##### Table of Contents



United States Securities And Exchange Commission Washington, D.C. 20549
 FORM 10-K  þ Annual report
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934For the fiscal year ended December 31,
2004.o Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934For the transition period fromto. Commission File Number 0-12728 INTEGRAL VISION, INC.  Michigan
    
    38-2191935(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification Number)organization)38700 Grand River Avenue,Farmington Hills, Michigan
    
    48335(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (248) 471-2660 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value, Stated Value $.20 Per Share  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to the filing requirements for at least the past
90 days. YES þ   NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). YES o   NO þ The aggregate market value of the voting stock held by non-affiliates of the registrant as of March
23, 2005: Common Stock, No Par Value,
Stated Value $.20 Per Share - $15,468,220 The number of shares outstanding on each of the issuers classes of common stock, as of March
23, 2005: Common Stock, No Par Value, Stated Value $.20 Per Share  14,877,638   1




---



TABLE OF CONTENTS  Part IITEM 1. BusinessITEM 2. PropertiesITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of Security HoldersPart IIITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesITEM 6. Summary of Selected Financial DataITEM 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 7a. Quantitative and Qualitative Disclosures about Market RiskITEM 8. Financial Statements and Supplementary DataITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureITEM 9A. Controls and ProceduresITEM 9B. Other InformationPart IIIITEM 10. Directors and Executive Officers of the RegistrantITEM 11. Executive CompensationITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersITEM 13. Certain Relationships and Related TransactionsITEM 14. Principal Accountant Fees and ServicesPART IVITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSIGNATURESSubsidiary of the RegistrantConsent of Rehmann Robson, Independent  Registered Public AccountingConsent of Moore Stephens Doeren Mayhew, Independent AuditorsCertification of Chief Executive Officer to Rule 13a-15(e)Certification of Chief Financial Officer to Rule 13a-15(e)Certification by Chief Executive Officer to 18 U.S.C.Certification by Chief Financial Officer to 18 U.S.C.    Table of Contents  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report onForm 10-Kcontains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the forward-looking
statements as a result of a number of factors, risks and uncertainties. Generally, the words
anticipate, expect, intend, believe and similar expressions identify forward-looking
statements. The information included in thisForm 10-Kis as of the filing date with the
Securities and Exchange Commission and future events or circumstances could differ
significantly from the forward-looking statements included herein. Accordingly, we caution
readers not to place undue reliance on such statements. 
 Part I 
 ITEM 1. Business General Integral Vision, Inc. (or the Company) develops, manufactures and markets
microprocessor-based process monitoring and inspection systems for use in industrial
manufacturing environments. The principle application for the Companys products is optical
display inspection (machine vision products). The Companys products are generally sold
as capital goods. Depending on the application, machine vision systems have an indefinite
life. Machine vision applications are more likely to require replacement due to possible
technological obsolescence than physical wear. Overview Integral Vision is a supplier of machine vision systems used to ensure product quality
during the manufacturing process. Machine vision has become a necessity for manufacturers who need to continually improve
production efficiency to meet the increasing demand for high quality products. The
Companys vision systems automatically identify, gauge or inspect parts with speed and
accuracy. Quantitative information about each part is evaluated for functional or cosmetic
defects. Our systems can be configured to statistically monitor the production process and
send data to other equipment in the manufacturing cell. Such data could be used, for
example, by a diverter to send defective parts to a reject bin, or by process controllers to
automatically adjust process variables. The Company markets its turnkey systems to the flat panel display industry. Applications
development software, such as our Industrial Vision Controller (IVC) technology, can be
applied to an extensive array of applications in industries that run the gamut from
aerospace to medical to textiles. Products Flat Panel Display Inspection
Integral Vision has over nine years of experience in the display industry. Our initial
product, LCI-Professional, is used for inspection of LCD Displays as components or final
assemblies. Applications include cell phones, car radios, pagers, electronic organizers and
hand-held video games. Integral Visions display inspection systems are designed to detect
two classes of defects: cosmetic and functional. Cosmetic defects do not affect the
functionality of the display, but they cause user annoyance and reduce product value.
Functional defects are flaws that cause the device to be inoperable or have a significant
effect on functionality. Integral Visions SharpEye provides Flat Panel Display (FPD) inspection for reflective,
emissive and transmissive display technologies. SharpEye is designed for the detection of
functional and cosmetic defects in LCOS, OLED, Poly OLED, DMD, EL, HTPS, LTPS, LCD and other
emerging display technologies. These technologies are applied to consumer products such as
camcorders, rear projection computer monitors, digital still cameras, HDTV, projectors,
video 2




---



##### Table of Contents



headsets and video telephones. The core technology of SharpEye inspection algorithms
is the ability to quantize data to the level of a single display pixel. SharpEye can be
configured for production inspection or for display evaluation in a laboratory based on the
equipment configuration selected. Integral Visions ChromaSee, introduced in 2003, provides luminance, color matching and
defect inspections for FPD displays. Defect detection includes functional (e.g. failed
pixels, icons) and cosmetic (e.g. scratches) defects. ChromaSee integrates with production
equipment to allow inline or offline testing. A configuration interface (Task Sequencer)
uses a familiar Tree View representation of the inspection sequence flow. For deployment
into production, the operators interface provides essential views of results, images and
statistics for production floor personnel. Production and Suppliers The Companys production process consists principally of assembling standard
electrical, electronic and optical components and hardware subassemblies purchased from
suppliers into finished products. When proprietary circuit boards are needed, the Company
generally contracts for outside vendors to build the boards based on internal company
designs. The Company generally does not rely on a single source for parts and subassemblies, although
certain components and subassemblies included in the Companys products may only be obtained
from a limited number of suppliers. Management believes alternative sources or designs
could be developed for any of the components used in its products thereby mitigating any
exposure to product interruption from shortages of parts or limited suppliers. Intellectual Property Management believes that the technology incorporated in its products gives it
advantages over its competitors and prospective competitors. Protection of technology is
attempted through a combination of patents, applied for patents, confidentiality agreements
and trade secrets. The Company presently has 14 patents. There can be no assurance that
the Company will have the resources to defend its patents or that patents the Company holds
will be considered valid if challenged. In addition, it is possible that some patents will
be rendered worthless as the result of technological obsolescence. Marketing The Company generally markets its vision products to end users, but the Company has had
success integrating its products with OEMs in certain circumstances. Although sales are
made worldwide, the Companys strongest presence is maintained in the US (through Company
employees), and in Europe and Asia (through sales representatives). Product Development The market for Machine Vision is characterized by rapid and continuous technological
development and product innovation. The Company believes that continued and timely
development of new products and enhancements to existing products is necessary to maintain
its competitive position. Accordingly, the Company devotes a significant portion of its
personnel and financial resources to product development programs and seeks to maintain
close relationships with customers to remain responsive to their needs. The Companys net
engineering and development costs amounted to $909,000, $663,000, and $852,000 in 2004,
2003, and 2002, respectively. The Companys current product development efforts are
primarily directed to Flat Panel Display Inspection products. Environmental Factors The costs to the Company of complying with federal, state and local provisions
regulating protection of the environment are not material. 3




---



##### Table of Contents



Competition The Company experiences competition in all areas in which it operates. Competition for
Flat Panel Display Inspection comes primarily from Westar Display Technologies, Inc. Cognex
Corp. competes either directly or indirectly via systems integrators in certain general
vision application work, as do numerous niche producers of machine vision solutions. Export Sales Sales outside of the United States accounted for 67%, 13% and 54% of the Companys net
sales in 2004, 2003 and 2002, respectively. Management expects that such sales will
continue to represent a significant percentage of its net sales. Most of the Companys
export billings are denominated in US dollars. On occasion other export billings are
denominated in the currency of the customers country. See Note I to the Consolidated Financial Statements Part II  ITEM 8 for details of
geographic area information. Major Customers The nature of the Companys product offerings may produce sales to one or a limited
number of customers in excess of 10% of total consolidated sales in any one year. It is
possible that the specific customers reaching this threshold may change from year to year.
Loss of any one of these customers could have a material impact on the Companys results of
operations. For the year ended December 31, 2004 sales to Philips represented 80% of
consolidated sales. There were no amounts due from this customer at December 31, 2004. For the year ended December 31,
2003 sales to Intel Corporation, Owens Brockway and Toyo Corporation represented 63%, 14%,
and 11% of consolidated sales, respectively. There were no amounts
due from these customers at December 31, 2003. For the
year ended December 31, 2002 sales to Ness Display Co., LTD and Uniax Corporation
represented 13% and 14% of consolidated sales, respectively. Amounts due from these
customers represented 3% of the respective outstanding trade receivable balance at December
31, 2002. Backlog As of December 31, 2004, the Company had an order backlog of approximately $518,000
compared to $1.6 million at December 31, 2003. Management expects that the Company will ship
products representing this entire backlog in 2005. Employees As of February 28, 2005, the Company had 16 permanent employees, as compared to 12 at
February 28, 2004 and 13 at February 28, 2003. None of the Companys employees are
represented by a labor union. 
 ITEM 2. Properties Manufacturing, engineering and administrative functions of Integral Vision are
performed at an approximately 5,000 square foot facility leased by the Company in Farmington
Hills, Michigan. 
 ITEM 3. Legal Proceedings The Company is not currently involved in any material litigation. 
 ITEM 4. Submission of Matters to a Vote of Security Holders None. 4




---



##### Table of Contents



Part II 
 ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities The Companys common stock is traded on the Over the Counter Bulletin Board (OTCBB)
under the symbol INVI. As of March 15, 2004, there were approximately 3,000 stockholders of
the Company including individual participants in security position listings. The Companys common stock was moved to the Over the Counter Bulletin Board (OTCBB)
effective with its delisting from The Nasdaq SmallCap Market with the open of business
August 16, 2001. The Company was informed by Nasdaq that the delisting was decided by the
Nasdaq Listing Qualifications panel which approved the Nasdaqs staff decision to delist the
stock due to its failing to maintain a minimum bid price of $1.00 for 30 consecutive trading
days as required by Marketplace Rule 4450(a)(5) for continued listing. Information on the current quotes on the stock, which will continue to use the ticker symbol
INVI, are available at the OTCBBs website, www.otcbb.com and most financial information
portals, such as that provided at http://finance.yahoo.com or http://quote.bloomberg.com.
Integral Vision will continue to provide information through filings with the Securities and
Exchange Commission (SEC) as required for continued listing on the OTCBB. These filings can
be found at the SECs website at www.sec.gov. The table below shows the high and low sales prices for the Companys common stock for each
quarter in the past two years. The closing sales price for the Companys common stock on
March 23, 2005 was $1.65 per share. 2004Mar 31
    
    
    Jun 30
    
    
    Sept 30
    
    
    Dec 31High
    
    $
    2.45
    
    
    $
    2.55
    
    
    $
    2.00
    
    
    $
    2.54Low
    
    
    0.34
    
    
    
    1.45
    
    
    
    0.83
    
    
    
    1.012003High
    
    $
    0.30
    
    
    $
    0.29
    
    
    $
    0.40
    
    
    $
    0.65Low
    
    
    0.08
    
    
    
    0.15
    
    
    
    0.17
    
    
    
    0.12
 The market for securities of small market-capitalization companies has been highly volatile
in recent years, often for reasons unrelated to a companys results of operations.
Management believes that factors such as quarterly fluctuations in financial results,
failure of new products to develop as expected, sales of common stock by existing
shareholders, and substantial product orders may contribute to the volatility of the price
of the Companys common stock. General economic trends such as recessionary cycles and
changing interest rates may also adversely affect the market price of the Companys common
stock. No cash dividends on common stock have been paid during any period. 5




---



##### Table of Contents



ITEM 6. Summary of Selected Financial Data Year ended December 312004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands, except per share data)Net revenues
    
    $
    1,542
    
    
    $
    641
    
    
    $
    1,579
    
    
    $
    2,633
    
    
    $
    5,956Gross margin
    
    
    212
    
    
    
    37
    
    
    
    402
    
    
    
    (2,763
    ) (b)
    
    
    (534
    ) (a)Net loss
    
    
    (2,459
    )
    
    
    (1,937
    )
    
    
    (2,203
    )
    
    
    (8,135
    )
    
    
    (7,124
    )Basic and diluted loss per share
    
    
    (0.18
    )
    
    
    (0.21
    )
    
    
    (0.23
    )
    
    
    (0.89
    )
    
    
    (0.79
    )Weighted average shares outstanding
    
    
    13,435
    
    
    
    9,430
    
    
    
    9,430
    
    
    
    9,198
    
    
    
    9,028
 At December 312004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)Working capital (deficit)
    
    $
    (1,804
    )
    
    $
    (2,892
    )
    
    $
    (2,006
    )
    
    $
    (1,472
    )
    
    $
    964Total assets
    
    
    872
    
    
    
    667
    
    
    
    1,308
    
    
    
    1,964
    
    
    
    11,164Long-term debt,
net of current portion and OID
    
    
    2,355
    
    
    
    1,425
    
    
    
    962
    
    
    
    337
    
    
    
    1,967Stockholders (deficit) equity
    
    
    (3,967
    )
    
    
    (3,922
    )
    
    
    (2,303
    )
    
    
    (672
    )
    
    
    6,936
   (a)
    
    In 2000, Management made a change in estimate, primarily related to inventory, that
resulted in a $666,000 charge to direct costs of sales.(b)
    
    In 2001, Management made a change in estimate that resulted in a $1.9 million
charge to direct costs of sales to write down inventory and capitalized software to
estimated net realizable values. The amount of the charge applicable to inventory was
$540,000 with the remaining $1.3 million applicable to capitalized software. The above selected financial data should be read in conjunction with Consolidated Financial
Statements, including the notes thereto (Part II  -  ITEM 8) and Managements Discussion and
Analysis of Financial Condition and Results of Operations
(Part II -  ITEM 7). The Company
has never paid a dividend and does not anticipate doing so in the foreseeable future. The
Company expects to retain earnings, if any, to finance the expansion and its development of
business. 
 ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Overview Integral Vision, Inc. develops, manufactures and markets microprocessor-based process
monitoring and inspection products for use in industrial manufacturing environments. The
Companys revenues are primarily derived from the sale of flat panel display inspection
equipment. Except for the historical information contained herein, the matters discussed in
this document are forward-looking statements made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934.
Such statements are based on managements current expectations and are subject to a number
of factors and uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. Such factors and uncertainties include, but
are not limited to: the impact of the level of the Companys indebtedness; the Companys
ability to obtain the cash needed to allow it to continue as a going concern; general
economic conditions and conditions in the specific industries in which the Company has
significant customers; price fluctuations in the materials purchased by the Company for
assembly into final products; competitive conditions in the Companys markets and the effect
of competitive products and pricing; and technological development by the Company, its
customers and its competition. As a result, the Companys results may fluctuate.
Additional information concerning risk factors that could cause actual results to differ
materially from those projected in the forward-looking statements is contained in 6




---



##### Table of Contents



the Companys filings with the Securities and Exchange Commission. These forward-looking
statements represent the Companys best estimates as of the date of this document. The
Company assumes no obligation to update such estimates except as required by the rules and
regulations of the Securities and Exchange Commission. Results of Operations The following table sets forth for the periods indicated certain items from the
Companys Statements of Operations as a percentage of net revenues. The impact of inflation
for the periods presented was not significant. 2004
    
    
    2003
    
    
    2002Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Direct cost of sales (a)
    
    
    86.3
    
    
    
    94.2
    
    
    
    74.5Gross margin
    
    
    13.7
    
    
    
    5.8
    
    
    
    25.5Other costs and expenses:Marketing
    
    
    16.9
    
    
    
    34.8
    
    
    
    35.3General and administrative
    
    
    77.5
    
    
    
    125.1
    
    
    
    66.8Engineering and development
    
    
    58.9
    
    
    
    103.4
    
    
    
    53.9Total other costs and expenses
    
    
    153.3
    
    
    
    263.3
    
    
    
    156.0Loss from operations
    
    
    (139.6
    )
    
    
    (257.5
    )
    
    
    (130.5
    )(Loss) gain on sales of assets
    
    
    
    
    
    
    (1.1
    )
    
    
    9.5Other income
    
    
    8.4
    
    
    
    13.6
    
    
    
    4.4Interest expense
    
    
    (28.3
    )
    
    
    (57.7
    )
    
    
    (15.9
    )Foreign currency translation gain (loss)
    
    
    0.1
    
    
    
    0.3
    
    
    
    (12.7
    )Loss from operations before income taxes
    
    
    (159.4
    )
    
    
    (302.4
    )
    
    
    (145.2
    )Credit for income taxes
    
    
    
    
    
    
    
    
    
    
    (5.7
    )Net loss
    
    
    (159.4
    )%
    
    
    (302.4
    )%
    
    
    (139.5
    )%
   (a)
    
    Direct cost of sales includes capitalized software amortization as a percentage of
sales of 11.1%, 30.2%, and 11.1% in 2004, 2003 and 2002, respectively. Year Ended December 31, 2004, compared to the year ended December 31, 2003 Net revenues increased $901,000 (141%) to $1.5 million in 2004 from $641,000 in 2003.
Net revenue is reported net of sales commission expense of approximately $19,000 in 2004
compared to $11,000 in 2003. The increase was primarily due to increased sales of the
Companys flat panel display inspection product. Sales from the flat panel display
inspection product line accounted for approximately $1.4 million and $497,000 of the
Companys net revenue in 2004 and 2003, respectively. The Companys revenue from other
applications was approximately $152,000 and $85,000 in 2004 and 2003, respectively. The
Companys revenue from software was approximately $33,000 and $43,000 in 2004 and 2003,
respectively. The Companys revenue from service activities was approximately $18,000 in
2003. There was no such revenue in 2004. Direct costs of sales increased $726,000 (120%) to $1.3 million (approximately 86.3% of
sales) in 2004 from $604,000 (approximately 94.2% of sales) in 2003. This was primarily
attributable to the higher sales volume. Management periodically performs an analysis of
the net realizable value of capitalized patent costs. In 2002, management determined that
capitalized patent costs exceeded the estimated net realizable value of amounts capitalized
and a write-down was necessary. In 2002, $74,000 of additional amortization was included in
costs of sales as a result of this determination. Marketing costs increased 17.0%, or $38,000, to $261,000 in 2004 compared to $223,000 in
2003. This increase is primarily attributable to additional staffing due to increased sales
activity. 7




---



##### Table of Contents



Employee related costs in the marketing division were $54,000 higher in 2004
compared to 2003 levels. Advertising costs were $15,000 lower in 2004 compared to 2003
levels. General and administrative costs increased 49.0%, or $393,000, to $1.2 million in 2004
compared to $802,000 in 2003. This was primarily due to an increase in legal, stockholder
relations, and professional fees totaling $183,000 in 2004. Employee related costs in the
general and administrative division were $124,000 higher in 2004 compared to 2003 levels. Engineering and development expenditures increased 37.1%, or $246,000, to $909,000 in 2003
compared to $663,000 in 2003. Employee related costs in the engineering and development
division were $130,000 higher in 2004 compared to 2003 levels. Approximately $109,000 of
this variance was attributable to engineering work done due to increased sales in the third
quarter. On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global test equipment
manufacturer DaTARIUS Technologies GmbH, purchased Integral Visions assets related to
inspection systems for the optical disc industry, including the names Automatic Inspection
Systems and AID. The sale included Integral Visions optical disc scanner products as
well as its range of print and identification code products used to inspect the printing
stage of disc manufacture. The consideration the Company received for the technology
consisted of a non-refundable $100,000 advanced minimum royalty payment in addition to
future royalties. The Company received approxmiately $61,000 in royalties in 2004 and
expects to receive additional royalties of approximately $30,000 in 2005. Additionally, the
Company received $25,000 from the sale of equipment to DaTARIUS. The Company recognized a
gain on the transaction of approximately $112,000, which is included in gain on sale of
assets in 2002, primarily attributable to the advanced minimum royalty payment received.
The proceeds from the transaction were used primarily to fund current operations. Other income(expense) was $129,000 in 2004 of which approximately $61,000 was royalty
income. Interest expense increased $66,000 to $436,000 in 2004 compared to $370,000 in 2003. The
increase is primarily attributable to the interest on Class 1, Class 2, and Class 3 Notes
that were placed subsequent to September 30, 2003 (see Note C to consolidated financial
statements). Year Ended December 31, 2003, compared to the year ended December 31, 2002 Net revenues decreased $938,000 (59%) to $641,000 in 2003 from $1.6 million in 2002.
Net revenue is reported net of sales commission expense of approximately $11,000 in 2003
compared to $83,000 in 2002. The decrease in net revenue was partially attributable to the
fact that the Company sold its disc identification/print inspection (CDiD/CDiP) product line
in 2002 (see Note J to consolidated financial statements). Sales from the Companys disc
identification/print inspection (CDiD/CDiP) product line accounted for $743,000 of the net
revenue in 2002. This decrease was partially offset by increased sales of the Companys
flat panel display inspection product. Sales from the flat panel display inspection product
line accounted for approximately $497,000 and $447,000 of the Companys net revenue in 2003
and 2002, respectively. The Companys revenue from other applications was approximately
$85,000 and $139,000 in 2003 and 2002, respectively. The Companys revenue from software
was approximately $43,000 and $62,000 in 2003 and 2002, respectively. The Companys revenue
from service activities was approximately $18,000 and $398,000 in 2003 and 2002,
respectively. Direct costs of sales decreased $572,000 (49%) to $604,000 (approximately 94.2% of sales) in
2003 from $1.2 million (approximately 74.5% of sales) in 2002. This was primarily
attributable to the lower sales volume and smaller structure required to support it as well
as lower patent amortization expense in the 2003 period. Management periodically performs
an analysis of the net realizable value of capitalized patent costs. In 2002, management
determined that capitalized patent costs exceeded the estimated net realizable value of
amounts capitalized and a write-down was necessary. In the year ended December 31, 2002,
$74,000 of additional amortization was included in costs of sales as a result of this
determination. Marketing costs decreased 60.0%, or $334,000, to $223,000 in 2003 compared to $557,000 in
2002. This decrease is primarily attributable to workforce reductions resulting from the 8




---



##### Table of Contents



implementation of a cost reduction plan by Management in late 2000 and throughout 2001.
Employee related costs in the marketing division were $143,000 lower in 2003 compared to
2002 levels. The plan also called for workforce reductions in both the general and
administrative department and the engineering department, as evidenced by the figures below. Advertising
costs were $62,000 lower in 2003 compared to 2002 levels. General and administrative costs decreased 23.4%, or $252,000, to $802,000 in 2003 compared
to $1.1 million in 2002. The costs for outside services were $107,000 lower in 2003
compared to 2002 levels. Legal expenses were $33,000 lower in 2003 compared to 2002.
Additionally bad debts expense in the general and administrative division decreased 98.1% or
$97,000 in 2003. Engineering and development expenditures decreased 22.1%, or $189,000, to $663,000 in 2003
compared to $852,000 in 2002. Facilities expenses were $123,000 lower in 2003 compared to
2002. The costs for outside services were $64,000 lower in 2003 compared to 2002 levels. On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global test equipment
manufacturer DaTARIUS Technologies GmbH, purchased Integral Visions assets related to
inspection systems for the optical disc industry, including the names Automatic Inspection
Systems and AID. The sale included Integral Visions optical disc scanner products as
well as its range of print and identification code products used to inspect the printing
stage of disc manufacture. The consideration the Company received for the technology
consisted of a non-refundable $100,000 advanced minimum royalty payment in addition to
future royalties. The Company received approxmiately $54,000 in royalties in 2003 and
expects to receive additional royalties of approximately $60,000 in 2004 and $30,000 in
2005. Additionally, the Company received $25,000 from the sale of equipment to DaTARIUS.
The Company recognized a gain on the transaction of approximately $112,000, which is
included in gain on sale of assets in 2002, primarily attributable to the advanced minimum
royalty payment received. The proceeds from the transaction were used primarily to fund
current operations. Other income(expense) in 2003 includes approximately $54,000 of royalty income and $18,000
for engineering fees in connection with the DaTARIUS Technologies transaction. Interest income decreased to $320 in 2003 compared to $11,000 in 2002. The income in the
2002 period is primarily attributable to interest charged on the officers notes receivable.
The decrease in interest income from the prior year period is primarily attributable to the
of the officers notes receivable in 2003. Interest expense increased $119,000 to $370,000 in 2003 compared to $251,000 in 2002. The
increase is primarily attributable to the interest on the debentures and Class 2 notes that
were sold under the 2001 Note and Warrant Purchase Agreement (see Note C to consolidated
financial statements) and the discount on the debentures amortized in 2003. In June 2002, Integral Vision, Inc. wrote-off an inter-company receivable due from Integral
Vision Ltd., its subsidiary in the United Kingdom. As the consolidated financial statements
include the accounts of both entities, upon consolidation, the charge recorded by Integral
Vision, Inc., approximately $3.1 million, was eliminated against the gain recorded by
Integral Vision Ltd. However, previously unrecognized losses that resulted from foreign
currency translation adjustments were recognized in the June 30, 2002 quarter and totaled
approximately $208,000. 9




---



##### Table of Contents



Quarterly Information The following table sets forth Consolidated Statements of Operations data for each of
the eight quarters in the two-year period ended December 31, 2004. The unaudited quarterly
information has been prepared on the same basis as the annual information and, in
managements opinion, includes all adjustments necessary for a fair presentation of the
information for the quarters presented. Quarter Ended2004

    
    2003restatedDec 31
    
    

Sep
30
    
    
    Jun 30
    
    
    Mar 31
    
    
    
    Dec 31
    
    
    Sep 30
    
    
    Jun 30
    
    
    Mar 31(in thousands except per share data)Net revenues
    
    $
    748
    
    
    $
    624
    
    
    $
    77
    
    
    $
    93
    
    
    
    $
    64
    
    
    $
    37
    
    
    $
    128
    
    
    $
    412Gross margin
    
    
    190
    
    
    
    121
    
    
    
    (70
    )
    
    
    (29
    )
    
    
    
    (58
    )
    
    
    (55
    )
    
    
    19
    
    
    
    131Net loss
    
    
    (505
    )
    
    
    (549
    )
    
    
    (776
    )
    
    
    (629
    )
    
    
    
    (547
    )
    
    
    (540
    )
    
    
    (498
    )
    
    
    (352
    )Basic and
diluted loss per share:Net loss*
    
    $
    (0.03
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )
   *
    
    The sum of the quarterly net loss per share amounts may not equal the annual amounts reported. Net loss
per share is computed independently for each quarter and the full year and is based on the respective weighted
average common shares outstanding.See MD&A for additional discussion 
 Seasonality and Quarterly Fluctuations The Companys revenues and operating results have varied substantially from quarter to
quarter and management believes these fluctuations may continue. The Companys reliance on
large orders has contributed to the variability of the Companys operating results. Liquidity and Capital Resources Operating activities for 2004 used cash of approximately $2.2 million primarily due to
the Companys loss from operations. Net loss, after non-cash adjustments of $297,000, was
$2.2 million. Increases in accounts receivable and inventories used cash of $264,000 while
a decrease in prepaid and other assets and an increase in accounts payable generated
$234,000. The
Companys investing activities included primarily the purchase of approximately $15,000 of
equipment in 2004. The Companys financing activities included proceeds of $1.5 million from the issuance of
restricted common stock. These shares cannot be transferred without registration or
pursuant to an applicable exemption from registration. The Company received $775,000 and
$478,000 from the sale of Class 2 Notes and Class 3 Notes, respectively. The Company made
principal payments of approximately $290,000 on its Class 2 Notes in the period. The
Company made principal payments of approximately $137,000 on other long term notes in the
period. Additionally, employee stock options were exercised during the period generating
approximately $28,000. For further discussion regarding the Companys obligations, see Note C to consolidated
financial statements. At December 31, 2004, under the terms of the Companys Note and Warrant Purchase agreement,
as amended, the Company could issue up to $5.5 million of senior debentures, which consists
of Class 1, Class 2, and Class 3 Notes which are secured by all intellectual property of the
Company. Class 2 Notes are working capital notes, are secured by accounts receivable of
the Company, and are subordinated to the Class 1 Notes issued prior to April 16, 2002. In
September 2003, the holders of all of the then outstanding Class 2 Notes agreed to modify
the 10




---



##### Table of Contents



maturity dates of those Notes to April 30, 2004. In December 2003, certain of the Class
2 Notes were amended to have maturity dates of May 31, 2004. The purchasers of the Class 2
Notes receive warrants for the purchase of the Companys common stock when the Note is
repaid. Class 2 Warrants entitle the holder to purchase one share of Common Stock for each
$1 in value of the Class 2 Note multiplied by a fraction, the numerator of which is the
number of days such Class 2 note is outstanding and the
denominator of which is 365. The price of these shares shall be approximately 150% of the recent fair market value of the
Common Stock as of the date of the issuance of the Class 2 Note. Based on their respective
maturity dates, the number of common shares that could be purchased with Class 2 warrants as
of December 31, 2004 is estimated to be 1,448,580. In August 2003, the holders of those
Notes agreed to a modification to the Note and Warrant Purchase Agreement that created a new
Class 3 Note which is convertible into Integral Vision, Inc. common stock at a conversion
rate set by the Companys board of directors at the date of issuance. Class 1 Notes issued
have maturities of up to four years, an interest rate of 10%, and the purchasers of the
Notes receive warrants for the purchase of the Companys common stock. The value assigned
to warrants is included in additional paid-in capital and the discount is amortized over the
life of the note. Additionally, the directors will determine the conversion rate at the
date of issuance, subject to change in the event additional shares are issued in the future.
In March 2004, the holders of the Class 1 and Class 2 Notes agreed to an additional
modification to the Note and Warrant Purchase Agreement that increased the maximum amount of
the Notes outstanding to $5.5 million. The maturity date on substantially all of the then
outstanding Class 2 Notes was extended to December 31, 2005. The amended Note and Warrant
Purchase Agreement provides that, as a result of the Companys shareholders approval of
managements proposal to increase the Companys authorized stock to 31,000,000 shares at the
Companys annual meeting of its shareholders that was held on May 6, 2004, the following has
occurred:  
    The accrued interest on outstanding Class 1 Notes as of December 31, 2003 in the
amount of approximately $331,000 has been exchanged for new Class 3 Notes due July
3, 2006 with interest at 8% payable semi-annually beginning April 1, 2005 and
convertible into shares of the Companys common stock at $0.75 per share.
    The initial interest payment due on Class 1 Notes for interest accruing after
December 31, 2003 is due April 1, 2005.
    Quarterly principal payments on Class 1 Notes have been eliminated, with all
principal due at maturity.
    $330,000 of principal on Class 1 Notes issued prior to April 16, 2002 has been
exchanged for Class 3 Notes due February 27, 2007 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys
common stock at $0.75 per share.
    Class 2 Notes outstanding at February 29, 2004, plus interest then accrued, may
be exchanged for Class 3 Notes due December 31, 2005 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys
common stock at $0.75 per share. On the modification date, the market price of the Companys common stock was approximately
$1.50 per share. The Board considered the $0.75 conversion price was justified given the
concessions received in connection with the debt, the fact that the shares are restricted,
and other factors. The following table details the projected principal and interest payments to be paid in
2005: Class 1
    
    
    Class 2
    
    
    Class 3Due date
    
    Interest
    
    
    Principal
    
    
    Interest
    
    
    Interest
    
    
    TotalMarch 31
    
    $
    
    
    
    $
    265
    
    
    $
    23
    
    
    $
    
    
    
    $
    288April 1
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    252April 15
    
    
    
    
    
    
    70
    
    
    
    1
    
    
    
    
    
    
    
    71April 30
    
    
    
    
    
    
    205
    
    
    
    4
    
    
    
    
    
    
    
    209October 1
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    112December 31
    
    
    
    
    
    
    942
    
    
    
    222
    
    
    
    
    
    
    
    1,164$
    205
    
    
    $
    1,482
    
    
    $
    250
    
    
    $
    159
    
    
    $
    2,096
 The notes and warrants referenced above were sold in private transactions exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. There are fifteen
purchasers, 11




---



##### Table of Contents



some of whom have purchased on more than one occasion. Of these, three of the
purchasers are related entities or insiders of the Company. Eleven of the purchasers are
either a client, or relative of the principal, of one State of California registered
investment advisor. To the best of the Companys knowledge, all of the purchasers are
either accredited investors as that term is defined in Regulation D under the Securities
Act of 1933 or, either alone or with their purchaser representative, have such knowledge and
experience in financial and business matters that they are capable of evaluating the merits
and risks of the investment. During the quarter ended June 2004, the Company sold 1,223,000 shares of unregistered shares
of its common stock at $1.23 per share in private transactions exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. The securities were sold to four
investment firms, one of which purchased in excess of 800,000 shares. These shares, and the shares to be issued pursuant to the notes and warrants discussed
above, are restricted from being transferred without registration or pursuant to an
exemption from registration. After one year, the shares could be sold in unsolicited broker
transactions pursuant to Rule 144 under the Securities Act of 1933 (Rule 144), which
includes restrictions on the number of shares that may be sold in any three month period.
For those holders who are not affiliates of the Company, after the restricted shares have
been held for at least two years, many of the restrictions of Rule 144, including the
restriction on the number of shares which may be sold, will no longer apply. Under the terms of the Note and Warrant Purchase Agreement and the agreements for the sale
of the restricted shares, the Company was obligated to use its best efforts to register the
restricted shares and the shares issuable upon exercise of the notes and warrants by
September 30, 2004. Although the deadline has passed, the Company still anticipates filing
a registration statement to fulfill this obligation. Such registration would eliminate the
restrictions on transfer. Management is projecting a cash shortfall over the next twelve months of approximately $1.3
million based on the existing capital structure of the Company, including $820,000 due to be
paid on various dates between March 31, 2005 and April 30,
2005. The holders of this debt have agreed to allow the Company to
defer these payments until April 30, 2005. Management is currently in negotiations with potential investors to place a
minimum of $5.0 million in unregistered convertible preferred stock and common stock
equivalents. If successful, the proceeds generated from this sale would be used to retire
certain notes as well as provide additional working capital. Alternatively, management
plans to seek additional investors of its debentures to cover the anticipated shortfall,
which would bring the amount of debentures outstanding to $4.7 million. Additionally, if
necessary, management would attempt to obtain any additional cash needed to enable the
Company to continue as a going concern through possible joint ventures and other strategic
alliances. Additional financing may or may not be available through banks. There can be no
assurance that management will be able to successfully execute any of these plans before the
Company has exhausted all of its resources. These uncertainties raise substantial doubt
about the Companys ability to continue as a going concern. Impact of Inflation The amounts presented in the financial statements do not provide for the effect of
inflation on the Companys operations or its financial position. Amounts shown for
property, plant and equipment and for costs and expenses reflect historical cost and do not
necessarily represent replacement cost or charges to operations based on replacement cost.
The Companys operations together with other sources are intended to provide funds to
replace property, plant and equipment as necessary. Net income would be lower than reported
if the effects of inflation were reflected either by charging operations with amounts that
represent replacement costs or by using other inflation adjustments. Recently Issued Accounting Standards In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151 Inventory Costs, an Amendment of ARB No. 43,
Chapter 4. SFAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) be recognized as
current period charges. It also requires that allocation of fixed production overheads to
the costs of conversion 12




---



##### Table of Contents



be based on the normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company does not believe that the adoption of SFAS 151 will have a material
impact on its results of operations or financial position. In December 2004, the FASB issued SFAS 123 (revised 2004), Share-BasedPayment, (SFAS 123R).
SFAS 123R addresses the accounting for share-based payments to employees, including grants
of employee stock options. Under the new standard, companies will no longer be able to
account for share-based compensation transactions using the intrinsic method in accordance
with APB Opinion No. 25, Accounting for Stock Issued toEmployees. Instead, companies will
be required to account for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. SFAS 123R will be effective for periods
beginning after June 15, 2005 and allows, but does not require, companies to restate the
full fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS
123R. The Company has not yet determined which fair-value method and transitional provision
it will follow. However, the Company expects that the adoption of SFAS123R will not have a
significant impact on its results of operations nor does it expect that the adoption of SFAS
123R will impact its overall financial position. See Note 8 for the proforma impact on net
income and net income per share from calculating stock-based compensation costs under the
fair value alternative of SFAS 123. However, the calculation of compensation cost for
share-based payment transactions after the effective date of SFAS 123R may be different from
the calculation of compensation cost under SFAS 123, but such differences have not yet been
quantified. In December 2004, the FASB issued SFAS 153 Exchanges of Nonmonetary Assets, and Amendment of
APB Opinion No.29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in APB Opinion No.
29, however, included certain exceptions to the principle. SFAS 153 amends APB Opinion No.
29 to eliminate the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges in fiscal
periods beginning after June 15, 2005. The Company does not believe that the adoption of
SFAS 153 will have a material impact on its results of operations or financial position. Management is aware of the requirements of Section 404 of the Sarbanes-Oxley act and is in
the process of evaluating its plans to comply with those requirements. The Company must
begin to comply with the internal control over financial reporting requirements in 2006. Managements Discussion of Critical Accounting Policies The Companys consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these
financial statements requires Management to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The accounting policies discussed below are considered
by management to be the most important to an understanding of our financial statements,
because their application places the most significant demands on managements judgment and
estimates about the effect of matters that are inherently uncertain. Our assumptions and
estimates were based on the facts and circumstances known at December 31, 2004, future
events rarely develop exactly as forecast, and the best estimates routinely require
adjustment. These policies are also discussed in Note A of the Notes to Consolidated
Financial Statements included in Item 8 of this report. Revenue Recognition The Company recognizes revenue in accordance with SOP 97-2, Software Revenue
Recognition and Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. Revenue is recognized when persuasive evidence of an arrangement
exists, 13




---



##### Table of Contents



delivery has occurred or services have been rendered, the selling price is fixed or
determinable and collectibility is reasonably assured. The Company accounts for certain product sales of its flat panel display inspection systems
as multiple-element arrangements. If specific customer acceptance requirements are met, the
Company recognizes revenue for a portion of the total contract price due and billable upon
shipment, with the remainder recognized when it becomes due (generally upon acceptance). The
Company recognizes all other product sales with customer acceptance provisions upon final
customer acceptance. The Company recognizes revenue from the sale of spare parts upon
shipment. Revenue from service contracts is recognized over the life of the contract.
Revenue is reported net of sales commissions. Inventories Inventories are stated at the lower of 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
our financial statements reflects the lower of our cost or the value we expect to receive
when we sell the inventory. This estimate is based on several factors, including the
condition and salability of our 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 The Company reviews its long-lived assets, including property, equipment and
intangibles, for impairment whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully recoverable. An impairment loss
would be recognized when estimated undiscounted future cash flows expected to result from
the use of the asset and its eventual disposition are less than the carrying amount of the
asset. Contingencies and Litigation The Company makes an assessment of the probability of an adverse judgment resulting
from current and threatened litigation. The Company accrues the cost of an adverse judgment
if, in Managements estimation, an adverse settlement is probable and Management can
reasonably estimate the ultimate cost of such litigation. The Company has made no such
accruals at December 31, 2004. 
 ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk stemming from changes in foreign exchange rates,
interest rates and prices of inventory purchased for assembly into finished products.
Changes in these factors could cause fluctuations in earnings and cash flows. In the normal
course of business, exposure to interest rates is managed by fixing the interest rates on
the Companys long-term debt whenever possible. The Company does not generally enter into
long-term purchase contracts but instead purchases inventory to fill specific sales
contracts thereby minimizing risks with respect to inventory price fluctuations. While sales are generally denominated in US dollars, from time to time the Company may
denominate sales in the following additional currencies:  v
    US Dollarsv
    Pound Sterlingv
    Eurosv
    Yen 14




---



##### Table of Contents



In managements opinion, as the currencies of Western Europe and the UK are generally
stable, there is no significant exposure to losses due to currency fluctuations. However,
because the Yen has not been stable over the past several years, the Company does enter into
forward sales contracts equal to the future amount of Yen to be received at the time the
order is accepted. These hedging transactions are on an order by order basis and at no time
are they speculative in nature. At December 31, 2004, the Company had no open positions and
had no sales denominated in a foreign currency. 
 ITEM 8. Financial Statements and Supplementary Data Financial statements and quarterly results of operations are submitted in separate
sections of this report. 
 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure Moore Stephens Doeren Mayhew, the Companys independent auditors, (Doeren) resigned
following completion of its audit of the Companys financial statements for the year ended
December 31, 2002. Doerens resignation was based on its decision to terminate its
engagements with any publicly owned companies. Doerens report on the Companys consolidated financial statements for the year ended
December 31, 2002 was qualified as to uncertainty regarding the Companys ability to
continue as a going concern. The report did not contain an adverse opinion or a disclaimer
of opinion and was not qualified or modified as to any other uncertainty or as to audit
scope, or accounting principles. In connection with the audit of the Companys consolidated
financial statements for the year ended December 31, 2002, there were no disagreements
between the Company and Doeren on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Doeren, would have caused Doeren to make reference to the matter in its
report. Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by
Section 202 of the Sarbanes-Oxley Act of 2002, the Company is responsible for listing the
non-audit services approved by the Companys Audit Committee to be performed by Rehmann
Robson, the Companys independent registered public accounting firm. Non-audit services are
defined as services other than those provided in connection with an audit or a review of the
financial statements of the Company. In the period covered by this filing, the Audit
Committee approved the following non-audit services currently being rendered to the Company
by Rehmann Robson, or to be rendered to the Company by Rehmann Robson:  
    preparation of tax returns, and tax advice in preparing for and in connection therewith;
    review of quarterly financial statements. 
 ITEM 9A. Controls and Procedures Controls and Procedures a)   Evaluation of disclosure controls and procedures Our chief executive officer and chief financial officer have each reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Securities Exchange
Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days before the filling
date of this report. Based on that evaluation, our chief executive officer and chief
financial officer have each concluded that our current disclosure controls and procedures
are effective to ensure that information required to be disclosed in our periodic reports
filed under the Exchange Act is recorded, processed, summarized, and reported, in each case, within the time period
specified by the SECs rules and regulations. 15




---



##### Table of Contents



b) Changes in internal controls There have not been any significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their evaluation. There
were no significant deficiencies or material weakness, and therefore no corrective actions
were taken. 
 ITEM 9B. Other Information None 
 Part III 
 ITEM 10. Directors and Executive Officers of the Registrant Item 10 is hereby incorporated by reference from the Registrants definitive proxy
statement to be filed within 120 days of December 31, 2004. 
 ITEM 11. Executive Compensation Item 11 is hereby incorporated by reference from the Registrants definitive proxy
statement to be filed within 120 days of December 31, 2004. 
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters Item 12 is hereby incorporated by reference from the Registrants definitive proxy
statement to be filed within 120 days of December 31, 2004. 
 ITEM 13. Certain Relationships and Related Transactions Maxco, Inc. (a 15% owner of the Company) provides consulting services to the Company.
These services include assistance with financial statement preparation, compliance with
governmental filing requirements, and assistance with certain financing arrangements. The
Company and Maxco have agreed on terms for payment to Maxco for current and prospective
services. The Board has determined that these services for the six months ending March 31,
2005 will be paid by the issuance of 42,000 shares of unregistered stock in the Company.
Starting April 1, 2005, the Company will pay Maxco $8,750 per month for each month such
services are rendered. The amount charged to operations in the fourth quarter of 2004 for
this compenstion amounted to $33,000 which is based on the average closing price of the
Companys common stock over that period. Additional Item 13 information is hereby incorporated by reference from the Registrants
definitive proxy statement to be filed within 120 days of December 31, 2004. 
 ITEM 14. Principal Accountant Fees and Services Item 13 is hereby incorporated by reference from the Registrants definitive proxy
statement to be filed within 120 days of December 31, 2004. 16




---



##### Table of Contents



PART IV 
 ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) and (2) The response to this portion of ITEM 15 is submitted as a separate section of
this report. (3) Listing of exhibits. ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended (filed as Exhibit 3.1 to the registrants Form 10-K for
the year ended December 31, 1995, SEC file 0-12728, and incorporated herein by reference).3.2
    
    Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the registrants Form 10-K for
the year ended December 31, 1994, SEC file 0-12728, and incorporated herein by reference).4.1
    
    Note and Warrant Purchase Agreement (filed as Exhibit 4.1 to the registrants Form 8-K dated
July 15, 1997, SEC file 0-12728, and incorporated herein by reference).4.3
    
    Form of Integral Vision, Inc. Common Stock Purchase Warrant Certificate (filed as Exhibit 4.3
to registrants Form 8-K dated July 15, 1997, SEC file 0-12728, and incorporated herein by
reference).4.4
    
    Note and Warrant Purchase Agreement dated March 29, 2001 including Form of Integral Vision,
Inc. 15% Senior Subordinated Secured Note and Integral Vision, Inc. Common Stock Purchase
Warrant Certificate (filed as Exhibit 4.4 to registrants Form 10-K for the year ended
December 31, 2000, SEC file 0-12728, and incorporated herein by reference).4.5
    
    Form of amended Note and Warrant Purchase Agreement including Form of Integral Vision, Inc.
10% Secured Note and Integral Vision, Inc. Common Stock Purchase Warrant Certificate (filed as
Exhibit 4.5 to registrants Form 10-Q for the quarter ended June 30, 2001, SEC file 0-12728,
and incorporated herein by reference).4.6
    
    Form of Second Amended Note and Warrant Purchase Agreement including Form of Integral Vision,
Inc. Class 2 Note and Integral Vision, Inc. Class 2 Common Stock Purchase Warrant Certificate
(filed as Exhibit 4.6 to registrants Form 10-Q for the quarter ended March 31, 2002, SEC file
0-12728, and incorporated herein by reference).4.7
    
    Consent to Modifications dated March 17, 2003 modifying the terms of the Second Amended Note
and Warrant Purchase Agreement (filed as Exhibit 4.7 to registrants Form 10-K for the year
ended December 31, 2002, SEC file 0-12728, and incorporated herein by reference).4.8
    
    Form of Fourth Amended Note and Warrant Purchase Agreement including Form of Integral Vision,
Inc. Class 3 Note. (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).10.1
    
    Incentive Stock Option Plan of the Registrant as amended (filed as Exhibit 10.4 to the
registrants Form S-1 Registration Statement effective July 2, 1985, SEC File 2-98085, and
incorporated herein by reference).10.2
    
    Second Incentive Stock Option Plan (filed as Exhibit 10.2 to the registrants Form 10-K for
the year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).10.3
    
    Non-qualified Stock Option Plan (filed as Exhibit 10.3 to the registrants Form 10-K for the
year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).10.4
    
    Amendment to Integral Vision, Inc. Incentive Stock Option Plan dated May 10, 1993 (filed as
Exhibit 10.3 to the registrants Form 10-K for the year ended December 31, 1993, SEC File
0-12728, and incorporated herein by reference).10.5
    
    Integral Vision, Inc. Employee Stock Option Plan (filed as Exhibit 10.5 to the registrants
Form 10-Q for the quarter ended September 30, 1995, SEC file 0-12728, and incorporated herein
by reference).10.6
    
    Form of Confidentiality and Non-Compete Agreement Between the Registrant and its Employees
(filed as Exhibit 10.4 to the registrants Form 10-K for the year ended December 31, 1992, SEC
File 0-12728, and incorporated herein by reference).10.7
    
    Integral Vision, Inc. 1999 Employee Stock Option Plan (filed as exhibit 10.5 to the
registrants Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by
reference).10.8*
    
    Patent License Agreement dated October 4, 1995 by and between Integral Vision, Inc. and
Square D Company (filed as Exhibit 10.24 to the registrants Form 10-Q for the quarter ended
September 30, 1995, SEC File 0-12728, and incorporated herein by reference).10.9
    
    Asset Sale Purchase Agreement between the registrant and n.v. DIMACO, s.a. (filed as exhibit
10.12 to the registrants Form 10-Q for the quarter ended September 30, 2001 and incorporated
herein by reference).
 17




---



##### Table of Contents



ExhibitNumber
    
    Description of Document10.10
    
    Asset Sale Purchase Agreement between the registrant and DaTARIUS Technologies, Inc. (filed
as exhibit 10.13 to the registrants Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference).10.11
    
    Integral Vision, Inc. 2004 Employee Stock Option Plan (filed as exhibit 10.11 to the
registrants Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by
reference).16
    
    Letter regarding change in certifying accountant (filed as Exhibit 16 to registrants Form
10-K for the year ended December 31, 2002, SEC file 0-12728, and incorporated herein by
reference).21
    
    Subsidiary of the registrant.23.1
    
    Consent of Rehmann Robson, independent registered public accounting firm.23.2
    
    Consent of Moore Stephens Doeren Mayhew, independent auditors.31.1
    
    Certification of Chief Executive Officer of periodic report pursuant to Rule 13a-15(e) or Rule
15d-15(e).31.2
    
    Certification of Chief Financial Officer of periodic report pursuant to Rule 13a-15(e) or Rule
15d-15(e).32.1
    
    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.(b)
    
    Reports on Form 8-K:None(c)
    
    Exhibits  The response to this portion of ITEM 15 is submitted as a separate section of this
report.(d)
    
    Financial statement schedules   The response to this portion of ITEM 15 is submitted as a
separate section of this report.
   *
    
    The Company has been granted confidential treatment with respect to certain portions of this
exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 18




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Date: March 29, 2005
    
    
    
    
    
    INTEGRAL VISION, INC.By:
    
    /S/ CHARLES J. DRAKECharles J. Drake, Chairman of the Board 
and Chief Executive OfficerBy:
    
    /S/ MARK R. DOEDEMark R. Doede, President, Chief Operating
Officer and Chief Financial Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated. /S/ CHARLES J. DRAKE
    
    Chairman of the Board, ChiefCharles J. Drake
    
    Executive Officer, and Director/S/ MAX A. COON
    
    Vice Chairman, Secretary and DirectorMax A. Coon/S/ VINCENT SHUNSKY
    
    Treasurer and DirectorVincent Shunsky/S/ WILLIAM B. WALLACE
    
    DirectorWilliam B. Wallace/S/ SAMUEL O. MALLORY
    
    DirectorSamuel O. Mallory
 19




---



##### Table of Contents



Annual Report on Form 10K ITEM 15(a)(1) and (2), (c) and (d) List of Financial Statements and Financial Statement Schedules Certain Exhibits Financial Statement Schedules Years Ended December 31, 2004, 2003, and 2002 INTEGRAL VISION, INC. Farmington Hills, Michigan 20




---



##### Table of Contents



Form 10-K - ITEM 15(a)(1) and (2)
Integral Vision, Inc. and Subsidiary List of Financial Statements and Financial Statement Schedules  (a)(1)
    The following consolidated financial statements of Integral Vision, Inc.
and subsidiary are included in ITEM 8: Report of Rehmann Robson, Independent Registered Public Accounting Firm Report of Moore Stephens Doeren Mayhew, Independent Auditors Consolidated Balance Sheets-December 31, 2004 and 2003 Consolidated Statements of Operations-Years ended December 31, 2004, 2003 and
2002 Consolidated Statements of Stockholders Deficit -Years ended December 31,
2004, 2003, and 2002 Consolidated Statements of Cash Flows-Years ended December 31, 2004, 2003 and
2002 Notes to Consolidated Financial Statements  (2)
    The following Consolidated Financial Statement schedule of Integral
Vision, Inc. and subsidiary is submitted herewith: Schedule II Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted. 21




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders
Integral Vision, Inc.
Farmington Hills, Michigan We have audited the accompanying consolidated balance sheets of Integral Vision, Inc. and
subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of operations,
stockholders deficit and cash flows for each of the two years then ended. In connection with our
audit of the consolidated financial statements, we also have audited the financial statement
schedules for 2004 and 2003 as listed in the accompanying index at Item 15(a). These consolidated
financial statements and the financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
and the financial statement schedule based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (U.S.) Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Integral Vision, Inc. and subsidiary as
of December 31, 2004 and 2003, and the consolidated results of their operations and their cash
flows for each of the two years then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related financial statement
schedules for 2004 and 2003, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the information set forth
therein. The accompanying consolidated financial statements and the financial statement schedules have been
prepared assuming the Company will continue as a going concern. As described in Note N to the
consolidated financial statements, the Company is sustaining recurring losses from operations and
is having difficulties generating sufficient cash flow to meet its obligations. These conditions
raise substantial doubt about the Companys ability to continue as a going concern. Managements
plans in regard to this matter are also described in Note N. The consolidated financial statements
and the financial statement schedule do not include any adjustments that might result from the
outcome of this uncertainty. /S/ Rehmann Robson
 Troy, Michigan
March 11, 2005 22




---



##### Table of Contents



Report of Independent Auditors To the Board of Directors and Stockholders
Integral Vision, Inc.
Farmington Hills, MI We have audited the
accompanying consolidated statements of operations, stockholders equity (deficit) and
cash flows of Integral Vision, Inc. and Subsidiary for the year ended December 31, 2002. In connection with our audit of the consolidated
financial statements, we also have audited the financial statement schedule for 2002 as listed in
the accompanying index at ITEM 15(a). These consolidated financial statements and the financial
statement schedule are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements and the financial statement schedule
based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of their operations and
their cash flows for the year ended
December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related financial
statement schedule for 2002, when considered in relation to the basic consolidated financial
statements taken as a whole presents fairly, in all material respects, the information set forth
therein. The accompanying consolidated financial statements and the financial statement schedule have been
prepared assuming that the Company will continue as a going concern. As discussed in Note N to the
consolidated financial statements, the Company is suffering recurring losses from operations and
its difficulties in generating sufficient cash flow to meet its obligations raise substantial doubt
about its ability to continue as a going concern. Managements plans in regard to this matter are
also described in Note N. The consolidated financial statements and the financial statement
schedule do not include any adjustments that might result from the outcome of this uncertainty. /S/ Moore Stephens Doeren Mayhew
Troy, Michigan
March 19, 2003 23




---



##### Table of Contents



Consolidated Balance SheetsIntegral Vision, Inc. and Subsidiary December 312004
    
    
    2003(in thousands)AssetsCurrent assetsCash
    
    $
    191
    
    
    $
    42Accounts receivable, less allowance of $2,000 ($166,000 in 2003)
    
    
    45
    
    
    
    14Inventories
-  Note A
    
    
    401
    
    
    
    168Other current assets
    
    
    43
    
    
    
    48Total current assets
    
    
    680
    
    
    
    272Property and equipmentLeasehold Improvements
    
    
    43
    
    
    
    43Production and engineering equipment
    
    
    134
    
    
    
    110Furniture and fixtures
    
    
    62
    
    
    
    64Vehicles
    
    
    18
    
    
    
    18Computer equipment
    
    
    135
    
    
    
    160392
    
    
    
    395Less accumulated depreciation
    
    
    371
    
    
    
    368Net property and equipment
    
    
    21
    
    
    
    27Other assetsCapitalized computer software development costs, less accumulated amortization
of $7,666,000 ($7,495,000 in 2003) -  Notes A, C, J, and K
    
    
    151
    
    
    
    323Patents,
less accumulated amortization of $457,000 ($428,000 in 2003) -  Notes A and C
    
    
    20
    
    
    
    45171
    
    
    
    368$
    872
    
    
    $
    667Liabilities and Stockholders DeficitCurrent liabilitiesNotes
payable -  Note C
    
    $
    1,313
    
    
    $
    1,171Accounts payable
    
    
    221
    
    
    
    412Current
maturities of long-term debt -  Note C
    
    
    
    
    
    
    666Accrued
compensation and related costs -  Note L
    
    
    283
    
    
    
    282Accrued
state income taxes -  Note B
    
    
    95
    
    
    
    166Accrued
interest -  Note C
    
    
    345
    
    
    
    403Other accrued liabilities
    
    
    227
    
    
    
    64Total current liabilities
    
    
    2,484
    
    
    
    3,164Long-term debt, less current maturities and original issue discount -
Note C
    
    
    2,355
    
    
    
    1,425Total Liabilities
    
    
    4,839
    
    
    
    4,589Stockholders deficitPreferred stock, 400,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, without par value, stated value $.20 per share; 31,000,000 shares
 authorized;
14,877,638 shares issued and outstanding (9,429,901 in 2003) -  Note H
    
    
    2,976
    
    
    
    1,886Additional paid-in capital -  Note C
    
    
    33,018
    
    
    
    31,694Accumulated deficit
    
    
    (39,961
    )
    
    
    (37,502
    )Total stockholders deficit
    
    
    (3,967
    )
    
    
    (3,922
    )$
    872
    
    
    $
    667
 See accompanying notes 24




---



##### Table of Contents



Consolidated Statements of OperationsIntegral Vision, Inc. and Subsidiary Year ended December 312004
    
    
    2003
    
    
    2002(in thousands, except per share data)Net revenues
    
    $
    1,542
    
    
    $
    641
    
    
    $
    1,579Costs of revenues:Direct costs
of revenues   Note K
    
    
    1,115
    
    
    
    341
    
    
    
    770Depreciation
and amortization  Notes J & K
    
    
    215
    
    
    
    263
    
    
    
    407Total costs of revenues
    
    
    1,330
    
    
    
    604
    
    
    
    1,177Gross margin
 Note A
    
    
    212
    
    
    
    37
    
    
    
    402Other costs and expenses:Marketing
    
    
    261
    
    
    
    223
    
    
    
    557General and
administrative  Note L
    
    
    1,195
    
    
    
    802
    
    
    
    1,054Engineering and development
    
    
    909
    
    
    
    663
    
    
    
    852Total other costs and expenses
    
    
    2,365
    
    
    
    1,688
    
    
    
    2,463Operating loss
    
    
    (2,153
    )
    
    
    (1,651
    )
    
    
    (2,061
    )(Loss) gain
on sales of assets  Note J
    
    
    
    
    
    
    (7
    )
    
    
    150Other income
  Note B
    
    
    129
    
    
    
    89
    
    
    
    59Interest
income  Notes B & L
    
    
    
    
    
    
    
    
    
    
    11Interest
expense  Note C
    
    
    (436
    )
    
    
    (370
    )
    
    
    (251
    )Foreign
currency translation gain (loss)  Note O
    
    
    1
    
    
    
    2
    
    
    
    (201
    )Loss from operations before income taxes
    
    
    (2,459
    )
    
    
    (1,937
    )
    
    
    (2,293
    )Credit for
income taxes  Note D
    
    
    
    
    
    
    
    
    
    
    90Net loss
    
    $
    (2,459
    )
    
    $
    (1,937
    )
    
    $
    (2,203
    )Basic and diluted loss per share:Net loss
    
    $
    (0.18
    )
    
    $
    (0.21
    )
    
    $
    (0.23
    )Weighted average number of shares of common
stock and common stock equivalents outstanding
    
    
    13,435
    
    
    
    9,430
    
    
    
    9,430
 See accompanying notes 25




---



##### Table of Contents



Consolidated Statements of Stockholders DeficitIntegral Vision, Inc. and Subsidiary Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    OtherShares
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    Officer
    
    
    ComprehensiveOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Notes
    
    
    Income(Loss)
    
    
    Total(in thousands, except number of common shares outstanding)Balances at January 1, 2002
    
    
    9,429,901
    
    
    $
    1,886
    
    
    $
    31,265
    
    
    $
    (33,362
    )
    
    $
    (250
    )
    
    $
    (211
    )
    
    $
    (672
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,203
    )
    
    
    
    
    
    
    
    
    
    
    (2,203
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    211
    
    
    
    211Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,992
    )Net officer note reductions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    250Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111Balances at December 31, 2002
    
    
    9,429,901
    
    
    
    1,886
    
    
    
    31,376
    
    
    
    (35,565
    )
    
    
    
    
    
    
    
    
    
    
    (4,295
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,937
    )
    
    
    
    
    
    
    
    
    
    
    (1,937
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,937
    )Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318Balances at December 31, 2003
    
    
    9,429,901
    
    
    $
    1,886
    
    
    $
    31,694
    
    
    $
    (37,502
    )
    
    $
    
    
    
    $
    
    
    
    $
    (3,922
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,459
    )
    
    
    
    
    
    
    
    
    
    
    (2,459
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,459
    )Warrants exercised
    
    
    4,000,737
    
    
    
    800
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    882Stock options exercised
    
    
    224,000
    
    
    
    45
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Restricted shares issued
    
    
    1,223,000
    
    
    
    245
    
    
    
    1,259
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,504Balances at December 31, 2004
    
    
    14,877,638
    
    
    $
    2,976
    
    
    $
    33,018
    
    
    $
    (39,961
    )
    
    $
    
    
    
    $
    
    
    
    $
    (3,967
    )
 See accompanying notes 26




---



##### Table of Contents



Consolidated Statements of Cash FlowsIntegral Vision, Inc. and Subsidiary Year Ended December 312004
    
    
    2003
    
    
    2002(in thousands)Operating ActivitiesNet loss
    
    $
    (2,459
    )
    
    $
    (1,937
    )
    
    $
    (2,203
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    21
    
    
    
    32
    
    
    
    145Amortization
    
    
    276
    
    
    
    333
    
    
    
    417Net loss (gain) on disposal of assets
    
    
    
    
    
    

    7
    
    
    
    (150
    )Value assigned to warrants issued in connection with Class 2 Notes
    
    
    
    
    
    
    
    
    
    
    11Changes in operating assets and liabilities:Accounts receivable
    
    
    (31
    )
    
    
    139
    
    
    
    179Inventories
    
    
    (233
    )
    
    
    160
    
    
    
    (120
    )Other
    
    
    5
    
    
    
    33
    
    
    
    331Accounts payable and other current liabilities
    
    
    229
    
    
    
    (292
    )
    
    
    (141
    )Net cash used in operating activities
    
    
    (2,192
    )
    
    
    (1,525
    )
    
    
    (1,531
    )Investing ActivitiesSale of property and equipment
    
    
    
    
    
    
    
    
    
    
    55Purchase of property and equipment
    
    
    (15
    )
    
    
    (7
    )
    
    
    (43
    )Proceeds from sale of disc inspection technology
    
    
    
    
    
    
    
    
    
    
    100Other
    
    
    (2
    )
    
    
    (4
    )
    
    
    (7
    )Net cash (used in) provided by investing activities
    
    
    (17
    )
    
    
    (11
    )
    
    
    105Financing ActivitiesProceeds from sale of Class 2 Notes
    
    
    775
    
    
    
    920
    
    
    
    907Repayments on Class 2 Notes
    
    
    (290
    )
    
    
    (254
    )
    
    
    (396
    )Proceeds from sale of Class 3 Notes
    
    
    478
    
    
    
    
    
    
    
    Repayments on long term notes
    
    
    (137
    )
    
    
    
    
    
    
    Repayments on short term notes
    
    
    
    
    
    
    (70
    )
    
    
    Proceeds from short term note receivable
    
    
    
    
    
    
    
    
    
    
    70Issuance of restricted common stock
    
    
    1,504
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    28
    
    
    
    
    
    
    
    Proceeds from sales of debentures, net of discount
    
    
    
    
    
    
    583
    
    
    
    490Proceeds from sales of warrants in connection with Class 1 Notes
    
    
    
    
    
    
    318
    
    
    
    100Net cash provided by financing activities
    
    
    2,358
    
    
    
    1,497
    
    
    
    1,171Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    211Increase (decrease) in cash
    
    
    149
    
    
    
    (39
    )
    
    
    (44
    )Cash at beginning of year
    
    
    42
    
    
    
    81
    
    
    
    125Cash at end of year
    
    $
    191
    
    
    $
    42
    
    
    $
    81
 See accompanying notes 27




---



##### Table of Contents



Notes to Consolidated Financial StatementsIntegral Vision, Inc. and Subsidiary Note A - Significant Accounting Policies Nature of Business Integral Vision, Inc. (or the Company) develops, manufactures and markets
microprocessor-based process monitoring and control systems for use in industrial
manufacturing environments. The principle application for the Companys products is optical
display inspection (machine vision products). The Companys product offerings include
LCI-Professional, SharpEye, ChromaSee, and Lifetime Tester. The Companys products are
generally sold as capital goods. Depending on the application, machine vision systems have
an indefinite life. Machine vision applications are more likely to require replacement due
to possible technological obsolescence rather than physical wear. Principles of
Consolidation The consolidated financial statements include the accounts of the Company and its 100%
owned subsidiary: Integral Vision LTD, United Kingdom. Upon consolidation, all significant
intercompany accounts and transactions are eliminated. Use of Estimates The preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. Estimates also affect the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Translation of Foreign Currencies The consolidated financial statements of Integral Vision LTD were translated into United
States dollar equivalents at exchange rates as follows: balance sheet accounts at year-end
rates; income statement accounts at average exchange rates for the year. Transaction gains
and losses are reflected in net earnings and are not significant. Accounts Receivable Trade accounts receivable primarily represent amounts due from equipment manufacturers
and end-users in North America, Asia and Europe. The Company maintains an allowance for the
inability of our customers to make required payments. These estimates are based on historical
data, the length of time the receivables are past due and other known factors. Major Customers The nature of the Companys product offerings may produce sales to one or a small number
of customers in excess of 10% of total sales in any one year. It is possible that the
specific customers reaching this threshold may change from year to year. Loss of any one of
these customers could have a material impact on the Companys results of operations. For
2004, sales to one customer represented 80% of consolidated net
sales. There were no amounts due from this customer at December
31, 2004. For 2003, sales to three certain customers represented 63%, 14%, and 11% of
consolidated net sales, respectively. There were no amounts due from
these customers at December 31, 2003. For 2002, sales to two
customers represented 13.2%, and 13.7% of consolidated net sales, respectively. 28




---



##### Table of Contents



Inventories Inventories are stated at the lower of first-in, first-out (FIFO) cost or market.
Cost is computed using currently adjusted standards which approximates actual costs on a FIFO
basis. The Company assesses the recoverability
of all inventory to determine whether adjustments for impairment are required. At December
31, inventories consisted of the following amounts (net of obsolescence reserves of $354,000
in 2004 and $671,000 in 2003): 2004
    
    

2003(in thousands)Raw materials
    
    $
    149
    
    
    $
    70Work in process
    
    
    183
    
    
    
    48Finished goods
    
    
    69
    
    
    
    50$
    401
    
    
    $
    168
 Management periodically performs an analysis of the Companys inventory to determine if its
cost exceeds estimated net realizable value. Over the last several years, given the market
conditions and the direction of the Company, management discontinued certain product lines
and attempted to liquidate the remaining inventory related to those product lines. Property and Equipment Property and equipment is stated on the basis of cost. Expenditures for normal repairs
and maintenance are charged to operations as incurred. Depreciation is computed by the straight-line method based on the estimated useful lives of
the assets (buildings-40 years, other property and equipment-3 to 10 years). Impairment of Long-lived Assets The Company reviews its long-lived assets, including property, equipment and
intangibles, for impairment whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully recoverable. An impairment loss would
be recognized when estimated undiscounted future cash flows expected to result from the use
of the asset and its eventual disposition are less than the carrying amount of the asset. Capitalized Computer Software Development Costs Computer software development costs are capitalized after the establishment of
technological feasibility of the related technology. These costs are amortized following
general release of products based on current and estimated future revenue for each product
with an annual minimum equal to the straight-line amortization over the remaining estimated
economic life of the product (not to exceed 5 years). Management continually reviews the net
realizable value of capitalized software costs. At the time that a determination is made
that capitalized software amounts exceed the estimated net realizable value of amounts
capitalized, any amounts in excess of the estimated realizable amounts are written off. Total software development costs incurred internally by the Company were $909,000,
$663,000, and $852,000 in 2004, 2003 and 2002 respectively. Amortization of the capitalized
costs amounted to $172,000, $193,000, and $194,000 in 2004, 2003, and 2002, respectively. Patents Total patent costs incurred and capitalized by the Company were $4,000, $2,000, and
$7,000 in 2004, 2003 and 2002, respectively. Patents are stated at cost less accumulated
amortization. Amortization of the patents amounted to $30,000, $46,000, and $178,000 in
2004, 2003, and 2002, respectively. These costs are amortized on a straight-line basis over
the estimated useful lives of the assets (not to exceed 5 years). 29




---



##### Table of Contents



Revenue Recognition The Company recognizes revenue in accordance with SOP 97-2, Software Revenue Recognition
and Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. Revenue is recognized when persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the selling price is fixed or determinable and
collectibility is reasonably assured. The Company accounts for certain product sales of its flat panel display inspection systems
as multiple-element arrangements. If specific customer acceptance requirements are met, the
Company recognizes revenue for a portion of the total contract price due and billable upon
shipment, with the remainder recognized when it becomes due (generally upon acceptance). The
Company recognizes all other product sales with customer acceptance provisions upon final
customer acceptance. The Company recognizes revenue from the sale of spare parts upon
shipment. Revenue from service contracts is recognized over the life of the contract.
Revenue is reported net of sales commissions. Concentrations of Credit and Other Risk Financial instruments which potentially subject the Company to concentrations of credit
risk consist principally of accounts receivable. A significant portion of the Companys
customers are located in Asia, primarily Japan, Taiwan, and Korea, and in Europe. Therefore,
the Companys sales to these customers may be adversely affected by the overall health of
their national economies, including the effects of currency exchange rate fluctuations and
political risks. The Company generally does not require collateral for most of its trade
accounts receivable. For sales to some of its customers in certain geographic regions, the
Company requires letters of credit. Substantially all of the Companys revenue is invoiced in
U.S. dollars. The Company believes its credit evaluation and monitoring mitigates its credit
risk. Advertising Advertising costs are expensed as incurred. Advertising costs were approximately $0,
$13,000, and $75,000 in 2004, 2003, and 2002, respectively. Income Taxes The Company accounts for income taxes in accordance with FASB Statement No. 109,
Accounting for Income Taxes(FAS 109), which requires the use of the liability method in
accounting for income taxes. Under FAS 109, deferred tax assets and liabilities are measured
based on differences between the financial reporting and tax bases of assets and liabilities
using enacted tax rates and laws that will be in effect when differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation allowance
is provided for net deferred tax assets if it is more likely than not that these items will
either expire before the Company is able to realize their benefit, or future deductibility is
uncertain. All deferred tax assets are offset by a valuation allowance. Fair Value Disclosure The carrying amounts of certain financial instruments such as cash, accounts receivable,
accounts payable and long-term debt approximate their fair values. The fair value of the
long-term financial instruments is estimated using discounted cash flow analysis and the
Companys current incremental borrowing rates for similar types of arrangements. Comprehensive Income The Company displays comprehensive income in the Consolidated Statements of Stockholders
Deficit. At January 1, 2002, accumulated other comprehensive loss consisted of unrealized loss
resulting from foreign currency translation adjustments. The accumulated unrealized losses from
foreign currency translation adjustments were recognized in 2002. 30




---



##### Table of Contents



Stock Options The Company has elected to follow APB No. 25 Accounting for Stock Issued to Employees
and related interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Companys employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is recognized. The
Company has elected to adopt only the disclosure provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, as amended by FASB Statement No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. Pro forma information regarding
net income and earnings per share is required by FAS 123 and has been determined as if the
Company had accounted for its employee stock options granted subsequent to September 30,
1995 under the fair value method of FAS 123 (see Note H and Recently Issued Accounting
Standards below). Reclassifications Certain amounts have been reclassified in prior periods presentations to conform to
the current years presentation. Contingencies and Litigation The Company makes an assessment of the probability of an adverse judgment resulting
from current and threatened litigation. The Company accrues the cost of an adverse judgment
if, in managements estimation, an adverse settlement is probable and management can
reasonably estimate the ultimate cost of such litigation. The Company has made no such
accruals at December 31, 2004. Recently Issued Accounting Standards In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151 Inventory Costs, an Amendment of ARB No. 43,
Chapter 4. SFAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) be recognized as
current period charges. It also requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company does not believe that the adoption of SFAS 151 will have a material
impact on its results of operations or financial position. In December 2004, the FASB issued SFAS 123 (revised 2004), Share-BasedPayment, (SFAS 123R).
SFAS 123R addresses the accounting for share-based payments to employees, including grants
of employee stock options. Under the new standard, companies will no longer be able to
account for share-based compensation transactions using the intrinsic method in accordance
with APB Opinion No. 25, Accounting for Stock Issued toEmployees. Instead, the Company
will be required to account for such transactions using a fair-value method and recognize
the expense in the consolidated statement of income. SFAS 123R will be effective for
periods beginning after June 15, 2005 and allows, but does not require, the Company to
restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments
under SFAS 123R. The Company has not yet determined which fair-value method and
transitional provision it will follow. However, the Company expects that the adoption of
SFAS123R will not have a significant impact on its results of operations nor does it expect
that the adoption of SFAS 123R will impact its overall financial position. See Note 8 for
the proforma impact on net income and net income per share from calculating stock-based
compensation costs under the fair value alternative of SFAS 123. However, the calculation
of compensation cost for share-based payment transactions after the effective date of SFAS
123R may be different from the calculation of compensation cost under SFAS 123, but such
differences have not yet been quantified. In December 2004, the FASB issued SFAS 153 Exchanges of Nonmonetary Assets, and Amendment of
APB Opinion No.29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in APB Opinion No.
29, however, included certain exceptions to the principle. SFAS 153 amends APB 31




---



##### Table of Contents



Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset
exchanges in fiscal periods beginning after June 15, 2005. The Company does not believe
that the adoption of SFAS 153 will have a material impact on its results of operations or
financial position. Note B  Sale of Welding Controls Division The Company incurred both Federal and State income tax liabilities as a result of the
sale of the assets of it Welding Controls division in 1999. The Company incurred a Michigan
Single Business Tax (SBT) liability of approximately $120,000 for the 1999 tax year as a
result of the transaction. At December 31, 2004, this liability was not yet paid in full
and was included in accrued state income taxes in the consolidated balance sheet. Including
interest and penalties, approximately $95,000 was outstanding at December 31, 2004 for this
obligation, which is included in accrued state income taxes in the consolidated balance
sheet. The Company is making monthly payments of approximately $6,300 to the taxing
authority. The buyer also assumed a liability to Square D in the amount of $1.8 million in accordance
with the purchase agreement. This liability resulted from the settlement of patent
litigation in 1994. The settlement required payments of $300,000 per year for ten years.
In the event the buyer fails to make the required payments, Integral Vision may be obligated
for those amounts due. As of December 31, 2004, no notifications have been made that the
Company is obligated for any payments not made. The final payment is due in October 2005. Note C  Long-Term Debt and Other Financing Arrangements At December 31, 2004, under the terms of the Companys Note and Warrant Purchase
agreement, as amended, the Company could issue up to $5.5 million of senior debentures,
which consists of Class 1, Class 2, and Class 3 Notes which are secured by all intellectual
property of the Company. Class 2 Notes are working capital notes, are secured by accounts
receivable of the Company, and are subordinated to the Class 1 Notes issued prior to April
16, 2002. In September 2003, the holders of all of the then outstanding Class 2 Notes
agreed to modify the maturity dates of those Notes to April 30, 2004. In December 2003,
certain of the Class 2 Notes were amended to have maturity dates of May 31, 2004. The
purchasers of the Class 2 Notes receive warrants for the purchase of the Companys common
stock when the Note is repaid. Class 2 Warrants entitle the holder to purchase one share of
Common Stock for each $1 in value of the Class 2 Note multiplied by a fraction, the
numerator of which is the number of days such Class 2 note is outstanding and the
denominator of which is 365. The price of these shares shall be approximately 150% of the
recent fair value of the Common Stock as of the date of the issuance of the Class 2 Note.
Based on their respective maturity dates, the number of common shares that could be
purchased with Class 2 warrants as of December 31, 2004 is estimated to be 1,448,580. In
August 2003, the holders of those Notes agreed to a modification to the Note and Warrant
Purchase Agreement that created a new Class 3 Note which is convertible into Integral
Vision, Inc. common stock at a conversion rate set by the Companys board of directors at
the date of issuance. Class 1 Notes issued have maturities of up to four years, an interest
rate of 10%, and the purchasers of the Notes receive warrants for the purchase of the
Companys common stock. The value assigned to warrants is included in additional paid-in
capital and the discount is amortized over the life of the note. Additionally, the
directors will determine the conversion rate at the date of issuance, subject to change in
the event additional shares are issued in the future. In March 2004, the holders of the
Class 1 and Class 2 Notes agreed to an additional modification to the Note and Warrant
Purchase Agreement that increased the maximum amount of the Notes outstanding to $5.5
million. The maturity date on substantially all of the then outstanding Class 2 Notes was
extended to December 31, 2005. The amended Note and Warrant Purchase Agreement provides
that, as a result of the Companys shareholders approval of managements proposal to
increase the Companys authorized stock to 31,000,000 shares at the Companys annual meeting
of its shareholders that was held on May 6, 2004, the following has occurred: 32




---



##### Table of Contents




    The accrued interest on outstanding Class 1 Notes as of December 31, 2003 in the
amount of approximately $331,000 has been exchanged for new Class 3 Notes due July
3, 2006 with interest at 8% payable semi-annually beginning April 1, 2005 and
convertible into shares of the Companys common stock at $0.75 per share.
    The initial interest payment due on Class 1 Notes for interest accruing after
December 31, 2003 is due April 1, 2005.
    Quarterly principal payments on Class 1 Notes have been eliminated, with all
principal due at maturity.
    $330,000 of principal on Class 1 Notes issued prior to April 16, 2002 has been
exchanged for Class 3 Notes due February 27, 2007 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys
common stock at $0.75 per share.
    Class 2 Notes outstanding at February 29, 2004, plus interest then accrued, may
be exchanged for Class 3 Notes due December 31, 2005 with interest at 8% payable
semi-annually beginning April 1, 2005 and convertible into shares of the Companys
common stock at $0.75 per share. On the modification date, the market price of the Companys common stock was approximately
$1.50 per share. The Board of Directors considered the $0.75 conversion price was justified
given the concessions received in connection with the debt, the fact that the shares are
restricted, and other factors. During 2004, $775,000 of Class 2 Notes and $478,000 of Class 3 Notes were placed.
Additionally, Warren, Cameron, Asciutto, & Blackmer, P.C. (the Companys corporate counsel),
agreed to convert $250,000 of its $354,000 note payable into a Class 3 Note. The remaining
$104,000 was repaid in June 2004. Also during the year, certain holders of Class 1 Notes
exercised their warrants to purchase 1,540,000 shares of the Companys common stock at $0.25
per share, the proceeds of which were used to repay the face value of the respective Class 1
Notes. Mr. Drake exercised his warrants to purchase 1,890,000 shares of the Companys
common stock at $0.25 per share, the proceeds of which were used to repay the face value of
the his Class 1 Notes. Maxco, Inc. exercised its warrants to purchase 240,000 shares of the
Companys common stock at $0.25 per share, the proceeds of which were used to repay the face
value of its Class 1 Note. Max A. Coon (a director of the Company) exercised his warrants
to purchase 270,000 and 60,737 shares of the Companys common stock at $0.25 and $0.75 per
share, respectively, the proceeds of which were used to repay the face value of the his
Class 1 and Class 3 Notes. In total, approximately $985,000 in face value of Class 1 Notes
was retired in exchange for non-cash considerations representing the value of common shares
issued upon exercise of the warrants. At December 31, 2004, a total of $1,140,000 of the
Class 1 Notes, $1,207,000 of the Class 2 Notes, and $1,355,326 of the Class 3 Notes were
outstanding. The following table details the projected principal and interest payments to be paid in
2005: Class 1
    
    
    Class 2
    
    
    Class 3Due date
    
    Interest
    
    
    Principal
    
    
    Interest
    
    
    Interest
    
    
    TotalMarch 31
    
    $
    
    
    
    $
    265
    
    
    $
    23
    
    
    $
    
    
    
    $
    288April 1
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    252April 15
    
    
    
    
    
    
    70
    
    
    
    1
    
    
    
    
    
    
    
    71April 30
    
    
    
    
    
    
    205
    
    
    
    4
    
    
    
    
    
    
    
    209October 1
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    112December 31
    
    
    
    
    
    
    942
    
    
    
    222
    
    
    
    
    
    
    
    1,164$
    205
    
    
    $
    1,482
    
    
    $
    250
    
    
    $
    159
    
    
    $
    2,096
 The holders
of the above debt that is due March 31, 2005 through
April 30, 2005 have agreed to allow the Company to defer payment
until April 30, 2005. In connection with the private placement of $7.0 million of debentures in 1997, which were
retired in 1999, the Company issued warrants for the purchase of 1,400,000 Integral Vision
common shares at $6.86 per share through June 30, 2005, all of which were outstanding at
December 31, 2004. Pursuant to the 1997 Note and Warrant Purchase agreement, these warrants
have been re-priced and additional warrants were required to be issued related to
non-dilution agreements as a result of subsequent warrant issues. At December 31, 2004, the
holders of these warrants 33




---



##### Table of Contents



had the right to purchase up to 3,827,343 shares of the Companys
common stock at $2.51 per share. During 2004 employee stock options for the purchase of 224,000 shares of the Companys
common stock at prices ranging from $0.10 to $0.24 per share were exercised, resulting in
net proceeds of approximately $28,000. Subsequent to December 31, 2004, $275,000 of Class 2 notes was placed. At December 31, 2004, the Company had a long term note payable to Maxco, Inc. (a 15% owner
of the Company) of approximately $106,000 with an interest rate of prime plus 0.5%. This
note matures in July 2005. Additionally, Maxco, Inc. provides consulting services to the Company. These services
include assistance with financial statement preparation, compliance with governmental filing
requirements, and assistance with certain financing arrangements. The Company and Maxco
have agreed on terms for payment to Maxco for current and prospective services. The Board
has determined that these services for the six months ending March 31, 2005 will be paid by
the issuance of 42,000 shares of unregistered stock in the Company. Starting April 1, 2005,
the Company will pay Maxco $8,750 per month for each month such services are rendered. The
amount charged to operations in the fourth quarter of 2004 for this compenstion amounted to
$33,000 which is based on the average closing price of the Companys common stock over that
period. A summary of the Companys debt obligations as of December 31 is as follows: 2004
    
    
    2003(in thousands)Long Term Debt:Face value Class 1 Notes
    
    $
    1,140
    
    
    $
    2,455Less Original Issue Discount (OID)
    
    
    (140
    )
    
    
    (364
    )Class 3 Notes
    
    
    1,355
    
    
    
    Less Current Maturities
    
    
    
    
    
    
    (666
    )Net Long Term Debt
    
    $
    2,355
    
    
    $
    1,425Short Term Debt:Class 2 Notes
    
    $
    1,207
    
    
    $
    722Other Short Term Debt
    
    
    106
    
    
    
    449Total Short Term Debt
    
    $
    1,313
    
    
    $
    1,171
 Interest paid in 2004 was approximately $162,000 compared to interest expensed of $436,000.
The $274,000 difference primarily represents amounts accrued for interest on the Notes and
the amount of discount on the debentures amortized in 2004. Interest paid in 2003 was
approximately $16,000 compared to interest expensed of $370,000. The $354,000 difference
primarily represents amounts accrued for interest on the Notes and the amount of discount on
the debentures amortized in 2003. Interest paid in 2002 was approximately $39,000 compared
to interest expensed of $251,000. The $212,000 difference primarily represents amounts
accrued for interest on the debentures and the amount of discount on the debentures
amortized in 2002. Note D   Income Taxes The Company establishes valuation allowances in accordance with the provisions of FASB
Statement No. 109, Accounting for Income Taxes. The Company continually reviews
realizability of deferred tax assets and recognizes these benefits only as reassessment
indicates that it is more likely than not that the benefits will be realized. As of December 31, 2004, the Company has cumulative net operating loss carryforwards
approximating $39.4 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, and $2.7 million in 2024) 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 subsidiary in 34




---



##### Table of Contents



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 $815,000 in 2004, $2.0 million in 2003, and
$1.6 million in 2002. 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: 2004
    
    
    2003(in thousands)Deferred tax liabilities:Deductible software development costs, net of amortization
    
    $
    51
    
    
    $
    110Total deferred tax liabilities
    
    
    51
    
    
    
    110Deferred tax assets:Net operating loss carryforwards
    
    
    13,382
    
    
    
    12,467Credit carryforwards
    
    
    331
    
    
    
    331Inventory reserve
    
    
    130
    
    
    
    239Other
    
    
    118
    
    
    
    168Total deferred tax assets
    
    
    13,961
    
    
    
    13,205Valuation allowance for deferred tax assets
    
    
    13,910
    
    
    
    13,095Net deferred tax assets
    
    
    51
    
    
    
    110Net deferred taxes
    
    $
    
    
    
    $
    
 The reconciliation of income taxes computed at the U.S. federal statutory tax rates to
income tax expense (credit) is as follows: 2004
    
    
    2003
    
    
    2002(in thousands)Consolidated net income (loss)
    
    $
    (2,459
    )
    
    $
    (1,937
    )
    
    $
    (2,203
    )Foreign net income (loss)
    
    
    
    
    
    
    3,928
    
    
    
    2,648U.S. net income (loss)
    
    $
    (2,459
    )
    
    $
    (5,865
    )
    
    $
    (4,851
    )Tax provision (credit) at U.S. statutory rates
    
    $
    (836
    )
    
    $
    (1,995
    )
    
    $
    (1,649
    )Change in valuation allowance
    
    
    826
    
    
    
    1,977
    
    
    
    1,629Nondeductible expenses
    
    
    10
    
    
    
    18
    
    
    
    20Other
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 There were no income tax payments in 2004, 2003, or 2002. 35




---



##### Table of Contents



Note E  Loss per Share The following table sets forth the computation of basic and diluted loss per share: 2004
    
    
    2003
    
    
    2002(in thousands, except per share data)Numerator for basic and diluted
loss per share - loss available
to common stockholdersNet loss
    
    $
    (2,459
    )
    
    $
    (1,937
    )
    
    $
    (2,203
    )*there was no effect of dilutive
securities, see belowDenominator for basic and
diluted loss per share -
weighted average shares
    
    
    13,435
    
    
    
    9,430
    
    
    
    9,430*there was no effect of dilutive
securities, see belowBasic and diluted loss per share:Net loss
    
    $
    (0.18
    )
    
    $
    (0.21
    )
    
    $
    (0.24
    )
 Warrants and options outstanding were not included in the computation of diluted
earnings per share because the inclusion of these options would have an antidilutive effect.
For additional disclosures regarding stock options and warrants see Note H. Note F  Employee Savings Plan The Company has an Employee Savings Plan covering substantially all United States
employees. The Company contributes $.20 to the Plan for every dollar contributed by the
employees up to 6% of their compensation. The Plan also provides for discretionary
contributions by the Company as determined annually by the Board of Directors. Company
contributions charged to operations under the Plan were $8,000, $6,000, and $7,000 for 2004,
2003 and 2002, respectively. Note G  Lease Commitments and Contingencies The Company uses equipment and office space under operating lease agreements requiring
rental payments approximating $6,000 in 2005, $4,000 in 2006, $4,000 in 2007, and $3,000 in
2008. Rent expense charged to operations approximated $78,000, $70,000, and $128,000 in
2004, 2003 and 2002, respectively. Note H  Stock Options, Warrants, and Preferred Stock The Company has elected to follow APB No. 25 Accounting for Stock Issued to Employees
and related interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Companys employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is recognized. The
Company has elected to adopt only the disclosure provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, as amended by FASB Statement No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. Pro forma information regarding net loss and loss per share is required by SFAS 123 and has
been determined as if the Company had accounted for its employee stock options granted
subsequent to September 30, 1995 under the fair value method of SFAS 123. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions: 2004May
    
    
    August
    
    
    2003
    
    
    2002Expected stock price volatility
    
    
    1.330
    
    
    
    1.308
    
    
    
    1.172
    
    
    
    0.833Risk free interest rate
    
    
    2.0
    %
    
    
    2.0
    %
    
    
    2.0
    %
    
    
    3.0
    %Expected life of options in years
    
    
    7.0
    
    
    
    7.0
    
    
    
    7.0
    
    
    
    7.4
 36




---



##### Table of Contents



For purposes of pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options vesting period. The Companys pro forma information for the
years ended December 31, 2004, 2003 and 2002 is as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002(in thousands, except per share data)Pro forma net loss
    
    $
    (2,659
    )
    
    $
    (1,960
    )
    
    $
    (2,235
    )Pro forma loss per share:Basic and Diluted
    
    $
    (0.20
    )
    
    $
    (0.21
    )
    
    $
    (0.24
    )
 The Black-Scholes option valuation model was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Companys employee stock option
plan has characteristics significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of such Company options. These proforma results reflect stock
options granted only in 1995 through 2003 and may not be comparable with the results of
applying the fair market value methodology to all stock options granted prior to the initial
adoption of SFAS 123. The estimated fair value per share of the options granted in May 2004 and August 2004 was
$1.58 and $0.95, respectively. The estimated fair value per share of the options granted in
2003 and 2002 was $0.13 and $0.08, respectively In January 2002, the Compensation Committee of the Companys Board of Directors resolved to
grant 225,000 qualified stock options for the purchase of common shares with an exercise
price equal to the market price at the close of trading on the grant date, $.10 per share.
In order to facilitate this grant, Mr. Charles Drake, the Companys Chairman, agreed to
forfeit options on 144,000 shares so that they could be distributed to other key people.
Additionally, in March 2002, the Compensation Committee resolved to grant 55,000 qualified
and 20,000 non-qualified stock options for the purchase of common shares with an exercise
price equal to the market price at the close of trading on the grant date, $.24 per share. In May 2003, the Compensation Committee of the Companys Board of Directors resolved to
grant 140,000 qualified stock options for the purchase of common shares with an exercise
price equal to the market price at the close of trading on the grant date, $.15 per share.
An additional 40,000 were granted in May 2003 with an exercise price equal to the market
price at the close of trading on the grant date, $.16 per share. In order to facilitate
this grant, Mr. Charles Drake, the Companys Chairman, agreed to forfeit options on 156,000
shares so that they could be distributed to other key people. In May 2004, the Compensation Committee of the Companys Board of Directors resolved to
grant 124,000 qualified stock options for the purchase of common shares with an exercise
price equal to the market price at the close of trading on the grant date, $1.71 per share.
In August 2004, the Compensation Committee of the Companys Board of Directors resolved to
grant 100,000 qualified stock options for the purchase of common shares with an exercise
price equal to the market price at the close of trading on the grant date, $1.03 per share.
At December 31, 2004, there were options outstanding to purchase 991,000 shares of common
stock at prices ranging from $.10 to $8.50 per share. 37




---



##### Table of Contents



A summary of the status of the Option Plans at December 31, 2004 is as follows: 2004 Plan
    
    
    1999 Plan
    
    
    1995 Plan(in thousands)Options outstanding
    
    
    224
    
    
    
    387
    
    
    
    380Options exercisable
    
    
    0
    
    
    
    387
    
    
    
    380Options granted during:2004
    
    
    224
    
    
    
    0
    
    
    
    02003
    
    
    0
    
    
    
    158
    
    
    
    222002
    
    
    0
    
    
    
    202
    
    
    
    982001
    
    
    0
    
    
    
    120
    
    
    
    2152000
    
    
    0
    
    
    
    0
    
    
    
    01999
    
    
    0
    
    
    
    400
    
    
    
    2061998
    
    
    0
    
    
    
    0
    
    
    
    01997
    
    
    0
    
    
    
    0
    
    
    
    2671996
    
    
    0
    
    
    
    0
    
    
    
    132Options available for grant
    
    
    776
    
    
    
    3
    
    
    
    4
 The Compensation Committee of the Board of Directors approves option grants. The
option price is the market price on the date of the grant, and vesting generally occurs
after one year and the expiration occurs ten years from the date of the grant. A summary of option activity under all plans follows: 2004
    
    2003
    
    2002Weighted Average
    
    
    
    
    
    
    Weighted Average
    
    
    
    
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise Price(number of shares in thousands)Outstanding at beginning
of year
    
    
    1,005
    
    
    $
    0.73
    
    
    
    1,038
    
    
    $
    1.15
    
    
    
    991
    
    
    $
    1.52Granted
    
    
    224
    
    
    
    1.41
    
    
    
    180
    
    
    
    0.15
    
    
    
    300
    
    
    
    0.14Exercised
    
    
    (224
    )
    
    
    0.12
    
    
    
    0
    
    
    
    0.00
    
    
    
    0
    
    
    
    0.00Canceled
    
    
    (14
    )
    
    
    7.75
    
    
    
    (213
    )
    
    
    2.31
    
    
    
    (253
    )
    
    
    1.40Outstanding at end of year
($.10 to $8.50 per share)
    
    
    991
    
    
    
    0.92
    
    
    
    1,005
    
    
    
    0.73
    
    
    
    1,038
    
    
    
    1.15Exercisable ($.10 to
$8.50 per share)
    
    
    767
    
    
    $
    0.77
    
    
    
    825
    
    
    $
    0.85
    
    
    
    982
    
    
    $
    1.16
 Additional information regarding the range of exercise prices and weighted average
remaining life of options outstanding at December 31, 2004 follows: WeightedRange of
    
    Number

    
    Average

    
    NumberExercise Prices
    
    Outstanding

    
    Remaining Life

    
    Exercisable(number of shares in thousands)$  .10 to $1.71
    
    
    934
    
    
    
    7.4
    
    
    
    710$4.88 to $8.50
    
    
    57
    
    
    
    1.9
    
    
    
    57$  .10
to $8.50
    
    
    991
    
    
    
    7.1
    
    
    
    767
 As of December 31, 2004, the Companys Board of Directors approved the issuance of up to
$5.5 million of senior subordinated debentures. At December 31, 2004, in connection with
placements of debt under this plan, there were warrants outstanding to purchase 3,938,150
shares of the Companys common stock at a conversion price of $.25 per share, 599,141 shares
at a conversion price of $.35 per share, 109,041 shares at a conversion price of $.80 per
share, and 34,110 shares at a conversion price of $1.23 per share. Additionally, the
Company has approximately $1.4 million in Class 3 Notes payable that are convertible into
the Companys common stock as follows: 1,169,757 shares at a conversion price of $.75 per
share, 100,000 38




---



##### Table of Contents



shares at a conversion price of $1.00 per share, and 307,313 shares at a
conversion price of $1.23 per share. The Companys chairman, Charles J. Drake, has invested
a total of $180,884 of the total Class 3 Notes which are convertible into 241,178 shares of
the Companys common stock. In connection with the private placement of $7.0 million of debentures in 1997, which were
retired in 1999, the Company issued warrants for the purchase of 1,400,000 Integral Vision
common
shares at $6.86 per share through June 30, 2005, all of which were outstanding at December
31, 2004. Pursuant to the 1997 Note and Warrant Purchase agreement, these warrants have
been re-priced based on subsequent warrant issues. At December 31, 2004, the holders of
these warrants had the right to purchase up to 3,827,343 shares of the Companys common
stock at $2.51 per share. A summary of the outstanding warrants and options at December 31, 2004 is as follows: Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Number
    
    
    Average
    
    
    NumberExercise Price
    
    
    Outstanding (1)
    
    
    Remaining Life
    
    
    Exercisable (1)(number of shares in thousands)1997 Note and Warrant Purchase Agreement
    
    $
    2.51
    
    
    
    3,827
    
    
    
    0.5
    
    
    
    3,8272001 Note and Warrant Purchase Agreement
    
    $
    0.28
    
    
    
    4,680
    
    
    
    2.0
    
    
    
    4,680Class 3 Notes
    
    $
    0.86
    
    
    
    1,577
    
    
    
    2.2
    
    
    
    1,5771995 Employee Stock Option Plan
    
    $
    1.30
    
    
    
    380
    
    
    
    5.5
    
    
    
    3801999 Employee Stock Option Plan
    
    $
    0.26
    
    
    
    387
    
    
    
    7.2
    
    
    
    3872004 Employee Stock Option Plan
    
    $
    1.41
    
    
    
    224
    
    
    
    9.5
    
    
    
    $
    1.19
    
    
    
    11,075
    
    
    
    2.0
    
    
    
    10,851
   (1)
    Excludes warrants exercisable under certain outstanding Class 2 Notes. The
number of warrants available to holders of Class 2 Notes is dependent on the length of
time the principal balance is outstanding and the agreed upon base exercise price. At
December 31, 2004, $1.2 million of the Class 2 Notes were outstanding. The Company is authorized to issue up to 400,000 shares of preferred stock the terms of
which are determined by the Board of Directors. Note I  Operations by Geographic Area The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information, for the year ended
December 31, 1998. SFAS No. 131 established standards for reporting information about
operating segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also established
standards for related disclosures about products and services, and geographic areas.
Operating segments are defined as components of the enterprise about which separate
financial information is available that is evaluated regularly by management in deciding how
to allocate resources and in assessing performance. 39




---



##### Table of Contents



The Company is engaged in one business segment, vision-based inspection products. The
following presents information by geographic area. Year Ended December 312004
    
    
    2003
    
    
    2002(in thousands)Net revenues from unaffiliated customers:United States
    
    $
    1,542
    
    
    $
    641
    
    
    $
    944United Kingdom
    
    
    
    
    
    
    
    
    
    
    635$
    1,542
    
    
    $
    641
    
    
    $
    1,579Net income (loss):United States
    
    $
    (2,459
    )
    
    $
    (2,031
    )
    
    $
    (1,747
    )United Kingdom
    
    
    
    
    
    
    94
    
    
    
    (456
    )$
    (2,459
    )
    
    $
    (1,937
    )
    
    $
    (2,203
    )Identifiable assets:United States
    
    $
    872
    
    
    $
    667
    
    
    $
    1,243United Kingdom
    
    
    
    
    
    
    
    
    
    
    65$
    872
    
    
    $
    667
    
    
    $
    1,308Long lived assets:United States
    
    $
    21
    
    
    $
    27
    
    
    $
    59United Kingdom
    
    
    
    
    
    
    
    
    
    
    $
    21
    
    
    $
    27
    
    
    $
    59Capital expenditures:United States
    
    $
    
    
    
    $
    
    
    
    $
    United Kingdom
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Depreciation and amortization expense:United States
    
    $
    297
    
    
    $
    365
    
    
    $
    542United Kingdom
    
    
    
    
    
    
    
    
    
    
    20$
    297
    
    
    $
    365
    
    
    $
    562Net revenues by geographic area:North America
    
    $
    243
    
    
    $
    556
    
    
    $
    633Europe
    
    
    1,230
    
    
    
    5
    
    
    
    547Asia
    
    
    69
    
    
    
    80
    
    
    
    399$
    1,542
    
    
    $
    641
    
    
    $
    1,579
    Note J  Sale of Technology Optical Disc Inspection Technology On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global test equipment
manufacturer DaTARIUS Technologies GmbH, purchased Integral Visions assets related to
inspection systems for the optical disc industry, including the names Automatic Inspection
Systems and AID. The sale included Integral Visions optical disc scanner products as well
as its range of print and identification code products used to inspect the printing stage of
disc manufacture. The consideration the Company received for the technology consisted of a
non-refundable $100,000 advanced minimum royalty payment in addition to future royalties.
The Company received approxmiately $61,000 in royalties in 2004 and expects to receive
additional royalties of approximately $30,000 in 2005. Additionally, the Company received
$25,000 from the sale of equipment to DaTARIUS. The Company recognized a gain on the
transaction of approximately $112,000, which is included in gain(loss) on sales of assets in
2002, primarily attributable to the advanced minimum royalty payment received. The proceeds
from the transaction were used primarily to fund current operations. The optical disc inspection technology included in the sale accounted for approximately
$743,000 of the Companys net revenue for 2002. 40




---



##### Table of Contents



Note K  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. In 2002, Management determined that capitalized patent costs exceeded the
estimated net realizable value of amounts capitalized and a write-down was necessary. In
2002, $74,000 of additional amortization was included in costs of sales as a result of this
determination. Note L  Officers Notes Receivable In 2001, Messrs. Charles Drake and Mark Doede each had loans from the Company, the
outstanding balances of which were included in the stockholders equity section of the
consolidated balance sheet. In August 2001, the Compensation Committee of the Companys
Board of Directors resolved to forgive $100,000 of the outstanding balance on each of their
loans from the Company. The $200,000 charge for the write-down of the notes was included as
compensation in general and administrative expenses in the consolidated statement of
operations in 2001. Mr. Drake also made approximately $250,000 in principal payments on his
note in 2001. Mr. Drake paid off the remaining $63,000 principal balance of this note in
2002. At June 30, 2002, Mr. Drake had received other short-term advances from the Company of
approximately $83,000. This debt was incurred by Mr. Drake in order to satisfy certain
personal obligations and was evidenced by a note bearing interest at 5.5% per annum with a
December 31, 2002 maturity date. At December 31, 2002, approximately $30,000 was still
outstanding on the note. In March 2003, this debt obligation, including accrued interest,
was paid in full. Mr. Drake received no new advances from the Company subsequent to June
30, 2002. In 2002, Mr. Doede paid off the remaining principal balance of his note, approximately
$188,000. This debt was incurred by Mr. Doede in order to satisfy certain personal
obligations and was evidenced by a promissory note bearing interest at 9%. Mr. Doede
received no new advances from the Company subsequent to June 30, 2002. Max A. Coon, Secretary and Vice Chairman of the Board of Integral Vision, advanced the
Company $70,000 to address short term capital needs. The advance from Mr. Coon was repaid
in 2003. Note M  Market for the Companys Common Stock The Companys common stock was moved to the Over the Counter Bulletin Board (OTCBB)
effective with its delisting from The Nasdaq SmallCap Market with the open of business
August 16, 2001. The Company was informed by Nasdaq that the delisting was decided by the
Nasdaq Listing Qualifications panel which approved the Nasdaqs staff decision to delist the
stock due to its failing to maintain a minimum bid price of $1.00 for 30 consecutive trading
days as required by Marketplace Rule 4450(a)(5) for continued listing. Information on the current quotes on the stock, which will continue to use the ticker symbol
INVI, are available at the OTCBBs website, www.otcbb.com and most financial information
portals, such as that provided at http://finance.yahoo.com or http://quote.bloomberg.com.
Integral Vision expects to continue to provide information through filings with the
Securities and Exchange Commission (SEC) as required for continued listing on the OTCBB.
These filings can be found at the SECs website at www.sec.gov. 41




---



##### Table of Contents



Note N  Going Concern Matters The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial statements, the
Company has incurred losses from operations in the years ended December 31, 2004, 2003, and
2002 of $2.4 million, $1.9 million, and $2.2 million, respectively. The continuing losses,
in addition to working capital deficiencies, recurring reductions in product sales, and cash
flow deficiencies, among other factors, indicate that the Company may be unable to continue
as a going concern for a reasonable period of time. The financial statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern. The Companys continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may be required, and
ultimately to attain profitability. Additionally, at December 31, 2004, approximately
$98,000 of the Companys $106,000 in trade accounts payable was overdue. The Company also
has an estimated $315,000 in amounts owed to certain regulatory agencies. The Company is
making monthly payments of approximately $6,300 to one of the regulatory agencies. Management is projecting a cash shortfall over the next twelve months of approximately $1.3
million based on the existing capital structure of the Company, including $820,000 due to be
paid on various dates between March 31, 2005 and April 30,
2005. The holders of this debt have agreed to allow the Company to
defer these payments until April 30, 2005. Management is currently in negotiations with potential investors to place a
minimum of $5.0 million in unregistered convertible preferred stock and common stock
equivalents. If successful, the proceeds generated from this sale would be used to retire
certain notes as well as provide additional working capital. Alternatively, management
plans to seek additional investors of its debentures to cover the anticipated shortfall,
which would bring the amount of debentures outstanding to $4.7 million. Additionally, if
necessary, management would attempt to obtain any additional cash needed to enable the
Company to continue as a going concern through possible joint ventures and other strategic
alliances. Additional financing may or may not be available through banks. There can be no
assurance that management will be able to successfully execute any of these plans before the
Company has exhausted all of its resources. These uncertainties raise substantial doubt
about the Companys ability to continue as a going concern For further
discussion regarding the Companys obligations, see Note C - Long-Term Debt and
Other Financing Arrangements. Note O  Foreign Currency Translation Adjustment In June 2002, Integral Vision, Inc. wrote-off as uncollectable an inter-company
receivable due from Integral Vision Ltd., its subsidiary in the United Kingdom. As the
consolidated financial statements include the accounts of both entities, upon consolidation,
the charge recorded by Integral Vision, Inc., approximately $3.1 million, was eliminated
against the gain recorded by Integral Vision Ltd. However, previously unrecognized losses
that resulted from foreign currency translation adjustments were recognized in the quarter
ended June 30, 2002 and totaled approximately $208,000. Note P  Off Balance Sheet Risk A claim has been made against the Company citing unpaid royalties totaling $107,000.
Management is still researching the claim but does not believe that the Company will
ultimately be found to be liable to the claimant. Note Q  Supplemental Cash Flows Disclosure Non-cash Investing and Financing Activities During 2004, the Company settled $985,000 of Class 1 Notes and $45,000 of Class 3 Notes in
exchange for the issuance of 4,000,737 shares of common stock in connection with the
exercise of warrants and conversion on notes. 42




---



##### Table of Contents



Other Cash Flows Information Interest of approximately $162,000, $16,000, and $39,000 was paid in 2004, 2003, and 2002,
respectively. Note R  Subsequent Events Subsequent to December 31, 2004, $275,000 of Class 2 notes was placed. Management is currently in negotiations with potential investors to place a minimum of $5.0
million in unregistered convertible preferred stock and common stock equivalents. If
successful, the proceeds generated from this sale would be used to retire certain notes as
well as provide additional working capital. The Company is obligated to pay $820,000 to
certain noteholders on various dates between March 31, 2005 and April 30,
2005. The noteholders have agreed to allow the Company to defer these
payments until April 30, 2005. Subject to the completion of this sale, the Board
has authorized the issuance of up to 6,000 convertible preferred shares at a stated value of
$1,000 per share. 43




---



##### Table of Contents



Schedule II - Valuation And Qualifying Accounts Integral Vision, Inc. And Subsidiary (in thousands) Column A
    
    
    Column B
    
    
    
    Column C
    
    
    
    Column D
    
    
    Column EAdditionsCharged toBalance at
    
    
    
    Charged to
    
    
    Other
    
    
    
    
    
    
    
    Balance atBeginning

    
    
    
    Costs and
    
    
    Accounts-
    
    
    
    Deductions -
    
    
    End ofDescription
    
    
    of Period
    
    
    
    Expenses
    
    
    Describe
    
    
    
    Describe
    
    
    PeriodYear ended December 31, 2004:Accounts receivable allowance
    
    
    $
    166
    
    
    
    $
    2
    
    
    
    
    
    
    
    $
    166
    (2)
    
    $
    2Inventory obsolescence reserve
    
    
    
    671
    
    
    
    
    56
    
    
    
    
    
    
    
    
    373
    (1)
    
    
    354Deferred tax valuation allowance
    
    
    
    13,095
    
    
    
    
    815
    
    
    
    
    
    
    
    
    
    
    
    
    13,910$
    13,932
    
    
    
    $
    873
    
    
    $
    
    
    

    
    $
    539
    
    
    $
    14,266Year ended December 31, 2003:Accounts receivable allowance
    
    
    $
    170
    
    
    
    $
    5
    
    
    
    
    
    
    
    $
    9
    (2)
    
    $
    166Inventory obsolescence reserve
    
    
    
    561
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    671Deferred tax valuation allowance
    
    
    
    11,118
    
    
    
    
    1,977
    
    
    
    
    
    
    
    
    
    
    
    
    13,095$
    11,849
    
    
    
    $
    2,092
    
    
    $
    
    
    
    
    $
    9
    
    
    $
    13,932Year ended December 31, 2002:Accounts receivable allowance
    
    
    $
    179
    
    
    
    $
    99
    
    
    
    
    
    
    
    $
    108
    (2)
    
    $
    170Inventory obsolescence reserve
    
    
    
    1,836
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    1,268
    (1)
    
    
    561Deferred tax valuation allowance
    
    
    
    9,489
    
    
    
    
    1,629
    
    
    
    
    
    
    
    
    
    
    
    
    11,118$
    11,504
    
    
    
    $
    1,721
    
    
    $
    
    
    
    
    $
    1,376
    
    
    $
    11,849
   1)
    
    Write-off obsolete inventory2)
    
    Net accounts receivable write-offs 44




---



##### Table of Contents



Exhibits to Form 10K Integral Vision, Inc. Year Ended December 31, 2004 Commission File Number 0-12728 45




---



##### Table of Contents



ExhibitNumber
    
    Exhibit Index Description21
    
    Subsidiary of the Registrant.23.1
    
    Consent of Rehmann Robson, independent registered public
accounting firm.23.2
    
    Consent of Moore Stephens Doeren Mayhew, independent auditors.31.1
    
    Certification of Chief Executive Officer of periodic report
pursuant to Rule 13a-15(e) or Rule 15d-15(e).31.2
    
    Certification of Chief Financial Officer of periodic report
pursuant to Rule 13a-15(e) or Rule 15d-15(e).32.1
    
    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.
 46