##### Table of Contents



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

FORM 10-K

| |  |                                                                                         
| |  | ----------------------------------------------------------------------------------------
| |  | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
| |  | For the fiscal year ended December 31, 2001.                                            
|
| |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
| |  | For the transition period from __________ to __________.                                

Commission File Number 0-12728

INTEGRAL VISION, INC.
(Exact name of registrant as specified in its charter)

|                                                                                              |                |                                                   
|--------------------------------------------------------------------------------------------- | -------------- | --------------------------------------------------
|Michigan
(State or other jurisdiction of
incorporation or organization)                       |                | 38-2191935
(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 üNO ____

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.

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2002:

Common Stock, No Par Value, Stated Value $.20 Per Share  $1,653,152

The number of shares outstanding on each of the issuers classes of common
stock, as of February 28, 2002:

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

Documents Incorporated By Reference:Portions of the proxy statement for the
annual shareholders meeting to be held May 23, 2002 are incorporated by
reference into Part III.

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TABLE OF CONTENTS



|                                                                                     |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 
|Part I                                                                              
|Part II                                                                             
|Part III                                                                            
|PART IV                                                                             
|SIGNATURES                                                                          
|Form 10-K  ITEM 14(a)(1) and (2)                                                   
|Report of Independent Auditors                                                      
|Schedule II - Valuation And Qualifying Accounts Integral Vision, Inc. And Subsidiary
|Exhibits to Form 10K                                                                
|Integral Vision, Inc.                                                               
|Year Ended December 31, 2001                                                        
|Commission File Number 0-12728                                                      
|Subsidiary of the Registrant                                                        
|Consent of Moore Stephens Doeren Mayhew                                             



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Part I

ITEM 1. Business

General



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 30, 1999, the Company sold the assets of its Welding
Controls division. As a result of the sale, the Company changed
its name to Integral Vision, Inc. Integral Vision (or the
Company), formerly known as Medar, Inc., is a Michigan
corporation incorporated in 1978. Integral Vision 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 inspection systems (machine vision
products). The Companys products are generally sold as capital
goods. Depending on the application, machine vision systems have
an indefinite life. Machine vision applications are more likely
to require replacement due to possible technological obsolescence
rather than physical wear.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of machine vision products are effected through Integral
Vision and through Integral Vision LTD., a wholly owned subsidiary
of the Company, located in Bedford, England.

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 to check 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.
|
| | Target markets for our turnkey systems include the small flat
panel display and optical disc industries. Applications
development software, such as our Industrial Vision Controller
(IVC) technology, can be applied to an extensive array of
applications in industries that run the gamut from aerospace to
medical to textiles, and everything in between.                                                                                                                                                                                                                                                                                                                            

Products



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Small Flat Panel Display Inspection                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Integral Vision has over six years of experience in the display
industry, with over 400 systems installed worldwide. 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.
|
| | We have recently begun delivering our SharpEye microdisplay
inspection systems capable of inspecting OLED (Organic Light
Emitting Diode), LCOS (Liquid Crystal on Silicon), MEMS-DLP
(MicroElectroMechanical Systems) and color LCD (Liquid Crystal
Display) devices. These technologies are applied to consumer
products such as camcorders, rear projection computer monitors,
digital still cameras, HDTV, projectors, video headsets and video
telephones.                                                                                                                                                                                                                                               
|
| | Optical Disc Inspection                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Compact disc inspection is considered an integral part of the
replication process. Product quality has become an ever-growing
concern among disc manufacturers during the evolution from CDs to
DVDs and recordable media. Integral Vision has been serving the                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | inspection needs of the optical disc inspection industry for over
13 years. During this time, we have seen many changes in the
industry, including smaller in-line systems, faster production
speeds, multiple inspections and many different disc formats. We
have addressed these issues and much more with the introduction of
our Series 2000 family of products.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Series 2000 is the latest generation of Integral Visions
optical disc inspection products. The series features systems
designed for all stages of the production process, including
replication, printing and packaging. We have upgraded our
electronic and optical components, designing products with
reliability, low maintenance and ease of use in mind. The Series
2000 family of products includes the OMNI, CDiD, CDiP, and CDiA.



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Omni is the base inspection scanner system for all disc
formats, consisting of a CPU, monitor, keyboard, optics and
software. Users can add optical inspection channels to
customize the OMNI to inspect the DVD, recordable and
rewritable media. The OMNI is intended for easy integration
into any replication line.
|
| | CDiD safeguards against mixed product by verifying disc
orientation codes during any stage of the production process.
The system performs optical character verification (OCV), bar
code reading, Show & Go or any combination of the above.                                                                           
|
| | CDiP is designed for monitoring the consistency of printed
labels on optical discs. CDiP controls print quality in
screen, offset and pad printing technologies.                                                                                                                                                       
|
| | CDiA is designed for use on the in-feed of an automatic
sleeving machine. The system provides rotational information
to guarantee all discs are packaged in the exact same manner.                                                                                                                                     

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 20
patents. There can be no assurance that that the Company will
have the resources to defend its patents or that patents the
Company holds will be considered valid if challenged. In
addition, it is possible that some patents will be rendered
worthless as the result of technological obsolescence.

Marketing



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company generally markets its vision products to end users,
but the Company has had success integrating its products with
OEMs in certain circumstances. More recently, the Company has
begun to use distributors for its application software development
tools for vision. Although sales are made worldwide, the
Companys strongest presence is maintained in the US (through
Company employees), and in Europe and Asia (through a combination
of representatives and Company employees). Company sales
employees are compensated by a combination of salary and
commission.

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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 cost
amounted to $1.6 million, $2.7 million, and $3.1 million for the
years ended December 31, 2001, 2000, and 1999, respectively. The
Companys current product development efforts are primarily
directed to Small Display Inspection products.

Environmental Factors



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

Competition



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company experiences competition in all areas in which it
operates. Competition is strongest in the optical disc market
where the Companys optical inspection systems compete with
equipment from Dr. Schenk GmbH and Basler GmbH. Competition for
Common VisionBlox, Small Display Inspection, and general vision
application work comes from numerous niche producers, each
providing competition within a particular product line. Cognex
Corp. competes either directly or indirectly via systems
integrators in some of the Companys product lines, except optical
disc inspection products.

Export Sales



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales outside of the United States accounted for 46%, 61% and 54%
of the Companys net sales in 2001, 2000 and 1999. 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. Billings in the UK and
Japan are generally in pound sterling and yen, respectively. On
occasion other export billings are denominated in the currency of
the customers country.
|
| | See Note J to the Consolidated Financial Statements Part II  ITEM
8 for details of geographic area information.                                                                                                                                                                                                                                                                                                                                                                   

Major Customers



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The nature of the Companys product offerings may produce sales to
one or a small number of customers in excess of 10% of total sales
in any one year. It is possible that the specific customers
reaching this threshold may change from year to year. Loss of any
one of these customers could have a material impact on the
Companys result of operations. For the year ended December 31,
2001 the Company did not have sales to a single customer that
exceeded 10% of total sales.

Backlog



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2001, the Company had an order backlog of
approximately $251,000 compared to $566,000 at December 31, 2000.
Management expects that the Company will ship products
representing this entire backlog in 2002.

Employees



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of February 28, 2002, the Company had approximately 18
permanent employees, as compared to 67 at February 28, 2001 and 89
at February 28, 2000. None of the Companys employees are
represented by a labor union.

4



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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.
In addition, Integral Vision LTD leases a 1,000 square foot
facility in Bedford, England for sales and administrative
functions.

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 February 28,
2002, there were approximately 4,500 stockholders of the Company
including individual participants in security position listings.                                                                                                                                                                                                                                                                      
|
| | The Companys common stock was moved to the Over the Counter
Bulletin Board (OTCBB) effective with its delisting from The
Nasdaq SmallCap Market with the open of business August 16, 2001.
The Company was informed by Nasdaq that the delisting was decided
by the Nasdaq Listing Qualifications panel which approved the
Nasdaqs staff decision to delist the stock due to its failing to
maintain a minimum bid price of $1.00 for 30 consecutive trading
days as required by Marketplace Rule 4450(a)(5) for continued
listing.
|
| | Information on the current quotes on the stock, which will
continue to use the ticker symbol INVI, are available at the
OTCBBs website, www.otcbb.com and most financial information
portals, such as that provided at http://finance.yahoo.com or
http://quote.bloomberg.com. Integral Vision will continue to
provide information through filings with the Securities and
Exchange Commission (SEC) as required for continued listing on the
OTCBB. These filings can be found at the SECs website at
www.sec.gov.               
|
| | The table below shows the high and low sales prices for the
Companys common stock for each quarter in the past two years.
The closing sales price for the Companys common stock on February
28, 2002 was $0.26 per share.                                                                                                                                                                                                                                                                                                          

|     |  |        |       |  |        |   |       |         |  |   |        |  |  |   |       | 
|---- |  | ------ | ----- |  | ------ | - | ----- | ------- |  | - | ------ |  |  | - | ----- | 
|     |  | 2001   |      
|     |  |        |      
|     |  | Mar 31 |       |  | Jun 30 |   |       | Sept 30 |  |   | Dec 31 | 
|     |  |        |       |  |        |   |       |         |  |   |        | 
|High |  | $      | 0.703 |  |        | $ | 0.280 |         |  | $ | 0.330  |  |  | $ | 0.230 | 
|Low  |  |        | 0.219 |  |        |   | 0.094 |         |  |   | 0.110  |  |  |   | 0.090 | 

|     |  |      |       |  |  |   |       |  |  |  |  |  |  |   |       |  |  |   |       | 
|---- |  | ---- | ----- |  |  | - | ----- |  |  |  |  |  |  | - | ----- |  |  | - | ----- | 
|     |  | 2000 |      
|     |  |      |      
|High |  | $    | 5.688 |  |  | $ | 3.500 |  |  |  |  |  |  | $ | 2.563 |  |  | $ | 1.625 | 
|Low  |  |      | 2.000 |  |  |   | 1.375 |  |  |  |  |  |  |   | 1.188 |  |  |   | 0.281 | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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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##### Table of Contents



ITEM 6. Selected Financial Data

|                                                   |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   |            |        |   |            |        |       |  
|-------------------------------------------------- | ------------------------------------ | -------------- | ---------------------- | ----- | - | ---- | ------------------------------------- | ----- | ---- | - | ------ | ----- | - | - | ---------- | ------ | - | ---------- | ------ | ----- | -
|                                                   |                                      |                | Year ended December 31 |      
|                                                   |                                      |                |                        |      
|                                                   |                                      |                | 2001                   |       |   | 2000 |                                       |       | 1999 |   |        | 1998  |   |   | 1997       |       
|                                                   |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   |            |       
|                                                   |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   | (restated) |        |   | (restated) |       
|                                                   |                                      |                |                        |       |   |      | (in thousands, except per share data) |       |      |   |        |      
|Net revenues                                       |                                      | $              | 2,633                  |       |   | $    | 5,956                                 |       |      | $ | 10,743 |       |   | $ | 9,434      |        |   | $          | 15,955 |      
|Gross margin                                       |                                      |                | (2,763                 | )(g)  |   |      | (534                                  | )(f)  |      |   | (105   | )(a)  |   |   | 1,265      | (c)(d) |   |            | 4,313  |      
|Loss from continuing
operations                    |                                      |                | (7,694                 | )     |   |      | (7,124                                | )     |      |   | (5,671 | )     |   |   | (11,203    | )(e)   |   |            | (1,663 | )    
|Loss on sale of note receivable                    |                                      |                | (441                   | )     |   |      |                                       |       |      |   |        |       |   |   |            |        |   |            |        |      
|Income(loss) from
discontinued operations (h)      |                                      |                |                        |       |   |      |                                       |       |      |   | 1,030  |       |   |   | 19         |        |   |            | 1,519  |      
|Gain on disposal of
Welding division               |                                      |                |                        |       |   |      |                                       |       |      |   | 8,749  |       |   |   |            |        |   |            |        |      
|Extraordinary charge from
early retirement of debt |                                      |                |                        |       |   |      |                                       |       |      |   | (583   | )     |   |   |            |        |   |            |        |      
|Net income(loss)                                   |                                      |                | (8,135                 | )     |   |      | (7,124                                | )     |      |   | 3,525  | (b)   |   |   | (11,184    | )(e)   |   |            | (144   | )    
|Basic and diluted earnings
(loss) per share:       |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   |            |        |   |            |        |      
|                                                   | Continuing operations                |                |                        | (0.84 | ) |      |                                       | (0.79 | )    |   |        | (0.63 | ) |   |            | (1.24  | ) |            |        | (0.19 | )
|                                                   | Loss on sale of note receivable      |                |                        | (0.05 | ) |      |                                       |       |      |   |        |       |   |   |            |        |   |            |        |       |  
|                                                   | Discontinued Welding
operations      |                |                        |      |   |      |                                       |      |      |   |        | 0.11  |   |   |            | 0.00   |   |            |        | 0.17  |  
|                                                   | Gain on disposal of
Welding division |                |                        |      |   |      |                                       |      |      |   |        | 0.97  |   |   |            |       |   |            |        |      |  
|                                                   | Extraordinary charge                 |                |                        |      |   |      |                                       |      |      |   |        | (0.06 | ) |   |            |       |   |            |        |      |  
|                                                   | Net income (loss)                    |                |                        | (0.89 | ) |      |                                       | (0.79 | )    |   |        | 0.39  |   |   |            | (1.24  | ) |            |        | (0.02 | )
|                                                   |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   |           
|Weighted average shares                            |                                      |                | 9,198                  |       |   |      | 9,028                                 |       |      |   | 9,025  |       |   |   | 9,025      |        |   |            | 8,897  |      
|                                                   |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   |           
|                                                  
|                                                   |                                      |                | At December 31         |      
|                                                   |                                      |                |                        |      
|                                                   |                                      |                | 2001                   |       |   | 2000 |                                       |       | 1999 |   |        | 1998  |   |   | 1997       |       
|                                                   |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   |            |       
|                                                   |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   | (restated) |        |   | (restated) |       
|                                                   |                                      | (in thousands) |                       
|Working capital                                    |                                      | $              | (1,472                 | )     |   | $    | 964                                   |       |      | $ | 5,810  |       |   | $ | 2,641      |        |   | $          | 3,478  |      
|Total assets                                       |                                      |                | 1,964                  |       |   |      | 11,164                                |       |      |   | 19,058 |       |   |   | 34,320     |        |   |            | 48,521 |      
|Long-term debt,
net of current portion             |                                      |                | 337                    |       |   |      | 1,967                                 |       |      |   | 2,000  |       |   |   | 20,123     |        |   |            | 22,592 |      
|Stockholders equity                               |                                      |                | (672                   | )     |   |      | 6,936                                 |       |      |   | 14,325 |       |   |   | 10,861     |        |   |            | 22,003 |      
|                                                   |                                      |                |                        |       |   |      |                                       |       |      |   |        |       |   |   |            |       



|(a) |  | In 1999, the Company charged-off inventory of $1.5
million resulting from a review of the marketability of
inventory related to a previously discontinued product line.  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | Includes an $8.7 million after tax gain on disposal of
the Welding Controls division and a $583,000 charge, net of
tax credit, for the early retirement of debt.         
|(c) |  | In 1998, the Company charged-off inventory of $1.4
million as a result of Managements decision to no longer
pursue the sale of certain products for the audio CD market.
|(d) |  | Net revenues included $1.5 million from the sale of
patent technology in both 1997 and 1998 which resulted in
lower direct cost of sales as a percentage of sales.       
|(e) |  | Includes a $4.2 million write-off of capitalized
software development costs.                                                                                             
|(f) |  | In 2000, Management made a change in estimate,
primarily related to inventory, that resulted in a $666,000
charge to direct costs of sales.                              



6



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##### Table of Contents



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



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

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

Overview



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 30, 1999, the Company sold the assets of its Welding
Controls division. As a result of the sale, the Company changed
its name to Integral Vision, Inc. Integral Vision develops,
manufactures and markets microprocessor-based process monitoring
and control products for use in industrial manufacturing
environments. The Companys revenues are primarily derived from
the sale of optical inspection equipment. Optical inspection
equipment is principally sold to end users and suppliers of small
flat panel display and optical disc manufacturing equipment.
Except for the historical information contained herein, the
matters discussed in this document are forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Act of
1934. Such statements are based on managements current
expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. Such
factors and uncertainties include, but are not limited to: the
impact of the level of the Companys indebtedness; the Companys
ability to obtain the cash needed to allow it to continue as a
going concern; general economic conditions and conditions in the
specific industries in which the Company has significant
customers; price fluctuations in the materials purchased by the
Company for assembly into final products; competitive conditions
in the Companys markets and the effect of competitive products
and pricing; and technological development by the Company, its
customers and its competition. As a result, the Companys results
may fluctuate. Additional information concerning risk factors
that could cause actual results to differ materially from those
projected in the forward-looking statements is contained in the
Companys filings with the Securities and Exchange Commission.
These forward-looking statements represent the Companys best
estimates as of the date of this document. The Company assumes no
obligation to update such estimates except as required by the
rules and regulations of the Securities and Exchange Commission.

7



---



##### Table of Contents



Results of Operations



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

|                                                                                    |                                                            |  |                        |        |   |      |        |       |      |  |       |       |  
|----------------------------------------------------------------------------------- | ---------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | ------ | ----- | ---- |  | ----- | ----- | -
|                                                                                    |                                                            |  | Year ended December 31 |       
|                                                                                    |                                                            |  |                        |       
|                                                                                    |                                                            |  | 2001                   |        |   | 2000 |        |       | 1999 | 
|                                                                                    |                                                            |  |                        |        |   |      |        |       |      | 
|Net revenues                                                                        |                                                            |  | 100.0                  | %      |   |      | 100.0  | %     |      |  | 100.0 | %    
|Direct cost of sales (a) (f)                                                        |                                                            |  | 184.4                  |        |   |      | 97.8   |       |      |  | 86.8  |      
|Specific inventory adjustment (b) (c) (d) (e)                                       |                                                            |  | 20.5                   |        |   |      | 11.2   |       |      |  | 14.2  |      
|                                                                                    |                                                            |  |                        |        |   |      |        |       |     
|                                                                                    | Gross margin                                               |  |                        | (104.9 | ) |      |        | (9.0  | )    |  |       | (1.0  | )
|Other costs and expenses:                                                           |                                                            |  |                        |        |   |      |        |       |      |  |       |      
|                                                                                    | Marketing                                                  |  |                        | 58.9   |   |      |        | 39.2  |      |  |       | 22.9  |  
|                                                                                    | General and administrative                                 |  |                        | 64.7   |   |      |        | 29.1  |      |  |       | 12.2  |  
|                                                                                    | Engineering and development:                               |  |                        |        |   |      |        |       |      |  |       |       |  
|                                                                                    | Expenditures                                               |  |                        | 73.9   |   |      |        | 55.9  |      |  |       | 39.0  |  
|                                                                                    | Allocated to capitalized software and direct
cost of sales |  |                        | (14.6  | ) |      |        | (10.7 | )    |  |       | (10.3 | )
|                                                                                    |                                                            |  |                        |        |   |      |        |       |     
|Net engineering and development expenses                                            |                                                            |  | 59.3                   |        |   |      | 45.2   |       |      |  | 28.7  |      
|                                                                                    |                                                            |  |                        |        |   |      |        |       |     
|Total other costs and expenses                                                      |                                                            |  | 182.9                  |        |   |      | 113.5  |       |      |  | 63.8  |      
|                                                                                    |                                                            |  |                        |        |   |      |        |       |     
|Loss from operations                                                                |                                                            |  | (287.8                 | )      |   |      | (122.5 | )     |      |  | (64.8 | )    
|Other income                                                                        |                                                            |  | (1.4                   | )      |   |      |        |       |      |  | 13.5  |      
|Interest income                                                                     |                                                            |  | 3.6                    |        |   |      | 5.8    |       |      |  | 3.5   |      
|Interest expense                                                                    |                                                            |  | (6.5                   | )      |   |      | (3.0   | )     |      |  | (5.0  | )    
|                                                                                    |                                                            |  |                        |        |   |      |        |       |     
|Loss from continuing operations before income taxes                                 |                                                            |  | (292.1                 | )      |   |      | (119.7 | )     |      |  | (52.8 | )    
|                                                                                    |                                                            |  |                        |        |   |      |        |       |     
|Provision (credit) for income taxes                                                 |                                                            |  |                        |        |   |      |        |       |      |  |       |      
|Loss from continuing operations                                                     |                                                            |  | (292.1                 | )      |   |      | (119.7 | )     |      |  | (52.8 | )    
|Loss on sale of note receivable                                                     |                                                            |  | (16.7                  | )      |   |      |        |       |      |  |       |      
|Income from discontinued welding operations, less
applicable income taxes           |                                                            |  |                        |        |   |      |        |       |      |  | 9.6   |      
|Gain on disposal of discontinued Welding division, less
applicable income taxes     |                                                            |  |                        |        |   |      |        |       |      |  | 81.4  |      
|Extraordinary charge for early retirement of debt less
applicable income tax credit |                                                            |  |                        |        |   |      |        |       |      |  | (5.4  | )    
|                                                                                    |                                                            |  |                        |        |   |      |        |       |     
|Net income(loss)                                                                    |                                                            |  | (308.8                 | )%     |   |      | (119.7 | )%    |      |  | 32.8  | %    
|                                                                                    |                                                            |  |                        |        |   |      |        |       |     



|(a) |  | Net revenues included $1.5 million from the sale of patent
technology in 1998, which resulted in lower direct cost of sales as a
percentage of sales.                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | 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.                                                                                                                                                             
|(c) |  | In 1998, the Company charged-off inventory of $1.4 million as a
result of Managements decision to no longer pursue the sale of certain
products for the audio CD market.                                                                                                                                                           
|(d) |  | In 2000, Management made a change in estimate, primarily related to
inventory, that resulted in a $666,000 charge to direct costs of sales.                                                                                                                                                                                         
|(e) |  | 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.
|(f) |  | Direct cost of sales includes capitalized software amortization as
a percentage of sales of 100%, 27.9% and 11.0% in 2001, 2000 and 1999,
respectively.                                                                                                                                                                             

8



---



##### Table of Contents



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net revenues decreased $3.3 million (55.8%) to $2.6 million in
2001 from $6.0 million in 2000. The decrease resulted primarily
from decreased sales of the Companys liquid crystal inspection
(LCI) and disc identification/print inspection (CDiD/CDiP)
products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Direct costs of sales decreased $1.1 million (16.9%) to $5.4
million in 2001 from $6.5 million in 2000. Direct costs of sales
as a percentage of sales increased to 205% in 2001 compared to
109% in 2000. Management periodically performs an analysis of the
net realizable value of capitalized software costs. Based on
current market conditions and the direction of the Company,
Management determined that capitalized software development costs
exceeded the estimated net realizable value of amounts capitalized
and a write-down was necessary. For the year ended December 31,
2001, $1.3 million of additional amortization is included in costs
of sales as a result of these analyses. Additionally, as a result
of the analyses, direct costs of sales includes a $540,000 charge
for the write-down of inventory. In 2000, management made a
change in estimate, primarily related to inventory, that resulted
in a $666,000 charge to direct costs of sales. The Company was in
the process of liquidating the inventory related to previously
discontinued product lines, however, due to disappointing results
of the inventory liquidation effort, management decided that a
change in estimate was necessary. Exclusive of the aforementioned
adjustments, direct costs of sales as a percentage of sales would
have been 134% in 2001 compared to 97.8% in 2000. The gross
margin in both periods was negatively impacted by the low sales
volume as the fixed charges, depreciation and amortization,
included in costs of sales make up a significant portion of the
total costs of sales.
|
| | Marketing costs decreased 33.5%, or $782,000, to $1.6 million in
2001 compared to $2.3 million in 2000. This decrease is primarily
attributable to workforce reductions resulting from the
implementation of a cost reduction plan by Management in late
2000. The plan also called for workforce reductions in both the
general and administrative department and the engineering
department, as evidenced by the figures below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | General and administrative costs decreased 1.7%, or $30,000, to
$1.7 million in 2001 compared to $1.7 million in 2000. Messrs.
Charles Drake and Mark Doede each have loans from the Company. In
August 2001, the Compensation Committee of the Companys Board of
Directors resolved to forgive $100,000 of the outstanding balance
on each of their loans from the Company, which resulted in a
$200,000 charge to compensation expense. Additionally, Mr.
Charles Drake was provided with 400,000 shares of unregistered
stock of the Company, subject to certain sale restrictions. An
additional $56,000 of compensation expense was charged to general
and administrative expense in 2001 as a result of the issuance of
these shares. General and administrative costs for 2001 also
includes a $109,000 charge for bad debts as certain of the
Companys debtors financial conditions have worsened over the
last several months. Exclusive of these non-recurring charges,
general and administrative costs decreased 22.8% or $395,000 in
2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Engineering and development expenditures decreased 41.5%, or $1.4
million, to $1.9 million in 2001 compared to $3.3 million in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

9



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Company recognized a loss on sale of the note receivable of
$441,000 in the quarter ended March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Interest income decreased $251,000 to $96,000 in 2001 compared to
$347,000 in 2000. This decrease is primarily attributable to the
sale of the Companys note receivable in May 2001 and the receipt
of principal payments on the outstanding balance of the note
throughout the year.                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Interest expense was $172,000 in 2001 compared to $177,000 in
2000. Interest expense decreased due to the fact that the
Companys mortgages were paid in full when the sale of its
building closed on July 27, 2001 (see Note D to consolidated
financial statements). Additionally, the Company used proceeds
from the sale of its note receivable in May 2001 (see Note B to
consolidated financial statements) to pay in full its revolving
line of credit at which time that agreement was terminated.
However, these decreases were offset by additional interest
expense attributable to the debentures that were sold in 2001 (see
Note I to consolidated financial statements).
|
| | On July 27, 2001, the Company completed a transaction to sell the
building it currently occupies in Farmington Hills, MI for $2.45
million, at which time the existing mortgages were retired. The
Company continues to occupy a portion of the building under a
five-year lease agreement with the new owner. Net proceeds from
the sale was approximately $200,000 of which $186,000 was used to
prepay nine months of rent, a requirement of the lease agreement.
In 2001, the Company recognized a loss on the transaction of
approximately $22,000, which is included in other income.                                                                                            
|
| | On August 24, 2001, the Company completed the sale of certain of
its packaging applications software and most of the fixed assets
of its subsidiary, Integral Vision Ltd., to n.v. DIMACO, s.a. for
$500,000 in cash and future royalties. Included in the transaction
was the sale of the worldwide exclusive rights to Integral
Visions Full Bottle Inspection System (FBIS), a product that
performs certain inspections on bottles at the end of a filling
line. Integral Vision will receive a royalty on each FBIS sold for
the next three years. The proceeds from the transaction were used
primarily to fund current operations and to pay down existing
trade payables.   
|
| | Also included with the transaction was a manufacturing agreement
whereby DIMACO will manufacture products for Integral Visions
Optical Disc and Display Inspection customers in Europe.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Under the terms of the sale, most of Integral Vision Ltd.s
personnel and costs 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 other income,
primarily attributable to the software included in the sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Year Ended December 31, 2000, compared to the year ended December 31, 1999



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net revenues decreased $4.7 million (44.3%) to $6.0 million in
2000 from $10.7 million in 1999. The decrease is primarily
attributable to a lack of demand for the Companys OMNI inspection
system. In 2000, the Companys ability to sell into the overseas
market was hampered by the strength of the U.S. Dollar versus the
German Mark, as the Company has major competitors based in
Germany. The average exchange rate of the U.S. Dollar to the
German Mark increased approximately 16% in 2000 versus 1999. The
Company was unable to lower its price enough to compete. In the
U.S., manufacturers and replicators in the disc market spent very
little to increase capacity in 2000 for a variety of reasons
including increased electronic distribution (versus disc media) of
music and computer software and the relocation of manufacturing
operations to Asia. However, the Company did experience a modest
increase in sales of its liquid crystal inspection (LCI) and disc
identification/print inspection (CDiD/CDiP) products which
partially offset the decline in OMNI sales.

10



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Direct costs of sales decreased to $6.5 million in 2000 from $10.8
million in 1999 and increased as a percentage of sales to 109%
from 101%. In 2000, Management made a change in estimate,
primarily related to inventory, that resulted in a $666,000 charge
to direct costs of sales. The Company was in the process of
liquidating the inventory related to previously discontinued
product lines, however, due to disappointing results of the
inventory liquidation effort, Management decided that a change in
estimate was necessary. The direct costs of sales for 1999
included an inventory charge-off of $1.5 million resulting from a
review of the marketability of remaining inventory related to a
previously discontinued product line. Exclusive of the
aforementioned adjustments, direct costs of sales as a percentage
of sales would have been 97.8% in 2000 compared to 86.8% in 1999.
The gross margin in 2000 was positively affected by a change in
product mix as sales of our LCI and CDiD/CDiP products have less
material cost than that of the OMNI systems. However, the gross
margin in both periods was negatively affected by low sales
volumes as fixed charges, depreciation, and amortization made up a
significant portion of the costs of sales.
|
| | Marketing expense decreased slightly in dollar terms, but
increased as a percentage of net revenues from 22.9% to 39.2%.
The increase as a percentage of net revenues was primarily
attributable to the decreased sales volume.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | General and administrative expenses increased to $1.7 million from
$1.3 million and as a percentage of net revenues from 12.2% to
29.1%. This was primarily due to the fact that a portion of the
G&A was allocated to the Welding Controls division in 1999. The
actual general and administrative expenditures decreased in 2000
compared to 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Product development expenses decreased to $2.7 million from $3.1
million and increased as a percentage of net revenues from 28.7%
to 45.2%. The reduction in development expenditures was primarily
the result of the Companys decision to focus its resources on a
few specific projects in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | In 1999, other income of $1.5 million and interest income of
$374,000 ($347,000 in 2000) resulted from the sale of the Welding
Controls division to Weltronic (WTC). The other income represents
fees paid for services provided by Integral Vision for WTC during
the transition period. These services included management
services, use of facilities and software usage. The interest
income represents the interest on the note receivable from WTC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Interest expense decreased to $177,000 from $539,000 and as a
percentage of net revenues to 3.0% from 5.0%. The decrease is a
result of the pay-off of substantially all debt at June 30, 1999
using the proceeds from the sale of the Welding Controls division.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | In 1999, the gain on disposal of the Welding division of $8.7
million, net of tax, resulted from the sale of substantially all
of the assets of the Welding Controls division on June 30, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | In 1999, the extraordinary charge of $583,000, net of tax credit,
was a result of charges related to the early retirement of debt.
These charges included unaccreted value assigned to warrants and
unamortized discounts. The Company used proceeds from the sale of
the Welding Controls division to pay-off substantially all
outstanding debt on June 30, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

11



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##### Table of Contents



Quarterly Information



| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table sets forth Consolidated Statements of
Operations data for each of the eight quarters in the two-year
period ended December 31, 2001. 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.



|                                             |                                 |   |                     |                                      |   |        |        |       |        |   |        |        |   |   |        |       |  
|-------------------------------------------- | ------------------------------- | - | ------------------- | ------------------------------------ | - | ------ | ------ | ----- | ------ | - | ------ | ------ | - | - | ------ | ----- | -
|                                             |                                 |   | Quarterly
Ended2001 |                                     
|                                             |                                 |   |                     |                                     
|                                             |                                 |   | Dec 31              |                                      |   | Sep 30 |        |       | Jun 30 |   |        | Mar 31 |  
|                                             |                                 |   |                     |                                      |   |        |        |       |        |   |        |        |  
|                                             |                                 |   |                     | (in thousands except per share data) |  
|Net revenues                                 |                                 | $ | 476                 |                                      |   | $      | 506    |       |        | $ | 669    |        |   | $ | 982    |      
|Gross margin                                 |                                 |   | (1,189              | )                                    |   |        | (1,209 | )     |        |   | (328   | )      |   |   | (37    | )    
|Income (loss) from
continuing operations     |                                 |   | (2,061              | )                                    |   |        | (2,507 | )     |        |   | (1,608 | )      |   |   | (1,518 | )    
|Loss on sale of
note receivable              |                                 |   |                     |                                      |   |        |        |       |        |   |        |        |   |   | (441   | )    
|Net income (loss)                            |                                 |   | (2,061              | )                                    |   |        | (2,507 | )     |        |   | (1,608 | )      |   |   | (1,959 | )    
|                                             |                                 |   |                     |                                      |   |        |        |       |        |   |        |       
|Basic and diluted earnings
(loss) per share: |                                 |   |                     |                                      |   |        |        |       |        |   |        |        |   |   |        |      
|                                             | Continuing operations           |   |                     | (0.22                                | ) |        |        | (0.27 | )      |   |        | (0.18  | ) |   |        | (0.17 | )
|                                             | Loss on sale of note receivable |   |                     |                                      |   |        |        |       |        |   |        |        |   |   |        | (0.05 | )
|                                             | Net income (loss)*              |   | $                   | (0.22                                | ) |        | $      | (0.27 | )      |   | $      | (0.18  | ) |   | $      | (0.22 | )
|                                             |                                 |   |                     |                                      |   |        |        |       |        |   |        |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                             |                                 |   |                   |                                      |   |        |        |       |        |   |        |        |   |   |        |       |  
|-------------------------------------------- | ------------------------------- | - | ----------------- | ------------------------------------ | - | ------ | ------ | ----- | ------ | - | ------ | ------ | - | - | ------ | ----- | -
|                                             |                                 |   | Quarter
Ended2000 |                                     
|                                             |                                 |   |                   |                                     
|                                             |                                 |   | Dec 31            |                                      |   | Sep 30 |        |       | Jun 30 |   |        | Mar 31 |  
|                                             |                                 |   |                   |                                      |   |        |        |       |        |   |        |        |  
|                                             |                                 |   |                   | (in thousands except per share data) |   |        |        |       |       
|Net revenues                                 |                                 | $ | 672               |                                      |   | $      | 1,535  |       |        | $ | 1,785  |        |   | $ | 1,964  |      
|Gross margin                                 |                                 |   | (916              | )                                    |   |        | (65    | )     |        |   | (132   | )      |   |   | 579    |      
|Income (loss) from
continuing operations     |                                 |   | (2,557            | )                                    |   |        | (1,634 | )     |        |   | (1,854 | )      |   |   | (1,079 | )    
|Loss on sale of
note receivable              |                                 |   |                   |                                      |   |        |        |       |        |   |        |        |   |   |        |      
|Net income (loss)                            |                                 |   | (2,557            | )                                    |   |        | (1,634 | )     |        |   | (1,854 | )      |   |   | (1,079 | )    
|                                             |                                 |   |                   |                                      |   |        |        |       |        |   |        |       
|Basic and diluted earnings
(loss) per share: |                                 |   |                   |                                      |   |        |        |       |        |   |        |        |   |   |        |      
|                                             | Continuing operations           |   |                   | (0.28                                | ) |        |        | (0.18 | )      |   |        | (0.21  | ) |   |        | (0.12 | )
|                                             | Loss on sale of note receivable |   |                   |                                      |   |        |        |       |        |   |        |        |   |   |        |       |  
|                                             | Net income (loss)*              |   | $                 | (0.28                                | ) |        | $      | (0.18 | )      |   | $      | (0.21  | ) |   | $      | (0.12 | )
|                                             |                                 |   |                   |                                      |   |        |        |       |        |   |        |       



---

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

Seasonality and Quarterly Fluctuations



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

Liquidity and Capital Resources



| |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating activities for 2001 used cash of approximately $1.9
million primarily due to the Companys loss from continuing
operations of $7.7 million. The cash used in operating activities
was partially offset by a net decrease of $2.1 million in certain
working capital items. Decreases in accounts receivable and
inventory were the primary reasons for the net decrease in certain
working capital items.

12



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##### Table of Contents





| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2001, the Company invested $384,000 in the development of
software for its small flat panel display inspection systems.
Additionally, the Companys investing activities included the
following:



| | 1. |  | The January 2001 sale of 19.9% of the $1.7 million
then outstanding on the note receivable that resulted from
the sale of the Welding Controls division to third party
investors in exchange for consideration of $300,000. The
Company also received $439,000 in principal payments on the
portion of the note receivable that was not sold. 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.                                                         
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | On July 27, 2001, the Company completed a transaction
to sell the building it currently occupies in Farmington
Hills, MI for $2.45 million, at which time the existing
mortgages were retired. The Company continues to occupy a
portion of the building under a five-year lease agreement
with the new owner. Net proceeds from the sale was
approximately $200,000 of which $186,000 was used to prepay
nine months of rent, a requirement of the lease agreement.
The Company recognized a loss on the transaction of
approximately $22,000, which is included in other income.                                                                                                  
|
| | 3. |  | On August 24, 2001, the Company completed the sale of
certain of its packaging applications software and most of
the fixed assets of its subsidiary, Integral Vision Ltd., to
n.v. DIMACO, s.a. for $500,000 in cash and future royalties.
Included in the transaction was the sale of the worldwide
exclusive rights to Integral Visions Full Bottle Inspection
System (FBIS), a product that performs certain inspections
on bottles at the end of a filling line. Integral Vision will
receive a royalty on each FBIS sold for the next three years.
The proceeds from the transaction were used primarily to
fund current operations and to pay down existing trade
payables.
|
| |    |  | Also included with the transaction was a manufacturing
agreement whereby DIMACO will manufacture products for Integral
Visions Optical Disc and Display Inspection customers in
Europe.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |    |  | Under the terms of the sale, most of Integral Vision Ltd.s
personnel and costs 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 other income,
primarily attributable to the software included in the sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys financing activities included $2.0 million paid to
retire its outstanding mortgage notes payable at the closing on
the sale of the building. The Company used proceeds from the sale
of its note receivable in May 2001 to pay in full its revolving
line of credit at which time that agreement was terminated. The
Company generated cash in the period through the placement of
$510,000 of its senior subordinated debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The Companys current resources include only anticipated cash
provided by operating activities. This resource will not be
sufficient to support the Companys cash flow needs over the next
twelve months. The expected cash shortfall over the next twelve
months is approximately $740,000. In March 2001, the Companys
board of directors approved the issuance of up to $1.5 million of
senior subordinated debentures (see Note D to consolidated
financial statements), which could provide additional financing to
the Company. Management plans to secure approximately $540,000
through additional sales of its debentures in 2002, of which
$500,000 had been secured as of February 28, 2002. In February
2002, the Companys chairman, Charles J. Drake, invested $350,000
in the Companys debentures. An additional $150,000 in debentures
were placed with outside investors subsequent to December 31,
2001. Managements plans to obtain the additional cash needed to
enable the Company to continue as a going concern, include the
sale of certain of its patented technologies, as well as pursuing
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

13



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##### Table of Contents





| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 June 2001, the FASB issued SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 are to be accounted for using the
purchase method and specifies the criteria for the recognition and
measurement of goodwill and other intangible assets acquired in a
business combination. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives are to no longer be
amortized but rather be tested at least annually for impairment.
SFAS No. 142 also requires that intangible assets with definite
useful lives will continue to be amortized over their respective
useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (which supersedes
SFAS No. 121). The Company adopted the provisions of SFAS No. 141
immediately and will adopt SFAS No. 142 effective January 1, 2002.
There was no material impact resulting from the application of
SFAS No. 141 and the Company does not believe that there will be a
material impact resulting from the application of SFAS No. 142.
|
| | In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 also extends the reporting
requirements to report separately as discontinued operations,
components of an entity that have either been disposed of or
classified as held-for-sale. The Company will adopt the provisions
of SFAS No. 144 effective January 1, 2002 and does not expect that
such adoption will have a significant effect on the Companys
results of operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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. On a consolidated
basis the Company denominates sales in the following currencies:                                                                                                                                                                                                                                                                                                                                                                         



| |  |  | Japanese Yen  
| | - |  | --------------
|
| |  |  | Pound Sterling
|
| |  |  | French Francs 
|
| |  |  | Euros         

14



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2001, 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



| |     
| | ----
| | None




Part III

ITEM 10. Directors and Executive Officers of the Registrant



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The information contained in the Integral Vision, Inc. proxy
statement (to be filed within 120 days of December 31, 2001), with
respect to directors and executive officers of the Company, is
incorporated herein by reference.

ITEM 11. Executive Compensation



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The information contained in the Integral Vision, Inc. proxy
statement (to be filed within 120 days of December 31, 2001), with
respect to directors and executive officers of the Company, is
incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The information contained in the Integral Vision, Inc. proxy
statement (to be filed within 120 days of December 31, 2001), with
respect to directors and executive officers of the Company, is
incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The information contained in the Integral Vision, Inc. proxy
statement (to be filed within 120 days of December 31, 2001), with
respect to directors and executive officers of the Company, is
incorporated herein by reference.




PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

|               |  |                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------
|(a)(1) and (2) |  | The response to this portion of ITEM 14 is submitted as a
separate section of this report.
|              
|(3)            |  | Listing of exhibits.                                                                      

|        |  |                                                                                                                                                                                         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                         
|Number  |  | Description of Document                                                                                                                                                                 
|        |  |                                                                                                                                                                                         
|3.1     |  | Articles of Incorporation, as amended (filed as Exhibit 3.1 to the registrants Form 10-K for the year
ended December 31, 1995, SEC file 0-12728, and incorporated
herein by reference).
|3.2     |  | Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the registrants Form 10-K for the year
ended December 31, 1994, SEC file 0-12728, and incorporated
herein by reference). 
|4.1     |  | Note and Warrant Purchase Agreement (filed as Exhibit 4.1 to the registrants Form 8-K dated July 15,
1997, SEC file 0-12728, and incorporated herein by reference).                     

15



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                         
|Number  |  | Description of Document                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                         
|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).                          
|10.1    |  | 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).                                                                                                                   
|10.2    |  | 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).                                                                                                                                                                     
|10.3    |  | 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).                                                                                                                                                
|10.4    |  | 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).                                                                                                          
|10.5    |  | 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).                                                                                                                                                                   
|10.6*   |  | 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).                                                                                       
|10.7    |  | Asset Purchase Agreement between the Registrant and Weltronic (filed
as exhibit to the registrants Preliminary Schedule 14A  Rule
14A-101 dated May 6, 1999 and incorporated herein by reference).                                                                                                                                                    
|10.8    |  | Post Closing Adjustment and Settlement Agreement between Integral Vision, Inc. and
Weltronic/Technitron, Inc. (filed as Exhibit 10.33 to the registrants Form 10-K for the year ended
December 31, 1999, SEC File 0-12728, and incorporated herein by
reference).                                                                                      
|10.9    |  | Loan agreement between National City Bank and Integral Vision, Inc. (filed as exhibit 10.9 to the
registrants Form 10-Q for the quarter ended June 30, 2000, SEC File 0-12728, and incorporated herein
by reference).                                                                                                                                  
|10.10   |  | 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).                                                                                                                                        
|21      |  | Subsidiary of the registrant.                                                                                                                                                                                                                                                                                                                           
|23      |  | Consent of Moore Stephens Doeren Mayhew, independent auditors.                                                                                                                                                                                                                                                                                          
|(b)     |  | Reports on Form 8-K: None.                                                                                                                                                                                                                                                                                                                              
|(c)     |  | Exhibits  The response to this portion of ITEM 14 is submitted as a separate section of this report.                                                                                                                                                                                                                                                   
|(d)     |  | Financial statement schedules  The response to this portion of ITEM 14 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.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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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 29, 2002 |  |  | INTEGRAL VISION, INC.                                                                          
|     
|      |                |  |  | By: /S/ CHARLES J. DRAKE
Charles J. Drake, Chairman of the Board
(Principal Executive Officer) 
|     
|      |                |  |  | By: /S/ VINCENT SHUNSKYVincent Shunsky, Treasurer and
Director
(Acting 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 (Principal
Executive Officer) and Director
|                                      |  |                                                                 
|/S/ MAX A. COON                       |  | Vice Chairman, Secretary and Director                           
|Max A. Coon                           |  |                                                                 
|                                     
|/S/ VINCENT SHUNSKY

Vincent Shunsky  |  | Treasurer and Director
(Acting Chief Financial Officer)         
|                                     
|/S/ WILLIAM B. WALLACE                |  | Director                                                        
|William B. Wallace                    |  |                                                                 
|                                      |  |                                                                 
|/S/ CRAIG A. BLACK                    |  | Director                                                        
|                                      |  |                                                                 
|Craig A. Black                        |  |                                                                 
|                                     
|/S/ SAMUEL O. MALLORY                 |  | Director                                                        
|                                      |  |                                                                 
|Samuel O. Mallory                     |  |                                                                 

17



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##### Table of Contents



Annual Report on Form 10K

ITEM 14(a)(1) and (2), (c) and (d)

List of Financial Statements and Financial Statement Schedules

Certain Exhibits

Financial Statement Schedules

Year Ended December 31, 2001

INTEGRAL VISION, INC.

Farmington Hills, MI

18



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##### Table of Contents






Form 10-K  ITEM 14(a)(1) and (2)
Integral Vision, Inc. and Subsidiary

List of Financial Statements and Financial Statement Schedules

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)(1) |  | The following consolidated financial statements of Integral Vision, Inc. and subsidiary
are included in ITEM 8:                                                                                                                                                                                                                                                                                                                                                
|      
|       |  | Report of Moore Stephens Doeren Mayhew, Independent Auditors
Consolidated Balance Sheets-December 31, 2001 and 2000
Consolidated Statements of Operations-Years ended December 31,
2001, 2000 and 1999 Consolidated Statements of Stockholders
Equity (Deficit) -Years ended December 31, 2001, 2000, and
1999 Consolidated Statements of Cash Flows-Years ended
December 31, 2001, 2000 and 1999 Notes to Consolidated
Financial Statements-December 31, 2001
|      
|(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.

19



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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 sheets of Integral
Vision, Inc. and subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 2001. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules for 2001, 2000 and 1999 as
listed in the accompanying index at ITEM 14(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, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement schedule for 2001, 2000
and 1999, 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 P 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 P. 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, 2002

20



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##### Table of Contents



Consolidated Balance Sheets
Integral Vision, Inc. and Subsidiary

|                                                                |                                                                                                                                                              |   |                |         |   |      |        |         |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | -------------- | ------- | - | ---- | ------ | ------- | -
|                                                                |                                                                                                                                                              |   | December 31    |        
|                                                                |                                                                                                                                                              |   |                |        
|                                                                |                                                                                                                                                              |   | 2001           |         |   | 2000 |       
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|                                                                |                                                                                                                                                              |   | (in thousands) |        
|Assets                                                          |                                                                                                                                                              |   |                |         |   |      |        |        
|Current assets                                                  |                                                                                                                                                              |   |                |         |   |      |        |        
|                                                                | Cash                                                                                                                                                         |   | $              | 125     |   |      | $      | 78      |  
|                                                                | Accounts receivable, less allowance of $179,000 ($82,000 in 2000)                                                                                            |   |                | 332     |   |      |        | 904     |  
|                                                                | Inventories  Note A                                                                                                                                         |   |                | 208     |   |      |        | 1,240   |  
|                                                                | Costs and estimated earnings in excess of billings on incomplete contracts  Note C                                                                          |   |                |        |   |      |        | 24      |  
|                                                                | Current maturities of notes from sale of Welding division  Note B                                                                                           |   |                |        |   |      |        | 837     |  
|                                                                | Prepaid Rent  Note K                                                                                                                                        |   |                | 91      |   |      |        |        |  
|                                                                | Other current assets                                                                                                                                         |   |                | 71      |   |      |        | 183     |  
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|Total current assets                                            |                                                                                                                                                              |   | 827            |         |   |      | 3,266  |        
|Property and equipment  Note K                                 |                                                                                                                                                              |   |                |         |   |      |        |        
|                                                                | Land and improvements                                                                                                                                        |   |                |        |   |      |        | 363     |  
|                                                                | Building and building improvements                                                                                                                           |   |                |        |   |      |        | 3,684   |  
|                                                                | Production and engineering equipment                                                                                                                         |   |                | 704     |   |      |        | 2,675   |  
|                                                                | Furniture and fixtures                                                                                                                                       |   |                | 457     |   |      |        | 878     |  
|                                                                | Vehicles                                                                                                                                                     |   |                | 47      |   |      |        | 114     |  
|                                                                | Computer equipment                                                                                                                                           |   |                | 1,153   |   |      |        | 2,695   |  
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|                                                                |                                                                                                                                                              |   | 2,361          |         |   |      | 10,409 |        
|                                                                | Less accumulated depreciation                                                                                                                                |   |                | 2,202   |   |      |        | 7,002   |  
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|                                                                |                                                                                                                                                              |   | 159            |         |   |      | 3,407  |        
|Other assets                                                    |                                                                                                                                                              |   |                |         |   |      |        |        
|                                                                | Capitalized computer software development costs,
less accumulated amortization  Notes A, L and M                                                            |   |                | 710     |   |      |        | 3,257   |  
|                                                                | Patents, less accumulated amortization  Note A                                                                                                              |   |                | 268     |   |      |        | 330     |  
|                                                                | Note from sale of Welding division, less unamortized
discount and current maturities  Note B                                                                |   |                |        |   |      |        | 862     |  
|                                                                | Other                                                                                                                                                        |   |                |        |   |      |        | 42      |  
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|                                                                |                                                                                                                                                              |   | 978            |         |   |      | 4,491  |        
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|                                                                |                                                                                                                                                              | $ | 1,964          |         |   | $    | 11,164 |        
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|Liabilities and Stockholders Equity                            |                                                                                                                                                              |   |                |         |   |      |        |        
|Current liabilities                                             |                                                                                                                                                              |   |                |         |   |      |        |        
|                                                                | Notes payable  Note D                                                                                                                                       |   | $              | 358     |   |      | $      | 270     |  
|                                                                | Accounts payable                                                                                                                                             |   |                | 993     |   |      |        | 1,035   |  
|                                                                | Employee compensation                                                                                                                                        |   |                | 427     |   |      |        | 403     |  
|                                                                | Accrued and other liabilities                                                                                                                                |   |                | 431     |   |      |        | 553     |  
|                                                                | Current maturities of long-term debt  Note D                                                                                                                |   |                | 90      |   |      |        | 41      |  
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|Total current liabilities                                       |                                                                                                                                                              |   | 2,299          |         |   |      | 2,302  |        
|Long-term debt, less current maturities and OID  Notes D and K |                                                                                                                                                              |   | 337            |         |   |      | 1,926  |        
|Stockholders equity (deficit)  Note F                         |                                                                                                                                                              |   |                |         |   |      |        |        
|                                                                | Common stock, without par value, stated value $.20 per share;
15,000,000 shares authorized; 9,429,901 shares (2000-9,029,901) issued and outstading  Note I |   |                | 1,886   |   |      |        | 1,806   |  
|                                                                | Additional paid-in capital                                                                                                                                   |   |                | 31,265  |   |      |        | 31,195  |  
|                                                                | Retained-earnings deficit                                                                                                                                    |   |                | (33,362 | ) |      |        | (25,227 | )
|                                                                | Notes receivable from officers  Note N                                                                                                                      |   |                | (250    | ) |      |        | (681    | )
|                                                                | Accumulated translation adjustment  Note A                                                                                                                  |   |                | (211    | ) |      |        | (157    | )
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|Total stockholders equity (deficit)                            |                                                                                                                                                              |   | (672           | )       |   |      | 6,936  |        
|                                                                |                                                                                                                                                              |   |                |         |   |      |       
|                                                                |                                                                                                                                                              | $ | 1,964          |         |   | $    | 11,164 |        
|                                                                |                                                                                                                                                              |   |                |         |   |      |       

See accompanying notes

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##### Table of Contents



Consolidated Statements of Operations
Integral Vision, Inc. and Subsidiary

|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |       |      |        |       |        |  
|----------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ------------------------------------------------------------ | ------ | ------------------------------------- | ----- | - | ------ | ----- | ----- | ---- | ------ | ----- | ------ | -
|                                                                                                                              |                                         |                                                              |        | Year ended December 31                |      
|                                                                                                                              |                                         |                                                              |        |                                       |      
|                                                                                                                              |                                         |                                                              |        | 2001                                  |       |   | 2000   |       |       | 1999 |       
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |       |      |       
|                                                                                                                              |                                         |                                                              |        | (in thousands, except per share data) |      
|Net revenues                                                                                                                  |                                         | $                                                            | 2,633  |                                       |       | $ | 5,956  |       |       | $    | 10,743 |      
|Direct costs of sales  Note M                                                                                                |                                         |                                                              | 5,396  |                                       |       |   | 6,490  |       |       |      | 10,848 |      
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|Gross margin Note A                                                                                                          |                                         |                                                              | (2,763 | )                                     |       |   | (534   | )     |       |      | (105   | )    
|Other costs and expenses:                                                                                                     |                                         |                                                              |        |                                       |       |   |        |       |       |      |        |      
|                                                                                                                              | Marketing                               |                                                              |        | 1,552                                 |       |   |        | 2,334 |       |      |        | 2,464 |       
|                                                                                                                              | General and administrative  Note N     |                                                              |        | 1,703                                 |       |   |        | 1,733 |       |      |        | 1,306 |       
|                                                                                                                              | Engineering and development:            |                                                              |        |                                       |       |   |        |       |       |      |        |       |       
|                                                                                                                              |                                         | Expenditures                                                 |        |                                       | 1,946 |   |        |       | 3,328 |      |        |       | 4,190  |  
|                                                                                                                              |                                         | Allocated to capitalized software and direct cost of sales  |        |                                       |       |   |        |       |       |      |        |       |        |  
|                                                                                                                              |                                         | Note A                                                       |        |                                       | (384  | ) |        |       | (635  | )    |        |       | (1,109 | )
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|                                                                                                                              | Net engineering and development expense |                                                              |        | 1,562                                 |       |   |        | 2,693 |       |      |        | 3,081 |       
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|Total other costs and expenses                                                                                                |                                         |                                                              | 4,817  |                                       |       |   | 6,760  |       |       |      | 6,851  |      
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|Loss from operations                                                                                                          |                                         |                                                              | (7,580 | )                                     |       |   | (7,294 | )     |       |      | (6,956 | )    
|Other income(expense)  Notes B, K and L                                                                                      |                                         |                                                              | (38    | )                                     |       |   |        |       |       |      | 1,450  |      
|Interest income  Note B                                                                                                      |                                         |                                                              | 96     |                                       |       |   | 347    |       |       |      | 374    |      
|Interest expense  Note D                                                                                                     |                                         |                                                              | (172   | )                                     |       |   | (177   | )     |       |      | (539   | )    
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|Loss from continuing operations before income taxes                                                                           |                                         |                                                              | (7,694 | )                                     |       |   | (7,124 | )     |       |      | (5,671 | )    
|Provision (credit) for income taxes  Note E                                                                                  |                                         |                                                              |        |                                       |       |   |        |       |       |      |        |      
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|Loss from continuing operations                                                                                               |                                         |                                                              | (7,694 | )                                     |       |   | (7,124 | )     |       |      | (5,671 | )    
|Loss on sale of note receivable  Note B                                                                                      |                                         |                                                              | (441   | )                                     |       |   |        |       |       |      |        |      
|Income
from discontinued welding operations, less applicableincome taxes
of $0 for the year ended December 31, 1999 Note B |                                         |                                                              |        |                                       |       |   |        |       |       |      | 1,030  |      
|Gain
on disposal of Welding division, less applicable incometaxes of $300  Note B                                            |                                         |                                                              |        |                                       |       |   |        |       |       |      | 8,749  |      
|Extraordinary
charge for early retirement of debt less applicableincome tax credit of $200  Note D                           |                                         |                                                              |        |                                       |       |   |        |       |       |      | (583   | )    
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|Net income (loss)                                                                                                             |                                         | $                                                            | (8,135 | )                                     |       | $ | (7,124 | )     |       | $    | 3,525  |      
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|Basic and diluted earnings per share:                                                                                         |                                         |                                                              |        |                                       |       |   |        |       |       |      |        |      
|                                                                                                                              | Continuing operations                   |                                                              | $      | (0.84                                 | )     |   | $      | (0.79 | )     |      | $      | (0.63 | )     
|                                                                                                                              | Loss on sale of note receivable         |                                                              |        | (0.05                                 | )     |   |        |       |       |      |        |       |       
|                                                                                                                              | Discontinued Welding operations         |                                                              |        |                                      |       |   |        |      |       |      |        | 0.11  |       
|                                                                                                                              | Disposal of Welding division            |                                                              |        |                                      |       |   |        |      |       |      |        | 0.97  |       
|                                                                                                                              | Extraordinary charge                    |                                                              |        |                                      |       |   |        |      |       |      |        | (0.06 | )     
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|                                                                                                                              | Net income (loss)                       |                                                              | $      | (0.89                                 | )     |   | $      | (0.79 | )     |      | $      | 0.39  |       
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      
|Weighted average number of shares of common stock and                                                                         |                                         |                                                              |        |                                       |       |   |        |       |       |      |        |      
|common stock equivalents outstanding                                                                                          |                                         |                                                              | 9,198  |                                       |       |   | 9,028  |       |       |      | 9,025  |      
|                                                                                                                              |                                         |                                                              |        |                                       |       |   |        |       |      

See accompanying notes

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##### Table of Contents



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

|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |        |        |        |  
|----------------------------- | ------------------------------- | -------------------- | ----- | -------------- |  | - | ---------------- | --- | - | --------- | ------- | -------- | ------- | - | ---- | ------------- | - | - | ----- | ----------- | - | - | ------ | ------ | ------ | -
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       | Accumulated |   |   |        |        |       
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         | Retained |         |   |      |               |   |   | Other |             |   |   |        |       
|                              |                                 |                      |       | Common         |  |   | Additional Paid- |     |   | Earnings  |         |          | Officer |   |      | Comprehensive |   |   |       |             |  
|                              |                                 |                      |       | Stock          |  |   | In Capital       |     |   | (Deficit) |         |          | Notes   |   |      | Income(Loss)  |   |   | Total |            
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |            
|                              |                                 |                      |       | (in thousands) | 
|Balances at January 1, 1999   |                                 | $                    | 1,805 |                |  | $ | 31,187           |     |   | $         | (21,628 | )        |         | $ | (580 | )             |   | $ | 77    |             |   | $ | 10,861 |       
|                              | Net income for the year         |                      |       |                |  |   |                  |     |   |           |         | 3,525    |         |   |      |               |   |   |       |             |   |   |        | 3,525  |       
|                              | Translation adjustments         |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       | (39         | ) |   |        | (39    | )     
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |       
|                              |                                 | Comprehensive income |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |        |        | 3,486  |  
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |       
|                              | Loans to Officers               |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      | (22           | ) |   |       |             |   |   |        | (22    | )     
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |  
|Balances at December 31, 1999 |                                 |                      | 1,805 |                |  |   | 31,187           |     |   |           | (18,103 | )        |         |   | (602 | )             |   |   | 38    |             |   |   | 14,325 |       
|                              | Net loss for the year           |                      |       |                |  |   |                  |     |   |           |         | (7,124   | )       |   |      |               |   |   |       |             |   |   |        | (7,124 | )     
|                              | Translation adjustments         |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       | (195        | ) |   |        | (195   | )     
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |       
|                              |                                 | Comprehensive loss   |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |        |        | (7,319 | )
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |       
|                              | Exercise of options to purchase |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |        |        |       
|                              | 5,000 shares                    |                      |       | 1              |  |   |                  | 8   |   |           |         |          |         |   |      |               |   |   |       |             |   |   |        | 9      |       
|                              | Loans to Officers               |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      | (79           | ) |   |       |             |   |   |        | (79    | )     
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |  
|Balances at December 31, 2000 |                                 |                      | 1,806 |                |  |   | 31,195           |     |   |           | (25,227 | )        |         |   | (681 | )             |   |   | (157  | )           |   |   | 6,936  |       
|                              | Net loss for the year           |                      |       |                |  |   |                  |     |   |           |         | (8,135   | )       |   |      |               |   |   |       |             |   |   |        | (8,135 | )     
|                              | Translation adjustments         |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       | (54         | ) |   |        | (54    | )     
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |       
|                              |                                 | Comprehensive loss   |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |        |        | (8,189 | )
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |   |       |             |   |   |       
|                              | Net officer note reductions     |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      | 431           |   |   |       |             |   |   |        | 431    |       
|                              | Issuance of stock               |                      |       | 80             |  |   |                  | (24 | ) |           |         |          |         |   |      |               |   |   |       |             |   |   |        | 56     |       
|                              | Sale of warrants                |                      |       |                |  |   |                  | 94  |   |           |         |          |         |   |      |               |   |   |       |             |   |   |        | 94     |       
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |  
|Balance at December 31, 2001  |                                 | $                    | 1,886 |                |  | $ | 31,265           |     |   | $         | (33,362 | )        |         | $ | (250 | )             |   | $ | (211  | )           |   | $ | (672   | )     
|                              |                                 |                      |       |                |  |   |                  |     |   |           |         |          |         |   |      |               |   |  

See accompanying notes

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##### Table of Contents



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

|                                                                                                      |  |                        |        |   |      |                |        |      |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | -------------- | ------ | ---- |  | - | ------- | -
|                                                                                                      |  | Year Ended December 31 |       
|                                                                                                      |  |                        |       
|                                                                                                      |  | 2001                   |        |   | 2000 |                |        | 1999 | 
|                                                                                                      |  |                        |        |   |      |                |        |      | 
|                                                                                                      |  |                        |        |   |      | (in thousands) |        |      |  |   |        
|Operating Activities                                                                                  |  |                        |        |   |      |                |        |      |  |   |         |  
|Net income (loss)                                                                                     |  | $                      | (8,135 | ) |      | $              | (7,124 | )    |  | $ | 3,525   |  
|Loss on sale of note receivable                                                                       |  |                        | 441    |   |      |                |        |      |  |   |         |  
|Income from discontinued operations                                                                   |  |                        |        |   |      |                |        |      |  |   | (1,030  | )
|Gain on sale of welding division                                                                      |  |                        |        |   |      |                |        |      |  |   | (8,749  | )
|Extraordinary charge for early retirement of debt                                                     |  |                        |        |   |      |                |        |      |  |   | 583     |  
|                                                                                                      |  |                        |        |   |      |                |        |      | 
|Loss from continuing operations                                                                       |  |                        | (7,694 | ) |      |                | (7,124 | )    |  |   | (5,671  | )
|Adjustments
to reconcile net loss from continuing operations to net cashused in operating activities: |  |                        |        |   |      |                |        |      |  |   |         |  
|Depreciation                                                                                          |  |                        | 539    |   |      |                | 886    |      |  |   | 1,046   |  
|Amortization                                                                                          |  |                        | 2,772  |   |      |                | 1,596  |      |  |   | 1,328   |  
|Net loss on disposal of assets                                                                        |  |                        | 111    |   |      |                |        |      |  |   |         |  
|Deemed compensation                                                                                   |  |                        | 256    |   |      |                |        |      |  |   |         |  
|Changes in operating assets and liabilities of continuing operations:                                 |  |                        |        |   |      |                |        |      |  |   |         |  
|Accounts receivable                                                                                   |  |                        | 572    |   |      |                | 2,979  |      |  |   | (1,045  | )
|Inventories                                                                                           |  |                        | 1,019  |   |      |                | 755    |      |  |   | 2,181   |  
|Prepaid and other                                                                                     |  |                        | 275    |   |      |                | 307    |      |  |   | 117     |  
|Accounts payable and other current liabilities                                                        |  |                        | 218    |   |      |                | (742   | )    |  |   | (603    | )
|                                                                                                      |  |                        |        |   |      |                |        |      | 
|Net cash used in operating activities                                                                 |  |                        | (1,932 | ) |      |                | (1,343 | )    |  |   | (2,647  | )
|Investing Activities                                                                                  |  |                        |        |   |      |                |        |      |  |   |         |  
|Proceeds from sale of Welding Controls division                                                       |  |                        |        |   |      |                |        |      |  |   | 22,394  |  
|Payments
received on note receivable resulting from the sale of theWelding Controls division          |  |                        | 1,189  |   |      |                | 1,719  |      |  |   |         |  
|Proceeds from the sale of a portion of note receivable                                                |  |                        | 300    |   |      |                |        |      |  |   |         |  
|Repurchase of portion of note receivable                                                              |  |                        | (221   | ) |      |                |        |      |  |   |         |  
|Sale (Purchase) of property and equipment                                                             |  |                        | 2,362  |   |      |                | (149   | )    |  |   | (290    | )
|Investment in capitalized software                                                                    |  |                        | (384   | ) |      |                | (635   | )    |  |   | (1,410  | )
|Proceeds from sale of packaging technology                                                            |  |                        | 500    |   |      |                |        |      |  |   |         |  
|Other                                                                                                 |  |                        | 14     |   |      |                | 44     |      |  |   | 265     |  
|                                                                                                      |  |                        |        |   |      |                |        |      | 
|Net cash provided by (used in) investing activities                                                   |  |                        | 3,760  |   |      |                | 979    |      |  |   | 20,959  |  
|Financing Activities                                                                                  |  |                        |        |   |      |                |        |      |  |   |         |  
|Repayments of revolving line of credit and other obligations                                          |  |                        |        |   |      |                |        |      |  |   | (20,448 | )
|Proceeds from (repayments on) revolving line of credit                                                |  |                        | (270   | ) |      |                | 270    |      |  |   |         |  
|Proceeds from (repayments on) mortgage note payable                                                   |  |                        | (1,967 | ) |      |                | (33    | )    |  |   | 2,000   |  
|Proceeds from exercise of stock options                                                               |  |                        |        |   |      |                | 9      |      |  |   |         |  
|Proceeds from sales of debentures, net of discount                                                    |  |                        | 416    |   |      |                |        |      |  |   |         |  
|Proceeds from sales of warrants                                                                       |  |                        | 94     |   |      |                |        |      |  |   |         |  
|                                                                                                      |  |                        |        |   |      |                |        |      | 
|Net cash provided by (used in) financing activities                                                   |  |                        | (1,727 | ) |      |                | 246    |      |  |   | (18,448 | )
|                                                                                                      |  |                        |        |   |      |                |        |      | 
|Effect of exchange rate changes                                                                       |  |                        | (54    | ) |      |                | (195   | )    |  |   | (39     | )
|                                                                                                      |  |                        |        |   |      |                |        |      | 
|Decrease in cash                                                                                      |  |                        | 47     |   |      |                | (313   | )    |  |   | (175    | )
|Cash at beginning of year                                                                             |  |                        | 78     |   |      |                | 391    |      |  |   | 566     |  
|                                                                                                      |  |                        |        |   |      |                |        |      | 
|Cash at end of year                                                                                   |  | $                      | 125    |   |      | $              | 78     |      |  | $ | 391     |  
|                                                                                                      |  |                        |        |   |      |                |        |      | 

See accompanying notes

24



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##### Table of Contents



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

Note A  Significant Accounting Policies

Nature of Business



| |  | On June 30, 1999, the Company sold the assets of its Welding
Controls division. As a result of the sale, the Company changed
its name to Integral Vision, Inc. Integral Vision (or the
Company), formerly known as Medar, Inc., is a Michigan
corporation incorporated in 1978. Integral Vision 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 inspection (machine vision products). The
Companys products are generally sold as capital goods. Depending
on the application, machine vision systems have an indefinite
life. Machine vision applications are more likely to require
replacement due to possible technological obsolescence rather than
physical wear.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Sales of machine vision products are effected through Integral
Vision and through Integral Vision LTD., a wholly owned subsidiary
of the Company, located in Bedford, England.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Principles of Consolidation



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

Use of Estimates



| |  | The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates
also affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Translation of Foreign Currencies



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

Accounts Receivable



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

Major Customers



| |  | The nature of the Companys product offerings may produce sales to
one or a small number of customers in excess of 10% of total sales
in any one year. It is possible that the specific customers
reaching this threshold may change from year to year. Loss of any
one of these customers could have a material impact on the
Companys result of operations. For the year ended December 31,
2001 the Company did not have sales to a single customer that
exceeded 10% of total sales. For the year ended December 31,
2000, sales to Machines Dubuit, Hanky America and Protronix Ltd
represented 33% of consolidated sales. Amounts due from these
customers represented 40% of the respective outstanding trade
receivable balance at December 31, 2000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Inventories



| |  | Inventories are stated at the lower of first-in, first-out cost or
market, and at December 31 consisted of the following (net of
obsolescence reserve of $1,836,000 in 2001 and $1,484,000 in
2000):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                |  |                |     |  |      |   |       | 
|--------------- |  | -------------- | --- |  | ---- | - | ----- | 
|                |  | 2001           |     |  | 2000 |  
|                |  |                |     |  |      |  
|                |  | (in thousands) |    
|Raw materials   |  | $              | 43  |  |      | $ | 853   | 
|Work in process |  |                | 81  |  |      |   | 132   | 
|Finished goods  |  |                | 84  |  |      |   | 255   | 
|                |  |                |     |  |      |  
|                |  | $              | 208 |  |      | $ | 1,240 | 
|                |  |                |     |  |      |  

Management periodically performs an analysis of the Companys inventory to
determine if its cost exceeds estimated net realizable value. Over the last
several years, given the market conditions and the direction of the Company,
Management discontinued certain product lines and attempted to liquidate the
remaining inventory related to those product lines. Due to disappointing
results of the inventory liquidation effort, Management decided that a change
in estimate was necessary. The charge to direct costs of sales to write the
inventory down to estimated net realizable value was $540,000 in 2001, $666,000
in 2000, and $1.5 million in 1999. 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, $1.9 million and
$1.4 million in 2001, 2000, and 1999, respectively. A reconciliation of gross
margin as reported to gross margin from operations is presented in the table
below.

|                               |                         |   |                |   |  |      |       |   |      |   |        |   | 
|------------------------------ | ----------------------- | - | -------------- | - |  | ---- | ----- | - | ---- | - | ------ | - | 
|                               |                         |   | 2001           |   |  | 2000 |       |   | 1999 |  
|                               |                         |   |                |   |  |      |       |   |      |  
|                               |                         |   | (in thousands) |  
|Net revenues                   |                         | $ | 2,633          |   |  | $    | 5,956 |   |      | $ | 10,743 |  
|Gross margin as reported       |                         |   | (2,763         | ) |  |      | (534  | ) |      |   | (105   | )
|Adjustments to reconcile gross |                         |   |                |   |  |      |       |   |      |   |        |  
|                               | margin from operations: |   |                |   |  |      |       |   |      |   |        |   | 
|Specific inventory adjustments |                         |   | 540            |   |  |      | 666   |   |      |   | 1,525  |  
|Other non-cash charges         |                         |   | 2,943          |   |  |      | 1,918 |   |      |   | 1,399  |  
|                               |                         |   |                |   |  |      |       |   |     
|Gross margin from operations   |                         | $ | 720            |   |  | $    | 2,050 |   |      | $ | 2,819  |  
|                               |                         |   |                |   |  |      |       |   |     

Capitalized Computer Software Development Costs



| |  | Computer software development costs are capitalized after the
establishment of technological feasibility of the related
technology. These costs are amortized following general release
of products based on current and estimated future revenue for each
product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the
product (not to exceed 5 years). Management continually reviews
the net realizable value of capitalized software costs. At the
time that a determination is made that capitalized software
amounts exceed the estimated net realizable value of amounts
capitalized, any amounts in excess of the estimated realizable
amounts are written off.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Total software development costs incurred internally by the
Company were $1,946,000, $3,328,000, and $4,190,000 in 2001, 2000
and 1999 respectively, of which $384,000, $635,000, and
$1,109,000, respectively, were capitalized. Amortization of the
capitalized costs amounted to $2,639,000, $1,661,000, and
$1,182,000 in 2001, 2000 and 1999, respectively. Total
accumulated amortization at December 31, 2001 and 2000 was
$7,837,000 and $5,418,000, respectively.                                                                                                                                                                                                                                                         

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##### Table of Contents



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
$50,000, $137,000, and $106,000 in 2001, 2000 and 1999
respectively. Patents are stated at cost less accumulated
amortization of $485,000 and $372,000 at December 31, 2001 and
2000, respectively. Amortization of the patents amounted to
$112,000, $54,000, and $146,000 in 2001, 2000, and 1999,
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



| |  | Revenues are recorded at the time services are performed or when
products are shipped, except for long-term contracts. Contracts
whose duration overlap an accounting quarter reporting period, are
non-repetitive and exceed $100,000 are accounted for under the
percentage-of-completion accounting method. The effects of
changes to estimated total contract costs are recognized in the
year determined and losses, if any, are fully recognized when
identified. Costs and estimated earnings recognized in excess of
amounts billed are classified under current assets as costs and
estimated earnings in excess of billings on incomplete contracts.
Long-term contracts include a relatively high percentage of
engineering costs and are generally less than one year in
duration.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Advertising



| |  | Advertising costs are expensed as incurred. The amounts were not
material for all years presented.
| |  | --------------------------------------------------------------------------------------------------

Income Taxes



| |  | The Company provides for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------

Fair Value Disclosure



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

Comprehensive Income



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

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
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

27



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##### Table of Contents





| |  | because, in managements opinion, the alternative
fair value provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires the use of
option valuation models that were not developed for use in valuing
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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reclassifications



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

Recently Issued Accounting Standards



| |  | In June 2001, the FASB issued SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 are to be accounted for using the
purchase method and specifies the criteria for the recognition and
measurement of goodwill and other intangible assets acquired in a
business combination. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives are to no longer be
amortized but rather be tested at least annually for impairment.
SFAS No. 142 also requires that intangible assets with definite
useful lives will continue to be amortized over their respective
useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (which supersedes
SFAS No. 121). The Company adopted the provisions of SFAS No. 141
immediately and will adopt SFAS No. 142 effective January 1, 2002.
There was no material impact resulting from the application of
SFAS No. 141 and the Company does not believe that there will be a
material impact resulting from the application of SFAS No. 142.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 also extends the reporting
requirements to report separately as discontinued operations,
components of an entity that have either been disposed of or
classified as held-for-sale. The Company will adopt the provisions
of SFAS No. 144 effective January 1, 2002 and does not expect that
such adoption will have a significant effect on the Companys
results of operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Note B  Discontinued Operations



| |  | 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
2001.                                                                                                        
|
| |  | In connection with the sale, Integral Vision entered into an
agreement to provide certain services to the purchaser for a fee
totaling $1.5 million, all of which was paid in cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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##### Table of Contents





| |  | These services, which were substantially concluded in 1999, included use
of the Companys personnel, facilities and software.                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the quarter ended December 31, 1999, the Company resolved
certain post closing adjustments with the purchaser of the former
Welding Controls division which produced the additional gain of
$2.1 million recognized in the quarter. Part of the resolution
with the purchaser included an agreement to pay amounts that
previously had been contingent on shipments to a certain customer.
This accounted for approximately $1.5 million of this additional
gain recorded.
|
| |  | 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.                                                               
|
| |  | The results of operations for this segment have been reported
separately as discontinued operations in the Consolidated
Statements of Operations for the two prior periods presented.                                                                                                                                                                                                                                                                                            

|                                        |  |                |        | 
|--------------------------------------- |  | -------------- | ------ | 
|                                        |  | 1999           |       
|                                        |  |                |       
|                                        |  | (in thousands) |       
|Net revenues                            |  | $              | 12,403 | 
|Costs and expenses                      |  |                | 11,373 | 
|                                        |  |                |       
|Income before income taxes              |  |                | 1,030  | 
|Income tax expense                      |  |                |       | 
|                                        |  |                |       
|Net income from discontinued operations |  | $              | 1,030  | 
|                                        |  |                |       

Note C -Costs and Estimated Earnings in Excess of Billings on Incomplete Contracts



| |  | Contracts whose duration overlap an accounting quarter reporting
period, are non-repetitive and exceed $100,000 are accounted for
under the percentage-of-completion accounting method.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Costs and estimated earnings in excess of billings on incomplete
contracts at December 31 are summarized as follows:                                                                   

|                                                                          |  |      |     | 
|------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                          |  | 2000 |    
|                                                                          |  |      |    
|Contract costs to date                                                    |  | $    | 46  | 
|Estimated contract earnings                                               |  |      | 91  | 
|                                                                          |  |      |    
|                                                                          |  |      | 137 | 
|Less billings to date                                                     |  |      | 113 | 
|                                                                          |  |      |    
|Costs
and estimated earnings in excess ofbillings on incomplete contracts |  | $    | 24  | 
|                                                                          |  |      |    



| |  | The Company had no long-term contracts at December 31, 2001.
| |  | ------------------------------------------------------------

Note D  Long-Term Debt and Other Financing Arrangements



| |  | In March 2001, the Companys board of directors approved the
issuance of up to $1.5 million of senior subordinated debentures.
At June 30, 2001, $120,000 of the debentures had been placed of
which $24,000 was deemed a discount on the note based on a $.10
per share value assigned to the warrants received by the
purchaser. The debentures had maturities of up to four years and
an interest rate of 15%. The holders of the debentures received
warrants for the purchase of two Integral Vision shares for each
$1 in principal value of the debentures purchased. The warrants
have a conversion rate of $.50 per share. In July 2001, the
Companys board of directors and the holder of the previously
outstanding debentures approved an amendment to the terms of its
debentures. As a
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





| |  | result of the amendment, the debentures, including
the $120,000 placed prior to the amendment, have an interest
rate of 10% and continue to have maturities of up to four
years. 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. At December 31, 2001,
subsequent to the amendment, an additional $390,000 of the
debentures were placed of which $70,200 was deemed a discount on
the notes based on a $.06 per share value assigned to the warrants
received by the purchasers. At December 31, 2001, a total of
$510,000 of the debentures had been placed. Subsequent to
December 31, 2001, the Companys chairman, Charles J. Drake,
invested $350,000 in the Companys debentures. An additional
$150,000 in debentures were placed with outside investors in 2002.
The purchasers of these debentures received warrants for the
purchase of 1,500,000 shares of the Companys common stock at a
conversion price of $.35 per share.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2000, the Company had two mortgage notes payable.
The Company had a mortgage with a bank and another with a director
of the Company that carried interest rates of 8.9% and prime plus
0.5%, respectively. The total outstanding mortgage balance was
$2,007,000 at December 31, 2000. On July 27, 2001, the Company
completed a transaction to sell the building it currently occupies
in Farmington Hills, MI for $2.45 million, at which time the
existing mortgages were retired. The Company continues to occupy
a portion of the building under a five-year lease agreement with
the new owner. Net proceeds from the sale was approximately
$200,000 of which $186,000 was used to prepay nine months of rent,
a requirement of the lease agreement.                                                                                                                                                                                                                                                                                  
|
| |  | Maturities of long-term debt are $90,000 in 2002; $170,000 in
2003; $170,000 in 2004; and $80,000 in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | At December 31, 2001, the Company had short term notes payable to
related parties of approximately $358,000. The Companys notes to
related parties included the following: a $139,000 obligation to
Maxco, Inc. (a 25% owner of the Company); a $96,000 obligation to
Warren, Cameron, Faust & Asciutto, P.C. (the Companys corporate
counsel); a $79,000 obligation to 2161 Limited Partnership (a
partnership in which J. Michael Warren of Warren, Cameron, Faust &
Asciutto, P.C. is a partner); and a $46,000 obligation to Mark R.
Doede (an officer of the Company). These notes have interest
rates ranging from 6.25% to 8.0% and are due on demand.                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | At December 31, 2000, the Company had a revolving line of credit
under which it could borrow up to $1.0 million on certain eligible
accounts receivable. The Company used proceeds from the sale of
its note receivable in May 2001 to pay in full its revolving line
of credit, at which time that agreement was terminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Company used cash received as a result of the sale of the
Welding Controls division to retire substantially all outstanding
debt at June 30, 1999 (see Note B). An extraordinary charge of
$583,000, net of tax credit, resulted from this early retirement
of debt. These charges included unaccreted value assigned to
warrants and unamortized discounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Interest paid in 2001 was approximately $125,000 compared to
interest expensed of $172,000. The $47,000 difference primarily
represents amounts accrued for interest on the debentures and the
amount of discount on the debentures amortized in 2001. Interest
paid approximates interest expensed for 2000 and 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Note E  Income Taxes



| |  | The Company establishes valuation allowances in accordance with
the provisions of FASB Statement No. 109, Accounting for Income
Taxes. The Company continually reviews realizability of deferred
tax assets and recognizes these benefits only as reassessment
indicates that it is more likely than not that the benefits will
be realized.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As of December 31, 2001, the Company has cumulative net operating
loss carryforwards approximating $25.5 million (expiring: $6.9
million in 2010, $3.9 million in 2011, $3.8                                                                                                                                                                  

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##### Table of Contents





| |  | million in 2012, $2.3 million in 2018, $6.6 million in
2020, and $1.9 million in 2021) 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 $6.4
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 $2.2 million in
2001, $2.3 million in 2000 and decreased $1.5 million in 1999.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                            |                                                           |   |                |       |  |      |       |       | 
|------------------------------------------- | --------------------------------------------------------- | - | -------------- | ----- |  | ---- | ----- | ----- | 
|                                            |                                                           |   | 2001           |       |  | 2000 |      
|                                            |                                                           |   |                |       |  |      |      
|                                            |                                                           |   | (in thousands) |      
|Deferred tax liabilities:                   |                                                           |   |                |       |  |      |       |      
|                                            | Deductible
software development costs, net ofamortization |   | $              | 241   |  |      | $     | 974   | 
|                                            | Tax over book depreciation                                |   |                | 21    |  |      |       | 612   | 
|                                            | Percentage of completion                                  |   |                |      |  |      |       | 8     | 
|                                            |                                                           |   |                |       |  |      |      
|Total deferred tax liabilities              |                                                           |   | 262            |       |  |      | 1,594 |      
|Deferred tax assets:                        |                                                           |   |                |       |  |      |       |      
|                                            | Net operating loss carryforwards                          |   |                | 8,668 |  |      |       | 8,032 | 
|                                            | Credit carryforwards                                      |   |                | 331   |  |      |       | 331   | 
|                                            | Inventory reserve                                         |   |                | 574   |  |      |       | 385   | 
|                                            | Bad debt reserve                                          |   |                | 57    |  |      |       | 26    | 
|                                            | Reserve for warranty                                      |   |                | 9     |  |      |       | 17    | 
|                                            | Other                                                     |   |                | 112   |  |      |       | 111   | 
|                                            |                                                           |   |                |       |  |      |      
|Total deferred tax assets                   |                                                           |   | 9,751          |       |  |      | 8,902 |      
|Valuation allowance for deferred tax assets |                                                           |   | 9,489          |       |  |      | 7,308 |      
|                                            |                                                           |   |                |       |  |      |      
|Net deferred tax assets                     |                                                           |   | 262            |       |  |      | 1,594 |      
|                                            |                                                           |   |                |       |  |      |      
|Net deferred tax                            |                                                           | $ |               |       |  | $    |      |      
|                                            |                                                           |   |                |       |  |      |      



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

|                                               |  |                |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                               |  | 2001           |        |   | 2000 |   |        | 1999 | 
|                                               |  |                |        |   |      |   |        |      | 
|                                               |  | (in thousands) |       
|Consolidate net income (loss)                  |  | $              | (8,135 | ) |      | $ | (7,124 | )    |  | $ | 3,525  |  
|Foreign net income (loss)                      |  |                | (1,620 | ) |      |   | (664   | )    |  |   | (985   | )
|                                               |  |                |        |   |      |   |        |      | 
|U.S. net income (loss)                         |  | $              | (6,515 | ) |      | $ | (6,460 | )    |  | $ | 4,510  |  
|                                               |  |                |        |   |      |   |        |      | 
|Tax provision (credit) at U.S. statutory rates |  | $              | (2,215 | ) |      | $ | (2,196 | )    |  | $ | 1,534  |  
|Change in valuation allowance                  |  |                | 2,181  |   |      |   | 2,318  |      |  |   | (1,478 | )
|Nondeductible expenses                         |  |                | 34     |   |      |   | 25     |      |  |   | 30     |  
|Other                                          |  |                |       |   |      |   | (147   | )    |  |   | (86    | )
|                                               |  |                |        |   |      |   |        |      | 
|                                               |  | $              |       |   |      | $ |       |      |  | $ |       |  
|                                               |  |                |        |   |      |   |        |      | 



| |  | In 2000, the Company paid $100,000 for its 1999 alternative minimum
tax liability.
| |  | ----------------------------------------------------------------------------------
|
| |  | There were no income tax payments in 2001 or 1999.                                

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Note F  Earnings per Share



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

|                                                       |  |                                             |       |                                       |        |   |       |   |        |      |       |   |        |  
|------------------------------------------------------ |  | ------------------------------------------- | ----- | ------------------------------------- | ------ | - | ----- | - | ------ | ---- | ----- | - | ------ | -
|                                                       |  |                                             |       | 2001                                  |        |   | 2000  |   |        | 1999 |      
|                                                       |  |                                             |       |                                       |        |   |       |   |        |      |      
|                                                       |  |                                             |       | (in thousands, except per share data) |       
|Numerator for basic and diluted earnings per share -   |  |                                             |       |                                       |        |   |       |   |        |      |       |  
|Income
(loss) available to common stockholders         |  |                                             |       |                                       |        |   |       |   |        |      |       |  
|                                                       |  | Loss from continuing operations             |       | $                                     | (7,694 | ) |       | $ | (7,124 | )    |       | $ | (5,671 | )
|                                                       |  | Loss on sale of note receivable             |       |                                       | (441   | ) |       |   |        |      |       |   |        |  
|                                                       |  | Income from discontinued Welding operations |       |                                       |        |   |       |   |        |      |       |   | 1,030  |  
|                                                       |  | Gain on disposal of Welding division        |       |                                       |        |   |       |   |        |      |       |   | 8,749  |  
|                                                       |  | Extraordinary charge                        |       |                                       |        |   |       |   |        |      |       |   | (583   | )
|                                                       |  |                                             |       |                                       |        |   |       |   |        |      |      
|                                                       |  | Net income (loss)                           |       | $                                     | (8,135 | ) |       | $ | (7,124 | )    |       | $ | 3,525  |  
|*there was no effect of dilutive securities, see below |  |                                             |       |                                       |        |   |       |   |        |      |      
|Denominator for basic and diluted earnings per         |  |                                             |       |                                       |        |   |       |   |        |      |       |  
|share  weighted average shares                        |  |                                             | 9,198 |                                       |        |   | 9,028 |   |        |      | 9,025 |  
|                                                       |  |                                             |       |                                       |        |   |       |   |        |      |      
|*there was no effect of dilutive securities, see below |  |                                             |       |                                       |        |   |       |   |        |      |       |  
|Basic and diluted earnings per share:                  |  |                                             |       |                                       |        |   |       |   |        |      |       |  
|                                                       |  | Continuing operations                       |       | $                                     | (0.84  | ) |       | $ | (0.79  | )    |       | $ | (0.63  | )
|                                                       |  | Loss on sale of note receivable             |       |                                       | (0.05  | ) |       |   |       |      |       |   |       |  
|                                                       |  | Discontinued Welding operations             |       |                                       |       |   |       |   |       |      |       |   | 0.11   |  
|                                                       |  | Disposal of Welding division                |       |                                       |       |   |       |   |       |      |       |   | 0.97   |  
|                                                       |  | Extraordinary charge                        |       |                                       |       |   |       |   |       |      |       |   | (0.06  | )
|                                                       |  |                                             |       |                                       |        |   |       |   |        |      |      
|                                                       |  | Net income (loss)                           |       | $                                     | (0.89  | ) |       | $ | (0.79  | )    |       | $ | 0.39   |  
|                                                       |  |                                             |       |                                       |        |   |       |   |        |      |      



| |  | 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 I.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note G  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 $15,000, $24,000, and $30,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note H  Lease Commitments and Contingencies



| |  | The Company and its subsidiary use equipment and office space
under long-term operating lease agreements requiring rental
payments approximating $118,000 in 2002, $77,000 in 2003, $75,000
in 2004 and $60,000 in 2005. Rent expense charged to operations
approximated $154,000, $72,000, and $65,000 in 2001, 2000 and
1999, 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. The rent expense in 2001 attributable to the
new lease was approximately $91,000. Subsequent to December 31,
2001, the Company entered into a new lease agreement whereby it
will occupy less square footage in exchange for a reduced lease
rate. This agreement is effective April 1, 2002 and is reflected
in the future lease payments previously discussed.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Note I  Stock Options and Warrants



| |  | A summary of the status of the Option Plans at December 31, 2001 is as
follows:
| |  | -------------------------------------------------------------------------------

|                            |      |  |                |   |  |              |               |   |           |  |     |           |  |  |     |     | 
|--------------------------- | ---- |  | -------------- | - |  | ------------ | ------------- | - | --------- |  | --- | --------- |  |  | --- | --- | 
|                            |      |  |                |   |  |              | Non-Qualified |   |           |  |     |           |  |  |     |    
|                            |      |  | Qualified ISO  |   |  | Stock Option |               |   |           |  |     |           |  |  |    
|                            |      |  | Plan           |   |  | Plan         |               |   | 1999 Plan |  |     | 1995 Plan | 
|                            |      |  |                |   |  |              |               |   |           |  |     |           | 
|                            |      |  | (in thousands) |  
|Options outstanding         |      |  | 69             |   |  |              | 9             |   |           |  | 470 |           |  |  | 443 |    
|Options exercisable         |      |  | 69             |   |  |              | 9             |   |           |  | 270 |           |  |  | 443 |    
|Options granted during:     |      |  |                |   |  |              |               |   |           |  |     |           |  |  |     |    
|                            | 2001 |  |                | 0 |  |              |               | 0 |           |  |     | 120       |  |  |     | 215 | 
|                            | 2000 |  |                | 0 |  |              |               | 0 |           |  |     | 0         |  |  |     | 0   | 
|                            | 1999 |  |                | 0 |  |              |               | 0 |           |  |     | 400       |  |  |     | 206 | 
|                            | 1998 |  |                | 0 |  |              |               | 0 |           |  |     | 0         |  |  |     | 0   | 
|                            | 1997 |  |                | 0 |  |              |               | 0 |           |  |     | 0         |  |  |     | 267 | 
|                            | 1996 |  |                | 0 |  |              |               | 0 |           |  |     | 0         |  |  |     | 132 | 
|Options available for grant |      |  | 0              |   |  |              | 0             |   |           |  | 30  |           |  |  | 55  |    
|                            |      |  |                |   |  |              |               |   |           |  |     |          



| |  | 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:                                                                                                                                                                                                  

|                                                    |  |  |                                 |   |  |                |                  |  |        |  |       |                |  |                  |        |  |  |                |       |   |                  |   |      |  | 
|--------------------------------------------------- |  |  | ------------------------------- | - |  | -------------- | ---------------- |  | ------ |  | ----- | -------------- |  | ---------------- | ------ |  |  | -------------- | ----- | - | ---------------- | - | ---- |  | 
|                                                    |  |  | 2001                            |   |  | 2000           |                  |  | 1999   | 
|                                                    |  |  |                                 |   |  |                | Weighted Average |  |        |  |       |                |  | Weighted Average |        |  |  |                |       |   | Weighted Average |  
|                                                    |  |  | Shares                          |   |  | Exercise Price |                  |  | Shares |  |       | Exercise Price |  |                  | Shares |  |  | Exercise Price |      
|                                                    |  |  |                                 |   |  |                |                  |  |        |  |       |                |  |                  |        |  |  |                |      
|                                                    |  |  | (number of shares in thousands) |  
|Outstanding
at beginning ofyear                     |  |  | 982                             |   |  | $              | 2.82             |  |        |  | 1,077 |                |  | $                | 3.02   |  |  |                | 597   |   |                  | $ | 5.48 | 
|Granted                                             |  |  | 335                             |   |  |                | 0.14             |  |        |  | 0     |                |  |                  | 0.00   |  |  |                | 606   |   |                  |   | 1.07 | 
|Exercised                                           |  |  | 0                               |   |  |                | 0.00             |  |        |  | (5    | )              |  |                  | 1.75   |  |  |                | 0     |   |                  |   | 0.00 | 
|Canceled                                            |  |  | (326                            | ) |  |                | 4.01             |  |        |  | (90   | )              |  |                  | 5.32   |  |  |                | (126  | ) |                  |   | 6.10 | 
|                                                    |  |  |                                 |   |  |                |                  |  |        |  |       |                |  |                  |        |  |  |               
|Outstanding at end of year($.14 to $9.25 per share) |  |  | 991                             |   |  |                | 1.52             |  |        |  | 982   |                |  |                  | 2.82   |  |  |                | 1,077 |   |                  |   | 3.02 | 
|                                                    |  |  |                                 |   |  |                |                  |  |        |  |       |                |  |                  |        |  |  |               
|Exercisable ($.14 to $9.25 per share)               |  |  | 791                             |   |  | $              | 1.64             |  |        |  | 585   |                |  | $                | 4.01   |  |  |                | 471   |   |                  | $ | 5.54 | 
|                                                    |  |  |                                 |   |  |                |                  |  |        |  |       |                |  |                  |        |  |  |               



| |  | Additional information regarding the range of exercise prices and
weighted average remaining life of options outstanding at December
31, 2001 follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|                |               |             |                                 |     |                |  |          |             |  |  |     |     | 
|--------------- | ------------- | ----------- | ------------------------------- | --- | -------------- |  | -------- | ----------- |  |  | --- | --- | 
|                |               |             |                                 |     |                |  | Weighted |             |  |  |     |    
|Range of        |               | Number      |                                 |     | Average        |  |          | Number      | 
|Exercise Prices |               | Outstanding |                                 |     | Remaining Life |  |          | Exercisable | 
|                |               |             |                                 |     |                |  |          |             | 
|                |               |             | (number of shares in thousands)
|                | $.14 to $1.07 |             |                                 | 843 |                |  |          | 8.5         |  |  |     | 643 | 
|$4.00 to $4.88  |               |             | 36                              |     |                |  | 5.2      |             |  |  | 36  |    
|$5.00 to $5.63  |               |             | 5                               |     |                |  | 5.6      |             |  |  | 5   |    
|$6.00 to $6.25  |               |             | 85                              |     |                |  | 2.1      |             |  |  | 85  |    
|$8.25 to $9.25  |               |             | 22                              |     |                |  | 3.0      |             |  |  | 22  |    
|                |               |             |                                 |     |                |  |          |             |  | 
|$1.07 to $9.25  |               |             | 991                             |     |                |  | 7.7      |             |  |  | 791 |    
|                |               |             |                                 |     |                |  |          |             |  | 

33



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##### Table of Contents





| |  | 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 because, in managements opinion, the
models required to be used by FASB Statement No. 123, Accounting
for Stock-Based Compensation, were not developed for use in
valuing 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For purposes of proforma disclosures, the estimated fair value of
the options is amortized to expense over the options vesting
period. After adjusting for the proforma effect of stock
compensation, the net loss in 2001 was estimated to be $8,172,000
($.89 per share), the net loss in 2000 was estimated to be
$7,124,000 ($.79 per share) and the net income for 1999 was
estimated to be $2,998,000 ($.33 per share). In 2001, the
assumptions used in determining the proforma disclosure was a risk
free interest rate of 5.5%, no dividend yields, .768 market price
volatility, and 7.7-year weighted average life of options. In
1999, the assumptions used in determining the proforma disclosure
was a risk free interest rate of 6.00%, no dividend yields, .85
market price volatility, and 7.8-year weighted average life of
options. These proforma results reflect only stock options
granted in 1995 through 2001 (no options were issued during 2000)
and may not be comparable with the results of applying the fair
market value methodology to all stock options granted prior to the
initial adoption of this statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | In March 2001, the Companys board of directors approved the
issuance of up to $1.5 million of senior subordinated debentures.
At June 30, 2001, $120,000 of the debentures had been placed of
which $24,000 was deemed a discount on the note based on a $.10
per share value assigned to the warrants received by the
purchaser. The debentures had maturities of up to four years and
an interest rate of 15%. The holders of the debentures received
warrants for the purchase of two Integral Vision shares for each
$1 in principal value of the debentures purchased. The warrants
have a conversion rate of $.50 per share. In July 2001, the
Companys board of directors and the holder of the previously
outstanding debentures approved an amendment to the terms of its
debentures. As a result of the amendment, the debentures,
including the $120,000 placed prior to the amendment, have an
interest rate of 10% and continue to have maturities of up to four
years. 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. At December 31, 2001,
subsequent to the amendment, an additional $390,000 of the
debentures were placed of which $70,200 was deemed a discount on
the notes based on a $.06 per share value assigned to the warrants
received by the purchasers. At December 31, 2001, a total of
$510,000 of the debentures had been placed. At December 31, 2001,
as a result of the sale of these debentures, there were warrants
outstanding to purchase 240,000 shares at $.50 per share and
1,170,000 shares at $.35 per share. Subsequent to December 31,
2001, the Companys chairman, Charles J. Drake, invested $350,000
in the Companys debentures. An additional $150,000 in debentures
were placed with outside investors in 2002. The purchasers of
these debentures received warrants for the purchase of 1,500,000
shares of the Companys common stock at a conversion price of $.35
per share.
|
| |  | In connection with the private placement of $7.0 million of
debentures in 1997, which were retired in 1999, the company issued
warrants for the purchase of 1,400,000 Integral Vision common
shares at $6.86 per share through June 30, 2004, all of which were
outstanding at December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On August 1, 2001, the Compensation Committee of the Companys
Board of Directors resolved to grant qualified stock options for
the purchase of 335,000 shares with an exercise price equal to the
market price at the close of trading on the grant date, $.14 per
share. In order to facilitate this grant, Mr. Charles Drake, the
Companys Chairman, agreed to forfeit options on 150,000 shares so
that they could be distributed to other key people. Additionally,
Mr. Drake was provided with 400,000 shares of unregistered stock
of the Company, subject to certain sale restrictions. An
additional $56,000 of compensation expense was charged to general
and administrative expense as a result of the issuance of these
shares. At December 31, 2001, there were options outstanding to purchase 991,000 shares of common stock at prices ranging from
$.14 to $9.25 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |  | Subsequent to December 31, 2001, on January 14, 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, on March
12, 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.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note J  Operations by Geographic Area



| |  | The Company adopted Statement of Financial Accounting Standards
(SAFS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, for the year ended December 31, 1998. SFAS
No. 131 established standards for reporting information about
operating segments in annual financial statements and requires
selected information about operating segments in interim financial
reports issued to stockholders. It also established standards for
related disclosures about products and services, and geographic
areas. Operating segments are defined as components of the
enterprise about which separate financial information is available
that is evaluated regularly by management in deciding how to
allocate resources and in assessing performance.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company is engaged in one business segment, vision-based
inspection products. The following presents information by
geographic area.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                                                |                |   |                        |        |   |      |        |        |      |   |        |        |  
|--------------------------------------------------------------- | -------------- | - | ---------------------- | ------ | - | ---- | ------ | ------ | ---- | - | ------ | ------ | -
|                                                                |                |   | Year Ended December 31 |       
|                                                                |                |   |                        |       
|                                                                |                |   | 2001                   |        |   | 2000 |        |        | 1999 |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                |   | (in thousands)         |       
|Net revenues from unaffiliated customers:                       |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | 1,436  |   |      | $      | 2,814  |      |   | $      | 7,589  |  
|                                                                | United Kingdom |   |                        | 1,197  |   |      |        | 3,142  |      |   |        | 3,154  |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 2,633                  |        |   | $    | 5,956  |        |      | $ | 10,743 |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Earnings (loss) from continuing operations before income taxes: |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | (6,073 | ) |      | $      | (6,460 | )    |   | $      | (4,686 | )
|                                                                | United Kingdom |   |                        | (1,621 | ) |      |        | (664   | )    |   |        | (985   | )
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | (7,694                 | )      |   | $    | (7,124 | )      |      | $ | (5,671 | )     
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Identifiable assets:                                            |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | 5,466  |   |      | $      | 13,315 |      |   | $      | 21,556 |  
|                                                                | United Kingdom |   |                        | 333    |   |      |        | 1,684  |      |   |        | 1,337  |  
|                                                                | Eliminations   |   |                        | (3,835 | ) |      |        | (3,835 | )    |   |        | (3,835 | )
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 1,964                  |        |   | $    | 11,164 |        |      | $ | 19,058 |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Capital expenditures:                                           |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      |       |   |      | $      | 57     |      |   | $      | 245    |  
|                                                                | United Kingdom |   |                        |       |   |      |        | 92     |      |   |        | 45     |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ |                       |        |   | $    | 149    |        |      | $ | 290    |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Depreciation and amortization expense:                          |                |   |                        |        |   |      |        |        |      |   |        |       
|                                                                | United States  |   | $                      | 2,907  |   |      | $      | 2,167  |      |   | $      | 1,997  |  
|                                                                | United Kingdom |   |                        | 404    |   |      |        | 315    |      |   |        | 377    |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 3,311                  |        |   | $    | 2,482  |        |      | $ | 2,374  |       
|                                                                |                |   |                        |        |   |      |        |        |      |  
|Net revenues by geographic area:                                |                |   |                        |        |   |      |        |        |      |   |        |       
|North America                                                   |                | $ | 1,412                  |        |   | $    | 2,303  |        |      | $ | 4,912  |       
|                                                                | Europe         |   |                        | 1,084  |   |      |        | 2,981  |      |   |        | 3,154  |  
|                                                                | Asia           |   |                        | 137    |   |      |        | 672    |      |   |        | 2,677  |  
|                                                                |                |   |                        |        |   |      |        |        |      |  
|                                                                |                | $ | 2,633                  |        |   | $    | 5,956  |        |      | $ | 10,743 |       
|                                                                |                |   |                        |        |   |      |        |        |      |  



| |  | 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.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Note K  Sale of Building



| |  | On July 27, 2001, the Company completed a transaction to sell the
building it currently occupies in Farmington Hills, MI for $2.45
million, at which time the existing mortgages were retired. The
Company continues to occupy a portion of the building under a
five-year lease agreement with the new owner. Net proceeds from
the sale was approximately $200,000 of which $186,000 was used to
prepay nine months of rent, a requirement of the lease agreement.
The Company recognized a loss on the transaction of approximately
$22,000, which is included in other income.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note L  Sale of Technology



| |  | On August 24, 2001, the Company completed the sale of certain of
its packaging applications software and most of the fixed assets
of its subsidiary, Integral Vision Ltd., to n.v. DIMACO, s.a. for
$500,000 in cash and future royalties. Included in the transaction
was the sale of the worldwide exclusive rights to Integral
Visions Full Bottle Inspection System (FBIS), a product that
performs certain inspections on bottles at the end of a filling
line. Integral Vision will receive a royalty on each FBIS sold for
the next three years. The proceeds from the transaction were used
primarily to fund current operations and to pay down existing
trade payables.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Also included with the transaction was a manufacturing agreement
whereby DIMACO will manufacture products for Integral Visions
Optical Disc and Display Inspection customers in Europe.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Under the terms of the sale, most of Integral Vision Ltd.s
personnel and costs will transfer to DIMACO. However, Integral
Vision Ltd. will maintain sales and service staff to support its
Optical Disc and Display Inspection customers in Europe.                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The approximate net book values of the assets sold were $13,000
for inventory, $97,000 for fixed assets, and $276,000 for
capitalized software development costs. The Company recognized a
gain on the transaction of approximately $114,000, which is
included in other income, primarily attributable to the software
included in the sale.                                                                                                                                                                                                                                                                                                                                       
|
| |  | The packaging applications included in the sale accounted for
approximately $518,000 of the Companys net revenue in 2001
compared to $2.1 million in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Note M  Change in Estimate



| |  | Management has focused its development, sales and marketing
efforts on the Companys inspection systems for the small flat
panel display (SFPD) industry. Industry sources indicate that
this market will be substantial once fully developed. The Company
has developed inspection solutions for the leading technologies
used in the SFPD industry including liquid crystal on silicon
(LCOS), organic light emitting diodes (OLED), liquid crystal
display (LCD), and microelectromechanical systems (MEMS).                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Management periodically performs an analysis of the net realizable
value of capitalized software costs. Based on current market
conditions and the direction of the Company, Management determined
that capitalized software development costs exceeded the estimated
net realizable value of amounts capitalized and a write-down was
necessary. For the year ended December 31, 2001, $1.3 million of
additional amortization is included in costs of sales as a result
of these analyses. Additionally, as a result of the analyses,
direct costs of sales includes a $540,000 charge for the
write-down of inventory.

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##### Table of Contents



Note N  Officers Notes Receivable



| |  | Messrs. Charles Drake and Mark Doede each have 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. The
$200,000 charge for the write-down of the notes is included in
general and administrative expenses in the consolidated statement
of operations for 2001. Mr. Drake also made approximately
$250,000 in principal payments on his note in 2001. Subsequent to
December 31, 2001, Mr. Drake and Mr. Doede each made principal
payments of approximately $29,000 and $110,000, respectively, on
their outstanding notes with the Company. At February 28, 2002,
Mr. Drakes outstanding note balance was $34,000 and Mr. Doedes
was $77,000.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note O  Market for the Companys Common Stock



| |  | The Companys common stock was moved to the Over the Counter
Bulletin Board (OTCBB) effective with its delisting from The
Nasdaq SmallCap Market with the open of business August 16, 2001.
The Company was informed by Nasdaq that the delisting was decided
by the Nasdaq Listing Qualifications panel which approved the
Nasdaqs staff decision to delist the stock due to its failing to
maintain a minimum bid price of $1.00 for 30 consecutive trading
days as required by Marketplace Rule 4450(a)(5) for continued
listing.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Information on the current quotes on the stock, which will
continue to use the ticker symbol INVI, are available at the
OTCBBs website, www.otcbb.com and most financial information
portals, such as that provided at http://finance.yahoo.com or
http://quote.bloomberg.com. Integral Vision will continue to
provide information through filings with the Securities and
Exchange Commission (SEC) as required for continued listing on the
OTCBB. These filings can be found at the SECs website at
www.sec.gov.               

Note P  Going Concern Matters



| |  | The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements during the years
ended December 31, 2001, 2000 and 1999, the Company incurred
losses from continuing operations of $7.7 million, $7.1 million,
and $5.7 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 current resources include only
anticipated cash provided by operating activities. This resource
will not be sufficient to support the Companys cash flow needs
over the next twelve months. The expected cash shortfall over the
next twelve months is approximately $740,000. In March 2001, the
Companys board of directors approved the issuance of up to $1.5
million of senior subordinated debentures (see Note D to
consolidated financial statements), which could provide additional
financing to the Company. Management plans to secure
approximately $540,000 through additional sales of its debentures
in 2002, of which $500,000 had been secured as of February 28,
2002. In February 2002, the Companys chairman, Charles J. Drake,
invested $350,000 in the Companys debentures. An additional
$150,000 in debentures were placed with outside investors
subsequent to December 31, 2001. Managements plans to obtain the
additional cash needed to enable the Company to continue as a
going concern, include the sale of certain of its patented
technologies, as well as pursuing 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

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| |  | exhausted all of its resources. These uncertainties raise substantial
doubt about the Companys ability to continue as a going concern.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------

Note Q  Subsequent Events



| |  | Subsequent to December 31, 2001, the Companys chairman, Charles
J. Drake, invested $350,000 in the Companys debentures. An
additional $150,000 in debentures were placed with outside
investors in 2002. The purchasers of these debentures received
warrants for the purchase of 1,500,000 shares of the Companys
common stock at a conversion price of $.35 per share.                                                                                                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On January 14, 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, on March 12, 2002, the Compensation
Committee resolved to grant 55,000 qualifed 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.
|
| |  | Subsequent to December 31, 2001, Mr. Drake and Mr. Doede each made
principal payments of approximately $29,000 and $110,000,
respectively, on their outstanding notes with the Company. At
February 28, 2002, Mr. Drakes outstanding note balance was
$34,000 and Mr. Doedes was $77,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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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 E            | 
|                              |                                  |          |              |           |          |            |       |          |           |   |                     | 
|                              |                                  |          |              | Additions |          |            |       |          |           |   |                    
|                              |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |           
|                              |                                  |          |              |           |          |            |       |          |           |   | Charged to          |  |  |        |       |            |     |   |        |      
|                              |                                  |          | Balance at   |           |          | Charged to |       |          | Other     |   |                     |  |  |        |       | Balance at |    
|                              |                                  |          | Beginning of |           |          | Costs and  |       |          | Accounts- |   |                     |  |  |        |       | End of     |    
|Description                   |                                  | Period   |              |           | Expenses |            |       | Describe |           |   | Deductions-Describe |  |  | Period |      
|                              |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |      
|Year ended December 31, 2001: |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |            |     |   |        |      
|                              | Accounts receivable allowance    |          | $            | 82        |          |            | $     | 109      |           |   |                     |  |  |        | $     | 12         | (3) |   | $      | 179   | 
|                              | Inventory obsolescence reserve   |          |              | 1,484     |          |            |       | 352      |           |   |                     |  |  |        |       |            |     |   |        | 1,836 | 
|                              | Deferred tax valuation allowance |          |              | 7,308     |          |            |       | 2,181    |           |   |                     |  |  |        |       |            |     |   |        | 9,489 | 
|                              |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |           
|                              |                                  | $        | 8,874        |           |          | $          | 2,642 |          |           | $ |                    |  |  | $      | 12    |            |     | $ | 11,504 |      
|                              |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |           
|Year ended December 31, 2000: |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |            |     |   |        |      
|                              | Accounts receivable allowance    |          | $            | 820       |          |            | $     | 12       |           |   |                     |  |  |        | $     | 750        | (3) |   | $      | 82    | 
|                              | Inventory obsolescence reserve   |          |              | 2,100     |          |            |       | 1,134    |           |   |                     |  |  |        |       | 1,750      | (1) |   |        | 1,484 | 
|                              | Deferred tax valuation allowance |          |              | 4,990     |          |            |       | 2,318    |           |   |                     |  |  |        |       |            |     |   |        | 7,308 | 
|                              |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |           
|                              |                                  | $        | 7,910        |           |          | $          | 3,464 |          |           | $ |                    |  |  | $      | 2,500 |            |     | $ | 8,874  |      
|                              |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |           
|Year ended December 31, 1999: |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |            |     |   |        |      
|                              | Accounts receivable allowance    |          | $            | 400       |          |            | $     | 516      |           |   |                     |  |  |        | $     | 96         | (3) |   | $      | 820   | 
|                              | Inventory obsolescence reserve   |          |              | 300       |          |            |       | 1,800    |           |   |                     |  |  |        |       |            |     |   |        | 2,100 | 
|                              | Deferred tax valuation allowance |          |              | 6,468     |          |            |       |          |           |   |                     |  |  |        |       | 1,478      | (2) |   |        | 4,990 | 
|                              |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |           
|                              |                                  | $        | 7,168        |           |          | $          | 2,316 |          |           | $ |                    |  |  | $      | 1,574 |            |     | $ | 7,910  |      
|                              |                                  |          |              |           |          |            |       |          |           |   |                     |  |  |        |       |           



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

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Exhibits to Form 10K




Integral Vision, Inc.




Year Ended December 31, 2001




Commission File Number 0-12728

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|               |  |                                                               
|-------------- |  | --------------------------------------------------------------
|Exhibit Number |  | Exhibit Index Description                                     
|21             |  | Subsidiary of the Registrant                                  
|23             |  | Consent of Moore Stephens Doeren Mayhew, independent auditors.

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