United
States Securities and Exchange Commission


Washington,
D.C.  20549





AMENDMENT
NO. 3 TO


FORM
10-KSB





x
                Annual
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
                  For
      the fiscal year ended December 31, 2007. ̈
                Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
                  For
      the transition period from ________ to ________.





Commission
File Number 0-12728





INTEGRAL
VISION, INC.


(Exact
name of registrant as specified in its charter)





Michigan
              38-2191935(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification Number)49113
      Wixom Tech Drive, Wixom, Michigan
              48393(Address
      of principal executive offices)
              (Zip
      Code)Issuer's
      telephone number, including area code:   (248)
      668-9230





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


None




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


Common
Stock, No Par Value, Stated Value $.20 Per Share


(Title of
Class)





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.


Yes þ        No ̈





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.  ̈





Indicate
by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes   ̈No  þ





State
issuer’s revenues for its most recent fiscal
year:  $1,151,000





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days.  (See definition of affiliate
in Rule 12b-2 of the Exchange Act.)   $3,847,160 as of February
29, 2008.





Note:  If
determining whether a person is an affiliate will involve an unreasonable effort
and expense, the issuer may calculate the aggregate market value of the common
equity held by non-affiliates on the basis of reasonable assumptions, if the
assumptions are stated.





(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.  Common Stock 29,566,409 shares as
of February 29, 2008.











DOCUMENTS
INCORPORATED BY REFERENCE





If the
following documents are incorporated by reference, briefly describe them and
identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which
the document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) of the Securities Act of 1933 (“Securities Act”). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24,
1990).   Portions of the annual proxy statement for the year
ended December 31, 2007 are incorporated by reference into Part
III.


Transitional
Small Business Format (check one):  Yes   ̈No  þ





EXPLANATORY
NOTE


The
registrant filed a Form 10-KSB on March 31, 2008, an Amendment No. 1 to Form
10-KSB on January 27, 2009 and an Amendment No. 2 to Form 10-KSB on February 5,
2009.   The registrant is filing this Amendment No. 3 to Form
10-KSB with the SEC in order to update our financial statements and Item 12 of
Part III with respect to certain related party transactions and to include
executed versions of the Consent to Amend and Replace Agreements dated March 12,
2008 (Exhibit 4.9).
  2




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




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




Part I




ITEM1.  Description
of Business




Overview




Integral
Vision, Inc., a Michigan corporation (or the "Company"), was incorporated in
1978.  We develop, manufacture and market flat panel display
inspection systems to ensure product quality in the display manufacturing
process.  We primarily inspect microdisplays and small flat panel
displays, though the technology used is scalable to allow inspection of full
screen displays and components.  Our products primarily use machine
vision to evaluate operating displays for cosmetic and functional defects, but
can also provide electrical testing if required for a given
application.  Our customers and potential customers are primarily
large companies with significant investment in the manufacture of
displays.  Nearly all of our sales originate in the United States,
Asia, or Europe.  Our products are generally sold as capital
goods.  Depending on the application, display inspection systems have
an indefinite life and are more likely to require replacement due to possible
technological obsolescence than from physical wear.




Automated
inspection has become a necessity for manufacturers who need to continually
improve production efficiency to meet the increasing demand for high quality
products.  Our automatic inspection systems can inspect parts at a
lower cycle time and with greater repeatability than is possible with human
inspectors.  While we have several large companies as customers, these
customers are working with new microdisplay technologies.  Our success
will be substantially dependant on these customers getting their emerging
display technologies into high volume production.




Products




SharpEye –Our SharpEye
product provides Flat Panel Display (FPD) inspection for reflective, emissive
and transmissive display technologies.  SharpEye is designed for the
detection of functional and cosmetic defects in LCOS, OLED, MEMS, 3LCD/HTPS, LCD
and other emerging display technologies.  These technologies are
applied to consumer products such as camcorders, rear projection computer
monitors, digital still cameras, HDTV, projectors, video headsets and video
telephones.  The core technology of SharpEye inspection algorithms is
the ability to quantize data to the level of a single display
pixel.  SharpEye can be configured for production inspection or for
display evaluation in a laboratory based on the equipment configuration
selected.




LumenEye –Our LumenEye
product provides an “out of the box” solution designed for a low skill level
user to setup and acguire images from an FPD panel.  It is targeted at
manufacturers of FPD products who need to inspect for inherent Image Retention
(Image Sticking) defects in their displays prior to shipment.  The
software provided with LumenEye will perform an evaluation of the panel based on
the acquired images to VESA 305-2 specification.  Integral Vision can
also provide the customer unique Image Retention analysis as part of its
software offering.  Custom panel evaluation software is also available
to meet the FPD manufacturer customer test pattern
requirements.


3




IVSee – Our IVSee provides FPD
inspection for applications which still require manual
handling.  IVSee is designed for the detection of functional and
cosmetic defects in LCOS, OLED, MEMS, 3LCD/HTPS, LCD and other emerging display
technologies.  IVSee is configured to be integrated into existing
manual inspection stations allowing them to receive the benefits of computer
aided optical inspection without the need to modify the manufacturing process to
automate handling of the display.  The operator’s interface provides
essential views of results, images, and statistics for production floor
personnel.




Marketing
and Sales




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




Competition




Presently,
most final inspection of small flat panel displays is manual.  Higher
resolution, increased brightness, and increased contrast in newer versions of
the displays are stretching human capabilities to do the inspections. Automated
inspection offers a good return on investment as it uses less clean room space,
requires fewer fixtures and hardware because of a faster cycle time, and reduces
the labor required for inspection.  Competition for machine vision
based microdisplay and small flat panel display inspection comes primarily from
Westar Display Technologies, Inc.




Production
and Suppliers




Our
production process is principally the assembling of standard electrical,
electronic and optical components and hardware subassemblies purchased from
suppliers into finished products.  We generally do not rely on a
single source for parts or subassemblies, although certain components and
subassemblies included in our products may only be available from a limited
number of suppliers.  Management believes alternative sources or
designs could be developed for any of the components used in its products
thereby mitigating any exposure to product interruption from shortages of parts
or limited suppliers.




Major
Customers




The
nature of our product offerings may produce sales to one or a limited number of
customers in excess of 10% of total net sales in any one year.  It is
possible that the specific customers reaching this threshold may change from
year to year.  Loss of any one of these customers could have a
material impact on our results of operations.  For 2007, sales to
Qualcomm MEMS Technologies, Samsung, Liquavista B.V., and Texas Instruments
represented 31%, 24%,14% and 10% of net sales,
respectively.  Approximately $50,000 was due from two of these
customers at December 31, 2007. For 2006, sales to Qualcomm MEMS Technologies,
Texas Instruments, Energy Conversion Devices, and DuPont represented 31%, 21%,
21% and 14% of net sales, respectively.  There were no amounts due
from these customers at December 31, 2006




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.  We presently have 14
U.S. patents.  There can be no assurance that we will have the
resources to defend our patents or that patents we hold will be considered valid
if challenged.  In addition, it is possible that some patents will be
rendered worthless as the result of technological obsolescence.




Governmental
Approvals and Regulations




We are
not subject to government approvals for any of our primary products or
services.  Certain applications using laser technology require
compliance with CDRH Section 21 CFR 1040.


4




Product
Development




The
market for Machine Vision is characterized by rapid and continuous technological
development and product innovation.  We believe that continued and
timely development of new products and enhancements to existing products is
necessary to maintain our competitive position.  Accordingly, we
devote a significant portion of our personnel and financial resources to product
development programs and seek to maintain close relationships with customers to
remain responsive to their needs.  During the period ended March 31,
2006 we began activity associated with a product development agreement with
Energy Conversion Devices (ECD) where we are compensated for a portion of our
costs for the development of online inspection for a continuous web of display
material.  This best efforts subcontract with ECD proceeds from a
contract from the United States Display Consortium.  Our net
engineering and product development costs amounted to $1.1 million and $1.2
million in 2007 and 2006, respectively.  Our current product
development efforts are primarily directed to Flat Panel Display and Component
Inspection products.




Environmental
Factors




Our cost
of complying with federal, state and local provisions regulating protection of
the environment are not material.




Employees




As of
February 29, 2008, we had 14 permanent employees, all full time, compared to 18
at February 28, 2007 and 21 at February 28, 2006.  None of our
employees are represented by a labor union.




ITEM2.Descriptionof
Properties




We lease
a light industrial building containing approximately 14,000 square feet at 49113
Wixom Tech Drive, Wixom, Michigan. The lease is for a five year period, which
commenced January 1, 2006. Our manufacturing, engineering and administrative
functions are performed at this location.  The building is
approxmately 10 years old and is in excellent condition.




ITEM3.  Legal
Proceedings




We are
not currently involved in any litigation other than routine litigation that is
incidental to our business.




ITEM4.  Submission of
Matters to a Vote of Security Holders




None.




Part II




ITEM5.  Market for
Registrant’s Common Equity and Related Stockholder Matters




Market
Information




Integral
Vision’s common stock is traded on the Over the Counter Bulletin Board (OTCBB)
under the symbol INVI.  The table below shows the high and low sales
prices for our common stock for each quarter in the past two
years.  These prices reflect inter-dealer prices and do not include
allowance for retail mark-up or mark-down, commissions or other transaction
costs and may not represent actual transactions.




2006
                        
                        
                        2007Mar 31
                        
                        
                        Jun 30
                        
                        
                        Sept 30
                        
                        
                        Dec 31
                        
                        
                        Mar 31
                        
                        
                        Jun 30
                        
                        
                        Sept 30
                        
                        
                        Dec 31High
                        
                        $
                        2.00
                        
                        
                        $
                        1.80
                        
                        
                        $
                        1.30
                        
                        
                        $
                        0.75
                        
                        
                        $
                        0.70
                        
                        
                        $
                        0.51
                        
                        
                        $
                        0.49
                        
                        
                        $
                        0.28Low
                        
                        
                        1.56
                        
                        
                        
                        0.94
                        
                        
                        
                        0.49
                        
                        
                        
                        0.28
                        
                        
                        
                        0.49
                        
                        
                        
                        0.28
                        
                        
                        
                        0.28
                        
                        
                        
                        0.06




Holders




As of
February 29, 2008, there were approximately 304 holders of record of our Common
Stock.  This figure does not reflect the approximately 1,300
beneficial stockholders whose shares are in nominee names.




5


Dividend
Policy




We have
never declared or paid any cash dividends on our Common Stock.  We
currently intend to retain any earnings for use in our operations and expansion
of our business and therefore do not anticipate paying any cash dividends in the
foreseeable future.




Issuer
Purchases




We did
not repurchase any equity securities during the years ended December 31, 2007
and 2006.




Information
Regarding Equity Compensation Plans




The
following table sets forth information regarding our equity compensation plans
in effect as of December 31, 2007.




Equity Compensation Plan InformationPlan Category
                                  
                                  Number of
                                    Securities to be
                                    issued upon
                                    exercise of
                                    outstanding
                                    options, warrants,
                                    and rights
                                  
                                  
                                  Weighted-average
                                    exercise price of
                                    outstanding
                                    options, warrants,
                                    and rights
                                  
                                  
                                  Number of securities
                                    remaining available for
                                    future issuance under equity
                                    compensation plans
                                    (excluding securities
                                    reflected in column (a))(a)
                                  
                                  
                                  (b)
                                  
                                  
                                  cEquity
      compensation plans approved by security holders
                                  
                                  
                                  1,496,000
                                  
                                  
                                  $
                                  0.71
                                  
                                  
                                  
                                  99,000Equity
      compensation plans not approved by security holders
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
                                  
                                  
                                  1,496,000
                                  
                                  
                                  $
                                  0.71
                                  
                                  
                                  
                                  99,000




We have
one terminated equity compensation plan which still has active options
outstanding (the 1995 Employee Stock Option Plan) and two active equity
compensation plans (the 1999 Employee Stock Option Plan and the 2004 Employee
Stock Option Plan), all of which have been approved by our
shareholders.  Each of the plans may grant nonqualified stock options
or incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.  The plans are administered by the
Compensation Committee of the Board of Directors.  Each of the plans
terminates after 10 years, though termination of the plan does not affect the
rights of beneficiaries under options granted prior to the termination of the
plan.  Options are to be granted at a price equal to or greater than
the closing price of the common stock on the day the option is granted and may
be exercisable for up to 10 years from the date of grant so long as the
beneficiary is employed by the Company, but terminate 3 months after the
beneficiary is no longer employed by the Company unless due to permanent and
total disability in which case the options terminate 12 months after employment
ceases.  For further information on equity compensation see Note I –
Share Based Compensation in the Notes to the Financial
Statements.


6




ITEM6.  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations




Overview




Integral
Vision, Inc., a Michigan corporation, develops, manufactures, and markets flat
panel display inspection systems to ensure product quality in the display
manufacturing process.  Our revenues are primarily derived from the
sale of flat panel display inspection equipment.  Except for the
historical information contained herein, the matters discussed in this document
are forward-looking statements made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  Such statements are based on management’s current expectations
and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements.  Such factors and uncertainties include, but are not
limited to:  the ability of the company to obtain volume orders from
its larger customers; general economic conditions and conditions in the specific
industries in which we have significant customers; price fluctuations in the
materials we purchase for assembly into final products; competitive conditions
in our markets and the effect of competitive products and pricing; and
technological development by us, our customers and our
competition.  As a result, our 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 our filings with the Securities and
Exchange Commission.  These forward-looking statements represent our
best estimates as of the date of this document.  We assume no
obligation to update such estimates except as required by the rules and
regulations of the Securities and Exchange Commission.




Results
of Operations - Year Ended December 31, 2007, compared to the year ended
December 31, 2006




Net
revenues for 2007 increased  $316,000 (37.8%) to $1,151,000 from
$835,000 in 2006.  Revenue is reported net of sales commission expense
which was approximately $67,000 in 2007 compared to approximately $24,000 in
2006.  Revenue for 2007 includes $92,000 from Product Development
Agreements compared to $172,000 in 2006.  Sales from the flat panel
display inspection product line were $1,048,000 in 2007, an increase of $399,000
(61.5%) from $649,000 in 2006.




Direct
costs of sales for 2007 increased $154,000 (20.8%) to $895,000 (approximately
77.7% of sales) from $741,000 (approximately 88.7% of sales)  in
2006.  This was primarily due to an increase of $256,000 in costs
related to flat panel display inspection equipment, partially offset by lower
costs of $102,000 for product development agreements.  Costs of sales
for product development agreements are recorded in amounts equal to the revenue
recognized and therefore do not contribute significantly to gross
margin.  See Note B to the Financial Statements Revenue Recognition
and Note B to the Financial Statements Allocations of General and Adminstrative
Costs and Engineering Costs for further discussion of product development
agreements.




Marketing
costs for 2007 were $608,000, a $45,000 (6.9%) decrease over
the  $653,000 spent in 2006.  This is primarily attributable
to a decrease in trade show activity, travel and promotion costs. Expense
allocated to marketing costs for amortization of share based compensation as
required by SFAS 123R was approximately $29,000 for 2007 and $33,000 for
2006.




General
and administrative costs for 2007 were $1,327,000 a $77,000 (6.2%) increase over
the $1,250,000 spent in 2006. We allocated $8,000 of general and administrative
costs to costs of sales for product development agreements in 2007 and $38,000
in 2006.  (For more information on the allocation of certain general
and administrative costs to cost of goods sold see Note B to the Financial
Statements.)  Without this allocation, general and administrative
costs would have increased by $47,000 (3.6%) over 2006 to $1,335,000. The
increase was primairly attributable to an increase in professional fees and
investor relations costs. Expense allocated to G&A for amortization of share
based compensation as required by SFAS 123R for 2007 was approximately $30,000
compared to $43,000 in 2006.




Engineering
and product development expenditures decreased $68,000 (5.6%) to
$1.146,000  in 2007 compared to $1.214,000 in 2006. We allocated
$20,000 of engineering costs to costs of sales for product development
agreements in 2007 compared to $137,000 in 2006.  (For more
information on the allocation of certain engineering costs to cost of goods sold
see Note B to the Financial Statements.)  Without these allocations,
engineering costs would have decreased by $185,000 (13.7%) to $1,166,000 in 2007
compared to $1.351,000 in 2006.  This is primarily attributable to
decreases in staffing and related costs of $404,000, partially offset by
increases in outside services and travel costs of $219,000. Expense allocated to
engineering and product development costs for the amortization of share-based
compensation as required by SFAS 123R for 2007 was $38,000 in 2007 compared to
$94,000 in 2006.




Other
income decreased  $33,000 to $13,000 in 2007 compared to $46,000 in
2006. The decrease in 2007 is primarily attributeable to a loss on the
abandonement of equipment of $16,000 and a decrease in royalty income of
$13,000.




7


Interest
expense increased $198,000 to $230,000 in 2007 compared to $32,000 in
2006.  The increase is primarily attributable to increased debt of
$2,614,000 in 2007 compared to 2006 (see Note C to financial
statements).




Seasonality
and Quarterly Fluctuations




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




Liquidity
and Capital Resources




Operating
activities for 2007 used cash of approximately $2.6 million primarily due to our
loss from operations.  Changes in working capital provided cash of
$201,000, which was primarily due to a decrease in inventory of $117,000, an
increase in accounts receivable of $54,000, a decrease in other current assets
of $22,000 and an increase in accounts payable and other current liabilities of
$116,000.




Our
investing activities included primarily the purchase of approximately $35,000 of
equipment in 2007 and $8,000 for legal and patent office fees for new patent
applications.




Our
financing activities included net proceeds of $2,614,000  from the
issuance of Class 2 Notes and we received $8,000 from the exercise of employee
stock options.




We paid
$30,000 of interest in 2007 on Class 3 Notes.




Management
has made arrangements to issue up to $3,122,000 of Class 2 Notes under the terms
of the Company’s existing Note and Warrant Purchase Agreement as
amended.  The Class 2 Notes are working capital notes and are secured
by accounts receivable, inventory, and intellectual property.  The
purchasers of Class 2 Notes receive 10% interest and the option to receive
either warrants for the purchase of the Company’s stock  or an
additional 2% interest.  Class 2 Warrants entitle the holder to
purchase one share of Common Stock for each $1 in value of the Class 2 Note
multiplied by a fraction, the numerator of which is the number of days such
Class 2 note is outstanding and the denominator of which is 365.  The
Board of Directors has approved a $1.60 strike price for the
warrants.  The Notes will mature April  30,
2008.  As of December 31, 2007 the Company had issued $2,964,000 of
Class 2 Notes, primarily purchased by related parties.  Management
anticipates issuing the balance of these notes during the first quarter of
2008.  As of December 31, 2007, the noteholders have earned 1,795,327
warrants, 335,545 of which are issued. The Company’s present cash position
requires us to secure additional funding for the immediate future as well as
funding to provide working capital for anticipated orders.  Refer to
Note P – Subsequent Events for recent activity associated with Class 2
Notes.  Management expects to refinance these notes as part of our
plan to raise additional capital in the second quarter of 2008 to fund
operations through at least the first quarter of 2009 and provide working
capital for anticipated orders.





Terms of
the 2005 Securities Purchase Agreement provide antidilution protection for the
3,500,000 warrants outstanding and grant a right to holders of the 6,200,0000
outstanding shares of stock purchased at $1.00 per share under the agreement to
swap the stock they purchased for new securities being offered in the future by
the Company if the terms of the new securities are more favorable to the holders
than the terms of the 2005 Securities Purchase Agreement.  The
antidilution protection on the warrants sets the conversion price of the warrant
at the price of the new securities being issued and increases the total number
of shares available under the warrant such that the total value of the warrant
is kept constant.  These terms would result in significant dilution if
securities were sold at current market prices.  Though there can be no
assurance they will be successful, management expects to negotiate these terms
as part of our plan to raise additional capital in the second quarter of
2008.  Further, the terms of the 5th Amended
Note and Warrant Purchase Agreement provides for the conversion price on
outstanding warrants to be reduced to the price of new securities offered, but
not lower than $0.25, resulting in a significant reduction of the amount of
funds that will be realized by the Company in the event of an exercise of the
warrants at current market prices.  See financial statements Note P –
Subsequent Events for additional information regarding potential
dilution.




For
further discussion regarding our obligations, see Note C—Long Term Debt and
Other Financing Arrangements and Note P – Subsequent Events.




8


Impact of
Inflation




The
amounts presented in the financial statements do not provide for the effect of
inflation on our operations or our 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.  Our operations together with other sources
are intended to provide funds to replace property, plant and equipment as
necessary.  Net income would be lower than reported if the effects of
inflation were reflected either by charging operations with amounts that
represent replacement costs or by using other inflation
adjustments.




Off-Balance
Sheet Arrangements




We have
no significant off-balance sheet arragements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to
investors.




Recently
Issued Accounting Standards





On
January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN
48”). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. There was no effect on our financial
position, results of operations or cash flows as a result of adopting FIN
48.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this statement does not require any new fair
value measurements. SFAS No. 157 is effective January 1, 2008 for financial
assets and liabilities and January 1, 2009 for non-financial assets and
liabilities. We are currently evaluating the effect, if any, of this statement
on our financial condition and results of operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be carried at fair
value. SFAS No. 159 does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS No. 157 and SFAS No. 107, “Disclosures about Fair
Value of Financial Instruments.” SFAS No. 159 is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. We will
adopt SFAS No. 159 on January 1, 2008 and do not anticipate adoption to
materially impact our financial position or results of operations.





In
December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations”
(“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business Combinations,” and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions. This
statement also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair
values. SFAS No. 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or to confirm the guidance in
that literature to that provided in this statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We expect to adopt this statement on January 1, 2009. SFAS
No. 141(R)’s impact on accounting for business combinations is dependent upon
acquisitions at that time.





9


In
December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements,” which amends Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. SFAS No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
non-controlling interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any non-controlling equity
investment. The statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. This statement applies
prospectively to all entities that prepare consolidated financial statements and
applies prospectively for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We are currently evaluating the
effect, if any, of this statement on our financial condition and results of
operations




Management’s
Discussion of Critical Accounting Policies




Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting year. The accounting policies
discussed below are considered by management to be the most important to an
understanding of our financial statements, because their application places the
most significant demands on management's judgment and estimates about the effect
of matters that are inherently uncertain. Our assumptions and estimates were
based on the facts and circumstances known at December 31, 2007, future events
rarely develop exactly as forecast, and the best estimates routinely require
adjustment. These policies are also discussed in Note B of the Notes to
Financial Statements included in Item 7 of this report.




Revenue
Recognition




We
recognize revenue in accordance with SOP 97-2, Software Revenue Recognition and
Staff Accounting Bulletin No. 101 (“SAB 101”), and Staff Accounting Bulletin No.
104 (“SAB 104”) Revenue Recognition in Financial Statements. Revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectibility is reasonably assured.




We
recognize revenue at the time of shipment for product sales where the customer’s
acceptance criteria can be demonstrated as met prior to shipment and where title
transfers on shipment.  We recognize revenue at the time of final
acceptance at the customer site when title does not transfer on shipment or if
acceptance criteria at the customer site are substantially different than
acceptance criteria for shipment.  We recognize revenue for product
sales with no specific customer acceptance criteria, including spare parts, on
shipment.  Revenue from service contracts is recognized over the term
of the contract.  Revenue is reported net of sales
commissions.




Revenue
is also derived through business agreements for product
development.  We conduct specified product development projects
related to one of our principal technology specializations for an agreed-upon
fee.  Typically the agreements require “best efforts” with no
specified performance criteria.  Revenue from product development
agreements, where there are no specific performance terms, is recognized in
amounts equal to the amounts expended on the programs.  Generally, the
agreed-upon fees contemplate reimbursing us, after our agreed-upon cost share if
any, for costs considered to be associated with project
activities.  These include expenses for direct product development and
research, operating expenses, general and administrative expenses, and
depreciation.  Accordingly, expenses related to product development
agreements are recorded as cost of revenues from product development
agreements.




10


Inventories




Inventories
are stated at the lower of standard cost, which approximates actual cost
determined on a first-in, first-out basis, or market.  Inventories are
recorded net of allowances for unsalable or obsolete raw materials,
work-in-process and finished goods. We evaluate, on a quarterly basis, the
status of our inventory to ensure the amount recorded in the financial
statements reflects the lower of our cost or the value we expect to receive when
the inventory is sold. This estimate is based on several factors, including the
condition and salability of the inventory and the forecasted demand for the
particular products incorporating these components. Based on current backlog and
expected orders, we forecast the upcoming usage of current stock. We record
reserves for obsolete and slow-moving parts ranging from 0% for active parts
with sufficient forecasted demand up to 100% for excess parts with insufficient
demand or obsolete parts. Amounts in work-in-process and finished goods
inventory typically relate to firm orders and, therefore, are not subject to
obsolescence risk.




Impairment
of Long-lived Assets




We review
our long-lived assets, including property, equipment and intangibles, for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. An impairment
loss would be recognized when estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition are less than
the carrying amount of the asset.




Share-Based
Compensation





We
account for our share based compensation plans according to the provisions of
SFAS 123-R. Accordingly, compensation costs attributable to stock options or
similar equity instruments granted are measured at the fair value at the grant
date, and expensed over the expected vesting period.





The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model.  The fair value of all awards is
amortized on a straight line basis over the requisite service
periods.  The expected life of all awards granted represents the
period of time that they are expected to be outstanding.  The expected
life is determined using historical and other information available at the time
of grant.  Expected volatilities are based on historical volatility of
our common stock, and other factors.  The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.  We use historical data to
estimate pre-vesting option forfeitures.




Contingencies
and Litigation




We make
an assessment of the probability of an adverse judgment resulting from current
and threatened litigation. The Company accrues the cost of an adverse judgment
if, in Management’s estimation, an adverse settlement is probable and Management
can reasonably estimate the ultimate cost of such litigation.  The
Company has made no such accruals at December 31, 2007.




ITEM7.   
Financial Statements and Supplementary Data




The
annual financial statements and results of operations are submitted in separate
sections of this report.




ITEM 8.
              Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure




None.




11


ITEM8A.Controls and
Procedures




Management’s
Report on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adaquate internal control over
financial reporting for the small business issuer, as such term is defined in
Exchange Act Rule 13a-15(f).  We have designed such internal control
over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles in the United States of America.





Management
has evaluated the effectiveness of our internal control over financial reporting
using the “Internal Control – Integrated Framework (1992)” created by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
framework using “SarboxPro”, a commercially available software package designed
to implement the COSO framework in compliance with SEC Release No.
34-55929.  Management has determined that internal controls over
financial reporting were effective as of December 31, 2007(as defined in Item
308T(a)(3) of Regulation S-B).  We have also disclosed in this report
any change in our internal control over financial reporting that occurred during
the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





This
annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.




Management’s
Evaluation of Disclosure Controls and Procedures




The
Company’s chief executive officer and chief financial officer have each reviewed
and evaluated the effectiveness of the Company’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report. Based on that evaluation, the
chief executive officer and chief financial officer have each concluded that the
Company’s current disclosure controls and procedures are
effective.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.





Changes
in Internal Controls





There
have been no changes in the Company’s internal controls over financial reporting
that occurred during the Company’s fourth quarter of the fiscal year that
materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting.




ITEM8B.  Other
Information




None


12


Part III




ITEM 9.
              Directors, Executive
      Officers, Promoters, Control Persons and Corporate Governance; Compliance
      with Section 16(a) of the Exchange
Act




Item 9 is
hereby incorporated by reference from the Registrant’s definitive proxy
statement to be filed within 120 days of December 31, 2007.




ITEM 10.
              Executive
      Compensation




Item 10
is hereby incorporated by reference from the Registrant’s definitive proxy
statement to be filed within 120 days of December 31, 2007.




ITEM 11.
              Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder
      Matters




Item 11
is hereby incorporated by reference from the Registrant’s definitive proxy
statement to be filed within 120 days of December 31, 2007.




ITEM 12.
              Certain Relationships
      and Related Transactions, and Director
  Independence


The
following table sumarizes debt transactions with the Company involving our
Directors and certain shareholders that own more than five percent (5%) of the
outstanding shares of common stock of the Company.


13
 
  Greater than 5% shareholder
                                                                                    
                                                                                    
                                                                                    DirectorJohn Hunter
                                                                                    
                                                                                    
                                                                                    John R. Kiely, III.
                                                                                    
                                                                                    
                                                                                    Max A. Coon
                                                                                    
                                                                                    
                                                                                    TotalOutstanding balance
      as of December 31, 2006Class
      2
                                                                                    
                                                                                    $
                                                                                    150,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    150,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Class
      3
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Total
                                                                                    
                                                                                    $
                                                                                    150,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    150,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    300,000Largest
      aggregate amount of principle outstanding during period2007
                                                                                    
                                                                                    $
                                                                                    1,184,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,050,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    250,0002006
                                                                                    
                                                                                    $
                                                                                    150,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    150,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Aggregate
      amount of transactions (See "Related Party Transaction Detail" table
      below)2007
                                                                                    
                                                                                    $
                                                                                    1,034,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    900,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    250,0002006
                                                                                    
                                                                                    $
                                                                                    150,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    150,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Outstanding
      balance as of December 31, 2007Class
      2
                                                                                    
                                                                                    $
                                                                                    1,184,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,050,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    250,000Class
      3
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Total
                                                                                    
                                                                                    $
                                                                                    1,184,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,050,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    250,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,484,000Outstanding
      balance as of November 22, 2010Class
      2
                                                                                    
                                                                                    $
                                                                                    1,781,112
                                                                                    
                                                                                    
                                                                                    $
                                                                                    710,945
                                                                                    
                                                                                    
                                                                                    $
                                                                                    125,000Class
      3
                                                                                    
                                                                                    $
                                                                                    1,490,167
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,321,844
                                                                                    
                                                                                    
                                                                                    $
                                                                                    298,161Total
                                                                                    
                                                                                    $
                                                                                    3,271,279
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,032,789
                                                                                    
                                                                                    
                                                                                    $
                                                                                    423,161
                                                                                    
                                                                                    
                                                                                    $
                                                                                    5,727,229Amount
      of principal paid during year2007
                                                                                    
                                                                                    $
                                                                                    61,000
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -2006
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Amount
      of interest paid during yearCash
      2007
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Notes
      issued in payment of interest 2007
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Value
      of warrants issued 2007
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    14,099
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Total
      2007
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    14,099
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    14,099Cash
      2006
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Notes
      issued in payment of interest 2006
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Value
      of warrants issued 2006
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Total
      2006
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Accrued
      interest at December 31Cash
      2007
                                                                                    
                                                                                    $
                                                                                    69,200
                                                                                    
                                                                                    
                                                                                    $
                                                                                    59,292
                                                                                    
                                                                                    
                                                                                    $
                                                                                    20,479Value
      of warrants accrued not issued 2007
                                                                                    
                                                                                    $
                                                                                    726
                                                                                    
                                                                                    
                                                                                    $
                                                                                    388
                                                                                    
                                                                                    
                                                                                    $
                                                                                    215Total
      2007
                                                                                    
                                                                                    $
                                                                                    69,926
                                                                                    
                                                                                    
                                                                                    $
                                                                                    59,680
                                                                                    
                                                                                    
                                                                                    $
                                                                                    20,694
                                                                                    
                                                                                    
                                                                                    $
                                                                                    150,300Cash
      2006
                                                                                    
                                                                                    $
                                                                                    1,089
                                                                                    
                                                                                    
                                                                                    $
                                                                                    519
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Value
      of warrants accrued not issued 2006
                                                                                    
                                                                                    $
                                                                                    2,524
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,203
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -Total
      2006
                                                                                    
                                                                                    $
                                                                                    3,613
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,722
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    5,335
 For an
explanation of the terms of the Class 2 Notes, Class 3 Notes, and Warrants,
refer to Note C – Long Term Debt and Other Financing in the notes to the
financial statements.
 
 The
following tables detail debt transactions with the Company involving our
Directors and certain shareholders that own more than five percent (5%) of the
outstanding shares of common stock of the Company for the years ended December
31, 2007 and December 31, 2006.
  14
  Related PartyNote
                                                                
                                                                Transaction Detail for
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Transaction
                                                                
                                                                
                                                                
                                                                
                                                                Interest
                                                                
                                                                
                                                                WarrantNumber
                                                                
                                                                2007
                                                                
                                                                Class 2 Note
                                                                
                                                                
                                                                Classs 3 Note
                                                                
                                                                Date
                                                                
                                                                Date due
                                                                
                                                                
                                                                rate
                                                                
                                                                
                                                                accrual rate (2)58
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                50,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                01/22/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                159
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                145,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                01/22/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                159
                                                                
                                                                J.N.
      Hunter (1)
                                                                
                                                                $
                                                                (61,000
                                                                )
                                                                
                                                                $
                                                                -
                                                                
                                                                02/07/07
                                                                
                                                                n/a
                                                                
                                                                
                                                                
                                                                n/a
                                                                
                                                                
                                                                
                                                                N/A62
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                70,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                02/22/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                165
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                75,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                03/26/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                169
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                112,500
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                04/24/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                170
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                92,500
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                05/23/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                176
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                50,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                07/17/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                178
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                100,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                07/26/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                181
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                50,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                08/23/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                182
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                50,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                08/29/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                185
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                75,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                09/25/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                187
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                100,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                10/25/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                189
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                75,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                11/26/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                191
                                                                
                                                                J.N.
      Hunter
                                                                
                                                                $
                                                                50,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                12/21/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                12
                                                                
                                                                
                                                                None$
                                                                1,034,000
                                                                
                                                                
                                                                $
                                                                -60
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                50,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                01/22/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                161
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                70,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                02/22/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                164
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                75,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                03/26/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                167
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                112,500
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                04/23/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                172
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                50,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                05/24/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                173
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                42,500
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                05/29/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                177
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                50,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                07/17/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                179
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                75,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                08/07/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                180
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                75,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                08/23/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                186
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                125,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                09/27/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                188
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                100,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                10/26/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                190
                                                                
                                                                John
      R. Kiely, III
                                                                
                                                                $
                                                                75,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                11/26/07
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                1$
                                                                900,000
                                                                
                                                                
                                                                $
                                                                -63
                                                                
                                                                Max
      A. Coon
                                                                
                                                                $
                                                                250,000
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                3/8/2007
                                                                
                                                                01/11/08
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                1$
                                                                250,000
                                                                
                                                                
                                                                $
                                                                -Total net transactions
                                                                    at December
      31,
                                                                  2007
                                                                
                                                                $
                                                                2,184,000
                                                                
                                                                
                                                                $
                                                                -
 
 (1)
                Principal
      paid with cash
 (2)
                Expressed
      as warranants/$/year. Note holder can elect to receive no warrants and
      earn an additional 2% interest.
 
 Related PartyNote
                                                                                                                                          
                                                                                                                                          Transaction Detail for
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Transaction
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Interest
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          WarrantNumber
                                                                                                                                          
                                                                                                                                          2006
                                                                                                                                          
                                                                                                                                          Class 2 Note
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Classs 3 Note
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Date
                                                                                                                                          
                                                                                                                                          Date due
                                                                                                                                          
                                                                                                                                          rate
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          accrual rate (1)51
                                                                                                                                          
                                                                                                                                          J.N.
      Hunter
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          75,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          11/21.06
                                                                                                                                          
                                                                                                                                          01/11/08
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          10
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          156
                                                                                                                                          
                                                                                                                                          J.N.
      Hunter
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          75,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          12/18/06
                                                                                                                                          
                                                                                                                                          01/11/08
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          10
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1$
                                                                                                                                          150,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -53
                                                                                                                                          
                                                                                                                                          John
      R. Kiely, III
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          94,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          12/18/06
                                                                                                                                          
                                                                                                                                          01/11/08
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          10
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          154
                                                                                                                                          
                                                                                                                                          John
      R. Kiely, III
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          56,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          12/19/06
                                                                                                                                          
                                                                                                                                          01/11/08
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          10
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1$
                                                                                                                                          150,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -Total net transactions
                                                                                                                                              at December
      31,
                                                                                                                                            2006
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          300,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
 
 (1)
                Expressed
      as warranants/$/year. Note holder can elect to receive no warrants and
      earn an additional 2% interest.
 15
  The
securities referenced above were obtained from the Company in transactions under
the same terms as concurrent transactions with unrelated
parties.  While the Company does not have a written policy regarding
related party transactions, in general, the Company will allow related parties
to participate in transactions under the same terms and conditions as unrelated
parties.  Where no unrelated parties are participating, the proposed
transaction is reviewed by the Board to determine whether the terms of the
transaction are fair to, and in the best interest of, the Company.  In
this respect, the Board uses the overriding “arms length transaction” criteria
to analyze the following factors, in addition to any other factors it deems
appropriate depending on the circumstances, in determining whether to approve a
related party transaction: (i) fairness of the terms for the Company as related
to market and current industry practice; (ii) whether the transaction is in the
Company’s best interest; (iii) materiality of the transaction as related to the
Company; (iv) role of the related party in the transaction; (v) structure of the
transaction; and (vi) interests of all related parties in the transaction.
Approval of a related party transaction may be conditioned upon the Company and
the related party taking certain recommended actions that the Board deems
appropriate and necessary, including, without limitation, any or all of the
following: (x) limiting the duration or magnitude of the transaction by changing
specific terms; (y) requiring that information about the related party
transaction be documented and that reports reflecting the nature and amount of
the transaction be delivered to the Board on a regular basis; and (z) appointing
a Company representative to monitor various aspects of the related party
transaction.


ITEM
13.  Exhibits





ExhibitNumber
                    
                    Description of Document3.1
                    
                    Articles
      of Incorporation, as amended (filed as Exhibit 3.1 to the registrant's
      Form 10-K for the year ended December 31, 1995, SEC file 0-12728, and
      incorporated herein by reference).3.2
                    
                    Bylaws
      of the Registrant, as amended (filed as Exhibit 3.2 to the registrant's
      Form 10-K for the year ended December 31, 1994, SEC file 0-12728, and
      incorporated herein by reference).4.1
                    
                    Form
      of Fourth Amended Note and Warrant Purchase Agreement including Form of
      Integral Vision, Inc. Class 3 Note (filed as Exhibit 4.8 to registrant’s
      Form 10-K for the year ended December 31, 2003, SEC file 0-12728, and
      incorporated herein by reference).4.2
                    
                    Securities
      Purchase Agreement, Effective April 12, 2005 (filed as Exhibit 4.(A) to
      registrant’s Form 8-K filed April 14, 2005, SEC file 0-12728, and
      incorporated herein by reference).4.3
                    
                    Form
      of Consent to Modifications dated November 14, 2006 modifying the terms of
      the Fourth Amended Note and Warrant Purchase Agreement including Form of
      Integral Vision, Inc. Class 2 Warrant (filed as Exhibit 4.9 to
      registrant’s Form 10-Q for the quarter ended September 30, 2006, SEC file
      0-12728, and incorporated herein by reference).4.4
                    
                    Form
      of Consent to Modifications dated August 13, 2007 modifying the terms of
      the Fourth Amended Note and Warrant Purchase Agreement (filed as Exhibit
      4.4 to registrant’s Form 10-QSB for the quarter ended June 30, 2007, SEC
      file 0-12728, and incorporated herein by reference).4.5
                    
                    Form
      of Consent to Modifications dated October 10, 2007 modifying the terms of
      the Fourth Amended Note and Warrant Purchase Agreement (filed as Exhibit
      4.6 to registrant’s Form 10-QSB for the quarter ended September 30, 2007,
      SEC file 0-12728, and incorporated herein by
reference).4.6
                    
                    Form
      of Consent to Modifications dated January 18, 2008 modifying the terms of
      the Fourth Amended Note and Warrant Purchase
Agreement.*4.7
                    
                    Form
      of Amended Collateral Assignment of Proprietary Rights dated March 5,
      2008.*


4.8
                                  
                                  Form
      of Amended Security Agreement dated March 6, 2008.*4.9
                                  
                                  Consent
      to Amend and Replace Agreements dated March 12, 2008.4.10
                                  
                                  Form
      of Fifth Amended and Restated Note and Warrant Purchase
      Agreement.*10.1
                                  
                                  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).10.2
                                  
                                  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).




16




10.3
            
            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).10.4
            
            Integral
      Vision, Inc. 2004 Employee Stock Option Plan (filed as exhibit 10.11 to
      the registrant’s Form 10-Q for the quarter ended June 30, 2004 and
      incorporated herein by reference).10.5
            
            Integral
      Vision, Inc. 2008 Equity Incentive Plan.*14
            
            Code
      of Ethics.*23.1
            
            Consent
      of Rehmann Robson, independent registered public accounting
      firm.*31.1
            
            Certification
      of Chief Executive Officer of Periodic Report pursuant to Rule 13a-15(e)
      or Rule 15d-15(e).31.2
            
            Certification
      of Chief Financial Officer of Periodic Report pursuant to Rule 13a-15(e)
      or Rule 15d-15(e).32.1
            
            Certification
      by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
      Section 1350.32.2
            
            Certification
      by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
      Section 1350.




*          
             Filed as an Exhibit to
      registrant’s Form 10-KSB filed March 31, 2008, SEC file 000-12728, and
      incorporated herein by
reference.




ITEM14.  Principal
Accountant Fees and Services




Item 14
is hereby incorporated by reference from the Registrant’s definitive proxy
statement to be filed within 120 days of December 31, 2007.


17




SIGNATURES




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




INTEGRAL
VISION, INC.




By:
                      /S/ CHARLES J. DRAKECharles
      J. Drake, Chairman of the Board
                        and
      Chief Executive OfficerDate:    December
      20, 2010By:
                      /S/ MARK R. DOEDEMark
      R. Doede, President, Chief Operating
                        Officer,
      Chief Financial Officer, and Principal
                        Accounting
      OfficerDate:    December
      20,
2010




Pursuant
to the requirements of the Exchange Act, this amendment has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.




/S/ CHARLES J. DRAKE
              
              Chairman
      of the Board, ChiefCharles
      J. Drake
              
              Executive
      Officer, and DirectorDate:  December
      20, 2010/S/ MAX A. COON
              
              Vice
      Chairman, Secretary and DirectorMax
      A. CoonDate:  December
      20, 2010/S/ VINCENT SHUNSKY
              
              Treasurer
      and DirectorVincent
      ShunskyDate:  December
      20, 2010/S/ WILLIAM B. WALLACE
              
              DirectorWilliam
      B. WallaceDate:  December
      20, 2010




18


Report of
Independent Registered Public Accounting Firm





Stockholders
and Board of Directors


Integral
Vision, Inc.


Wixom,
Michigan





We have
audited the accompanying balance sheet of Integral Vision, Inc. as of December
31, 2007, and the related statements of operations,
stockholders'  deficit and cash flows for each of the years in the
two-year period then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Integral Vision, Inc. as of
December 31, 2007, and the results of its operations and its cash flows for each
of the years in the two-year period then ended, in conformity with accounting
principles generally accepted in the United States of America.





The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.  As described in Note O to the financial
statements, the Company is sustaining recurring losses from operations and is
having difficulties in achieving the necessary sales to attain
profitability.  These conditions raise substantial doubt about the
Company's ability to continue as a going concern.  Management's plans
in regard to this matter are also described in Note O.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





/S/
      Rehmann Robson, P.C.


Troy,
Michigan


March 31,
2008


19


Balance
Sheet


Integral
Vision, Inc.





December 312007(in thousands)AssetsCurrent
      assetsCash
                                                          
                                                          $
                                                          11Accounts
      receivable
                                                          
                                                          
                                                          75Inventories
      - Note B
                                                          
                                                          
                                                          265Other
      current assets
                                                          
                                                          
                                                          97Total
      current assets
                                                          
                                                          
                                                          448Property
      and equipmentBuilding
      improvements
                                                          
                                                          
                                                          4Production
      and engineering equipment
                                                          
                                                          
                                                          234Furniture
      and fixtures
                                                          
                                                          
                                                          80Computer
      Equipment
                                                          
                                                          
                                                          190Marketing/demonstration
      equipment
                                                          
                                                          
                                                          139647Less
      accumulated depreciation
                                                          
                                                          
                                                          431Net
      property and equipment
                                                          
                                                          
                                                          216Other
      assets - net of accumulated amortization of $1,493,000
                                                          
                                                          
                                                          3434$
                                                          698Liabilities
      and Stockholders' DeficitCurrent
      liabilitiesNotes
      payable
                                                          
                                                          $
                                                          858Notes
      payable to related parties (see Note D)
                                                          
                                                          
                                                          2,484Accounts
      payable
                                                          
                                                          
                                                          75Accrued
      compensation and related costs
                                                          
                                                          
                                                          298Accrued
      interest
                                                          
                                                          
                                                          46Accrued
      interest payable to related parties (see Note D)
                                                          
                                                          
                                                          150Accrued
      product warranty
                                                          
                                                          
                                                          82Other
      accrued liabilities
                                                          
                                                          
                                                          40Total
      current liabilities
                                                          
                                                          
                                                          4,033Long-term
      debt
                                                          
                                                          
                                                          -Total
      liabilities
                                                          
                                                          
                                                          4,033Stockholders'
      deficitPreferred
      stock, 400,000 shares authorized; none issued
                                                          
                                                          
                                                          -Common
      stock, without par value, stated value $.20 per share; 50,000,000 shares
      authorized; 29,566,409 shares issued and outstanding
                                                          
                                                          
                                                          5,913Additional
      paid-in capital
                                                          
                                                          
                                                          39,407Accumulated
      deficit
                                                          
                                                          
                                                          (48,655
                                                          )Total
      stockholders' deficit
                                                          
                                                          
                                                          (3,335
                                                          )$
                                                          698





The
accompanying notes are an integral part of these financial
statements.




20




Statements
of Operations


Integral
Vision, Inc.





Year Ended December 31,2007
                                        
                                        
                                        2006(In thousands, except per share data)Revenues:Net
      product sales
                                        
                                        $
                                        1,059
                                        
                                        
                                        $
                                        663Net
      revenue from product development agreements
                                        
                                        
                                        92
                                        
                                        
                                        
                                        172Total
      net revenues (See Note-B)
                                        
                                        
                                        1,151
                                        
                                        
                                        
                                        835Costs
      of sales:Costs
      of sales for products
                                        
                                        
                                        781
                                        
                                        
                                        
                                        488Cost
      of sales for product development agreements
                                        
                                        
                                        97
                                        
                                        
                                        
                                        199Depreciation
      and amortization
                                        
                                        
                                        17
                                        
                                        
                                        
                                        54Total
      costs of sales
                                        
                                        
                                        895
                                        
                                        
                                        
                                        741Gross
      margin
                                        
                                        
                                        256
                                        
                                        
                                        
                                        94Other
      costs and expenses:Marketing
                                        
                                        
                                        608
                                        
                                        
                                        
                                        653General
      and administrative - net
                                        
                                        
                                        1,327
                                        
                                        
                                        
                                        1,250Engineering
      and development - net
                                        
                                        
                                        1,146
                                        
                                        
                                        
                                        1,214Total
      other costs and expenses
                                        
                                        
                                        3,081
                                        
                                        
                                        
                                        3,117Operating
      loss
                                        
                                        
                                        (2,825
                                        )
                                        
                                        
                                        (3,023
                                        )Other
      income
                                        
                                        
                                        13
                                        
                                        
                                        
                                        46Interest
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        42Interest
      expense
                                        
                                        
                                        (68
                                        )
                                        
                                        
                                        (30
                                        )Interest
      expense for related parties
                                        
                                        
                                        (162
                                        )
                                        
                                        
                                        (2
                                        )Foreign
      currency translation gain (loss)
                                        
                                        
                                        1
                                        
                                        
                                        
                                        (7
                                        )Loss
      from operations before income taxes
                                        
                                        
                                        (3,041
                                        )
                                        
                                        
                                        (2,974
                                        )Income
      taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Net
      loss
                                        
                                        $
                                        (3,041
                                        )
                                        
                                        $
                                        (2,974
                                        )Basic
      and diluted loss per share:Net
      loss
                                        
                                        $
                                        (0.10
                                        )
                                        
                                        $
                                        (0.10
                                        )Weighted
      average number of shares outstanding of common stock and  common
      stock equivalents, where applicable
                                        
                                        
                                        29,534
                                        
                                        
                                        
                                        29,491





The
accompanying notes are an integral part of these financial
statements.




21




Statements
of Stockholders' Deficit


Integral
Vision, Inc.





Number of
                    Common
                    Shares
                    Outstanding
                  
                  
                  Common
                    Stock
                  
                  
                  Preferred
                    Stock
                  
                  
                  Additional
                    Paid-In
                    Capital
                  
                  
                  Accumulated
                    Deficit
                  
                  
                  Total(in thousands, except number of common shares outstanding)Balances
      at January 1, 2006
                  
                  
                  29,491,409
                  
                  
                  $
                  5,898
                  
                  
                  $
                  -
                  
                  
                  $
                  39,126
                  
                  
                  $
                  (42,640
                  )
                  
                  $
                  2,384Net
      loss for the year
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,974
                  )
                  
                  
                  (2,974
                  )Share-based
      compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  170
                  
                  
                  
                  
                  
                  
                  
                  170Balances
      at December 31, 2006
                  
                  
                  29,491,409
                  
                  
                  $
                  5,898
                  
                  
                  $
                  -
                  
                  
                  $
                  39,296
                  
                  
                  $
                  (45,614
                  )
                  
                  $
                  (420
                  )Net
      loss for the year
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,041
                  )
                  
                  
                  (3,041
                  )Stock
      options exercised
                  
                  
                  75,000
                  
                  
                  
                  15
                  
                  
                  
                  
                  
                  
                  
                  (7
                  )
                  
                  
                  
                  
                  
                  
                  8Warrants
      issued
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21
                  
                  
                  
                  
                  
                  
                  
                  21Share-based
      compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  97
                  
                  
                  
                  
                  
                  
                  
                  97Balances
      at December 31, 2007
                  
                  
                  29,566,409
                  
                  
                  $
                  5,913
                  
                  
                  $
                  -
                  
                  
                  $
                  39,407
                  
                  
                  $
                  (48,655
                  )
                  
                  $
                  (3,335
                  )





The
accompanying notes are an integral part of these financial
statements.





22




Statements
of Cash Flows


Integral
Vision, Inc.





Year Ended December 312007
                                          
                                          
                                          2006(in thousands)Cash
      Flows From Operating Activities:Net
      loss
                                          
                                          $
                                          (3,041
                                          )
                                          
                                          $
                                          (2,974
                                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                          
                                          
                                          70
                                          
                                          
                                          
                                          48Amortization
                                          
                                          
                                          11
                                          
                                          
                                          
                                          48Equipment
      abandonment loss
                                          
                                          
                                          16
                                          
                                          
                                          
                                          -Warrants
      issued in settlement of interest
                                          
                                          
                                          21
                                          
                                          
                                          
                                          -Warrants
      issued in settlement of interest for related parties (see Note
      D)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Share-based
      compensation
                                          
                                          
                                          97
                                          
                                          
                                          
                                          170Changes
      in operating assets and liabilities:Accounts
      receivable
                                          
                                          
                                          (54
                                          )
                                          
                                          
                                          56Inventories
                                          
                                          
                                          117
                                          
                                          
                                          
                                          (172
                                          )Other
      current assets
                                          
                                          
                                          22
                                          
                                          
                                          
                                          (17
                                          )Accounts
      payable and other current liabilities
                                          
                                          
                                          116
                                          
                                          
                                          
                                          108Net
      cash used in operating activities
                                          
                                          
                                          (2,625
                                          )
                                          
                                          
                                          (2,733
                                          )Cash
      Flows From Investing Activities:Purchase
      of property and equipment
                                          
                                          
                                          (35
                                          )
                                          
                                          
                                          (49
                                          )Additional
      patent expenditures
                                          
                                          
                                          (8
                                          )
                                          
                                          
                                          (12
                                          )Net
      cash used in investing activities
                                          
                                          
                                          (43
                                          )
                                          
                                          
                                          (61
                                          )Cash
      Flows From Financing Activities:Proceeds
      from sale of Class 2 Notes-net
                                          
                                          
                                          491
                                          
                                          
                                          
                                          50Proceeds
      from sale of Class 2 Notes from related parites (see Note
    D)
                                          
                                          
                                          2,184
                                          
                                          
                                          
                                          300Payments
      of Class 2 Notes to related parties (see Note D)
                                          
                                          
                                          (61
                                          )
                                          
                                          
                                          -Proceeds
      from exercise of stock options
                                          
                                          
                                          8
                                          
                                          
                                          
                                          -Net
      cash provided by financing activities
                                          
                                          
                                          2,622
                                          
                                          
                                          
                                          350Decrease
      in cash
                                          
                                          
                                          (46
                                          )
                                          
                                          
                                          (2,444
                                          )Cash
      at beginning of  year
                                          
                                          
                                          57
                                          
                                          
                                          
                                          2,501Cash
      at end of year
                                          
                                          $
                                          11
                                          
                                          
                                          $
                                          57Supplemental
      cash flows information:Interest
      paid
                                          
                                          $
                                          30
                                          
                                          
                                          $
                                          30Supplemental
      noncash investing activity:Reclassification
      of inventory to equipment
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          153





The
accompanying notes are an integral part of these financial
statements.




23




Notes
to Financial Statements


Integral
Vision, Inc.





Note A –
Nature of Business




Integral
Vision, Inc. develops, manufactures, and markets flat panel display inspection
systems to ensure product quality in the display manufacturing
process.  We primarily inspect Microdisplays and small flat panel
displays, though the technology used is scalable to allow inspection of full
screen displays and components.  Our customers and potential customers
are primarily large companies with significant investment in the manufacture of
displays.  Nearly all of our sales originate in the United States,
Asia, or Europe.  Our products are generally sold as capital
goods.  Depending on the application, display inspection systems have
an indefinite life and are more likely to require replacement due to possible
technological obsolescence than from physical wear.




During
the period ended March 31, 2006, we began activity associated with a product
development agreement where we are compensated for a portion of our development
costs for a certain best efforts product development. We may not be able to find
future opportunities similar to this, but remain open to such development
agreements where they facilitate our strategic goals.





Major
Customers




The
nature of our product offerings may produce sales to one or a limited number of
customers in excess of 10% of total net sales in any one year.  It is
possible that the specific customers reaching this threshold may change from
year to year.  Loss of any one of these customers could have a
material impact on our results of operations.  For 2007, sales to
Qualcomm MEMS Technologies, Samsung, Liquavista B.V., and Texas Instruments
represented 31%, 24% 14%, and 10% of net sales,
respectively.  Approximately $50,000 was due from two of these
customers at December 31, 2007.  For 2006, sales to Qualcomm MEMS
Technologies, Texas Instruments, Energy Conversion Devices, and DuPont
represented 31%, 21%, 21% and 14% of net sales, respectively. There were no
amounts due from these customers at December 31, 2006.




Note B -
Summary of Significant Accounting Policies




Use
of Estimates




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




Cash
Equivalents





Cash and
cash equivalents consist primarily of cash on deposit, certificates of deposit,
money market accounts, and investment grade commercial paper that are readily
convertible into cash and purchased with original maturities of three months or
less.




Accounts
Receivable




Trade
accounts receivable during the year primarily represent amounts due from
equipment manufacturers and end-users in North America, Asia and
Europe.  At times we maintain an allowance for the inability of our
customers to make required payments. These estimates are based on historical
data, the length of time the receivables are past due and other known
factors.  An allowance for doubtful accounts was not required at
December 31, 2007.




Inventories




Inventories
are stated at the lower of first-in, first-out (“FIFO”) cost or
market.  Cost is computed using currently adjusted standards which
approximates actual costs on a FIFO basis.  We assesses the
recoverability of all inventory to determine whether adjustments for impairment
are required.  At December 31, 2007 inventories consisted of the
following amounts (net of an obsolescence allowance of $79,000 in
2007):




24




2007(in thousands)Raw
      materials
                        
                        $
                        265Work
      in process
                        
                        
                        -Finished
      goods
                        
                        
                        -$
                        265




We
periodically perform an analysis of our 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, we discontinued
certain product lines and attempted to liquidate the remaining inventory related
to those product lines.




Property
and Equipment




Property
and equipment is stated on the basis of cost.  Expenditures for normal
repairs and maintenance are charged to operations as incurred.




Depreciation
is computed by the straight-line method based on the estimated useful lives of
the assets (building improvements-40 years, other property and equipment-3 to 10
years).




Capitalized
Computer Software Development Costs




Computer
software development costs are capitalized after the establishment of
technological feasibility of the related technology.  These costs are
amortized following general release of products based on current and estimated
future revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of the
product (not to exceed 5 years).  We continually review the net
realizable value of capitalized software costs.  At the time that a
determination is made that capitalized software amounts exceed the estimated net
realizable value of amounts capitalized, any amounts in excess of the estimated
realizable amounts are written off.




No
software development costs were capitalized during 2007.  Amortization
of the costs capitalized prior to 2003 amounted to $0 and $38,000 in 2007 and
2006, respectively.  These costs were primarily made up of payroll,
fringe benefits, and other direct expenses such as facilities
allocation.  The software amortized over the period is tour
microdisplay inspection software toolbox including vision processing algorithms
and our patented sequence development and execution software.  These
software components are used in the products we sell.




Patents




Total
patent costs incurred and capitalized were $8,000 and $12,000 in 2007 and 2006,
respectively.  Patents are stated at cost less accumulated
amortization.  Amortization of the patents amounted to $11,000 and
$9,000 in 2007 and 2006, respectively.  These costs are amortized on a
straight-line basis over the estimated useful lives of the assets (not to exceed
5 years).





Impairment
of Long-lived Assets




We review
our long-lived assets, including property, equipment and intangibles, for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. An impairment
loss would be recognized when estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition are less than
the carrying amount of the asset.





Deferred
Revenue





Deferred
revenue represents amounts periodically invoiced for sales orders in excess of
amounts recognized as revenues. At December 31, 2007 there was no deferred
revenue.





25




Fair
Value of Financial Instruments





Our
financial instruments are cash and cash equivalents, accounts receivable,
accounts payable, notes payable, and long-term debt. The recorded values of cash
and cash equivalents, accounts receivable, and accounts payable approximate
their fair values based on their short-term nature. The recorded values of notes
payable and long-term debt approximate their fair values, as interest
approximates market rates.




Revenue
Recognition




We
recognize revenue in accordance with SOP 97-2, Software Revenue Recognition,
Staff Accounting Bulletin No. 101 (“SAB 101”), and Staff Accounting Bulletin No.
104 (“SAB 104”) Revenue Recognition in Financial Statements. Revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectibility is reasonably assured.




We
recognize revenue at the time of shipment for product sales where the customer’s
acceptance criteria can be demonstrated as met prior to shipment and where title
transfers on shipment.  We recognize revenue at the time of final
acceptance at the customer site when title does not transfer on shipment or if
acceptance criteria at the customer site are substantially different than
acceptance criteria for shipment.  We recognize revenue for product
sales with no specific customer acceptance criteria, including spare parts, on
shipment.  Revenue from service contracts is recognized over the term
of the contract.  Revenue is reported net of sales commissions and was
$67,000 and $24,000 in 2007 and 2006, respectively.




Revenue
is also derived through business agreements for product
development.  We conduct specified product development projects
related to one of our principal technology specializations for an agreed-upon
fee.  Typically the agreements require “best efforts” with no
specified performance criteria.  Revenue from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs.  Generally, the
agreed-upon fees contemplate reimbursing us, after our agreed-upon cost share if
any, for costs considered to be associated with project
activities.  These include expenses for direct product development and
research, operating expenses, general and administrative expenses, and
depreciation.  Accordingly, expenses related to product development
agreements are recorded as cost of revenues from product development
agreements.




Allocations
of General and Administrative Costs and Engineering Costs




We
allocate a portion of general and administrative expense and a portion of
engineering and product development expense to cost of sales from product
development agreements based on a percentage of direct labor
costs.  These allocations are limited to the amount of revenues, after
direct expenses, under the applicable agreements.




The
following is a summary of the allocations made for the year ended December
31:




2007
                      
                      
                      2006(in thousands)Gross
      G&A Expense
                      
                      $
                      1,335
                      
                      
                      $
                      1,288Less
      allocation to cost of  sales from product development
      agreements
                      
                      
                      (8
                      )
                      
                      
                      (38
                      )Remaining
      G&A Expense
                      
                      $
                      1,327
                      
                      
                      $
                      1,250





2007
                      
                      
                      2006(in thousands)Gross
      Engineering and Development Expense
                      
                      $
                      1,166
                      
                      
                      $
                      1,351Less
      allocation to cost of  sales from product development
      agreements
                      
                      
                      (20
                      )
                      
                      
                      (137
                      )Remaining
      Engineering and Development Expense
                      
                      $
                      1,146
                      
                      
                      $
                      1,214




26




Concentrations
of Credit and Other Risk




Financial
instruments that potentially subject us to concentrations of credit risk consist
principally of accounts receivable.  A significant portion of our
customers are located in Asia, primarily Taiwan and Korea, and in Europe.
Therefore, our sales to these countries may be adversely affected by the overall
health of these economies, including the effects of currency exchange rate
fluctuations and political risks.  We generally do not require
collateral for most of our trade accounts receivable. For sales to some of our
customers in certain geographic regions, we  require letters of
credit. Substantially all of our revenue is invoiced in U.S. dollars. For 2007,
sales to four of the Company’s customers represented 79% of our total net
revenue.  We believe our credit evaluation and monitoring mitigates
our credit risk.




Advertising




Advertising
costs are expensed as incurred.  Advertising costs were approximately
$14,000 and $58,000 in 2007 and 2006, respectively.




Shipping
and Handling Costs




Our
shipping and handling costs are included in cost of sales for all periods
presented.




Income
Taxes




We
account for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes(“SFAS 109”), which requires the use of the liability method in
accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities
are measured based on differences between the financial reporting and tax bases
of assets and liabilities using enacted tax rates and laws that will be in
effect when differences are expected to reverse.  The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.  A valuation
allowance is provided for net deferred tax assets if it is more likely than not
that these items will either expire before we are able to realize their benefit,
or future deductibility is uncertain.  All deferred tax assets are
offset by a valuation allowance.





Common
Stock Options





We
account for our share-based compensation plans according to the provisions of
SFAS 123R. Accordingly, compensation costs attributable to stock options or
similar equity instruments granted are measured at the fair value at the grant
date, and expensed over the expected vesting period.  SFAS 123R
requires excess tax benefits be reported as a financing cash inflow rather than
as a reduction of taxes paid




Foreign
Currency Transactions




Most
sales are made in US dollars.  Occasionally a sale or purchase may be
made in Euros or Japanese Yen.  Any transaction gains and losses are
reflected in operating results and are generally not significant.




Reclassifications




Certain
amounts have been reclassified in prior periods’ presentations to conform to the
current year's presentation.




Contingencies
and Litigation




We make
an assessment of the probability of an adverse judgment resulting from current
and threatened litigation. We accrue the cost of an adverse judgment if, in our
estimation, an adverse settlement is probable and management can reasonably
estimate the ultimate cost of such litigation.  We had no such
accruals at December 31, 2007.




27




Recently
Issued Accounting Standards





On
January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN
48”). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. There was no effect on our financial
position, results of operations or cash flows as a result of adopting FIN
48.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this statement does not require any new fair
value measurements. SFAS No. 157 is effective January 1, 2008 for financial
assets and liabilities and January 1, 2009 for non-financial assets and
liabilities. We are currently evaluating the effect, if any, of this statement
on our financial condition and results of operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be carried at fair
value. SFAS No. 159 does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS No. 157 and SFAS No. 107, “Disclosures about Fair
Value of Financial Instruments.” SFAS No. 159 is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. We will
adopt SFAS No. 159 on January 1, 2008 and do not anticipate adoption to
materially impact our financial position or results of operations.





In
December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations”
(“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business Combinations,” and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions. This
statement also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair
values. SFAS No. 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or to confirm the guidance in
that literature to that provided in this statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We expect to adopt this statement on January 1, 2009. SFAS
No. 141(R)’s impact on accounting for business combinations is dependent upon
acquisitions at that time.





In
December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements,” which amends Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. SFAS No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
non-controlling interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any non-controlling equity
investment. The statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. This statement applies
prospectively to all entities that prepare consolidated financial statements and
applies prospectively for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We are currently evaluating the
effect, if any, of this statement on our financial condition and results of
operations





28




Note C -
Long-Term Debt and Other Financing Arrangements




The Board
of Directors at various meetings during 2007 authorized increases in the
allowable outstanding balance of Class 2 Notes to the present total of
$3,622,000.  From November 2006 through December 31, 2007, we have
issued $2,964,000 of Class 2 Notes to fund operations leaving a balance of
$658,000 of Class 2 Notes available to be issued in future periods.





Class 2
notes have been issued primarily to related parties.   The issued
Notes have a maturity date of April 30, 2008.  See Note O – Going
Concern in the Notes to Condensed Financial Statements for activity associated
with the maturity date of the Notes.  See Note P – Subsequent Events
in the Notes to Condensed Financial Statements for recent activity associated
with the issuance of Class 2 Notes.





The terms
of the 5th Amended
Note and Warrant Purchase agreement have been amended and or modified at various
dates during 2007 and 2008 to affect the following:





1)
            Grant
      the holders of Class 2 Notes the right to participate in future equity
      financings up to the face amount of their respective
  Notes.


2)
            Issue
      warrants accrued on Class 2 Notes through July 30, 2007 if requested. The
      number of warrants requested by and issued to the Class 2 Note Holders was
      335,545. The value of the warrants issued was $21,118 as determined using
      the Black-Scholes option-pricing
model.


3)
            Allow
      Class 2 Note Holders to elect to receive accrued Class 2 warrants at the
      time they amend their notes and once each
  quarter.


4)
            Extend
      the maturity date to April 30,
2008.





The Class
2 Notes are working capital notes and are secured by accounts receivable,
inventory, and intellectual property.  The purchasers of Class 2 Notes
receive 10% interest and the option to earn either warrants for the purchase of
our common stock or additional interest at the annual rate of 2% for the period
such Notes were outstanding.  Class 2 Warrants entitle the holder to
purchase one share of common stock for each $1 in value of the Class 2 Note
multiplied by a fraction, the numerator of which is the number of days such
Class 2 Note is outstanding and the denominator of which is 365.  The
Board of Directors has approved a $1.60 strike price for the
warrants.  The antidilution terms of the warrants earned provide for
the conversion price on the warrants to be reduced to the price of new
securities sold, but not lower than $0.25, resulting in significant reduction of
the amount of funds that will be realized by the Company in the event of an
exercise of the warrants at current market prices.  As of December 31,
2007, the note holders had earned 1,795,327  warrants of which
1,459,782 had not been issued.  See Note P – Subsequent Events in the
Notes to Condensed Financial Statements for recent activity associated with the
issuance of Class 2 Notes.





As of
December 31, 2007, we had $378,000 in outstanding Class 3 Notes payable that are
convertible into our common stock at $1.00 per share.  The Notes are
due April 30, 2008, and interest is paid semi-annually at 8%. The Class 3 Notes
are secured by our intellectual property. The antidilution terms of the Class 3
Notes provide for their conversion price to be reduced to the price of new
securities sold, but not lower than $0.25, which could result in an increase in
the number of shares that would be realized by the noteholders in the event of a
conversion of the notes if new capital is raised using equity at current market
prices. See Note P – Subsequent Events in the Notes to Condensed Financial
Statements for recent activity associated with the Class 3 Notes.





29




A summary
of the Company’s debt obligations is as follows as of December 31:




2007
                      
                      
                      2006(in thousands)Long
      Term Debt:Class
      3 Notes
                      
                      $
                      -
                      
                      
                      $
                      378Net
      Long Term Debt
                      
                      $
                      -
                      
                      
                      $
                      378Short
      Term Debt:Class
      2 Notes
                      
                      $
                      2,964
                      
                      
                      $
                      350Class
      3 Notes
                      
                      $
                      378
                      
                      
                      $
                      -Total
      Short Term Debt
                      
                      $
                      3,342
                      
                      
                      $
                      350




Interest
paid in 2007 was approximately $30,000 compared to interest expensed of
$230,000.  The $200,000 difference primarily represents amounts
accrued and unpaid.  Interest paid in 2006 was approximately $30,000
compared to interest expensed of $32,000.




Note D -
Related Party Transactions





The
portion of debt described in Note C above that has been issued to Directors and
to certain shareholders that own more than five percent (5%) of the outstanding
shares of common stock of the Company is disclosed in the table
below.




Greater than 5% shareholder
                                                      
                                                      
                                                      DirectorJohn Hunter
                                                      
                                                      
                                                      John R. Kiely, III.
                                                      
                                                      
                                                      Max A. Coon
                                                      
                                                      
                                                      TotalOutstanding
      balance as of December 31, 2007Class
      2
                                                      
                                                      $
                                                      1,184,000
                                                      
                                                      
                                                      $
                                                      1,050,000
                                                      
                                                      
                                                      $
                                                      250,000Class
      3
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Total
                                                      
                                                      $
                                                      1,184,000
                                                      
                                                      
                                                      $
                                                      1,050,000
                                                      
                                                      
                                                      $
                                                      250,000
                                                      
                                                      
                                                      $
                                                      2,484,000Amount
      of principal paid during year2007
                                                      
                                                      $
                                                      61,000
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -2006
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Amount
      of interest paid during yearCash
      2007
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Notes
      issued in payment of interest 2007
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Value
      of warrants issued 2007
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      14,099
                                                      
                                                      
                                                      $
                                                      -Total
      2007
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      14,099
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      14,099Cash
      2006
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Notes
      issued in payment of interest 2006
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Value
      of warrants issued 2006
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Total
      2006
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Accrued
      interest at December 31Cash
      2007
                                                      
                                                      $
                                                      69,200
                                                      
                                                      
                                                      $
                                                      59,292
                                                      
                                                      
                                                      $
                                                      20,479Value
      of warrants accrued not issued 2007
                                                      
                                                      $
                                                      726
                                                      
                                                      
                                                      $
                                                      388
                                                      
                                                      
                                                      $
                                                      215Total
      2007
                                                      
                                                      $
                                                      69,926
                                                      
                                                      
                                                      $
                                                      59,680
                                                      
                                                      
                                                      $
                                                      20,694
                                                      
                                                      
                                                      $
                                                      150,300Cash
      2006
                                                      
                                                      $
                                                      1,089
                                                      
                                                      
                                                      $
                                                      519
                                                      
                                                      
                                                      $
                                                      -Value
      of warrants accrued not issued 2006
                                                      
                                                      $
                                                      2,524
                                                      
                                                      
                                                      $
                                                      1,203
                                                      
                                                      
                                                      $
                                                      -Total
      2006
                                                      
                                                      $
                                                      3,613
                                                      
                                                      
                                                      $
                                                      1,722
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      5,335




Interest
expense for the fiscal year ended December 31, 2007 was $230,000, for which
$141,710 and $20,479 were for related parties and Directors,
respectively.  Interest expense for the fiscal year ended December 31,
2006 was $32,000, for which $2,000 and $0 were for related parties and
Directors, respectively.




30
 
  For more
information on Class 2 and Class 3 notes, see Note C – Long Term Debt and Other
Financing.
 
 Maxco,
Inc. provided consulting services to the Company through June of
2006.  These services, which are no longer required, included
assistance with financial statement preparation, compliance with governmental
filing requirements, and assistance with certain financing
arrangements.  The Company and Maxco agreed on terms for payment for
these services resulting in charges to operations of $6,960 in
2006.


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, 2007, the Company has cumulative net operating loss carryforwards
approximating $48.0 million (expiring: $6.9 million in 2010, $3.9 million in
2011, $3.8 million in 2012, $2.3 million in 2018, $6.6 million in 2020, $1.9
million in 2021, $5.7 million in 2022, $5.5 million in 2023, $2.7 million in
2024, $2.7 million in 2025, $2.9 million in 2026 and $3.0 million in 2027) for
federal income tax purposes available to reduce taxable income of future periods
and unused investment, alternative minimum tax, and research and development tax
credits approximating $331,000.  Additionally, the Company’s inactive
subsidiary in the United Kingdom has cumulative net operating loss carryforwards
approximating $3.8 million that do not expire.  For financial
reporting purposes, the net operating losses and credits have been offset
against net deferred tax liabilities based upon their expected amortization
during the loss carryforward period.  The remaining valuation
allowance is necessary due to the uncertainty of future income
estimates.  The valuation allowance increased $989,000 in 2007 and
$957,000 in 2006.




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:




2007
                              
                              
                              2006(in thousands)Deferred
      tax liabilities:Tax
      depreciation
                              
                              $
                              20
                              
                              
                              $
                              -Total
      deferred tax liabilities
                              
                              
                              20
                              
                              
                              
                              -Deferred
      tax assets:Net
      operating loss carryforwards
                              
                              
                              16,301
                              
                              
                              
                              15,294Credit
      carryforwards
                              
                              
                              331
                              
                              
                              
                              331Inventory
      reserve
                              
                              
                              27
                              
                              
                              
                              27Warranty
      reserve
                              
                              
                              28
                              
                              
                              
                              17Other
                              
                              
                              103
                              
                              
                              
                              113Total
      deferred tax assets
                              
                              
                              16,790
                              
                              
                              
                              15,782Valuation
      allowance for deferred tax assets
                              
                              
                              16,770
                              
                              
                              
                              15,782Net
      deferred tax assets
                              
                              
                              20
                              
                              
                              
                              -Net
      deferred taxes
                              
                              $
                              -
                              
                              
                              $
                              -




The
reconciliation of income taxes computed at the U.S. federal statutory tax rates
to income tax expense (credit) is as follows for the years ended December
31:




31




2007
                        
                        
                        2006(in thousands)Net
      income (loss)
                        
                        $
                        (3,041
                        )
                        
                        $
                        (2,974
                        )Foreign
      net income (loss)
                        
                        
                        -
                        
                        
                        
                        -U.S.
      net income (loss)
                        
                        $
                        (3,041
                        )
                        
                        $
                        (2,974
                        )Tax
      provision (benefit) at U.S. statutory rates
                        
                        $
                        (1,034
                        )
                        
                        $
                        (1,011
                        )Change
      in valuation allowance
                        
                        
                        989
                        
                        
                        
                        957Nondeductible
      expenses
                        
                        
                        45
                        
                        
                        
                        54$
                        -
                        
                        
                        $
                        -




There
were no income tax payments made in 2007 or 2006.





On
January 1, 2007, we adopted the provisions of Financial Accounting Standards
Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”), an interpretation of FASB Statement No. 109 (“SFAS 109”).  There
was no impact on our financial statements upon adoption.  Because of
our historical significant net operating losses, we have not been subject to
income taxes since 1995.  There were no unrecognized tax benefits
during  the periods presented.





We
classify all interest and penalties as income tax expense.  We did not
have any accrued interest and penalties related to uncertain tax positions as of
December 31, 2007.





We file
income tax returns in the United States federal jurisdiction and various state
jurisdictions.  The tax years 2003 through 2006 remain open to
examination by taxing jurisdictions to which we are subject.  As of
December 31, 2007, we did not have any tax examinations in process.




Note F –
Loss per Share




Basic net
loss per common share is computed by dividing net loss applicable to common
shareholders by the weighted-average number of common shares outstanding during
the year. Diluted net loss per common share is determined using the
weighted-average number of common shares outstanding during the year, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon the exercise of common stock options and purchase
warrants.


2007
                
                
                2006(in thousands, except per share data)Numerator
      for basic and diluted loss per share - loss available to common
      stockholdersNet
      loss
                
                $
                (3,041
                )
                
                $
                (2,974
                )*there
      was no effect of dilutive securities, see belowDenominator
      for basic and diluted loss per share - weighted average
    shares
                
                
                29,534
                
                
                
                29,491*there
      was no effect of dilutive securities, see belowBasic
      and diluted loss per share:Net
      loss
                
                $
                (0.10
                )
                
                $
                (0.10
                )





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




32


Note G -
Employee Savings Plan




We have
an Employee Savings Plan covering substantially all employees.  We
contribute $.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 our Board of
Directors.  The contributions we charged to operations under the Plan
were approximately $12,000 and $13,000 for 2007 and 2006,
respectively.




Note H –
Lease Commitments and Contingencies




We use
equipment and office space under operating lease agreements requiring rental
payments approximating $104,000 in 2008, $102,000 in 2009, and $103,000 in
2010.  Rent expense charged to operations approximated $104,000 and
$99,000 in 2007 and 2006, respectively.




Note I –
Share-Based Compensation





We
currently have two active stock option plans, the 1999 and the 2004 stock option
plans ( the “Plans”) which provide for options that may be granted to eligible
employees, officers and directors of Integral Vision. We reserved 1,500,000
shares for future issuance under the Plans.  As of December 31, 2007,
there remained 99,000 shares which can be issued under the Plans.





The
purpose of the Plans generally is to retain and attract persons of appropriate
education, experience and ability to serve as our employees, to encourage a
sense of proprietorship of such persons, and to stimulate an active interest in
our development and financial success.





The Plans
are administered by the Compensation Committee of the Board of Directors (the
“Committee”).  The Committee determines which eligible employees will
receive awards, the timing and manner of the grant of such option awards, the
exercise price of the stock options (which may not be less than market value on
the date of grant) and the number of shares.  We may at any time amend
or terminate the Plans, however no amendment that would impair the rights of any
participant with respect to outstanding grants can be made without the
participant’s prior consent.





We
granted 475,000 options to employees during 2007.  210,000 options
were granted to employees during 2006.  See Note P Subsequent Events
for activity associated with stock options since January 1, 2008.





The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model with the assumptions noted in the following
table. The fair value of all awards is amortized on a straight line basis over
the requisite service periods.  The expected life of all awards
granted represents the period of time that they are expected to be
outstanding.  The expected life is determined using historical and
other information available at the time of grant.  Expected
volatilities are based on historical volatility of our common stock, and other
factors.  The risk-free rate for periods within the contractual life
of the option is based on the U.S. Treasury yield curve in effect at the time of
grant.  We use historical data to estimate pre-vesting option
forfeitures.





Year Ended December 312007
                      
                      
                      2006(in thousands)Expected
      Life (in years)
                      
                      
                      6.0
                      
                      
                      
                      6.0Expected
      volatility
                      
                      
                      77.70
                      %
                      
                      
                      82.7
                      %Risk-free
      interest rate
                      
                      
                      4.11
                      %
                      
                      
                      4.90
                      %Expected
      dividend yield
                      
                      
                      0
                      %
                      
                      
                      0
                      %Expected
      forfeiture rate
                      
                      
                      0
                      %
                      
                      
                      0
                      %





A summary
of option activity under all plans for the years ended December 31, 2007, and
2006 follows:




33




2007
                                                  
                                                  
                                                  2006Shares
                                                  
                                                  
                                                  Weighted
                                                    Average
                                                    Exercise Price
                                                  
                                                  
                                                  Shares
                                                  
                                                  
                                                  Weighted
                                                    Average
                                                    Exercise Price(number of shares in thousands)Outstanding
      at January 1
                                                  
                                                  
                                                  1,309
                                                  
                                                  
                                                  $
                                                  0.95
                                                  
                                                  
                                                  
                                                  1,114
                                                  
                                                  
                                                  $
                                                  0.97Granted
                                                  
                                                  
                                                  475
                                                  
                                                  
                                                  
                                                  0.36
                                                  
                                                  
                                                  
                                                  210
                                                  
                                                  
                                                  
                                                  0.60Exercised
                                                  
                                                  
                                                  (75
                                                  )
                                                  
                                                  
                                                  0.10
                                                  
                                                  
                                                  
                                                  0
                                                  
                                                  
                                                  
                                                  0.00Expired
                                                  
                                                  
                                                  (213
                                                  )
                                                  
                                                  
                                                  1.53
                                                  
                                                  
                                                  
                                                  (15
                                                  )
                                                  
                                                  
                                                  6.25Outstanding at
      December 31($.10
      to $1.71 per share)
                                                  
                                                  
                                                  1,496
                                                  
                                                  
                                                  $
                                                  0.71
                                                  
                                                  
                                                  
                                                  1,309
                                                  
                                                  
                                                  $
                                                  0.95Exercisable
      ($.10 to $1.71 per share)
                                                  
                                                  
                                                  846
                                                  
                                                  
                                                  $
                                                  0.80
                                                  
                                                  
                                                  
                                                  1,099
                                                  
                                                  
                                                  $
                                                  0.90




A summary
of the status of our nonvested shares as of December 31, 2007, and changes
during year ended December 31, 2007, is presented below:




Shares
                
                
                Weighted
                  AverageGrant-DateFair
                  ValueExercise
                  PriceNonvested
      at January 1, 2007
                
                
                210,000
                
                
                $
                0.77Granted
                
                
                475,000
                
                
                
                0.36Forfeited
                
                
                (35,000
                )
                
                
                0.77Vested
                
                
                0
                
                
                
                0.00Nonvested
      at December 31, 2007
                
                
                650,000
                
                
                $
                0.47




The
weighted average grant date fair value of options granted during 2007 and 2006
was $0.36 and $0.77, respectively.




The
following table summarizes share-based compensation expense for the years ended
December 31, 2007 and 2006 related to share-based awards under SFAS No. 123R as
recorded in the statement of operations in the following expense
categories:





2007
                        
                        
                        2006(in
      thousands)Marketing
                        
                        $
                        29
                        
                        
                        $
                        33Engineering
      and Development
                        
                        
                        38
                        
                        
                        
                        94General
      and Administrative
                        
                        
                        30
                        
                        
                        
                        43Total
      share-based compensation expense
                        
                        $
                        97
                        
                        
                        $
                        170





The
Compensation Committee of the Board of Directors modified the terms of the May
16, 2006 option award program.  The modification which was effective
October 24, 2006 changed the exercise price from $1.50 top $0.60 per share and
changed the vesting period from one year to two years.





The
financial statement impact of the modifications, which was determined in
accordance with SFAS 123R, increased the award program cost by
$18,792.  This amount added to the unrecognized cost of $144,910 from
the original option award program totaled $163,702 and will be recognized
ratably as compensation cost over the vesting period from October 24, 2006
through May 18, 2008





34


As of
December 31, 2007, we had $110,169 of unrecognized expense related to un-vested
share-based compensation which will be recognized ratably as compensation
expense over the remaining vesting period from January 1, 2008 through
September, 2008.





Additional
information regarding the range of exercise prices and weighted average
remaining life of options outstanding at December 31, 2007 follows:




Range
      of
                          Exercise
      Prices
                        
                        Number
                          Outstanding
                        
                        
                        Weighted
                          Average
                          Remaining
      Life
                        
                        
                        Number
                          Exercisable(number
      of shares in thousands)$.10
      to $.60
                        
                        
                        1,009
                        
                        
                        
                        7.6
                        
                        
                        
                        359$1.03
      to $1.71
                        
                        
                        487
                        
                        
                        
                        5.3
                        
                        
                        
                        487$.10
      to $1.71
                        
                        
                        1,496
                        
                        
                        
                        6.8
                        
                        
                        
                        846





A summary
of the outstanding warrants, options, and shares available upon the conversion
of debt at December 31, 2007 is as follows:





Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Number
                          Outstanding
                        
                        
                        Weighted
                          Average
                          Remaining
                          Life
                        
                        
                        Number
                          Exercisable(number
      of shares in thousands)Warrants
                        
                        $
                        1.60
                        
                        
                        
                        3,500
                        
                        
                        
                        2.28
                        
                        
                        
                        3,500Class
      2 Notes
                        
                        $
                        1.31
                        
                        
                        
                        657
                        
                        
                        
                        2.43
                        
                        
                        
                        657Class
      3 Notes
                        
                        $
                        1.00
                        
                        
                        
                        378
                        
                        
                        
                        0.25
                        
                        
                        
                        3781995
      Employee Stock Option Plan
                        
                        $
                        0.54
                        
                        
                        
                        312
                        
                        
                        
                        3.08
                        
                        
                        
                        3121999
      Employee Stock Option Plan
                        
                        $
                        0.28
                        
                        
                        
                        205
                        
                        
                        
                        4.53
                        
                        
                        
                        2052004
      Employee Stock Option Plan
                        
                        $
                        0.78
                        
                        
                        
                        979
                        
                        
                        
                        8.52
                        
                        
                        
                        329$
                        1.30
                        
                        
                        
                        6,031
                        
                        
                        
                        3.30
                        
                        
                        
                        5,381




Note J –
Contingencies and Litigation




Product
Warranties





We
provide standard warranty coverage for most of our products, generally for one
year from the date of customer acceptance. We record a liability for estimated
warranty claims based on historical claims and other factors. We review these
estimates on a regular basis  and adjust the warranty reserves as
actual experience differs from historical estimates or other information becomes
available. This warranty liability primarily includes the anticipated cost of
materials, labor and travel, and shipping necessary to repair and service the
equipment.





The
following table illustrates the changes in our warranty liability for the years
ended December 31, 2007 and 2006:




35





2007
                          
                          
                          2006(in
      thousands)Balance
      as of January 1
                          
                          $
                          49
                          
                          
                          $
                          77Charges/(credits)
      to expense
                          
                          
                          40
                          
                          
                          
                          (12
                          )Utilization/payment
                          
                          
                          (7
                          )
                          
                          
                          (16
                          )Balance
      as of December 31
                          
                          $
                          82
                          
                          
                          $
                          49




Note K –
Operations by Geographic Area




Statement
of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments
of an Enterprise and Related Information established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders.  It also established standards for related
disclosures about products and services, and geographic
areas.  Operating segments are defined as components of the enterprise
about which separate financial information is available that is evaluated
regularly by management in deciding how to allocate resources and in assessing
performance.




We are
engaged in one business segment, vision-based inspection
products.  The following presents information by geographic
area.




Year
      Ended December 312007
                            
                            
                            2006(in
      thousands)Net
      revenues by geographic area:North
      America
                            
                            $
                            528
                            
                            
                            $
                            835Europe
                            
                            
                            166
                            
                            
                            
                            -Asia
                            
                            
                            457
                            
                            
                            
                            -$
                            1,151
                            
                            
                            $
                            835




*
Geographic areas that are considered individually material are listed (more than
10% of net revenues), all others are included in North America and in total are
considered immaterial.




Note L –
Royalty Payments Received




The
Company received approximately $23,000 and $36,000 in royalties in 2007 and
2006, respectively.




Note M –
Capitalized Software Costs




Management
has focused its development, sales and marketing efforts on the Company’s
inspection systems for the flat panel display (FPD)
industry.  Industry sources indicate that this market will be
substantial once fully developed.  The Company has developed
inspection solutions for the leading technologies used in the FPD industry
including liquid crystal on silicon (LCOS), organic light emitting diodes (OLED
and PolyOLED), electroluminescent (EL), high temperature polysilicon (HTPS), low
temperature polysilicon (LTPS), liquid crystal display (LCD), and
microelectromechanical systems (MEMS).




Management
periodically performs an analysis of the net realizable value of capitalized
software costs.




Note N –
Market for the Company’s Common Stock




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




36


Note O –
Going Concern Matters




The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.  As shown in the financial
statements, we incurred losses from operations in the the years of 2007 and 2006
of $3.0 million and $3.0 million, respectively.  The continuing losses
raise substantial doubt about our ability to continue operating as
a going concern.





We are
currently working with a number of large customers who are using our
technologies to evaluate their microdisplay production or are evaluating our
technology for the inspection of LCD displays and components.  We
expect that additional sales orders will be placed by these customers throughout
2008 and into 2009 provided that markets for these products continue to grow and
the customers continue to have interest in our technology-assisted inspection
systems.  Ultimately, our ability to continue as a going concern will
be dependent on these large companies getting their emerging display technology
products into high volume production and placing sales orders with us for
inspection products to support that production.  However, there can be
no assurance that we will be succesful in securing sales orders sufficient to
continue operating as a going concern.





From
November 2006 through March 26, 2008, we have used $3,464,000 of Class 2 Notes
to fund operations.  All of these Notes mature April 30,
2008.  We need to raise additional funds early in the second quarter
of 2008 in order to sustain operations beyond that time frame.  We
expect that we will need to raise a minimum of $1.6 million to fund operations
through the first quarter of 2009.  We are in ongoing discussions with
the existing Class 2 Note holders and expect the debt will be restructured and
the maturity date will be extended as part of our plan to raise additional
capital in the second quarter of 2008 to fund operations through at least the
first quarter of 2009 and provide working capital for anticipated orders,
however there can be no assurance that will happen.  Additionally,
terms of the 2005 Securities Purchase Agreement provide antidilution protection
for the 3,500,000 warrants outstanding and grant a right to holders of the
6,200,000 outstanding shares of stock purchased at $1.00 per share under the
agreement to swap the stock they purchased for new securities being offered in
the future by the Company if the terms of the new securities are more favorable
to the holders than the terms of the 2005 Securities Purchase
Agreement.  The antidilution protection on the warrants sets the
conversion price of the warrant at the price of the new securities being issued
and increases the total number of shares available under the warrant such that
the total value of the warrant is kept constant.  These terms would
result in significant dilution if securities were sold at current market
prices.  Though there can be no assurance they will be successful,
management expects to negotiate these terms as part of its plan to raise
additional capital in the second quarter of 2008.





For
further information regarding our obligations, see Note C – Long Term Debt and
Other Financing Arrangements and Note P – Subsequent Events in the Notes to
Condensed Financial Statements.





The
financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern.




Note P –
Subsequent Events





Effective
January 2, 2008, certain holders of Class 2 Notes earning 10% interest and
warrants requested that all earned but unissued warrants be issued, resulting in
the issuance of 568,986 warrants with a conversion price of $1.60 per
share.  The value of the warrants issued was $1,191 as valued using
the Black-Sholes option pricing model.  On January 18, 2008, the
Noteholders and managment amended the terms of the existing Note and Warrant
Purchase Agreement to increase the aggregate amount of Notes allowable from
$3,500,000 to $3,700,000.  In January 2008 we sold an additional
$300,000 of Class 2 Notes, bringing the aggegate amount of outstanding Class 2
and Class 3 Notes to $3,642,000.





37


On
January 22, 2008, the Compensation Committee of the Board of Directors approved
the issuance of 129,000 options at $0.13 per share to certain officers of the
Company.  The issuance resulted in an expense of $11,278 which will be
recognized ratably as compensation expense over the one year vesting
period.





On
February 15, 2008, the Compensation Committee of the Board of Directors approved
a plan to offer key employees the oppportunity to surrender certain options in
exchange for replacement options effective February 15, 2008.  The
replacement options “cliff vest” 50% after 1 year and the balance after 2
years.  The program received 100% participation.  The
exchange resulted in an additional expense of $62,995 which will be recognized
ratably as compensation expense over the remaining vesting period from February
15, 2008 to February 15, 2010 along with the remaining $85,438 of unamortized
compensation expense for the unvested portion of the options
exchanged.





On March
12, 2008, the Board and Noteholders approved a 5th Amended
and Restated Note and Warrant Purchase Agreement.  This agreement (i)
increased the total allowable secured debt to $6,000,000; (ii) explicitly
allowed for the exchange of one class of note under the agreement for another
class of note under the agreement; (iii) committed us to request that
shareholders authorize an increase in the number of shares of authorized Common
Stock to 70,000,000; (iv) limits anti-dilution rights the Company can agree to
in future capital raising transactions; (v) prohibits the Company from
committing to issuing securities which exceed or potentially exceed 70,000,000
shares or the current authorized shares, whichever is greater; (vi) limits the
number of shares that can be issued to existing employees while Class 2 debt is
outstanding; (vii) modifies registration rights to take into account new SEC
limitations on registrable shares; (viii) provides for reimbursment of certain
expenses; (ix) explicitly allows notes to be purchased under separate agreements
to a total of $6,000,000 of aggregate secured debt, (x) defers interest payments
on Class 2 Notes until January 1, 2009; and (xi) modifies the conditions for
prepayment of Class 3 Notes.





On March
21, 2008, the Board approved the 2008 Integral Vision, Inc. Equity Incentive
Plan and is requesting that our shareholders ratify the plan.  The
Plan is designed to promote the interests of the Company and its shareholders by
providing a means by which the Company can grant equity-based incentives to
eligible employees of the Company or any Subsidiary as well as non-employee
directors, consultants, or advisors who are in a position to contribute
materially to the Company’s success ("Participants").  The Plan
permits the Compensation Committee of the Company's Board of Directors to grant
Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock, and
Shares.  The maximum number of shares cumulatively available is
4,828,000 plus (i) any shares that are forfeited or remain unpurchased or
undistributed upon termination or expiration of the awards from the Plan or
options from the 2004 Employee Stock Option Plan and (ii) any shares exchanged
as full or partial payment for the exercise price of any award under the
plan.





In March
we sold an additional $200,000 of Class 2 Notes, bringing the aggregate amount
of outstanding Class 2 and Class 3 Notes to $3,842,000.





The
maturity dates of the outstanding Class 2 Notes and Class 3 Notes were extended
on various dates so that all are presently due on April 30,
2008.


38





Corporate
      Officers
                      
                      Corporate
      DirectoryCharles J. Drake, 67, is
      CEO and Chairman of the Board of Integral Vision, Inc.  Mr.
      Drake founded the Company (originally known as Medar) in 1969 and has
      served as Chief Executive Officer since 1978.
                      
                      Corporate
      Headquarters
                        49113
      Wixom Tech Drive
                        Wixom,
      MI 48393
                        +1
      (248) 668-9230
                        +1
      (248) 668-9384 faxMark R. Doede, 50, is
      President, Chief Operating Officer, and Chief Financial Officer of
      Integral Vision Inc.  Mr. Doede has served as an officer since
      1989.
                      
                      Independent
      Auditors
                        Rehmann
      Robson
                        Troy,
      MIGeneral
      CounselJeffrey J. Becker, 46,
      is Senior Vice President of Integral Vision, Inc.
                      
                      J.M.
      Warren Law Offices, P.C.
                        Lansing,
      MIAndrew Blowers, 40, is
      Chief Technical Officer of Integral Vision, Inc.
                      
                      Stock
      Trading
                        Over
      the Counter Bulletin Board (OTCBB)
                        Symbol:  INVIPaul Zink, 42, is Vice
      President ofApplications
      of Integral Vision, Inc.
                      
                      Stock Registrar and Transfer
      Agent
                        Registrar
      and Transfer Company
                        Cranford,
      NJ
                        +1
      (908) 497-2300Board
      of DirectorsForm
      10-KSBCharles
      J. Drake
                        Chairman
      of the Board of Directors, Integral Vision,Inc.
                        Chief Executive Officer, Integral Vision, Inc.
                      
                      Interested
      stockholders may obtain, without charge, a copy of the Company’s AnnualReport
      on Form 10-KSB, as filed with the Securities and Exchange Commission, upon
      written request to:Max
      A. CoonVice
      Chairman and Secretary of the Board of
                      
                      Investor
      RelationsDirectors,
      Integral Vision, Inc.
                      
                      Integral
      Vision, Inc.President
      and Chairman of the Board, Maxco, Inc.
                      
                      49113
      Wixom Tech DriveWixom,
      MI 48393Vincent
      ShunskyDirector,
      Integral Vision, Inc.
                      
                      Investor/Analyst
      InformationTreasurer,
      Integral Vision, Inc.
                        Partner,
      Gannon Group, P.C.
                      
                      Stockholder
      and analyst inquiries concerning
                        the
      Company should be addressed to:William
      B. Wallace
                      
                      Investor
      RelationsDirector,
      Integral Vision, Inc.
                      
                      Integral
      Vision, Inc.Senior
      Managing Director, Equity Partners, Ltd.
                      
                      49113
      Wixom Tech DriveWixom,
      MI 48393Guerrant
      AssociatesLaura
      Guerrant+1
      (808) 882-1467E-Mail
      Investor Relationscdrake@iv-usa.comlguerrant@guerrantir.comOn
      the World Wide Webwww.iv-usa.com


39





Exhibits
to Form 10-KSB





Integral
Vision, Inc.





Year
Ended December 31, 2007





Commission
File Number 0-12728


40








Exhibit
                    Number
                  
                  Exhibit
      Index Description4.6
                  
                  Form
      of Consent to Modifications dated January 18, 2008 modifying the terms of
      the Fourth Amended Note and Warrant Purchase Agreement.*4.7
                  
                  Form
      of Amended Collateral Assignment of Proprietary Rights dated March 5,
      2008.*4.8
                  
                  Form
      of Amended Security Agreement dated March 6, 2008.*4.9
                  
                  Consent
      to Amend and Replace Agreements dated March 12, 2008.4.10
                  
                  Form
      of Fifth Amended and Restated Note and Warrant Purchase
      Agreement.*10.5
                  
                  Integral
      Vision, Inc. 2008 Equity Incentive Plan.*14
                  
                  Code
      of Ethics.*23.1
                  
                  Consent
      of Rehmann Robson, independent registered public accounting
      firm.*31.1
                  
                  Certification
      of Chief Executive Officer of periodic report pursuant to Rule 13a-15(e)
      or Rule 15d-15(e).31.2
                  
                  Certification
      of Chief Financial Officer of periodic report pursuant to Rule 13a-15(e)
      or Rule 15d-15(e).32.1
                  
                  Certification
      by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
      Section 1350.32.2
                  
                  Certification
      by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
      Section 1350.




*  These Exhibits were filed as an Exhibit to
registrant’s Form 10-KSB filed March 31, 2008, SEC file 000-12728, and
incorporated herein by reference.


41