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United
States Securities and Exchange CommissionWashington,D.C. 20549FORM 10-KSB

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

|                                                      
|------------------------------------------------------
|Commission File
 Number 0-12728                       
|                                                      
|INTEGRAL
 VISION, INC.                                
|(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Common Stock, No Par Value, Stated Value $.20 Per Share(Title of Class)

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

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

Indicate by
check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).Yes o   Nox

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

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

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

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

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

|                                   
|-----------------------------------
|                                   
|DOCUMENTS INCORPORATED BY REFERENCE

1

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

Transitional Small
Business Format (check one): Yes o No x





2

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SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

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

Part I

ITEM 1.  Description of Business

Overview

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | Integral Vision, Inc., a Michigan corporation (or the
  Company), was incorporated in 1978. We develop, manufacture and market flat
  panel display inspection systems to ensure product quality in the display
  manufacturing process. We primarily inspect microdisplays and small flat
  panel displays, though the technology used is scalable to allow inspection of
  full screen displays and components. Our products primarily use machine
  vision to evaluate operating displays for cosmetic and functional defects,
  but can also provide electrical testing if required for a given application.
  Our customers and potential customers are primarily large companies with
  significant investment in the manufacture of displays. Nearly all of our
  sales originate in the United States, Asia, or Europe. Our products are
  generally sold as capital goods. Depending on the application, display
  inspection systems have an indefinite life and are more likely to require
  replacement due to possible technological obsolescence than from physical
  wear.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | Automated inspection has become a necessity for
  manufacturers who need to continually improve production efficiency to meet
  the increasing demand for high quality products. Our automatic inspection
  systems can inspect parts at a lower cycle time and with greater
  repeatability than is possible with human inspectors. While we have several
  large companies as customers, these customers are working with new
  microdisplay technologies. Our success will be substantially dependant on
  these customers getting their emerging display technologies into high volume
  production.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Products
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | SharpEyeOur SharpEye product provides Flat
  Panel Display (FPD) inspection for reflective, emissive and transmissive
  display technologies. SharpEye is designed for the detection of functional
  and cosmetic defects in LCOS, OLED, MEMS, 3LCD/HTPS, LCD and other emerging
  display technologies. These technologies are applied to consumer products
  such as camcorders, rear projection computer monitors, digital still cameras,
  HDTV, projectors, video headsets and video telephones. The core technology of
  SharpEye inspection algorithms is the ability to quantize data to the level
  of a single display pixel. SharpEye can be configured for production
  inspection or for display evaluation in a laboratory based on the equipment
  configuration selected.                                                                                                                                                                                                                                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | LumenEyeOur LumenEye product provides an
  out of the box solution designed for a low skill level user to setup and
  acguire images from an FPD panel. It is targeted at manufacturers of FPD
  products who need to inspect for inherent Image Retention (Image Sticking)
  defects in their displays prior to shipment. The software provided with
  LumenEye will perform an evaluation of the panel based on the acquired images
  to VESA 305-2 specification. Integral Vision can also provide the customer
  unique Image Retention analysis as part of its software offering. Custom panel
  evaluation software is also available to meet the FPD manufacturer customer
  test pattern requirements.                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | IVSee Our IVSee provides FPD inspection for
  applications which still require manual handling. IVSee is designed for the
  detection of functional and cosmetic defects in LCOS, OLED, MEMS, 3LCD/HTPS,
  LCD and other emerging display technologies. IVSee is configured to be
  integrated                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

3

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|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                         | into
  existing manual inspection stations allowing them to receive the benefits of
  computer aided optical inspection without the need to modify the
  manufacturing process to automate handling of the display. The operators
  interface provides essential views of results, images, and statistics for
  production floor personnel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Marketing and Sales                     
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                         | We generally market our vision products to end users, but
  we have had success integrating our products with OEMs in certain
  circumstances. Although sales are made worldwide, our strongest presence is
  maintained in the US (through Company employees), and in Asia and Europe
  (through sales representatives).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Competition                             
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                         | Presently, most final inspection of small flat panel
  displays is manual. Higher resolution, increased brightness, and increased
  contrast in newer versions of the displays are stretching human capabilities
  to do the inspections. Automated inspection offers a good return on
  investment as it uses less clean room space, requires fewer fixtures and
  hardware because of a faster cycle time, and reduces the labor required for
  inspection. Competition for machine vision based microdisplay and small flat
  panel display inspection comes primarily from Westar Display Technologies,
  Inc.                                                                                                                                                                                                                                           
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Production and Suppliers                
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                         | Our production process is principally the assembling of
  standard electrical, electronic and optical components and hardware
  subassemblies purchased from suppliers into finished products. We generally
  do not rely on a single source for parts or subassemblies, although certain
  components and subassemblies included in our products may only be available
  from a limited number of suppliers. Management believes alternative sources
  or designs could be developed for any of the components used in its products
  thereby mitigating any exposure to product interruption from shortages of
  parts or limited suppliers.                                                                                                                                                                                                               
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Major Customers                         
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                         | The nature of our product offerings may produce sales to
  one or a limited number of customers in excess of 10% of total net sales in
  any one year. It is possible that the specific customers reaching this
  threshold may change from year to year. Loss of any one of these customers
  could have a material impact on our results of operations. For 2007, sales to
  Qualcomm MEMS Technologies, Samsung, Liquavista B.V., and Texas Instruments
  represented 31%, 24%,14% and 10% of net sales, respectively. Approximately
  $50,000 was due from two of these customers at December 31, 2007. For 2006,
  sales to Qualcomm MEMS Technologies, Texas Instruments, Energy Conversion
  Devices, and DuPont represented 31%, 21%, 21% and 14% of net sales,
  respectively. There were no amounts due from these customers at December 31,
  2006
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Intellectual Property                   
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                         | Management believes that the technology incorporated in
  its products gives it advantages over its competitors and prospective
  competitors. Protection of technology is attempted through a combination of
  patents, applied for patents, confidentiality agreements and trade secrets.
  We presently have 14 U.S. patents. There can be no assurance that we will
  have the resources to defend our patents or that patents we hold will be
  considered valid if challenged. In addition, it is possible that some patents
  will be rendered worthless as the result of technological obsolescence.                                                                                                                                                                                                                                                 
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Governmental Approvals
  and Regulations
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                         | We are not subject to government approvals for any of our
  primary products or services. Certain applications using laser technology
  require compliance with CDRH Section 21 CFR 1040.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Product Development                     
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                         | The market for Machine Vision is characterized by rapid
  and continuous technological development and product innovation. We believe
  that continued and timely development of new products and enhancements to
  existing products is necessary to maintain our competitive position.
  Accordingly, we devote a significant portion of our personnel and financial
  resources to product development programs and seek to maintain close
  relationships with customers to remain responsive to their needs. During the
  period ended March 31, 2006 we began activity associated                                                                                                                                                                                                                                                                      

4

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|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      | with a product development agreement with Energy
  Conversion Devices (ECD) where we are compensated for a portion of our costs
  for the development of online inspection for a continuous web of display
  material. This best efforts subcontract with ECD proceeds from a contract
  from the United States Display Consortium. Our net engineering and product
  development costs amounted to $1.1 million and $1.2 million in 2007 and 2006,
  respectively. Our current product development efforts are primarily directed
  to Flat Panel Display and Component Inspection products.
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Environmental Factors
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                      | Our cost of complying with federal, state and local
  provisions regulating protection of the environment are not material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Employees            
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                      | As of February 29, 2008, we had 14 permanent employees,
  all full time, compared to 18 at February 28, 2007 and 21 at February 28,
  2006. None of our employees are represented by a labor union.                                                                                                                                                                                                                                                                                                                                                                                          
|                     

ITEM 2. 
Description of Properties

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

ITEM 3.  Legal Proceedings

|                                                               |                                                                                                                    
|-------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------
|                                                               | We are not currently involved in any litigation other than
  routine litigation that is incidental to our business.
|                                                               |                                                                                                                    
|ITEM 4. 
  Submission of Matters to a Vote of Security Holders
|                                                               |                                                                                                                    
|                                                               | None.                                                                                                              
|                                                               |                                                                                                                    
|Part II                                                       
|                                                               |                                                                                                                    

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

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

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

Holders

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

5

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|                                                  |                                                                                                                                                                                                                                                                     
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dividend Policy                                  
|                                                 
|                                                  | We have never declared or paid any cash dividends on our
  Common Stock. We currently intend to retain any earnings for use in our
  operations and expansion of our business and therefore do not anticipate
  paying any cash dividends in the foreseeable future.
|                                                  |                                                                                                                                                                                                                                                                     
|Issuer Purchases                                 
|                                                 
|                                                  | We did not repurchase any equity securities during the
  years ended December 31, 2007 and 2006.                                                                                                                                                                    
|                                                  |                                                                                                                                                                                                                                                                     
|Information Regarding
  Equity Compensation Plans
|                                                  |                                                                                                                                                                                                                                                                     
|                                                  | The following table sets forth information regarding our
  equity compensation plans in effect as of December 31, 2007.                                                                                                                                             

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

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

ITEM 6.  Managements Discussion and Analysis of Financial Condition and
Results of Operations

Overview

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Integral Vision, Inc., a Michigan corporation, develops,
  manufactures, and markets flat panel display inspection systems to ensure
  product quality in the display manufacturing process. Our revenues are
  primarily derived from the sale of flat panel display inspection equipment.
  Except for the historical information contained herein, the matters discussed
  in this document are forward-looking statements made pursuant to the safe harbor
  provisions of Section 27A of the Securities Act of 1933, as amended (the
  Securities Act) and Section 21E of the Securities Exchange Act of

6

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|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                     | 1934, as amended (the Exchange Act). Such statements are
  based on managements current expectations and are subject to a number of
  factors and uncertainties that could cause actual results to differ
  materially from those described in the forward-looking statements. Such
  factors and uncertainties include, but are not limited to: the ability of the
  company to obtain volume orders from its larger customers; general economic
  conditions and conditions in the specific industries in which we have
  significant customers; price fluctuations in the materials we purchase for
  assembly into final products; competitive conditions in our markets and the
  effect of competitive products and pricing; and technological development by
  us, our customers and our competition. As a result, our results may
  fluctuate. Additional information concerning risk factors that could cause actual
  results to differ materially from those projected in the forward-looking
  statements is contained in our filings with the Securities and Exchange
  Commission. These forward-looking statements represent our best estimates as
  of the date of this document. We assume no obligation to update such
  estimates except as required by the rules and regulations of the Securities
  and Exchange Commission.
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Results of Operations - Year
  Ended December 31, 2007, compared to the year ended December 31, 2006
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                     | Net revenues for 2007 increased $316,000 (37.8%) to
  $1,151,000 from $835,000 in 2006. Revenue is reported net of sales commission
  expense which was approximately $67,000 in 2007 compared to approximately
  $24,000 in 2006. Revenue for 2007 includes $92,000 from Product Development
  Agreements compared to $172,000 in 2006. Sales from the flat panel display
  inspection product line were $1,048,000 in 2007, an increase of $399,000
  (61.5%) from $649,000 in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                     | Direct costs of sales for 2007 increased $154,000 (20.8%)
  to $895,000 (approximately 77.7% of sales) from $741,000 (approximately 88.7%
  of sales) in 2006. This was primarily due to an increase of $256,000 in costs
  related to flat panel display inspection equipment, partially offset by lower
  costs of $102,000 for product development agreements. Costs of sales for
  product development agreements are recorded in amounts equal to the revenue
  recognized and therefore do not contribute significantly to gross margin. See
  Note B to the Financial Statements Revenue Recognition and Note B to the
  Financial Statements Allocations of General and Adminstrative Costs and
  Engineering Costs for further discussion of product development agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                     | Marketing costs for 2007 were $608,000, a $45,000 (6.9%)
  decrease over the $653,000 spent in 2006. This is primarily attributable to a
  decrease in trade show activity, travel and promotion costs. Expense
  allocated to marketing costs for amortization of share based compensation as
  required by SFAS 123R was approximately $29,000 for 2007 and $33,000 for
  2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                     | General and administrative costs for 2007 were $1,327,000
  a $77,000 (6.2%) increase over the $1,250,000 spent in 2006. We allocated
  $8,000 of general and administrative costs to costs of sales for product
  development agreements in 2007 and $38,000 in 2006. (For more information on
  the allocation of certain general and administrative costs to cost of goods
  sold see Note B to the Financial Statements.) Without this allocation,
  general and administrative costs would have increased by $47,000 (3.6%) over
  2006 to $1,335,000. The increase was primairly attributable to an increase in
  professional fees and investor relations costs. Expense allocated to G&A
  for amortization of share based compensation as required by SFAS 123R for 2007
  was approximately $30,000 compared to $43,000 in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                     | Engineering and product development expenditures decreased
  $68,000 (5.6%) to $1.146,000 in 2007 compared to $1.214,000 in 2006. We
  allocated $20,000 of engineering costs to costs of sales for product
  development agreements in 2007 compared to $137,000 in 2006. (For more
  information on the allocation of certain engineering costs to cost of goods
  sold see Note B to the Financial Statements.) Without these allocations,
  engineering costs would have decreased by $185,000 (13.7%) to $1,166,000 in
  2007 compared to $1.351,000 in 2006. This is primarily attributable to
  decreases in staffing and related costs of $404,000, partially offset by
  increases in outside services and travel costs of $219,000. Expense allocated
  to engineering and product development costs for the amortization of
  share-based compensation as required by SFAS 123R for 2007 was $38,000 in
  2007 compared to $94,000 in 2006.                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                     | Other income decreased $33,000 to $13,000 in 2007 compared
  to $46,000 in 2006. The decrease in 2007 is primarily attributeable to a loss
  on the abandonement of equipment of $16,000 and a decrease in royalty income
  of $13,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

7

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|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                         | Interest expense increased $198,000 to $230,000 in 2007
  compared to $32,000 in 2006. The increase is primarily attributable to
  increased debt of $2,614,000 in 2007 compared to 2006 (see Note C to
  financial statements).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Seasonality and Quarterly
  Fluctuations
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         | Integral Visions revenues and operating results have
  varied substantially from quarter to quarter and management believes these
  fluctuations may continue. Our reliance on large orders has contributed to
  the variability of the our operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Liquidity and Capital Resources         
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         | Operating activities for 2007 used cash of approximately
  $2.6 million primarily due to our loss from operations. Changes in working
  capital provided cash of $201,000, which was primarily due to a decrease in
  inventory of $117,000, an increase in accounts receivable of $54,000, a
  decrease in other current assets of $22,000 and an increase in accounts
  payable and other current liabilities of $116,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         | Our investing activities included primarily the purchase
  of approximately $35,000 of equipment in 2007 and $8,000 for legal and patent
  office fees for new patent applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         | Our financing activities included net proceeds of
  $2,614,000 from the issuance of Class 2 Notes and we received $8,000 from the
  exercise of employee stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         | We paid $30,000 of interest in 2007 on Class 3 Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         | Management has made arrangements to issue up to $3,122,000
  of Class 2 Notes under the terms of the Companys existing Note and Warrant
  Purchase Agreement as amended. The Class 2 Notes are working capital notes
  and are secured by accounts receivable, inventory, and intellectual property.
  The purchasers of Class 2 Notes receive 10% interest and the option to
  receive either warrants for the purchase of the Companys stock or an
  additional 2% interest. Class 2 Warrants entitle the holder to purchase one
  share of Common Stock for each $1 in value of the Class 2 Note multiplied by
  a fraction, the numerator of which is the number of days such Class 2 note is
  outstanding and the denominator of which is 365. The Board of Directors has
  approved a $1.60 strike price for the warrants. The Notes will mature April
  30, 2008. As of December 31, 2007 the Company had issued $2,964,000 of Class
  2 Notes, primarily purchased by related parties. Management anticipates
  issuing the balance of these notes during the first quarter of 2008. As of
  December 31, 2007, the noteholders have earned 1,795,327 warrants, 335,545 of
  which are issued. The Companys present cash position requires us to secure
  additional funding for the immediate future as well as funding to provide
  working capital for anticipated orders. Refer to Note P  Subsequent Events
  for recent activity associated with Class 2 Notes. Management expects to
  refinance these notes as part of our plan to raise additional capital in the
  second quarter of 2008 to fund operations through at least the first quarter
  of 2009 and provide working capital for anticipated orders.
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         | Terms of the 2005 Securities Purchase Agreement provide
  antidilution protection for the 3,500,000 warrants outstanding and grant a
  right to holders of the 6,200,0000 outstanding shares of stock purchased at
  $1.00 per share under the agreement to swap the stock they purchased for new
  securities being offered in the future by the Company if the terms of the new
  securities are more favorable to the holders than the terms of the 2005
  Securities Purchase Agreement. The antidilution protection on the warrants
  sets the conversion price of the warrant at the price of the new securities
  being issued and increases the total number of shares available under the
  warrant such that the total value of the warrant is kept constant. These
  terms would result in significant dilution if securities were sold at current
  market prices. Though there can be no assurance they will be successful,
  management expects to negotiate these terms as part of our plan to raise
  additional capital in the second quarter of 2008. Further, the terms of the 5th
  Amended Note and Warrant Purchase Agreement provides for the conversion price
  on outstanding warrants to be reduced to the price of new securities offered,
  but not lower than $0.25, resulting in a significant reduction of the amount
  of funds that will be realized by the Company in the event of an exercise of
  the warrants at current market prices. See financial statements Note P  Subsequent
  Events for additional information regarding potential dilution.                                                                                                                                         
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                         | For further discussion regarding our obligations, see Note
  CLong Term Debt and Other Financing Arrangements and Note P  Subsequent
  Events.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

8

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|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Impact of Inflation                   
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                       | The amounts presented in the financial statements do not
  provide for the effect of inflation on our operations or our financial
  position. Amounts shown for property, plant and equipment and for costs and
  expenses reflect historical cost and do not necessarily represent replacement
  cost or charges to operations based on replacement cost. Our operations
  together with other sources are intended to provide funds to replace
  property, plant and equipment as necessary. Net income would be lower than
  reported if the effects of inflation were reflected either by charging
  operations with amounts that represent replacement costs or by using other
  inflation adjustments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Off-Balance Sheet Arrangements        
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                       | We have no significant off-balance sheet arragements that
  have or are reasonably likely to have a current or future effect on our
  financial condition, changes in financial condition, revenues or expenses,
  results of operations, liquidity, capital expenditures or capital resources
  that are material to investors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Recently Issued Accounting
  Standards
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                       | On January 1, 2007, we adopted FASB Interpretation No. 48,
  Accounting for Uncertainty in Income Taxes, an interpretation of FASB
  Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for income
  taxes by prescribing the minimum recognition threshold a tax position is
  required to meet before being recognized in the financial statements. FIN 48
  also provides guidance on de-recognition, classification, interest and
  penalties, accounting in interim periods, disclosure and transition. There
  was no effect on our financial position, results of operations or cash flows
  as a result of adopting FIN 48.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                       | In September 2006, the FASB issued SFAS No. 157, Fair
  Value Measurements. The statement defines fair value, establishes a
  framework for measuring fair value in generally accepted accounting
  principles, and expands disclosures about fair value measurements. This
  statement applies under other accounting pronouncements that require or
  permit fair value measurements, the FASB having previously concluded in those
  accounting pronouncements that fair value is the relevant measurement
  attribute. Accordingly, this statement does not require any new fair value
  measurements. SFAS No. 157 is effective January 1, 2008 for financial assets
  and liabilities and January 1, 2009 for non-financial assets and liabilities.
  We are currently evaluating the effect, if any, of this statement on our
  financial condition and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                       | In February 2007, the FASB issued SFAS No. 159, The Fair
  Value Option for Financial Assets and Financial Liabilities  including an
  amendment of FASB Statement No. 115 (SFAS No. 159), which permits entities
  to choose to measure many financial instruments and certain other items at
  fair value that are not currently required to be measured at fair value. SFAS
  No. 159 also establishes presentation and disclosure requirements designed to
  facilitate comparisons between entities that choose different measurement
  attributes for similar types of assets and liabilities. SFAS No. 159 does not
  affect any existing accounting literature that requires certain assets and
  liabilities to be carried at fair value. SFAS No. 159 does not eliminate
  disclosure requirements included in other accounting standards, including
  requirements for disclosures about fair value measurements included in SFAS
  No. 157 and SFAS No. 107, Disclosures about Fair Value of Financial
  Instruments. SFAS No. 159 is effective as of the beginning of an entitys
  first fiscal year that begins after November 15, 2007. We will adopt SFAS No.
  159 on January 1, 2008 and do not anticipate adoption to materially impact
  our financial position or results of operations.
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                       | In December 2007, the FASB issued SFAS No. 141(Revised),
  Business Combinations (SFAS No. 141(R)), which replaces SFAS No. 141,
  Business Combinations, and requires an acquirer to recognize the assets
  acquired, the liabilities assumed, and any non-controlling interest in the
  acquiree at the acquisition date, measured at their fair values as of that
  date, with limited exceptions. This statement also requires the acquirer in a
  business combination achieved in stages to recognize the identifiable assets
  and liabilities, as well as the non-controlling interest in the acquiree, at
  the full amounts of their fair values. SFAS No. 141(R) makes various other
  amendments to authoritative literature intended to provide additional
  guidance or to confirm the guidance in that literature to that provided in
  this statement. This statement applies prospectively to business combinations
  for which the acquisition date is on or after the beginning of the first                                                                                                                                                                                                                                                                                                

9

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|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                          | annual reporting period beginning on or after December 15,
  2008. We expect to adopt this statement on January 1, 2009. SFAS No. 141(R)s
  impact on accounting for business combinations is dependent upon acquisitions
  at that time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                          | In December 2007, FASB issued SFAS No. 160,
  Non-controlling Interests in Consolidated Financial Statements, which
  amends Accounting Research Bulletin No. 51, Consolidated Financial
  Statements, to improve the relevance, comparability, and transparency of the
  financial information that a reporting entity provides in its consolidated
  financial statements. SFAS No. 160 establishes accounting and reporting
  standards that require the ownership interests in subsidiaries not held by
  the parent to be clearly identified, labeled and presented in the
  consolidated statement of financial position within equity, but separate from
  the parents equity. This statement also requires the amount of consolidated
  net income attributable to the parent and to the non-controlling interest to
  be clearly identified and presented on the face of the consolidated statement
  of income. Changes in a parents ownership interest while the parent retains
  its controlling financial interest must be accounted for consistently, and
  when a subsidiary is deconsolidated, any retained non-controlling equity
  investment in the former subsidiary must be initially measured at fair value.
  The gain or loss on the deconsolidation of the subsidiary is measured using
  the fair value of any non-controlling equity investment. The statement also
  requires entities to provide sufficient disclosures that clearly identify and
  distinguish between the interests of the parent and the interests of the
  non-controlling owners. This statement applies prospectively to all entities
  that prepare consolidated financial statements and applies prospectively for
  fiscal years, and interim periods within those fiscal years, beginning on or after
  December 15, 2008. We are currently evaluating the effect, if any, of this
  statement on our financial condition and results of operations
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Managements Discussion of
  Critical Accounting Policies
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                          | Our financial statements are prepared in accordance with
  accounting principles generally accepted in the United States. The
  preparation of these financial statements requires management to make
  estimates and judgments that affect the reported amounts of assets and
  liabilities and disclosure of contingent assets and liabilities at the date
  of the financial statements and the reported amounts of revenues and expenses
  during the reporting year. The accounting policies discussed below are
  considered by management to be the most important to an understanding of our
  financial statements, because their application places the most significant
  demands on managements judgment and estimates about the effect of matters
  that are inherently uncertain. Our assumptions and estimates were based on
  the facts and circumstances known at December 31, 2007, future events rarely
  develop exactly as forecast, and the best estimates routinely require
  adjustment. These policies are also discussed in Note B of the Notes to
  Financial Statements included in Item 7 of this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                          | Revenue
  Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                          | We recognize revenue in accordance with SOP 97-2, Software
  Revenue Recognition and Staff Accounting Bulletin No. 101 (SAB 101), and
  Staff Accounting Bulletin No. 104 (SAB 104) Revenue Recognition in
  Financial Statements. Revenue is recognized when persuasive evidence of an
  arrangement exists, delivery has occurred or services have been rendered, the
  selling price is fixed or determinable and collectibility is reasonably
  assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                          | We account for certain product sales of flat panel display
  inspection systems as multiple-element arrangements. If specific customer
  acceptance requirements are met, we recognize 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). We recognize all
  other product sales with customer acceptance provisions upon final customer
  acceptance. We recognize revenue from the sale of spare parts upon shipment.
  Revenue from service contracts is recognized over the term of the contract.
  Revenue is reported net of sales commissions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                          | Revenue is also derived through business agreements for
  product development. We conduct specified product development projects
  related to one of our principal technology specializations for an agreed-upon
  fee. Typically the agreements require best efforts with no specified
  performance criteria. Revenue from product development agreements, where
  there are no specific performance terms, is recognized in amounts equal to the
  amounts expended on the programs. Generally, the agreed-upon fees contemplate
  reimbursing us, after our agreed-upon cost share if any, for costs considered
  to be associated with project activities. These include expenses for direct
  product development and research, operating expenses, general and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

10

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | administrative expenses, and depreciation. Accordingly,
  expenses related to product development agreements are recorded as cost of
  revenues from product development agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Inventories are stated at the lower of standard cost,
  which approximates actual cost determined on a first-in, first-out basis, or
  market. Inventories are recorded net of allowances for unsalable or obsolete
  raw materials, work-in-process and finished goods. We evaluate, on a
  quarterly basis, the status of our inventory to ensure the amount recorded in
  the financial statements reflects the lower of our cost or the value we
  expect to receive when the inventory is sold. This estimate is based on
  several factors, including the condition and salability of the inventory and
  the forecasted demand for the particular products incorporating these
  components. Based on current backlog and expected orders, we forecast the
  upcoming usage of current stock. We record reserves for obsolete and
  slow-moving parts ranging from 0% for active parts with sufficient forecasted
  demand up to 100% for excess parts with insufficient demand or obsolete
  parts. Amounts in work-in-process and finished goods inventory typically
  relate to firm orders and, therefore, are not subject to obsolescence risk.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Impairment
  of Long-lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | We review our long-lived assets, including property,
  equipment and intangibles, for impairment whenever events or changes in
  business circumstances indicate that the carrying amount of the assets may
  not be fully recoverable. An impairment loss would be recognized when
  estimated undiscounted future cash flows expected to result from the use of
  the asset and its eventual disposition are less than the carrying amount of
  the asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Share-Based
  Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | We account for our share based compensation plans
  according to the provisions of SFAS 123-R. Accordingly, compensation costs
  attributable to stock options or similar equity instruments granted are measured
  at the fair value at the grant date, and expensed over the expected vesting
  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The fair value of each option award is estimated on the
  date of grant using the Black-Scholes option valuation model. The fair value
  of all awards is amortized on a straight line basis over the requisite
  service periods. The expected life of all awards granted represents the
  period of time that they are expected to be outstanding. The expected life is
  determined using historical and other information available at the time of
  grant. Expected volatilities are based on historical volatility of our common
  stock, and other factors. The risk-free rate for periods within the
  contractual life of the option is based on the U.S. Treasury yield curve in
  effect at the time of grant. We use historical data to estimate pre-vesting
  option forfeitures.                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Contingencies
  and Litigation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | We make an assessment of the probability of an adverse
  judgment resulting from current and threatened litigation. The Company
  accrues the cost of an adverse judgment if, in Managements estimation, an
  adverse settlement is probable and Management can reasonably estimate the
  ultimate cost of such litigation. The Company has made no such accruals at
  December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

ITEM 7.  Financial
Statements and Supplementary Data

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

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

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

11

---



ITEM 8A. Controls and Procedures

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Managements
  Report on Internal Control over Financial Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Management is responsible for establishing and maintaining
  adaquate internal control over financial reporting for the small business
  issuer, as such term is defined in Exchange Act Rule 13a-15(f). We have
  designed such internal control over financial reporting to provide reasonable
  assurance regarding the reliability of financial reporting and the
  preparation of financial statements for external purposes in accordance with
  generally accepted accounting principles in the United States of America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Management has evaluated the effectiveness of our
  disclosure controls and procedures and our internal fincancial controls using
  SarboxPro, a commercially available software package designed to implement
  the Committee of Sponsoring Organizations of the Treadway Commission
  framework in compliance with SEC Release No. 34-55929. We have presented in
  this report our conclusions about the effectiveness of the disclosure
  controls and procedures, as of the end of the period covered by this report
  based on our evaluation. We have also disclosed in this report any change in
  our internal control over financial reporting that occurred during the most
  recent fiscal quarter that has materially affected, or is reasonably likely
  to materially affect, our internal control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | This annual report does not include an attestation report
  of the Companys independent registered public accounting firm regarding internal
  control over financial reporting. Managements report was not subject to
  attestation by the Companys independent registered public accounting firm
  pursuant to temporary rules of the Securities and Exchange Commission that
  permit the Company to provide only managements report in this annual report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Managements
  Evaluation of Disclosure Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Companys chief executive officer and chief financial
  officer have each reviewed and evaluated the effectiveness of the Companys
  disclosure controls and procedures (as defined in Exchange Act
  Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
  this report. Based on that evaluation, the chief executive officer and chief
  financial officer have each concluded that the Companys current disclosure
  controls and procedures are effective to ensure that information required to
  be disclosed in its 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. Disclosure controls and
  procedures include, without limitation, controls and procedures designed to
  ensure that information required to be disclosed by an issuer in the reports
  that it files or submits under the Exchange Act is accumulated and
  communicated to the issuers management, including its principal executive
  and principal financial officers, or persons performing similar functions, as
  appropriate to allow timely decisions regarding required disclosure.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Changes
  in Internal Controls                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | There have been no changes in the Companys internal
  controls over financial reporting that occurred during the Companys fourth
  quarter of the fiscal year that materially affected, or are reasonably likely
  to materially affect, the Companys internal controls over financial
  reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

ITEM 8B.  Other
Information

| |     
| | ----
| | None

12

---



Part III

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

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

ITEM 10. 
Executive Compensation

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

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

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

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

| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Item 12 information is hereby incorporated by reference
  from the Registrants definitive proxy statement to be filed within 120 days
  of December 31, 2007.

ITEM 13.  Exhibits

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

13

---



|     |                                                                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.8  | Form of Amended Security Agreement dated March 6, 2008.                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                     
|4.9  | Form of Consent to Amend and Replace Agreements dated
  March 12, 2008.                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                     
|4.10 | Form of Fifth Amended and Restated Note and Warrant
  Purchase Agreement.                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                     
|10.1 | Integral Vision, Inc. Employee Stock Option Plan (filed as
  Exhibit 10.5 to the registrants Form 10-Q for the quarter ended September
  30, 1995, SEC file 0-12728, and incorporated herein by reference).                                        
|     |                                                                                                                                                                                                                                                     
|10.2 | Form of Confidentiality and Non-Compete Agreement Between
  the Registrant and its Employees (filed as Exhibit 10.4 to the registrants
  Form 10-K for the year ended December 31, 1992, SEC File 0-12728, and
  incorporated herein by reference).
|     |                                                                                                                                                                                                                                                     
|10.3 | Integral Vision, Inc. 1999 Employee Stock Option Plan
  (filed as exhibit 10.5 to the registrants Form 10-Q for the quarter ended
  June 30, 1999 and incorporated herein by reference).                                                           
|     |                                                                                                                                                                                                                                                     
|10.4 | Integral Vision, Inc. 2004 Employee Stock Option Plan
  (filed as exhibit 10.11 to the registrants Form 10-Q for the quarter ended
  June 30, 2004 and incorporated herein by reference).                                                          
|     |                                                                                                                                                                                                                                                     
|10.5 | Integral Vision, Inc. 2008 Equity Incentive Plan.                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                     
|14   | Code of Ethics.                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                     
|23.1 | Consent of Rehmann Robson, independent registered public
  accounting firm.                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                     
|31.1 | Certification of Chief Executive Officer of Periodic
  Report pursuant to Rule 13a-15(e) or Rule 15d-15(e).                                                                                                                                         
|     |                                                                                                                                                                                                                                                     
|31.2 | Certification of Chief Financial Officer of Periodic
  Report pursuant to Rule 13a-15(e) or Rule 15d-15(e).                                                                                                                                         
|     |                                                                                                                                                                                                                                                     
|32.1 | Certification by Chief Executive Officer of Periodic
  Report Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                   
|     |                                                                                                                                                                                                                                                     
|32.2 | Certification by Chief Financial Officer of Periodic
  Report Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                   

ITEM 14. 
Principal Accountant Fees and Services

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

14

---



SIGNATURES

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

INTEGRAL VISION, INC.

| |                                                                                                                    |                | 
| | ------------------------------------------------------------------------------------------------------------------ | -------------- | 
| | By: /S/ CHARLES J. DRAKE                                                                                          
| |                                                                                                                    |               
| | Charles J. Drake, Chairman of
  the Board
  and Chief Executive Officer                                           
| |                                                                                                                    |               
| | Date:                                                                                                              | March 31, 2008
| |                                                                                                                    |               
| | By: /S/ MARK R. DOEDE                                                                                             
| |                                                                                                                    |               
| | Mark R. Doede, President, Chief
  Operating
  Officer, Chief Financial Officer, and Principal
  Accounting Officer
| |                                                                                                                    |               
| | Date:                                                                                                              | March 31, 2008
| |                                                                                                                   

Pursuant to the requirements of
the Exchange Act, 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, Chief           
|                       |                | Executive Officer, and Director        
|Charles J. Drake       |                |                                        
|                       |                |                                        
|Date:                  | March 31, 2008 |                                         | 
|                       |                |                                        
|/S/ MAX A. COON        |                | Vice Chairman, Secretary and
  Director
|                       |                |                                        
|Max A. Coon            |                |                                        
|                       |                |                                        
|Date:                  | March 31, 2008 |                                         | 
|                       |                |                                        
|/S/ VINCENT SHUNSKY    |                | Treasurer and Director                 
|                       |                |                                        
|Vincent Shunsky        |                |                                        
|                       |                |                                        
|Date:                  | March 31, 2008 |                                         | 
|                       |                |                                        
|/S/ WILLIAM B. WALLACE |                | Director                               
|                       |                |                                        
|William B. Wallace     |                |                                        
|                       |                |                                        
|Date:                  | March 31, 2008 |                                         | 

15

---



Report of Independent Registered Public Accounting Firm

Stockholders
and Board of Directors
Integral Vision, Inc.
Wixom, Michigan

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

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

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

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

|               |                         
|-------------- | ------------------------
|               | /S/ Rehmann Robson, P.C.
|Troy, Michigan |                         
|March 31, 2008 |                         

16

---



Balance Sheet 
Integral Vision, Inc.

|                                                                                                                                     |  |                |         |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------- | -
|                                                                                                                                     |  |                |        
|                                                                                                                                     |  | December 31    |        
|                                                                                                                                     |  |                |        
|                                                                                                                                     |  | 2007           |        
|                                                                                                                                     |  |                |        
|                                                                                                                                     |  | (in thousands) |        
|Assets                                                                                                                               |  |                |         |  
|Current assets                                                                                                                       |  |                |         |  
|Cash                                                                                                                                 |  | $              | 11      |  
|Accounts receivable                                                                                                                  |  |                | 75      |  
|Inventories - Note B                                                                                                                 |  |                | 265     |  
|Other current assets                                                                                                                 |  |                | 97      |  
|                                                                                                                                     |  |                |         |  
|Total current
  assets                                                                                                               |  |                | 448     |  
|                                                                                                                                     |  |                |         |  
|Property and
  equipment                                                                                                             |  |                |         |  
|Building improvements                                                                                                                |  |                | 4       |  
|Production and engineering
equipment                                                                                                 |  |                | 234     |  
|Furniture and fixtures                                                                                                               |  |                | 80      |  
|Computer equipment                                                                                                                   |  |                | 190     |  
|Marketing/demonstration
equipment                                                                                                    |  |                | 139     |  
|                                                                                                                                     |  |                |         |  
|                                                                                                                                     |  |                | 647     |  
|Less accumulated depreciation                                                                                                        |  |                | 431     |  
|                                                                                                                                     |  |                |         |  
|Net property and
  equipment                                                                                                         |  |                | 216     |  
|                                                                                                                                     |  |                |         |  
|Other assets -
  net of accumulated amortization of $1,493,000                                                                       |  |                | 34      |  
|                                                                                                                                     |  |                |         |  
|                                                                                                                                     |  |                | 34      |  
|                                                                                                                                     |  |                |         |  
|                                                                                                                                     |  | $              | 698     |  
|                                                                                                                                     |  |                |         |  
|                                                                                                                                     |  |                |         |  
|Liabilities and
  Stockholders Deficit                                                                                              |  |                |         |  
|Current
  liabilities                                                                                                                |  |                |         |  
|Notes payable                                                                                                                        |  | $              | 3,342   |  
|Accounts payable                                                                                                                     |  |                | 75      |  
|Accrued compensation and related
costs                                                                                               |  |                | 298     |  
|Accrued interest                                                                                                                     |  |                | 196     |  
|Accrued product warranty                                                                                                             |  |                | 82      |  
|Other accrued liabilities                                                                                                            |  |                | 40      |  
|                                                                                                                                     |  |                |         |  
|Total current liabilities                                                                                                            |  |                | 4,033   |  
|                                                                                                                                     |  |                |         |  
|Long-term debt                                                                                                                       |  |                |        |  
|                                                                                                                                     |  |                |         |  
|Total
  liabilities                                                                                                                  |  |                | 4,033   |  
|                                                                                                                                     |  |                |         |  
|Stockholders
  deficit                                                                                                              |  |                |         |  
|Preferred stock, 400,000 shares
authorized; none issued                                                                              |  |                |        |  
|Common stock, without par value, stated
value $.20 per share; 50,000,000 shares authorized; 29,566,409 shares issued and
outstanding |  |                | 5,913   |  
|Additional paid-in capital                                                                                                           |  |                | 39,407  |  
|Accumulated deficit                                                                                                                  |  |                | (48,655 | )
|                                                                                                                                     |  |                |         |  
|Total
  stockholders deficit                                                                                                        |  |                | (3,335  | )
|                                                                                                                                     |  |                |         |  
|                                                                                                                                     |  | $              | 698     |  
|                                                                                                                                     |  |                |         |  

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

17

---



Statements of Operations Integral Vision, Inc.

|                                                                                                               |  |                                       |        |      |   |        |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ | -
|                                                                                                               |  | Year Ended December 31,               |       
|                                                                                                               |  |                                       |       
|                                                                                                               |  | 2007                                  |        | 2006 |  
|                                                                                                               |  |                                       |        |      |  
|                                                                                                               |  |                                       |        |      |  
|                                                                                                               |  | (In thousands, except per share data) |       
|Revenues:                                                                                                      |  |                                       |       
|Net product sales                                                                                              |  | $                                     | 1,059  |      | $ | 663    |  
|Net revenue from product development
agreements                                                                |  |                                       | 92     |      |   | 172    |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Total net revenues (See
Note-B)                                                                                |  |                                       | 1,151  |      |   | 835    |  
|Costs of sales:                                                                                                |  |                                       |        |      |   |        |  
|Costs of sales for products                                                                                    |  |                                       | 781    |      |   | 488    |  
|Cost of sales for product development
agreements                                                               |  |                                       | 97     |      |   | 199    |  
|Depreciation and amortization                                                                                  |  |                                       | 17     |      |   | 54     |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Total costs of sales                                                                                           |  |                                       | 895    |      |   | 741    |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Gross margin                                                                                                   |  |                                       | 256    |      |   | 94     |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Other costs and expenses:                                                                                      |  |                                       |        |      |   |        |  
|Marketing                                                                                                      |  |                                       | 608    |      |   | 653    |  
|General and administrative -
net                                                                               |  |                                       | 1,327  |      |   | 1,250  |  
|Engineering and development -
net                                                                              |  |                                       | 1,146  |      |   | 1,214  |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Total other costs and expenses                                                                                 |  |                                       | 3,081  |      |   | 3,117  |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Operating loss                                                                                                 |  |                                       | (2,825 | )    |   | (3,023 | )
|Other income                                                                                                   |  |                                       | 13     |      |   | 46     |  
|Interest income                                                                                                |  |                                       |       |      |   | 42     |  
|Interest expense                                                                                               |  |                                       | (230   | )    |   | (32    | )
|Foreign currency translation gain
  (loss)                                                                     |  |                                       | 1      |      |   | (7     | )
|                                                                                                               |  |                                       |        |      |   |        |  
|Loss from operations before
  income taxes                                                                     |  |                                       | (3,041 | )    |   | (2,974 | )
|Income taxes                                                                                                   |  |                                       |       |      |   |       |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Net loss                                                                                                       |  | $                                     | (3,041 | )    | $ | (2,974 | )
|                                                                                                               |  |                                       |        |      |   |        |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Basic and diluted loss per share:                                                                              |  |                                       |        |      |   |        |  
|Net loss                                                                                                       |  | $                                     | (0.10  | )    | $ | (0.10  | )
|                                                                                                               |  |                                       |        |      |   |        |  
|                                                                                                               |  |                                       |        |      |   |        |  
|Weighted average number of shares
  outstanding of common stock and common stock equivalents, where applicable |  |                                       | 29,534 |      |   | 29,491 |  
|                                                                                                               |  |                                       |        |      |   |        |  

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

18

---



Statements of Stockholders
Deficit 
Integral Vision, Inc.

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

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

19

---



Statements of Cash Flows Integral Vision, Inc.

|                                                                              |  |                          |        |      |   |        |  
|----------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                                                                              |  | Year
  Ended December 31 |       
|                                                                              |  | 2007                     |        | 2006 |  
|                                                                              |  |                          |        |      |  
|                                                                              |  | (in
  thousands)         |       
|Cash Flows From
  Operating Activities:                                       |  |                          |        |      |   |        |  
|Net loss                                                                      |  | $                        | (3,041 | )    | $ | (2,974 | )
|                                                                              |  |                          |        |      |   |        |  
|Adjustments to reconcile net loss to net
cash used in
  operating activities: |  |                          |        |      |   |        |  
|Depreciation                                                                  |  |                          | 70     |      |   | 48     |  
|Amortization                                                                  |  |                          | 11     |      |   | 48     |  
|Equipment abandonment loss                                                    |  |                          | 16     |      |   |       |  
|Warrants issued in settlement of
interest                                     |  |                          | 21     |      |   |       |  
|Share-based compensation                                                      |  |                          | 97     |      |   | 170    |  
|Changes in operating assets and
liabilities:                                  |  |                          |        |      |   |        |  
|Accounts receivable                                                           |  |                          | (54    | )    |   | 56     |  
|Inventories                                                                   |  |                          | 117    |      |   | (172   | )
|Other current assets                                                          |  |                          | 22     |      |   | (17    | )
|Accounts payable and other current
liabilities                                |  |                          | 116    |      |   | 108    |  
|                                                                              |  |                          |        |      |   |        |  
|Net cash used in operating activities                                         |  |                          | (2,625 | )    |   | (2,733 | )
|                                                                              |  |                          |        |      |   |        |  
|                                                                              |  |                          |        |      |   |        |  
|Cash Flows From
  Investing Activities:                                       |  |                          |        |      |   |        |  
|Purchase of property and
equipment                                            |  |                          | (35    | )    |   | (49    | )
|Additional patent expenditures                                                |  |                          | (8     | )    |   | (12    | )
|                                                                              |  |                          |        |      |   |        |  
|Net cash used in investing
  activities                                       |  |                          | (43    | )    |   | (61    | )
|                                                                              |  |                          |        |      |   |        |  
|                                                                              |  |                          |        |      |   |        |  
|Cash Flows From
  Financing Activities:                                       |  |                          |        |      |   |        |  
|Proceeds from sale of Class 2
Notes-net                                       |  |                          | 2,614  |      |   | 350    |  
|Proceeds from exercise of stock
options                                       |  |                          | 8      |      |   |       |  
|                                                                              |  |                          |        |      |   |        |  
|Net cash provided by financing
  activities                                   |  |                          | 2,622  |      |   | 350    |  
|                                                                              |  |                          |        |      |   |        |  
|Decrease in cash                                                              |  |                          | (46    | )    |   | (2,444 | )
|Cash at beginning of year                                                     |  |                          | 57     |      |   | 2,501  |  
|                                                                              |  |                          |        |      |   |        |  
|Cash at end of year                                                           |  | $                        | 11     |      | $ | 57     |  
|                                                                              |  |                          |        |      |   |        |  
|Supplemental cash flows information:                                          |  |                          |        |      |   |        |  
|Interest paid                                                                 |  | $                        | 30     |      | $ | 30     |  
|                                                                              |  |                          |        |      |   |        |  
|Supplemental
  noncash investing activity:                                    |  |                          |        |      |   |        |  
|Reclassification of inventory to
equipment                                    |  | $                        |       |      | $ | 153    |  
|                                                                              |  |                          |        |      |   |        |  

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

20

---



Notes to Financial
Statements Integral Vision, Inc.

Note A  Nature of
Business

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Integral Vision, Inc. develops,
 manufactures, and markets flat panel display inspection systems to ensure
 product quality in the display manufacturing process. We primarily inspect
 Microdisplays and small flat panel displays, though the technology used is
 scalable to allow inspection of full screen displays and components. Our
 customers and potential customers are primarily large companies with
 significant investment in the manufacture of displays. Nearly all of our
 sales originate in the United States, Asia, or Europe. Our products are
 generally sold as capital goods. Depending on the application, display
 inspection systems have an indefinite life and are more likely to require
 replacement due to possible technological obsolescence than from physical
 wear.
| | During the period ended March 31, 2006, we began activity associated
 with a product development agreement where we are compensated for a portion
 of our development costs for a certain best efforts product development. We
 may not be able to find future opportunities similar to this, but remain open
 to such development agreements where they facilitate our strategic goals.                                                                                                                                                                                                                                                                                                                                                                                                                  

Major Customers

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

Note B - Summary of Significant
Accounting Policies

Use of Estimates

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

Cash Equivalents

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

Accounts
Receivable

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

Inventories

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

21

---



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

|                       |                                                                                                                                                                                                                                                                                                                                               
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       | We periodically perform an
 analysis of our inventory to determine if its cost exceeds estimated net
 realizable value. Over the last several years, given the market conditions
 and the direction of the Company, we discontinued certain product lines and
 attempted to liquidate the remaining inventory related to those product
 lines.
|                       |                                                                                                                                                                                                                                                                                                                                               
|Property and
Equipment

| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property and equipment is stated
 on the basis of cost. Expenditures for normal repairs and maintenance are
 charged to operations as incurred.                                       
| |                                                                                                                                                                                       
| | Depreciation is computed by the
 straight-line method based on the estimated useful lives of the assets
 (building improvements-40 years, other property and equipment-3 to 10 years).

Capitalized
Computer Software Development Costs

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Computer software development
 costs are capitalized after the establishment of technological feasibility of
 the related technology. These costs are amortized following general release
 of products based on current and estimated future revenue for each product
 with an annual minimum equal to the straight-line amortization over the
 remaining estimated economic life of the product (not to exceed 5 years). We
 continually review the net realizable value of capitalized software costs. At
 the time that a determination is made that capitalized software amounts
 exceed the estimated net realizable value of amounts capitalized, any amounts
 in excess of the estimated realizable amounts are written off.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | No software development costs
 were capitalized during 2007. Amortization of the costs capitalized prior to
 2003 amounted to $0 and $38,000 in 2007 and 2006, respectively. These costs
 were primarily made up of payroll, fringe benefits, and other direct expenses
 such as facilities allocation. The software amortized over the period is tour
 microdisplay inspection software toolbox including vision processing
 algorithms and our patented sequence development and execution software.
 These software components are used in the products we sell.                                                                                                                                                                

Patents

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

Impairment of
Long-lived Assets

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

Deferred Revenue

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

Fair Value of
Financial Instruments

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

22

---



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | The recorded values of notes
 payable and long-term debt approximate their fair values, as interest
 approximates market rates.

Revenue
Recognition

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We recognize revenue in
 accordance with SOP 97-2, Software Revenue Recognition, Staff Accounting
 Bulletin No. 101 (SAB 101), and Staff Accounting Bulletin No. 104 (SAB
 104) Revenue Recognition in Financial Statements. Revenue is recognized when
 persuasive evidence of an arrangement exists, delivery has occurred or
 services have been rendered, the selling price is fixed or determinable and
 collectibility is reasonably assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | We account for certain product sales of
 our flat panel display inspection systems as multiple-element arrangements.
 If specific customer acceptance requirements are met, we recognize 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). We recognize all other product sales with customer acceptance
 provisions upon final customer acceptance. We recognize revenue from the sale
 of spare parts upon shipment. Revenue from service contracts is recognized
 over the term of the contract. Revenue is reported net of sales commissions
 of $67,000 and $24,000 in 2007 and 2006, respectively. Revenue is also
 derived through business agreements for product development. We conduct
 specified product development projects related to one of our principal
 technology specializations for an agreed-upon fee. Typically the agreements
 require best efforts with no specified performance criteria. Revenue from
 product development agreements, where there are no specific performance
 terms, are recognized in amounts equal to the amounts expended on the
 programs. Generally, the agreed-upon fees contemplate reimbursing us, after
 our agreed-upon cost share if any, for costs considered to be associated with
 project activities. These include expenses for direct product development and
 research, operating expenses, general and administrative expenses, and
 depreciation. Accordingly, expenses related to product development agreements
 are recorded as cost of revenues from product development agreements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Allocations of
General and Administrative Costs and Engineering Costs

| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We allocate a portion of general
 and administrative expense and a portion of engineering and product
 development expense to cost of sales from product development agreements
 based on a percentage of direct labor costs. These allocations are limited to
 the amount of revenues, after direct expenses, under the applicable
 agreements.
| |                                                                                                                                                                                                                                                                                                                                                 
| | The following is a summary of
 the allocations made for the year ended December 31:                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                 

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

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

23

---



Concentrations of Credit and Other Risk

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

Advertising

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

Shipping and
Handling Costs

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

Income Taxes

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

Common Stock
Options

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

Foreign Currency
Transactions

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

Reclassifications

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

Contingencies and
Litigation

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

24

---



Recently Issued Accounting Standards

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 1, 2007, we adopted
 FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
 interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
 accounting for income taxes by prescribing the minimum recognition threshold
 a tax position is required to meet before being recognized in the financial
 statements. FIN 48 also provides guidance on de-recognition, classification,
 interest and penalties, accounting in interim periods, disclosure and
 transition. There was no effect on our financial position, results of
 operations or cash flows as a result of adopting FIN 48.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In September 2006, the FASB
 issued SFAS No. 157, Fair Value Measurements. The statement defines fair
 value, establishes a framework for measuring fair value in generally accepted
 accounting principles, and expands disclosures about fair value measurements.
 This statement applies under other accounting pronouncements that require or
 permit fair value measurements, the FASB having previously concluded in those
 accounting pronouncements that fair value is the relevant measurement
 attribute. Accordingly, this statement does not require any new fair value
 measurements. SFAS No. 157 is effective January 1, 2008 for financial assets
 and liabilities and January 1, 2009 for non-financial assets and liabilities.
 We are currently evaluating the effect, if any, of this statement on our
 financial condition and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In February 2007, the FASB
 issued SFAS No. 159, The Fair Value Option for Financial Assets and
 Financial Liabilities  including an amendment of FASB Statement No. 115
 (SFAS No. 159), which permits entities to choose to measure many financial
 instruments and certain other items at fair value that are not currently
 required to be measured at fair value. SFAS No. 159 also establishes
 presentation and disclosure requirements designed to facilitate comparisons
 between entities that choose different measurement attributes for similar
 types of assets and liabilities. SFAS No. 159 does not affect any existing
 accounting literature that requires certain assets and liabilities to be
 carried at fair value. SFAS No. 159 does not eliminate disclosure
 requirements included in other accounting standards, including requirements
 for disclosures about fair value measurements included in SFAS No. 157 and
 SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS
 No. 159 is effective as of the beginning of an entitys first fiscal year
 that begins after November 15, 2007. We will adopt SFAS No. 159 on January 1,
 2008 and do not anticipate adoption to materially impact our financial
 position or results of operations.                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In December 2007, the FASB
 issued SFAS No. 141(Revised), Business Combinations (SFAS No. 141(R)),
 which replaces SFAS No. 141, Business Combinations, and requires an
 acquirer to recognize the assets acquired, the liabilities assumed, and any
 non-controlling interest in the acquiree at the acquisition date, measured at
 their fair values as of that date, with limited exceptions. This statement
 also requires the acquirer in a business combination achieved in stages to
 recognize the identifiable assets and liabilities, as well as the
 non-controlling interest in the acquiree, at the full amounts of their fair
 values. SFAS No. 141(R) makes various other amendments to authoritative
 literature intended to provide additional guidance or to confirm the guidance
 in that literature to that provided in this statement. This statement applies
 prospectively to business combinations for which the acquisition date is on
 or after the beginning of the first annual reporting period beginning on or
 after December 15, 2008. We expect to adopt this statement on January 1,
 2009. SFAS No. 141(R)s impact on accounting for business combinations is
 dependent upon acquisitions at that time.                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In December 2007, FASB issued SFAS No. 160,
 Non-controlling Interests in Consolidated Financial Statements, which
 amends Accounting Research Bulletin No. 51, Consolidated Financial
 Statements, to improve the relevance, comparability, and transparency of the
 financial information that a reporting entity provides in its consolidated
 financial statements. SFAS No. 160 establishes accounting and reporting
 standards that require the ownership interests in subsidiaries not held by
 the parent to be clearly identified, labeled and presented in the
 consolidated statement of financial position within equity, but separate from
 the parents equity. This statement also requires the amount of consolidated
 net income attributable to the parent and to the non-controlling interest to
 be clearly identified and presented on the face of the consolidated statement
 of income. Changes in a parents ownership interest while the parent retains
 its controlling financial interest must be accounted for consistently, and
 when a subsidiary is deconsolidated, any retained non-controlling equity
 investment in the former subsidiary must be initially measured at fair value.
 The gain or loss on the deconsolidation of the subsidiary is measured using the
 fair value of any non-controlling equity investment. The statement also requires entities to provide sufficient
 disclosures that clearly identify and distinguish between the interests of
 the parent and the interests of the non-controlling owners. This statement
 applies

25

---



| |                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | prospectively to
 all entities that prepare consolidated financial statements and applies
 prospectively for fiscal years, and interim periods within those fiscal
 years, beginning on or after December 15, 2008. We are currently evaluating
 the effect, if any, of this statement on our financial condition and results
 of operations

Note C - Long-Term Debt and Other
Financing Arrangements

| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Board of
 Directors at various meetings during 2007 authorized increases in the
 allowable outstanding balance of Class 2 Notes to the present total of
 $3,622,000. From November 2006 through December 31, 2007, we have issued
 $2,964,000 of Class 2 Notes to fund operations leaving a balance of $658,000
 of Class 2 Notes available to be issued in future periods.                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Class 2 notes have
 been issued primarily to related parties. The issued Notes have a maturity
 date of April 30, 2008. See Note O  Going Concern in the Notes to Condensed
 Financial Statements for activity associated with the maturity date of the
 Notes. See Note P  Subsequent Events in the Notes to Condensed Financial
 Statements for recent activity associated with the issuance of Class 2 Notes.
| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The terms of the 5th
 Amended Note and Warrant Purchase agreement have been amended and or modified
 at various dates during 2007 and 2008 to affect the following:                                                                                                                                                                                                                                               

| |    |                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) | Grant the holders
 of Class 2 Notes the right to participate in future equity financings up to
 the face amount of their respective Notes.                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                 
| | 2) | Issue warrants
 accrued on Class 2 Notes through July 30, 2007 if requested. The number of
 warrants requested by and issued to the Class 2 Note Holders was 335,545. The
 value of the warrants issued was $21,118 as determined using the
 Black-Scholes option-pricing model.
| |    |                                                                                                                                                                                                                                                                                 
| | 3) | Allow Class 2 Note
 Holders to elect to receive accrued Class 2 warrants at the time they amend
 their notes and once each quarter.                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                 
| | 4) | Extend the
 maturity date to April 30, 2008.                                                                                                                                                                                                                                    

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Class 2 Notes
 are working capital notes and are secured by accounts receivable, inventory,
 and intellectual property. The purchasers of Class 2 Notes receive 10%
 interest and the option to earn either warrants for the purchase of our
 common stock or additional interest at the annual rate of 2% for the period
 such Notes were outstanding. Class 2 Warrants entitle the holder to purchase
 one share of common stock for each $1 in value of the Class 2 Note multiplied
 by a fraction, the numerator of which is the number of days such Class 2 Note
 is outstanding and the denominator of which is 365. The Board of Directors
 has approved a $1.60 strike price for the warrants. The antidilution terms of
 the warrants earned provide for the conversion price on the warrants to be
 reduced to the price of new securities sold, but not lower than $0.25,
 resulting in significant reduction of the amount of funds that will be
 realized by the Company in the event of an exercise of the warrants at
 current market prices. As of December 31, 2007, the note holders had earned
 1,795,327 warrants of which 1,459,782 had not been issued. See Note P 
 Subsequent Events in the Notes to Condensed Financial Statements for recent
 activity associated with the issuance of Class 2 Notes.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | As of December 31,
 2007, we had $378,000 in outstanding Class 3 Notes payable that are convertible
 into our common stock at $1.00 per share. The Notes are due April 30, 2008,
 and interest is paid semi-annually at 8%. The Class 3 Notes are secured by
 our intellectual property. The antidilution terms of the Class 3 Notes
 provide for their conversion price to be reduced to the price of new
 securities sold, but not lower than $0.25, which could result in an increase
 in the number of shares that would be realized by the noteholders in the
 event of a conversion of the notes if new capital is raised using equity at
 current market prices. See Note P  Subsequent Events in the Notes to
 Condensed Financial Statements for recent activity associated with the Class
 3 Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | A summary of the
 Companys debt obligations is as follows as of December 31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

26

---



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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest paid in
 2007 was approximately $30,000 compared to interest expensed of $230,000. The
 $200,000 difference primarily represents amounts accrued and unpaid. Interest
 paid in 2006 was approximately $30,000 compared to interest expensed of
 $32,000. The $2,000 difference primarily represents amounts accrued and
 unpaid. Interest expense incurred on notes to related parties was
 approximately $200,000 and $2,000 in 2007 and 2006, respectively.

Note D - Related Party Transactions

| |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Maxco, Inc.
 provided consulting services to the Company through June of 2006. These
 services, which are no longer required, included assistance with financial
 statement preparation, compliance with governmental filing requirements, and
 assistance with certain financing arrangements. The Company and Maxco agreed
 on terms for payment for these services resulting in charges to operations of
 $6,960 in 2006.

Note E - Income Taxes

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company establishes
 valuation allowances in accordance with the provisions of FASB Statement No.
 109, Accounting for Income Taxes. The Company continually reviews
 realizability of deferred tax assets and recognizes these benefits only as
 reassessment indicates that it is more likely than not that the benefits will
 be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | As of December 31,
 2007, the Company has cumulative net operating loss carryforwards
 approximating $48.0 million (expiring: $6.9 million in 2010, $3.9 million in
 2011, $3.8 million in 2012, $2.3 million in 2018, $6.6 million in 2020, $1.9
 million in 2021, $5.7 million in 2022, $5.5 million in 2023, $2.7 million in
 2024, $2.7 million in 2025, $2.9 million in 2026 and $3.0 million in 2027)
 for federal income tax purposes available to reduce taxable income of future
 periods and unused investment, alternative minimum tax, and research and
 development tax credits approximating $331,000. Additionally, the Companys
 inactive subsidiary in the United Kingdom has cumulative net operating loss
 carryforwards approximating $3.8 million that do not expire. For financial
 reporting purposes, the net operating losses and credits have been offset
 against net deferred tax liabilities based upon their expected amortization
 during the loss carryforward period. The remaining valuation allowance is
 necessary due to the uncertainty of future income estimates. The valuation
 allowance increased $989,000 in 2007 and $957,000 in 2006.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Deferred income
 taxes reflect the net tax effects of temporary differences between the
 carrying amounts of assets and liabilities for financial reporting purposes
 and the amounts used for income tax purposes. Significant components of the
 Companys deferred tax liabilities and assets as of December 31 are as
 follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

27

---



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

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There were no
 income tax payments made in 2007 or 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | On January 1, 2007,
 we adopted the provisions of Financial Accounting Standards Board
 Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
 48), an interpretation of FASB Statement No. 109 (SFAS 109). There was no
 impact on our financial statements upon adoption. Because of our historical
 significant net operating losses, we have not been subject to income taxes
 since 1995. There were no unrecognized tax benefits during the periods
 presented.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | We classify all
 interest and penalties as income tax expense. We did not have any accrued
 interest and penalties related to uncertain tax positions as of December 31,
 2007.                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | We file income tax
 returns in the United States federal jurisdiction and various state
 jurisdictions. The tax years 2003 through 2006 remain open to examination by
 taxing jurisdictions to which we are subject. As of December 31, 2007, we did
 not have any tax examinations in process.                                                                                                                                                                                             

Note F  Loss per Share

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

28

---



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

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

Note G - Employee Savings Plan

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have an
 Employee Savings Plan covering substantially all employees. We contribute
 $.20 to the Plan for every dollar contributed by the employees up to 6% of their
 compensation. The Plan also provides for discretionary contributions by the
 company as determined annually by our Board of Directors. The contributions
 we charged to operations under the Plan were approximately $12,000 and
 $13,000 for 2007 and 2006, respectively.

Note H  Lease Commitments and
Contingencies

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

Note I  Share-Based Compensation

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently have
 two active stock option plans, the 1999 and the 2004 stock option plans (the
 Plans) which provide for options that may be granted to eligible employees,
 officers and directors of Integral Vision. We reserved 1,500,000 shares for
 future issuance under the Plans. As of December 31, 2007, there remained
 99,000 shares which can be issued under the Plans.                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The purpose of the
 Plans generally is to retain and attract persons of appropriate education,
 experience and ability to serve as our employees, to encourage a sense of
 proprietorship of such persons, and to stimulate an active interest in our
 development and financial success.                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Plans are
 administered by the Compensation Committee of the Board of Directors (the
 Committee). The Committee determines which eligible employees will receive
 awards, the timing and manner of the grant of such option awards, the
 exercise price of the stock options (which may not be less than market value
 on the date of grant) and the number of shares. We may at any time amend or
 terminate the Plans, however no amendment that would impair the rights of any
 participant with respect to outstanding grants can be made without the
 participants prior consent.                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | We granted 475,000
 options to employees during 2007. 210,000 options were granted to employees
 during 2006. See Note P Subsequent Events for activity associated with stock
 options since January 1, 2008.                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The fair value of
 each option award is estimated on the date of grant using the Black-Scholes
 option valuation model with the assumptions noted in the following table. The
 fair value of all awards is amortized on a straight line basis over the
 requisite service periods. The expected life of all awards granted represents
 the period of time that they are expected to be outstanding. The expected
 life is determined using historical and other information available at the
 time of grant. Expected volatilities are based on historical volatility of
 our common stock, and other factors. The

29

---



risk-free rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant. We use
historical data to estimate pre-vesting option forfeitures.

|                         |  |                        |   |      |  
|------------------------ |  | ---------------------- | - | ---- | -
|                         |  | Year Ended December 31 |  
|                         |  |                        |  
|                         |  | 2007                   |   | 2006 |  
|                         |  |                        |   |      |  
|                         |  | (in thousands)         |  
|                         |  |                        |  
|Expected Life (in years) |  | 6.0                    |   | 6.0  |  
|Expected volatility      |  | 77.70                  | % | 82.7 | %
|Risk-free interest rate  |  | 4.11                   | % | 4.90 | %
|Expected dividend yield  |  | 0                      | % | 0    | %
|Expected forfeiture rate |  | 0                      | % | 0    | %

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

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

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

|                               |  |         |   |                                                                |      | 
|------------------------------ |  | ------- | - | -------------------------------------------------------------- | ---- | 
|                               |  | Shares  |   | Weighted
  Average Grant-
  Date Fair
  Value Exercise
  Price |     
|                               |  |         |   |                                                                |     
|Nonvested at January 1, 2007   |  | 210,000 |   | $                                                              | 0.77 | 
|Granted                        |  | 475,000 |   |                                                                | 0.36 | 
|Forfeited                      |  | (35,000 | ) |                                                                | 0.77 | 
|Vested                         |  | 0       |   |                                                                | 0.00 | 
|                               |  |         |   |                                                                |      | 
|                               |  |         |   |                                                                |      | 
|Nonvested at December 31, 2007 |  | 650,000 |   | $                                                              | 0.47 | 
|                               |  |         |   |                                                                |      | 

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

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

30

---



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

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

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

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

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

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

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

|                    |  |                                       |      |                      |       |                                       |      |                      |       | 
|------------------- |  | ------------------------------------- | ---- | -------------------- | ----- | ------------------------------------- | ---- | -------------------- | ----- | 
|                    |  | Weighted
  Average
  Exercise
  Price |      | Number
  Outstanding |       | Weighted
  Average
  Remaining
  Life |      | Number
  Exercisable |      
|                    |  |                                       |      |                      |       |                                       |      |                      |      
|                    |  | (number of shares in thousands)       |     
|                    |  |                                       |      |                      |       |                                       |      |                      |       | 
|Warrants            |  | $                                     | 1.60 |                      | 3,500 |                                       | 2.28 |                      | 3,500 | 
|Class 2 Notes       |  | $                                     | 1.31 |                      | 657   |                                       | 2.43 |                      | 657   | 
|Class 3 Notes       |  | $                                     | 1.00 |                      | 378   |                                       | 0.25 |                      | 378   | 
|1995 Employee Stock |  | $                                     | 0.54 |                      | 312   |                                       | 3.08 |                      | 312   | 
|1999 Employee Stock |  | $                                     | 0.28 |                      | 205   |                                       | 4.53 |                      | 205   | 
|2004 Employee Stock |  | $                                     | 0.78 |                      | 979   |                                       | 8.52 |                      | 329   | 
|                    |  |                                       |      |                      |       |                                       |      |                      |       | 
|                    |  | $                                     | 1.30 |                      | 6,031 |                                       | 3.30 |                      | 5,381 | 
|                    |  |                                       |      |                      |       |                                       |      |                      |       | 

31

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Note J  Contingencies and Litigation

Product Warranties

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

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

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

Note K  Operations by Geographic
Area

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

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

|                                 |  |                        |       |      |   |     | 
|-------------------------------- |  | ---------------------- | ----- | ---- | - | --- | 
|                                 |  | Year Ended December 31 |      
|                                 |  |                        |      
|                                 |  | 2007                   |       | 2006 |  
|                                 |  |                        |       |      |  
|                                 |  | (in thousands)         |      
|                                 |  |                        |      
|Net revenues by geographic area: |  |                        |       |      |   |     | 
|North America                    |  | $                      | 528   |      | $ | 835 | 
|Europe                           |  |                        | 166   |      |   |    | 
|Asia                             |  |                        | 457   |      |   |    | 
|                                 |  |                        |       |      |   |     | 
|                                 |  | $                      | 1,151 |      | $ | 835 | 
|                                 |  |                        |       |      |   |     | 

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

Note L  Royalty Payments Received

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

Note M  Capitalized Software Costs

| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management has focused its development, sales and marketing efforts
  on the Companys inspection systems for the flat panel display (FPD)
  industry. Industry sources indicate that this market will be substantial once
  fully developed. The Company has developed inspection solutions for the
  leading technologies used in the FPD industry including liquid crystal on
  silicon (LCOS),

32

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| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | organic light emitting diodes (OLED and PolyOLED), electroluminescent
  (EL), high temperature polysilicon (HTPS), low temperature polysilicon
  (LTPS), liquid crystal display (LCD), and microelectromechanical systems
  (MEMS).
| |                                                                                                                                                                                                                                    
| | Management
  periodically performs an analysis of the net realizable value of capitalized
  software costs.                                                                                                                        

Note N  Market for the Companys
Common Stock

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

Note O  Going Concern Matters

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

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

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

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

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

33

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Note P  Subsequent Events

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

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

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

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

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

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

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

34

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Corporate Officers Charles
J. Drake,67, is CEO and Chairman of the Board of Integral Vision, Inc. Mr. Drake
founded the Company (originally known as Medar) in 1969 and has served as Chief
Executive Officer since 1978. Mark
R. Doede,50, is President, Chief Operating Officer, and Chief Financial Officer
of Integral Vision Inc. Mr. Doede has served as an officer since 1989. Jeffrey
J. Becker,46, is Senior Vice President of Integral Vision, Inc. Andrew
Blowers,40, is Chief Technical Officer of Integral Vision, Inc. Paul Zink,42, is
Vice President of Applications of
Integral Vision, Inc. Board of Directors Charles
J. DrakeChairman
of the Board of Directors, Integral Vision,
Inc.
Chief Executive Officer, Integral Vision, Inc. Max
A. CoonVice
Chairman and Secretary of the Board of
Directors, Integral Vision, Inc.
President and Chairman of the Board, Maxco, Inc. Vincent
ShunskyDirector,
Integral Vision, Inc.
Treasurer, Integral Vision, Inc.
Partner, Gannon Group, P.C. William
B. WallaceDirector,
Integral Vision, Inc.
Senior Managing Director, Equity Partners, Ltd.


Corporate Directory Corporate
Headquarters49113 Wixom Tech
DriveWixom, MI 48393
+1 (248) 668-9230
+1 (248) 668-9384 fax Independent Auditors
Rehmann Robson
Troy, MI General Counsel
J.M. Warren Law Offices, P.C.
Lansing, MI Stock Trading
Over the Counter Bulletin Board (OTCBB)
Symbol: INVI Stock Registrar and Transfer Agent
Registrar and Transfer Company
Cranford, NJ
+1 (908) 497-2300 Form
10-KSBInterested
stockholders may obtain, without charge, a copy of the Companys Annual Report
on Form 10-KSB, as filed with the Securities and Exchange Commission, upon
written request to: Investor RelationsIntegral Vision,
 Inc.49113 Wixom Tech
 DriveWixom, MI 48393 Investor/Analyst
InformationStockholder and
analyst inquiries concerning the Company should be addressed to: Investor Relations
 Integral Vision, Inc.
 49113 Wixom Tech Drive
 Wixom, MI 48393Guerrant
 Associates
 Laura Guerrant
 +1 (808) 882-1467 E-Mail
Investor Relationscdrake@iv-usa.com
lguerrant@guerrantir.com On
the World Wide Webwww.iv-usa.com


35

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Exhibits to Form 10-KSB

Integral Vision, Inc.

Year Ended December 31, 2007

Commission File Number 0-12728

36

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|               |  |                                                                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Exhibit Index Description                                                                                                               
|               |  |                                                                                                                                         
|4.6            |  | Form of Consent to
 Modifications dated January 18, 2008 modifying the terms of the Fourth
 Amended Note and Warrant Purchase Agreement.
|               |  |                                                                                                                                         
|4.7            |  | Form of Amended
 Collateral Assignment of Proprietary Rights dated March 5, 2008.                                                       
|               |  |                                                                                                                                         
|4.8            |  | Form of Amended
 Security Agreement dated March 6, 2008.                                                                                
|               |  |                                                                                                                                         
|4.9            |  | Form and Consent
 to Amend and Replace Agreements dated March 12, 2008.                                                                 
|               |  |                                                                                                                                         
|4.10           |  | Form of Fifth
 Amended and Restated Note and Warrant Purchase Agreement.                                                                
|               |  |                                                                                                                                         
|10.5           |  | Integral Vision,
 Inc. 2008 Equity Incentive Plan.                                                                                      
|               |  |                                                                                                                                         
|14             |  | Code of Ethics.                                                                                                                         
|               |  |                                                                                                                                         
|23.1           |  | Consent of Rehmann
 Robson, independent registered public accounting firm.                                                              
|               |  |                                                                                                                                         
|31.1           |  | Certification of
 Chief Executive Officer of periodic report pursuant to Rule 13a-15(e) or Rule
 15d-15(e).                             
|               |  |                                                                                                                                         
|31.2           |  | Certification of
 Chief Financial Officer of periodic report pursuant to Rule 13a-15(e) or Rule
 15d-15(e).                             
|               |  |                                                                                                                                         
|32.1           |  | Certification by
 Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C. Section
 1350.                                       
|               |  |                                                                                                                                         
|32.2           |  | Certification by
 Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section
 1350.                                       

37

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