGRAL VISION, INC.
 By: /S/ CHARLES J. DRAKECharles J. Drake, Chairman of the Board and Chief Executive OfficerBy: /S/ MARK R. DOEDEMark R. Doede, President, ChiefOperating Officer 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

Max A. Coon
    
    Vice Chairman, Secretary and Director/S/ VINCENT SHUNSKY
Vincent Shunsky
    
    Treasurer and Director/S/ WILLIAM B. WALLACE

William B. Wallace
    
    Director/S/ SAMUEL O. MALLORY

Samuel O. Mallory
    
    Director
 21




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##### 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 Years Ended December 31, 2003, 2002, and 2001 INTEGRAL VISION, INC. Farmington Hills, Michigan 22




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##### 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 Rehmann Robson, Independent AuditorsReport of Moore Stephens Doeren Mayhew, Independent AuditorsConsolidated Balance Sheets-December 31, 2003 and 2002Consolidated Statements of Operations-Years ended December
31, 2003, 2002 and 2001Consolidated Statements of Stockholders Deficit -Years
ended December 31, 2003, 2002, and 2001Consolidated Statements of Cash Flows-Years ended December
31, 2003, 2002 and 2001Notes to Consolidated Financial Statements(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. 23




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##### Table of Contents



Independent Auditors Report Board of Directors and Stockholders
Integral Vision, Inc.
Farmington Hills, Michigan We have audited the accompanying consolidated balance sheet of Integral Vision,
Inc. and subsidiary as of December 31, 2003, and the related consolidated
statements of operations, stockholders deficit and cash flows for the year
then ended. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedule for 2003 as
listed in the accompanying index at Item 15(a). These consolidated financial
statements and the financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audit. We conducted our audit 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 misstatement. 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 audit provides 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, 2003, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement
schedule for 2003, 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 the Company will continue as a going
concern. As described in Note O to the consolidated financial statements, the
Company is sustaining recurring losses from operations and is having
difficulties generating sufficient cash flow to meet its obligations. These
conditions raise substantial doubt about the Companys ability to continue as a
going concern. Managements plans in regard to this matter are also described
in Note O. The consolidated financial statements and the financial statement
schedule do not include any adjustments that might result from the outcome of
this uncertainty. /S/ Rehmann Robson
Troy, Michigan
March 11, 2004 24




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##### 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 sheet of Integral Vision,
Inc. and subsidiary as of December 31, 2002, and the related consolidated
statements of operations, stockholders equity (deficit) and cash flows for
each of the years in the two-year period ended December 31, 2002. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule for 2002 and 2001 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 the
consolidated results of their operations and their cash flows for each of the
years in the two-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 and
2001, 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 25




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##### Table of Contents



Consolidated Balance Sheets
Integral Vision, Inc. and Subsidiary December 312003
    
    2002(in thousands)AssetsCurrent assetsCash
    
    $
    42
    
    
    $
    81Accounts
receivable, less allowance of $166,000 ($170,000 in 2002)
    
    
    14
    
    
    
    153Inventories
- Note A
    
    
    168
    
    
    
    328Note
Receivable - Note M
    
    
    
    
    
    
    30Other
current assets
    
    
    48
    
    
    
    51Total current assets
    
    
    272
    
    
    
    643Property
and equipment - Note JLeasehold Improvements
    
    
    43
    
    
    
    43Production
and engineering equipment
    
    
    110
    
    
    
    153Furniture
and fixtures
    
    
    64
    
    
    
    73Vehicles
    
    
    18
    
    
    
    18Computer equipment
    
    
    160
    
    
    
    203395
    
    
    
    490Less
accumulated depreciation
    
    
    368
    
    
    
    431Net property and equipment
    
    
    27
    
    
    
    59Other assetsCapitalized
computer software development costs, less accumulated amortization
of $7,495,000 ($7,301,000 in 2002) - Notes A, K and L
    
    
    323
    
    
    
    516Patents,
less accumulated amortization of $428,000 ($382,000 in 2002) - Note A
    
    
    45
    
    
    
    90368
    
    
    
    606$
    667
    
    
    $
    1,308Liabilities and Stockholders DeficitCurrent liabilitiesNotes
payable - Note C
    
    $
    1,171
    
    
    $
    967Accounts payable
    
    
    412
    
    
    
    678Current
maturities of long-term debt - Note C
    
    
    666
    
    
    
    Accrued
compensation and related costs - Note M
    
    
    282
    
    
    
    331Accrued
state income taxes - Note B
    
    
    166
    
    
    
    204Accrued
interest - Note C
    
    
    403
    
    
    
    170Other
accrued liabilities
    
    
    64
    
    
    
    95Customer deposits
    
    
    
    
    
    
    204Total current liabilities
    
    
    3,164
    
    
    
    2,649Long-term debt, less current maturities and original issue discount -Notes C
and J
    
    
    1,425
    
    
    
    962Stockholders deficitCommon
stock, without par value, stated value $.20 per share; 25,000,000
shares authorized; 9,429,901 shares issued and outstanding - Note H
    
    
    1,886
    
    
    
    1,886Additional
paid-in capital - Note C
    
    
    31,694
    
    
    
    31,376Accumulated deficit
    
    
    (37,502
    )
    
    
    (35,565
    )Total stockholders deficit
    
    
    (3,922
    )
    
    
    (2,303
    )$
    667
    
    
    $
    1,308
 See accompanying notes 26




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##### Table of Contents



Consolidated Statements of OperationsIntegral Vision, Inc. and Subsidiary Year ended December 312003
    
    2002
    
    2001(in thousands, except per share data)Net revenues
    
    $
    641
    
    
    $
    1,579
    
    
    $
    2,633Costs of revenues:Direct costs of revenues - Note L
    
    
    341
    
    
    
    770
    
    
    
    2,453Depreciation and amortization - Notes J, K & L
    
    
    263
    
    
    
    407
    
    
    
    2,943Total costs of revenues
    
    
    604
    
    
    
    1,177
    
    
    
    5,396Gross margin
 Note A
    
    
    37
    
    
    
    402
    
    
    
    (2,763
    )Other costs and expenses:Marketing
    
    
    223
    
    
    
    557
    
    
    
    1,483General and administrative - Note M
    
    
    802
    
    
    
    1,054
    
    
    
    1,703Engineering and development:Expenditures
    
    
    663
    
    
    
    852
    
    
    
    1,946Allocated to capitalized software and direct cost of sales - Note A
    
    
    
    
    
    
    
    
    
    
    (384
    )Net engineering and development expense
    
    
    663
    
    
    
    852
    
    
    
    1,562Total other costs and expenses
    
    
    1,688
    
    
    
    2,463
    
    
    
    4,748Operating loss
    
    
    (1,651
    )
    
    
    (2,061
    )
    
    
    (7,511
    )Gain(loss) on sales of assets - Notes J & K
    
    
    (7
    )
    
    
    150
    
    
    
    (111
    )Other income(expense) - Note B
    
    
    89
    
    
    
    59
    
    
    
    (437
    )Interest income - Notes B & M
    
    
    
    
    
    
    11
    
    
    
    96Interest expense - Note C
    
    
    (370
    )
    
    
    (251
    )
    
    
    (172
    )Foreign
currency translation gain (loss) - Note P
    
    
    2
    
    
    
    (201
    )Loss from operations before income taxes
    
    
    (1,937
    )
    
    
    (2,293
    )
    
    
    (8,135
    )Credit for
income taxes  Note D
    
    
    
    
    
    
    90Net loss
    
    $
    (1,937
    )
    
    $
    (2,203
    )
    
    $
    (8,135
    )Basic and diluted loss per share:Net loss
    
    $
    (0.21
    )
    
    $
    (0.23
    )
    
    $
    (0.89
    )Weighted average number of shares of common
stock and common stock equivalents outstanding
    
    
    9,430
    
    
    
    9,430
    
    
    
    9,198
 See accompanying notes 27




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##### Table of Contents



Consolidated Statements of Stockholders DeficitIntegral Vision, Inc. and Subsidiary Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    OtherShares
    
    Common
    
    Paid-In
    
    Accumulated
    
    Officer
    
    ComprehensiveOutstanding
    
    Stock
    
    Capital
    
    Deficit
    
    Notes
    
    Income(Loss)
    
    Total(in thousands, except number of common shares outstanding)Balances at January 1, 2001
    
    
    9,029,901
    
    
    $
    1,806
    
    
    $
    31,195
    
    
    $
    (25,227
    )
    
    $
    (681
    )
    
    $
    (157
    )
    
    $
    6,936Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,135
    )
    
    
    
    
    
    
    
    
    
    
    (8,135
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    (54
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,189
    )Net officer note reductions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    431
    
    
    
    
    
    
    
    431Issuance of 400,000 shares
of common stock
    
    
    400,000
    
    
    
    80
    
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94Balances 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
    
    
    
    211Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,992
    )Net officer note reductions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    250Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111Balances at December 31, 2002
    
    
    9,429,901
    
    
    
    1,886
    
    
    
    31,376
    
    
    
    (35,565
    )
    
    
    
    
    
    
    
    
    
    
    (2,303
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,937
    )
    
    
    
    
    
    
    
    
    
    
    (1,937
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,937
    )Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318Balance at December 31, 2003
    
    
    9,429,901
    
    
    $
    1,886
    
    
    $
    31,694
    
    
    $
    (37,502
    )
    
    $
    
    
    
    $
    
    
    
    $
    (3,922
    )
 See accompanying notes 28




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##### Table of Contents



Consolidated Statements of Cash FlowsIntegral Vision, Inc. and Subsidiary Year Ended December 312003
    
    2002
    
    2001(in thousands)Operating ActivitiesNet loss
    
    $
    (1,937
    )
    
    $
    (2,203
    )
    
    $
    (8,135
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    32
    
    
    
    145
    
    
    
    539Amortization
    
    
    333
    
    
    
    417
    
    
    
    2,772Net (gain) loss on disposal of assets
    
    
    7
    
    
    
    (150
    )
    
    
    111Loss on sale of note receivable
    
    
    
    
    
    
    
    
    
    
    441Deemed compensation
    
    
    
    
    
    
    
    
    
    
    256Value assigned to warrants issued in connection with Class 2 Notes
    
    
    
    
    
    
    11Changes in operating assets and liabilities of continuing operations:Accounts receivable
    
    
    139
    
    
    
    179
    
    
    
    572Inventories
    
    
    160
    
    
    
    (120
    )
    
    
    1,019Prepaid and other
    
    
    33
    
    
    
    331
    
    
    
    275Accounts payable and other current liabilities
    
    
    (292
    )
    
    
    (141
    )
    
    
    218Net cash used in operating activities
    
    
    (1,525
    )
    
    
    (1,531
    )
    
    
    (1,932
    )Investing ActivitiesPayments received on note receivable resulting from the sale of the Welding
Controls division
    
    
    
    
    
    
    
    
    
    
    1,189Proceeds from the sale of a portion of note receivable
    
    
    
    
    
    
    
    
    
    
    300Repurchase of portion of note receivable
    
    
    
    
    
    
    
    
    
    
    (221
    )Sale of property and equipment
    
    
    
    
    
    
    55
    
    
    
    2,362Purchase of property and equipment
    
    
    (7
    )
    
    
    (43
    )Investment in capitalized software
    
    
    
    
    
    
    
    
    
    
    (384
    )Proceeds from sale of packaging inspection technology
    
    
    
    
    
    
    
    
    
    
    500Proceeds from sale of disc inspection technology
    
    
    
    
    
    
    100Other
    
    
    (4
    )
    
    
    (7
    )
    
    
    14Net cash (used in) provided by investing activities
    
    
    (11
    )
    
    
    105
    
    
    
    3,760Financing ActivitiesProceeds from sale of Class 2 Notes
    
    
    920
    
    
    
    907Repayments on Class 2 Notes
    
    
    (254
    )
    
    
    (396
    )Repayments on short term notes
    
    
    (70
    )Proceeds from short term note receivable
    
    
    
    
    
    
    70Repayments on revolving line of credit
    
    
    
    
    
    
    
    
    
    
    (270
    )Repayments on mortgage note payable
    
    
    
    
    
    
    
    
    
    
    (1,967
    )Proceeds from sales of debentures, net of discount
    
    
    583
    
    
    
    490
    
    
    
    416Proceeds from sales of warrants in connection with Class 1 Notes
    
    
    318
    
    
    
    100
    
    
    
    94Net cash provided by (used in) financing activities
    
    
    1,497
    
    
    
    1,171
    
    
    
    (1,727
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    211
    
    
    
    (54
    )(Decrease) increase in cash
    
    
    (39
    )
    
    
    (44
    )
    
    
    47Cash at beginning of year
    
    
    81
    
    
    
    125
    
    
    
    78Cash at end of year
    
    $
    42
    
    
    $
    81
    
    
    $
    125Supplemental cash flows disclosure:Interest paid
    
    $
    16
    
    
    $
    39
    
    
    $
    125
 See accompanying notes 29




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Notes to Consolidated Financial StatementsIntegral 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. 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 consolidated 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 consolidated 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 consolidated financial statements of Integral Vision LTD were
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. 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 results of operations. For 2003, sales to three certain
customers represented 63%, 14%, and 11% of consolidated sales,
respectively. Amounts due from these customers represented 0% of
the respective outstanding trade receivable balance at December
31, 2003. For 2002, sales to two certain customers 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 any single customer that
exceeded 10% of total sales. 30




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Inventories  Inventories are stated at the lower of first-in, first-out
(FIFO) cost or market. Cost is computed using currently
adjusted standards which approximates actual costs on a FIFO
basis. The Company assesses the recoverability of all inventory
to determine whether adjustments for impairment are required. At
December 31, inventories consisted of the following (net of
obsolescence reserves of $671,000 in 2003 and $561,000 in 2002): 2003
    
    2002(in thousands)Raw materials
    
    $
    70
    
    
    $
    112Work in process
    
    
    48
    
    
    
    216Finished goods
    
    
    50
    
    
    
    $
    168
    
    
    $
    328
  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. A
charge to direct costs of sales to write the inventory down to
estimated net realizable value was $540,000 in 2001. 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. A
reconciliation of gross margin as reported to gross margin from
operations is presented in the table below. 2003
    
    2002
    
    2001(in thousands)Net revenues
    
    $
    641
    
    
    $
    1,579
    
    
    $
    2,633Gross margin as reported
    
    
    37
    
    
    
    402
    
    
    
    (2,763
    )Adjustments to reconcile gross
margin from operations:Specific inventory adjustments
    
    
    
    
    
    
    
    
    
    
    540Other non-cash charges
    
    
    
    
    
    
    
    
    
    
    2,943Gross margin from operations
    
    $
    37
    
    
    $
    402
    
    
    $
    720
 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. 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 31




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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 $663,000, $852,000, and $1,946,000 in 2003, 2002 and
2001 respectively, of which $384,000 was capitalized in 2001.
Amortization of the capitalized costs amounted to $193,000,
$194,000, and $2,639,000 in 2003, 2002, and 2001, respectively.
Total accumulated amortization at December 31, 2003 and 2002 was
$7,495,000 and $7,301,000, 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
$2,000, $7,000, and $50,000 in 2003, 2002 and 2001, respectively.
Patents are stated at cost less accumulated amortization of
$428,000 and $382,000 at December 31, 2003 and 2002, respectively.
Amortization of the patents amounted to $46,000, $178,000, and
$112,000 in 2003, 2002, and 2001, 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 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. 32




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Advertising  Advertising costs are expensed as incurred. Advertising costs
were approximately $13,000, $75,000, and $181,000 in 2003, 2002,
and 2001, 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 Deficit. At December 31, 2001,
accumulated other comprehensive loss consisted of unrealized loss
resulting from foreign currency translation adjustments. The
accumulated unrealized losses from foreign currency translation
adjustments were 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. 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,
2003. 33




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Recently Issued Accounting Standards  In December 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 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. The Company has elected to adopt
only the disclosure provisions of FASB Statement No. 123, as
amended by FASB Statement No. 148.  In April 2003 the FASB issued SFAS No. 149 which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.
This statement clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of SFAS No. 133, clarifies when a
derivative contains a financing component, amends the definition
of an underlying to conform to language used in FASB
Interpretation No. 45, and amends certain other existing
pronouncements. This statement is effective for contracts entered
into or modified after June 30, 2003. The provisions of Statement
No. 149 did not have an
impact on the consolidated financial position or results of
operations of the Company.  In May 2003 the FASB issued SFAS No. 150, which establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in
some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the
interim period of adoption. The provisions of Statement No. 150
did not have an impact on the consolidated financial position of
the Company. 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. 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, 2003, this liability was not yet paid in 34




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full and was
included in accrued state income taxes in the consolidated balance
sheet. Including interest and penalties, approximately $166,000
was outstanding at December 31, 2003 for this obligation, which is
included in accrued state income taxes in the consolidated balance
sheet. The Company is making monthly payments of approximately
$6,300 to 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. As of December 31, 2003, no notifications have been
made that the Company is obligated for any payments not made and
the arrangement expires in 2004. Note C - Long-Term Debt and Other Financing Arrangements  At December 31, 2003, under the terms of the Companys Note and
Warrant Purchase Agreement, as amended, the Company could issue up
to $4.0 million of senior debentures, which consists of Class 1
and Class 2 Notes. Class 2 Notes are working capital notes, are
secured by accounts receivable of the Company, and are
subordinated to the Class 1 Notes issued prior to April 16, 2002.
In September 2003, the holders of all of the then outstanding
Class 2 Notes agreed to modify the maturity dates of those Notes
to April 30, 2004. In December 2003, certain of the Class 2 Notes
were amended to have maturity dates of May 31, 2004. The
purchasers of the Class 2 Notes receive warrants for the purchase
of the Companys common stock when the Note is repaid. Class 2
Warrants entitle the holder to purchase one share of Common Stock
for each $1 in value of the Class 2 Note multiplied by a fraction,
the numerator of which is the number of days such Class 2 note is
outstanding and the denominator of which is 365, at a specified
price which shall be approximately 150% of the recent fair market
value of the Common Stock as of the date of the issuance of the
Class 2 Note. Based on their respective maturity dates, the
number of common shares that could be purchased with Class 2
warrants is estimated to be 486,000. There was approximately $2.8
million in principal and interest due to the Class 1 Note holders
at December 31, 2003. In August 2003, the holders of those Notes
agreed to a modification to the Note and Warrant Purchase
Agreement that increased the maximum amount of the Notes
outstanding to $4.0 million and created a new Class 3 Note which
is convertible into Integral Vision, Inc. common stock at a
conversion rate set by the Companys board of directors at the
date of issuance. No Class 3 Notes were issued, however. Class 1
Notes issued have maturities of up to four years, an interest rate
of 10%, and the purchasers of the Notes receive warrants for the
purchase of the Companys common stock. The value assigned to
warrants is included in additional paid-in capital and the
discount is amortized over the life of the note. Additionally,
the directors will determine the conversion rate at the date of
issuance, subject to change in the event additional shares are
issued in the future. In March 2004, the holders of the Class 1
and Class 2 Notes agreed to an additional modification to the Note
and Warrant Purchase Agreement. The maturity date on
substantially all of the outstanding Class 2 Notes was extended to
December 31, 2005. Principal and interest due on the Class 2 notes
on December 31, 2005 is projected to be approximately $1.2
million. The terms of the Class 1 Notes were changed such that
all accrued interest (projected to be approximately $425,000)
would be due on June 30, 2004. Additionally, the first principal
payments (projected to be approximately $176,000) on the Class 1
Notes would be due on June 30, 2004. However, the amended Note
and Warrant Purchase Agreement provides that, if the Companys
shareholders approve managements proposal to increase the
Companys authorized stock to 31,000,000 at the Companys annual
meeting of its shareholders to be held on May 6, 2004, the
following will occur:  
    
    The accrued interest on outstanding Class 1
Notes as of December 31, 2003 in the amount of
approximately $313,418 will be exchanged for new Class 3
Notes due July 3, 2006 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share. 35




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
    
    The initial interest payment due on Class 1
Notes for interest accruing after December 31, 2003 will
be due April 1, 2005.
    
    Quarterly principal payments on Class 1 Notes
would be eliminated, with all principal due at maturity.
    
    $330,000 of principal on Class 1 Notes issued
prior to April 16, 2002 will be exchanged for Class 3
Notes due February 27, 2007 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.
    
    Class 2 Notes outstanding at February 29, 2004,
plus interest then accrued, may be exchanged for Class 3
Notes due December 31, 2005 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.  During 2003, $1,355,000 of the Class 1 Notes were placed, $210,000
of which were purchased by the Companys chairman, Charles J.
Drake. At December 31, 2003, a total of $2,455,000 of the Class 1
Notes had been placed. Mr. Drake has purchased a total of
$560,000 of the Companys Class 1 Notes and Max A. Coon (a
director of the Company) has purchased a total of $90,000 of the
Companys Class 1 Notes.During 2003, $920,000 of the Class 2 Notes were placed. The
Company made principal payments of $254,000 to Class 2 Note
holders and an additional $455,000 of Class 2 Notes were converted
to Class 1 Notes by the Note holders in the twelve months ended
December 31, 2003. The outstanding principal balance on the Class
2 Notes was $722,000 at December 31, 2003.Subsequent to December 31, 2003, $250,000 of Class 2 Notes were
placed. The holders of these Notes will receive warrants when
their notes are paid off, the amount of which will be determined
at the pay off date (See discussion above). Also subsequent to
December 31, 2003, $193,000 of Class 3 Notes were placed. These
Notes are due April 1, 2008 and are convertible into the Companys
common stock at $1.00 per share for $100,000 of the Class 3 Notes
and $1.25 for $93,000 of the Class 3 Notes. Finally, subsequent
to December 31, 2003, Class 1 Notes totaling $827,500 were
canceled as payment for the exercise of warrants to purchase
3,310,000 shares of the Companys common stock. Included in these
amounts were $472,500 of Class 1 Notes canceled as payment for the
exercise of warrants to purchase 1,890,000 shares of common stock
by Mr. Drake.At December 31, 2003, the Company had short-term notes payable to
related parties of approximately $449,000. The Companys notes to
related parties included the following: a $139,000 obligation to
Maxco, Inc. (an 18% owner of the Company); a $232,000 obligation
to Warren, Cameron, Asciutto, and Blackmer, P.C. (the Companys
corporate counsel); and a $79,000 obligation to 2161 Limited
Partnership (a partnership in which J. Michael Warren of Warren,
Cameron, Asciutto, and Blackmer, P.C. is a partner). These notes
have interest rates ranging from 4.5% to 6.75% and, at December
31, 2003, were due on demand. Interest expense related to the
Maxco note was approximately $7,000 in 2003. Subsequent to
December 31, 2003, the due date on the obligation to Maxco was
extended to July 1, 2005 and $250,000 of the obligations
(including accrued interest) to Warren, Cameron, Asciutto, and
Blackmer, P.C. were exchanged for Class 3 Notes due December 31,
2005, with the remaining portion of the obligation, approximately
$104,000, due July 1, 2005.Additionally, Maxco provides consulting services to the Company.
These services include assistance with financial statement
preparation, compliance with governmental filing requirements, and
assistance with certain financing arrangements. The Company has
not recorded any charge for these services to date. For future
services the Company may record charges, if and when, Management,
Maxco, and the Independent Directors determine the value of such
services on an ongoing basis. 36




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A summary of the Companys debt obligations as of December 31 is
as follows: 2003
    
    2002(in thousands)Long Term Debt:Face value Class 1 Notes
    
    $
    2,455
    
    
    $
    1,100Less Original Issue Discount (OID)
    
    
    (364
    )
    
    
    (138
    )Less Current Maturities
    
    
    (666
    )Net Long Term Debt
    
    $
    1,425
    
    
    $
    962Short Term Debt:Class 2 Notes
    
    $
    722
    
    
    $
    511Other Short Term Debt
    
    
    449
    
    
    
    456Total Short Term Debt
    
    $
    1,171
    
    
    $
    967
  Interest paid in 2003 was approximately $16,000 compared to
interest expensed of $370,000. The $354,000 difference primarily
represents amounts accrued for interest on the debentures and the
amount of discount on the debentures amortized in 2003. 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. 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, 2003, the Company has cumulative net operating
loss carryforwards approximating $36.7 million (expiring: $6.9
million in 2010, $3.9 million in 2011, $3.8 million in 2012, $2.3
million in 2018, $6.6 million in 2020, $1.9 million in 2021, $5.7
million in 2022, and $5.5 million in 2023) 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 $2.0 million in 2003, $1.6 million in 2002, and $2.2
million in 2001. 37




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##### 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: 2003
    
    2002(in thousands)Deferred tax liabilities:Deductible software development costs, net of amortization
    
    $
    110
    
    
    $
    175Tax under book depreciation
    
    
    (9
    )Total deferred tax liabilities
    
    
    101
    
    
    
    175Deferred tax assets:Net operating loss carryforwards
    
    
    12,467
    
    
    
    10,604Credit carryforwards
    
    
    331
    
    
    
    331Inventory reserve
    
    
    239
    
    
    
    193Bad debt reserve
    
    
    56
    
    
    
    56Reserve for warranty
    
    
    9
    
    
    
    9Other
    
    
    94
    
    
    
    100Total deferred tax assets
    
    
    13,196
    
    
    
    11,293Valuation allowance for deferred tax assets
    
    
    13,095
    
    
    
    11,118Net deferred tax assets
    
    
    101
    
    
    
    175Net deferred tax
    
    $
    
    
    
    $
    
  The reconciliation of income taxes computed at the U.S. federal
statutory tax rates to income tax expense (credit) is as follows: 2003
    
    2002
    
    2001(in thousands)Consolidated net income (loss)
    
    $
    (1,937
    )
    
    $
    (2,203
    )
    
    $
    (8,135
    )Foreign net income (loss)
    
    
    3,928
    
    
    
    2,648
    
    
    
    (1,620
    )U.S. net income (loss)
    
    $
    (5,865
    )
    
    $
    (4,851
    )
    
    $
    (6,515
    )Tax provision (credit) at U.S. statutory rates
    
    $
    (1,995
    )
    
    $
    (1,649
    )
    
    $
    (2,215
    )Change in valuation allowance
    
    
    1,977
    
    
    
    1,629
    
    
    
    2,181Nondeductible expenses
    
    
    18
    
    
    
    20
    
    
    
    34Other
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
  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 2003,
2002, or 2001. Note E  Loss per Share  The following table sets forth the computation of basic and
diluted loss per share: 2003
    
    2002
    
    2001(in thousands, except per share data)Numerator
for basic and diluted loss per share - loss available to common
stockholdersNet loss
    
    $
    (1,937
    )
    
    $
    (2,203
    )
    
    $
    (8,135
    )*there was no effect of dilutive securities, see belowDenominator for basic and diluted loss per share - weighted average shares
    
    
    9,430
    
    
    
    9,430
    
    
    
    9,198*there was no effect of dilutive securities, see belowBasic and diluted loss per share:Net loss
    
    $
    (0.21
    )
    
    $
    (0.24
    )
    
    $
    (0.88
    )
 38




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##### Table of Contents



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 $6,000, $7,000, and $15,000 for 2003, 2002 and 2001,
respectively. Note
G - Lease Commitments and Contingencies  The Company uses equipment and office space under operating lease
agreements requiring rental payments approximating $92,000 in 2004
and $2,000 in 2005. Rent expense charged to operations
approximated $70,000, $128,000, and $154,000 in 2003, 2002 and
2001, 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 occupies 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 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: 2003
    
    2002
    
    2001Expected stock price volatility
    
    
    1.172
    
    
    
    0.833
    
    
    
    0.768Risk free interest rate
    
    
    2.0
    %
    
    
    3.0
    %
    
    
    5.5
    %Expected life of options in years
    
    
    7.0
    
    
    
    7.4
    
    
    
    7.7
  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, 2003, 2002 and 2001 is as follows: Year ended December 31,2003
    
    2002
    
    2001(in thousands, except per share data)Pro forma net loss
    
    $
    (1,960
    )
    
    $
    (2,235
    )
    
    $
    (8,172
    )Pro forma loss per share:Basic and Diluted
    
    $
    (0.21
    )
    
    $
    (0.24
    )
    
    $
    0.89
 39




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##### Table of Contents



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 proforma results
reflect only stock options granted in 1995 through 2003 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 in 2001 as a result of the issuance of
these shares. At December 31, 2003, there were options
outstanding to purchase 1,005,000 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.In May 2003, the Compensation Committee of the Companys Board of
Directors resolved to grant 140,000 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, $.15 per
share. An additional 40,000 were granted in May 2003 with an
exercise price equal to the market price at the close of trading
on the grant date, $.16 per share. In order to facilitate this
grant, Mr. Charles Drake, the Companys Chairman, agreed to
forfeit options on 156,000 shares so that they could be
distributed to other key people.A summary of the status of the Option Plans at December 31, 2003 is as
follows: Non-QualifiedQualified ISO
    
    Stock OptionPlan
    
    Plan
    
    1999 Plan
    
    1995 Plan(in thousands)Options outstanding
    
    
    7
    
    
    
    7
    
    
    
    497
    
    
    
    494Options exercisable
    
    
    7
    
    
    
    7
    
    
    
    339
    
    
    
    472Options granted during:2003
    
    
    0
    
    
    
    0
    
    
    
    158
    
    
    
    222002
    
    
    0
    
    
    
    0
    
    
    
    202
    
    
    
    982001
    
    
    0
    
    
    
    0
    
    
    
    120
    
    
    
    2152000
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    01999
    
    
    0
    
    
    
    0
    
    
    
    400
    
    
    
    2061998
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    01997
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2671996
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    132Options available for grant
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    6
 40




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##### Table of Contents



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: 2003
    
    2002
    
    2001Weighted Average
    
    
    
    
    
    Weighted Average
    
    
    
    
    
    Weighted AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise Price
    
    Shares
    
    Exercise Price(number of shares in thousands)Outstanding at beginning of year
    
    
    1,038
    
    
    $
    1.15
    
    
    
    991
    
    
    $
    1.52
    
    
    
    982
    
    
    $
    2.82Granted
    
    
    180
    
    
    
    0.15
    
    
    
    300
    
    
    
    0.14
    
    
    
    335
    
    
    
    0.14Exercised
    
    
    0
    
    
    
    0.00
    
    
    
    0
    
    
    
    0.00
    
    
    
    0
    
    
    
    0.00Canceled
    
    
    (213
    )
    
    
    2.31
    
    
    
    (253
    )
    
    
    1.40
    
    
    
    (326
    )
    
    
    4.01Outstanding at end of year
($.10 to $9.25 per share)
    
    
    1,005
    
    
    
    0.73
    
    
    
    1,038
    
    
    
    1.15
    
    
    
    991
    
    
    
    1.52Exercisable ($.10 to $9.25 per share)
    
    
    825
    
    
    $
    0.85
    
    
    
    982
    
    
    $
    1.16
    
    
    
    791
    
    
    $
    1.64
  Additional information regarding the range of exercise prices and
weighted average remaining life of options outstanding at December
31, 2003 follows: WeightedRange of
    
    Number
    
    Average
    
    NumberExercise Prices
    
    Outstanding
    
    Remaining Life
    
    Exercisable(number of shares in thousands)$
    .10
    
    to
    
    $
    1.07
    
    
    
    934
    
    
    
    7.7
    
    
    
    754$
    4.75
    
    to
    
    $
    4.88
    
    
    
    31
    
    
    
    3.4
    
    
    
    31$
    5.63
    
    to
    
    $
    6.25
    
    
    
    28
    
    
    
    2.1
    
    
    
    28$
    8.50
    
    to
    
    $
    9.25
    
    
    
    12
    
    
    
    1.0
    
    
    
    12$
    .10
    
    to
    
    $
    9.25
    
    
    
    1,005
    
    
    
    7.4
    
    
    
    825
  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 and further increased to $4.0 million in August 2003) of
senior subordinated debentures. At December 31, 2003, in
connection with placements of debt under this plan, there were
warrants outstanding to purchase 7,878,150 shares of the Companys
common stock at a conversion price of $.25 per share, 584,100
shares at a conversion price of $.35 per share and 109,041 shares
at a conversion price of $.80 per share. The Companys chairman,
Charles J. Drake, has invested a total of $560,000 in the
Companys debentures and in connection with these committments
received warrants for the purchase of 1,890,000 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, 2005, all of which were
outstanding at December 31, 2003. Pursuant to the 1997 Note and
Warrant Purchase agreement, these warrants have been re-priced
based on subsequent warrant issues. At December 31, 2003, the
holders of these warrants had the right to purchase up to
2,582,264 shares of the Companys common stock at $3.72 per share. 41




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##### Table of Contents



A summary of the outstanding warrants and options at December 31, 2003 is
as follows: Weighted
    
    
    
    
    
    WeightedAverage
    
    Number
    
    Average
    
    NumberExercise Price
    
    Outstanding (1)
    
    Remaining Life
    
    Exercisable (1)(number of shares in thousands)1997 Note and Warrant Purchase Agreement
    
    $
    3.72
    
    
    
    2,582
    
    
    
    1.5
    
    
    
    2,5822001 Note and Warrant Purchase Agreement
    
    $
    0.26
    
    
    
    8,571
    
    
    
    2.9
    
    
    
    8,571Qualified ISO Plan
    
    $
    9.25
    
    
    
    7
    
    
    
    0.7
    
    
    
    7Non-Qualified Stock Option Plan
    
    $
    6.25
    
    
    
    7
    
    
    
    1.1
    
    
    
    71995 Employee Stock Option Plan
    
    $
    1.03
    
    
    
    494
    
    
    
    6.8
    
    
    
    4721999 Employee Stock Option Plan
    
    $
    0.23
    
    
    
    497
    
    
    
    8.2
    
    
    
    339$
    1.03
    
    
    
    12,158
    
    
    
    3.0
    
    
    
    11,978
  (1)
    
    Excludes warrants exercisable under certain 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, $722,000 of the Class 2 Notes were outstanding. 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. 42




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##### Table of Contents



The Company is engaged in one business segment, vision-based
inspection products. The following presents information by
geographic area. Year Ended December 312003
    
    2002
    
    2001(in thousands)Net revenues from unaffiliated customers:United States
    
    $
    641
    
    
    $
    944
    
    
    $
    1,436United Kingdom
    
    
    
    
    
    
    635
    
    
    
    1,197$
    641
    
    
    $
    1,579
    
    
    $
    2,633Earnings (loss) from continuing operations before income taxes:United States
    
    $
    (2,031
    )
    
    $
    (1,747
    )
    
    $
    (6,514
    )United Kingdom
    
    
    94
    
    
    
    (456
    )
    
    
    (1,621
    )$
    (1,937
    )
    
    $
    (2,203
    )
    
    $
    (8,135
    )Identifiable assets:United States
    
    $
    667
    
    
    $
    1,243
    
    
    $
    1,631United Kingdom
    
    
    
    
    
    
    65
    
    
    
    333$
    667
    
    
    $
    1,308
    
    
    $
    1,964Long lived assets:United States
    
    $
    27
    
    
    $
    59
    
    
    $
    139United Kingdom
    
    
    
    
    
    
    
    
    
    
    20$
    27
    
    
    $
    59
    
    
    $
    159Capital expenditures:United States
    
    $
    
    
    
    $
    
    
    
    $
    United Kingdom
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Depreciation and amortization expense:United States
    
    $
    365
    
    
    $
    542
    
    
    $
    2,907United Kingdom
    
    
    
    
    
    
    20
    
    
    
    404$
    365
    
    
    $
    562
    
    
    $
    3,311Net revenues by geographic area:North America
    
    $
    556
    
    
    $
    633
    
    
    $
    1,412Europe
    
    
    5
    
    
    
    547
    
    
    
    1,084Asia
    
    
    80
    
    
    
    399
    
    
    
    137$
    641
    
    
    $
    1,579
    
    
    $
    2,633
  * Geographic areas that are considered individually material are
listed (more than 10% of net revenues), all others are included
in North America and in total are considered immaterial. Note 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 were
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 property and equipment in 2001,
both of which are included in gain(loss) on sales of assets. 43




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##### Table of Contents



Note K  Sale of Technology  Packaging Inspection TechnologyOn August 24, 2001, the Company completed the sale of certain of
its packaging applications software and most of the property and
equipment 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 have transferred to DIMACO. However, Integral
Vision Ltd. maintains 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 property and equipment, 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 of the Companys net revenue for the year
ended December 31, 2001.Optical Disc Inspection TechnologyOn 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
received approxmiately $54,000 in royalties in 2003 and expects to
receive additional royalties in excess of $60,000 a year for the
next two years. Additionally, the Company received $25,000 from
the sale of equipment to DaTARIUS. The Company recognized a gain
on the transaction of approximately $112,000, which is included in
gain(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.The optical disc inspection technology included in the sale
accounted for approximately $743,000, and $1.1 million of the
Companys net revenue for 2002 and 2001, 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). 44




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##### Table of Contents



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. During 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
revenues in 2001 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 as
compensation 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 $14,000 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 expects to continue to
provide information through filings with the Securities and
Exchange Commission (SEC) as required for continued listing on the
OTCBB. These filings can be found at the SECs website at
www.sec.gov. 45




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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 consolidated financial statements,
during 2003, 2002 and 2001, the Company incurred losses from
operations of $1.9 million, $2.2 million, and $8.1 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, 2003, substantially all of the
Companys $412,000 in trade accounts payable was overdue, of which
$62,000 was paid subsequent to December 31, 2003. The Company
also has an estimated $386,000 in amounts owed to certain
regulatory agencies. The Company is making monthly payments of
approximately $6,300 to one of the regulatory agencies. At
December 31, 2003, under the terms of the Companys Note and
Warrant Purchase Agreement, as amended, the Company could issue up
to $4.0 million of senior debentures, which consists of Class 1
and Class 2 Notes. Class 2 Notes are working capital notes, are
secured by accounts receivable of the Company, and are
subordinated to the Class 1 Notes issued prior to April 16, 2002.
In September 2003, the holders of all of the then outstanding
Class 2 Notes agreed to modify the maturity dates of those Notes
to April 30, 2004. In December 2003, certain of the Class 2 Notes
were amended to have maturity dates of May 31, 2004. The
purchasers of the Class 2 Notes receive warrants for the purchase
of the Companys common stock when the Note is repaid. Class 2
Warrants entitle the holder to purchase one share of Common Stock
for each $1 in value of the Class 2 Note multiplied by a fraction,
the numerator of which is the number of days such Class 2 note is
outstanding and the denominator of which is 365, at a specified
price which shall be approximately 150% of the recent fair market
value of the Common Stock as of the date of the issuance of the
Class 2 Note. Based on their respective maturity dates, the
number of common shares that could be purchased with Class 2
warrants is estimated to be 486,000. There was approximately $2.8
million in principal and interest due to the Class 1 Note holders
at December 31, 2003. In August 2003, the holders of those Notes
agreed to a modification to the Note and Warrant Purchase
Agreement that increased the maximum amount of the Notes
outstanding to $4.0 million and created a new Class 3 Note which
is convertible into Integral Vision, Inc. common stock at a
conversion rate set by the Companys board of directors at the
date of issuance. No Class 3 Notes were issued, however. Class 1
Notes issued have maturities of up to four years, an interest rate
of 10%, and the purchasers of the Notes receive warrants for the
purchase of the Companys common stock (see Note A to consolidated
financial statements). The value assigned to warrants is included
in additional paid-in capital and the discount is amortized over
the life of the note. Additionally, the directors will determine
the conversion rate at the date of issuance, subject to change in
the event additional shares are issued in the future. In March
2004, the holders of the Class 1 and Class 2 Notes agreed to an
additional modification to the Note and Warrant Purchase
Agreement. The maturity date on substantially all of the
outstanding Class 2 Notes was extended to December 31, 2005.
Principal and interest due on the Class 2 notes on December 31,
2005 is projected to be approximately $1.2 million. The terms of
the Class 1 Notes were changed such that all accrued interest
(projected to be approximately $425,000) would be due on June 30,
2004. Additionally, the first principal payments (projected to be
approximately $176,000) on the Class 1 Notes would be due on June
30, 2004. However, the amended Note and Warrant Purchase
Agreement provides that, if the Companys shareholders approve
managements proposal to increase the Companys authorized stock
to 31,000,000 at the Companys annual meeting of its shareholders
to be held on May 6, 2004, the following will occur: 46




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
    
    The accrued interest on outstanding Class 1 Notes as of December 31, 2003 in the amount of
approximately $313,418 will be exchanged for new Class 3 Notes due July
3, 2006 with interest at 8% payable semi-annually beginning April 1,
2005 and convertible into shares of the Companys common stock at $0.75
per share.
    
    The initial interest payment due on Class 1 Notes for interest accruing
after December 31, 2003 will be due April 1, 2005.
    
    Quarterly principal payments on Class 1 Notes
would be eliminated, with all principal due at maturity.
    
    $330,000 of principal on Class 1 Notes issued
prior to April 16, 2002 will be exchanged for Class 3
Notes due February 27, 2007 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.
    
    Class 2 Notes outstanding at February 29, 2004,
plus interest then accrued, may be exchanged for Class 3
Notes due December 31, 2005 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.  Management is projecting a cash shortfall over the next twelve
months of approximately $70,000. Management plans to seek
additional investors of its debentures to cover the anticipated
shortfall, which would bring the amount of debentures outstanding
to $1.7 million. 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. No adjustments. If any, that may
ultimately be needed if the Company is unable to continue
operating as a going concern, have been made in these consolidated
financial statements. Note P  Foreign Currency Translation Adjustment  In June 2002, Integral Vision, Inc. wrote-off as uncollectible 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, 2003, $250,000 of Class 2 Notes were
placed. The holders of these Notes will receive warrants when
their notes are paid off, the amount of which will be determined
at the pay off date (See discussion in Note C). Also subsequent
to December 31, 2003, $193,000 of Class 3 Notes were placed.
These Notes are due April 1, 2008 and are convertible into the
Companys common stock at $1.00 per share for $100,000 of the
Class 3 Notes and $1.25 for $93,000 of the Class 3 Notes.
Finally, subsequent to December 31, 2003, Class 1 Notes totaling
$827,500 were canceled as payment for the exercise of warrants to
purchase 3,310,000 shares of the Companys common stock.  In March 2004, the holders of the Class 1 and Class 2 Notes agreed
to an additional modification to the Note and Warrant Purchase
Agreement. The maturity date on substantially all of the
outstanding Class 2 Notes was extended to December 31, 2005. 47




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Principal and interest due on the Class 2 notes on December 31,
2005 is projected to be approximately $1.2 million. The terms of
the Class 1 Notes were changed such that all accrued interest
(projected to be approximately $425,000) would be due on June 30,
2004. Additionally, the first principal payments (projected to be
approximately $176,000) on the Class 1 Notes would be due on June
30, 2004. However, the amended Note and Warrant Purchase
Agreement provides that, if the Companys shareholders approve
managements proposal to increase the Companys authorized stock
to 31,000,000 at the Companys annual meeting of its shareholders
to be held on May 6, 2004, the following will occur:  
    
    The accrued interest on outstanding Class 1
Notes as of December 31, 2003 in the amount of
approximately $313,418 will be exchanged for new Class 3
Notes due July 3, 2006 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.
    
    The initial interest payment due on Class 1
Notes for interest accruing after December 31, 2003 will
be due April 1, 2005.
    
    Quarterly principal payments on Class 1 Notes
would be eliminated, with all principal due at maturity.
    
    $330,000 of principal on Class 1 Notes issued
prior to April 16, 2002 will be exchanged for Class 3
Notes due February 27, 2007 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.
    
    Class 2 Notes outstanding at February 29, 2004,
plus interest then accrued, may be exchanged for Class 3
Notes due December 31, 2005 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys common stock at $0.75 per share.  The Companys Board of Directors unanimously approved
the additional modification to the Amended Note and Warrant Purchase
Agreement, including the conversion price of $0.75 per share for
Class 3 Notes to be issued as described above. On the modification
date, the market price of the Companys common stock was
approximately $1.50 per share. The Board felt the $0.75 conversion
price was justified given the concessions received in connection with
the debt, the fact that the shares are restricted, and other factors. 48




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Schedule II - Valuation And Qualifying Accounts Integral Vision, Inc. And Subsidiary (in thousands) Column A
    
    Column B
    
    Column C
    
    Column D
    
    Column EAdditionsCharged toBalance at
    
    Charged to
    
    Other
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    Accounts-
    
    
    
    
    
    End ofDescription
    
    Period
    
    Expenses
    
    Describe
    
    Deductions - Describe
    
    PeriodYear ended December 31, 2003:Accounts receivable allowance
    
    $
    170
    
    
    $
    5
    
    
    
    
    
    
    $
    9
    (3)
    
    $
    166Inventory obsolescence reserve
    
    
    561
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    671Deferred tax valuation allowance
    
    
    11,118
    
    
    
    1,977
    
    
    
    
    
    
    
    
    
    
    
    13,095$
    11,849
    
    
    $
    2,092
    
    
    $
    
    
    
    $
    9
    
    
    $
    13,932Year ended December 31, 2002:Accounts receivable allowance
    
    $
    179
    
    
    $
    99
    
    
    
    
    
    
    $
    108
    (3)
    
    $
    170Inventory obsolescence reserve
    
    
    1,836
    
    
    
    (7
    )
    
    
    
    
    
    
    1,268
    (1)
    
    
    561Deferred tax valuation allowance
    
    
    9,489
    
    
    
    1,629
    
    
    
    
    
    
    
    
    
    
    
    11,118$
    11,504
    
    
    $
    1,721
    
    
    $
    
    
    
    $
    1,376
    
    
    $
    11,849Year ended December 31, 2001:Accounts receivable allowance
    
    $
    82
    
    
    $
    109
    
    
    
    
    
    
    $
    12
    (3)
    
    $
    179Inventory obsolescence reserve
    
    
    1,484
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    1,836Deferred tax valuation allowance
    
    
    7,308
    
    
    
    2,181
    
    
    
    
    
    
    
    
    
    
    
    9,489$
    8,874
    
    
    $
    2,642
    
    
    $
    
    
    
    $
    12
    
    
    $
    11,504
  1)
    
    Write-off obsolete inventory2)
    
    Net change in deferred tax valuation allowance3)
    
    Net accounts receivable write-offs 49




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Exhibits to Form 10K Integral Vision, Inc. Year Ended December 31, 2003 Commission File Number 0-12728 50




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ExhibitNumber
    
    Exhibit Index Description4.8
    
    Form of Fourth Amended Note and Warrant Purchase Agreement
including Form of Integral Vision, Inc. Class 3 Note.21
    
    Subsidiary of the Registrant.23.1
    
    Consent of Rehmann Robson, independent auditors.23.2
    
    Consent of Moore Stephens Doeren Mayhew, independent auditors.31.1
    
    Certification of Chief Executive Officer of periodic report
pursuant to Rule 13a-15(e) or Rule 15d-15(e).31.2
    
    Certification of Chief Financial Officer of periodic report
pursuant to Rule 13a-15(e) or Rule 15d-15(e).32
    
    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).
 51