**United
      States Securities and Exchange Commission**


**Washington,
      D.C. 20549**





**FORM
      10-K/A(Amendment
      No. 1)**





X
            Annual
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934
              *For
                the fiscal year ended December 31, 2005.*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)Registrant's
                telephone number, including
                area code:
            (248)
                471-2660





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


None




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


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


(Title
      of
      Class)




Indicate
      by check mark whether the registrant is a well-known seasoned issuer, as defined
      in Rule 405 of the Securities Act. Yes   ̈  No  þ





Indicate
      by check mark whether the registrant is not required to file reports pursuant
      to
      Section 13 or Section 15(d) of the Exchange Act. Yes   ̈  No  þ





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  Yes þ  No  ̈





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.   ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
                accelerated filer ̈
            
            Accelerated
                filer ̈
            
            Non-accelerated
                filerþ





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





The
      aggregate market value of the registrant’s common stock, $1.00 par value per
      share, held by non-affiliates of the registrant on June 30, 2005, the last
      business day of the registrant’s most recently completed second fiscal quarter,
      was $13,486,010 (based on the closing sales price of the registrant’s common
      stock on that date). Shares of the registrant’s common stock held by each
      officer and director and each person who owns 5% or more of the outstanding
      common stock of the registrant have been excluded in that such persons may
      be
      deemed to be affiliates. This determination of affiliate status is not
      necessarily a conclusive determination for other purposes. At March 15, 2006,
      there were 29,491,409 outstanding shares of the Registrant's common
      stock.





Documents
      Incorporated By Reference





Portions
      of the annual proxy statement for the year ended December 31, 2005 are
      incorporated by reference into Part III.





1




**EXPLANATORY
        NOTE**
 
 This
        Amendment No. 1 to the Annual Report on Form 10-K of Integral Vision, Inc.
        for
        the fiscal year ended December 31, 2005 is being filed to correct a
        typographical error in which we inadvertently transposed the percentage of
        sales
        of our major customers. Otherwise, this amendment does not update or modify
        in
        any way the financial position, results of operations, cash flows or the
        disclosures in Integral Vision, Inc.’s Annual Report on Form 10-K for the fiscal
        year ended December 31, 2005, and does not reflect events occurring after
        the
        original filing date of March 31, 2006.





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**







*This
      Annual Report on Form 10-K contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934. Actual results could differ materially from
      those projected in the forward-looking statements as a result of a number of
      factors, risks and uncertainties. Generally, the words “anticipate”, “expect”,
“intend”, “believe” and similar expressions identify forward-looking statements.
      The information included in this Form 10-K 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. Business**




General




Integral
      Vision, Inc. (or the "Company") develops, manufactures, and markets flat panel
      display inspection systems to ensure product quality in the display
      manufacturing process. The Company primarily inspects Microdisplays and small
      flat panel displays, though the technology used is scalable to allow inspection
      of full screen displays and components. Integral Vision’s customers and
      potential customers are primarily large companies with significant investment
      in
      the manufacture of displays. Nearly all of the Company’s sales originate in the
      United States, Asia, or Europe. The Company's 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.






***Overview***




The
      Company is a supplier of flat panel inspection systems used to ensure product
      quality during the manufacturing process. The Company’s products primarily use
      machine vision to evaluate functional displays for cosmetic and functional
      defects, but can also provide electrical testing if required for a given
      application. Machine vision has become a necessity for manufacturers who need
      to
      continually improve production efficiency to meet the increasing demand for
      high
      quality products. The Company’s inspection systems automatically inspect parts
      at a lower cycle time and with greater repeatability than is possible with
      human
      inspectors.




The
      Company has several large companies as customers. These companies are working
      with new microdisplay technologies. Integral Vision’s success will be
      substantially dependant on these large companies getting their emerging display
      technologies into high volume production






***Products***






**LCI
      Professional -** Integral
      Vision’s LCI-Professional product is used for inspection of LCD Displays as
      components or final assemblies. Applications include cell phones, car radios,
      pagers, electronic organizers and hand-held video games. Integral Vision’s
      display inspection systems are designed to detect two classes of defects:
      cosmetic and functional. Cosmetic defects do not affect the functionality of
      the
      display, but they cause user annoyance and reduce product value. Functional
      defects are flaws that cause the device to be inoperable or have a significant
      effect on functionality.






**SharpEye
      -** Integral
      Vision’s 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.




2




**ChromaSee
      -** Integral
      Vision’s ChromaSee product, which was introduced in 2003, provides luminance,
      color matching and defect inspections for FPD displays. Defect detection
      includes functional (e.g. failed pixels, icons) and cosmetic (e.g. scratches)
      defects. ChromaSee integrates with production equipment to allow inline or
      offline testing. A configuration interface (Task Sequencer) uses a familiar
      “Tree View” representation of the inspection sequence flow. For deployment into
      production, the operator’s interface provides essential views of results, images
      and statistics for production floor personnel.






**Lifetime
      Tester -** Integral
      Vision’s Lifetime Tester product, which was introduced in 2003, evaluates
      changes in display luminance, color and other performance characteristics over
      time. The Lifetime Tester facilitates the process of comparing different display
      manufacturing processes and formulas by evaluating large numbers of samples
      side
      by side to determine their life characteristics. This allows design and process
      engineers to efficiently evaluate the effectiveness of proposed design and
      process changes off line prior to implementation .






**IVSee
      -** Integral
      Vision’s IVSee, introduced in 2005, provides FPD inspection for applications
      which still require manual handling. IVSee is designed for the detection of
      functional and cosmetic defects in LCOS, OLED, MEMS, 3LCD/HTPS, LCD and other
      emerging display technologies. IVSee is configured to be integrated into
      existing manual inspection stations allowing them to receive the benefits of
      computer aided optical inspection without the need to modify the manufacturing
      process to automate handling of the display. The operator’s interface provides
      essential views of results, images, and statistics for production floor
      personnel.






***Production
      and Suppliers***




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






***Intellectual
      Property***




Management
      believes that the technology incorporated in its products gives it advantages
      over its competitors and prospective competitors. Protection of technology
      is
      attempted through a combination of patents, applied for patents, confidentiality
      agreements and trade secrets. The Company presently has 14 U.S. patents. There
      can be no assurance that the Company will have the resources to defend its
      patents or that patents the Company holds will be considered valid if
      challenged. In addition, it is possible that some patents will be rendered
      worthless as the result of technological obsolescence.






***Marketing***




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






***Product
      Development***




The
      market for Machine Vision is characterized by rapid and continuous technological
      development and product innovation. The Company believes that continued and
      timely development of new products and enhancements to existing products is
      necessary to maintain its competitive position. Accordingly, the Company devotes
      a significant portion of its personnel and financial resources to product
      development programs and seeks to maintain close relationships with customers
      to
      remain responsive to their needs. The Company’s net engineering and development
      costs amounted to $960,000, $909,000, and $663,000 in 2005, 2004, and 2003,
      respectively. The Company’s current product development efforts are primarily
      directed to Flat Panel Display Inspection products.




3




***Environmental
      Factors***




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






***Competition***




Competition
      for machine vision based microdisplay and small flat panel display inspection
      comes primarily from Westar Display Technologies, Inc






***Export
      Sales***




Sales
      outside of the United States accounted for 5%, 84% and 13% of the Company's
      net
      sales in 2005, 2004 and 2003, respectively. Management expects that such sales
      will continue to represent a significant percentage of its net sales. Most
      of
      the Company's export billings are denominated in US dollars. On occasion other
      export billings are denominated in the currency of the customer's
      country.




See
      Note
      I to Notes to the Consolidated Financial Statements Part II - ITEM 8 for details
      of geographic area information.






***Major
      Customers***




The
      nature of the Company’s product offerings may produce sales to one or a limited
      number of customers in excess of 10% of total consolidated 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 the Company’s results of operations. For 2005, sales to
      Hewlett Packard and Texas Instruments represented 71% and 21% of consolidated
      net sales, respectively. Approximately $75,000 was due from one of these
      customers at December 31, 2005. For 2004, sales to Philips represented 80%
      of
      consolidated net sales. There were no amounts due from this customer at December
      31, 2004. For 2003, sales to Intel Corporation, Owens Brockway and Toyo
      Corporation represented 63%, 14%, and 11% of consolidated net sales,
      respectively. There were no amounts due from these customers at December 31,
      2003.






***Backlog***




As
      of
      December 31, 2005, the Company had an order backlog of approximately $367,000
      compared to $518,000 at December 31, 2004. Management expects that the Company
      will ship products representing this entire backlog in 2006.






***Employees***




As
      of
      February 28, 2006, the Company had 21 permanent employees, compared to 16 at
      February 28, 2005 and 12 at February 28, 2004. None of the Company's employees
      are represented by a labor union.






**ITEM** **2. Properties**




On
      October 19, 2005, the Company entered into a lease agreement to lease a light
      industrial building containing approximately 14,000 square feet at 49113 Wixom
      Tech Drive, Wixom, Michigan. The five year lease commenced on January 1, 2006.
      Manufacturing, engineering and administrative functions of Integral Vision
      are
      performed at this location.






**ITEM** **3. Legal Proceedings**




The
      Company is not currently involved in any material litigation.






**ITEM** **4. Submission of Matters to a Vote of Security Holders**




None.


4


Part
      II




**ITEM** **5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities**




The
      Company's common stock is traded on the Over the Counter Bulletin Board (OTCBB)
      under the symbol INVI. As of March 15, 2005, there were approximately 2,500
      stockholders of the Company including individual participants in security
      position listings.




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




The
      table
      below shows the high and low sales prices for the Company's common stock for
      each quarter in the past two years. The closing sales price for the Company's
      common stock on March 15, 2006 was $1.76 per share.




**2004**
            
            **2005****Mar
                31**
            
            **Jun
                30**
            
            **Sept
                30**
            
            **Dec
                31**
            
            **Mar
                31**
            
            **Jun
                30**
            
            **Sept
                30**
            
            **Dec
                31**High
            
            $
            2.45
            
            $
            2.55
            
            $
            2.00
            
            $
            2.54
            
            $
            2.43
            
            $
            2.06
            
            $
            2.10
            
            $
            2.00Low
            
            
            0.34
            
            
            1.45
            
            
            0.83
            
            
            1.01
            
            
            1.30
            
            
            1.16
            
            
            1.32
            
            
            1.35





The
      market for securities of small market-capitalization companies has been highly
      volatile in recent years, often for reasons unrelated to a company's results
      of
      operations. Management believes that factors such as quarterly fluctuations
      in
      financial results, failure of new products to develop as expected, sales of
      common stock by existing shareholders, and substantial product orders may
      contribute to the volatility of the price of the Company's common stock. General
      economic trends such as recessionary cycles and changing interest rates may
      also
      adversely affect the market price of the Company's common stock. No cash
      dividends on common stock have been paid during any period.






**ITEM** **6. Summary of Selected Financial Data**




**Year
                  ended December 31****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****(in
                  thousands, except per share data)**Net
                  revenues
              
              $
              686
              
              $
              1,542
              
              $
              641
              
              $
              1,579
              
              $
              2,633Gross
                  margin
              
              
              68
              
              
              212
              
              
              37
              
              
              402
              
              
              (2,763
              )(a)Net
                  loss
              
              
              (2,679
              )
              
              (2,459
              )
              
              (1,937
              )
              
              (2,203
              )
              
              (8,135
              )Basic
                  and diluted loss per share
              
              
              (0.11
              )
              
              (0.18
              )
              
              (0.21
              )
              
              (0.23
              )
              
              (0.89
              )Weighted
                  average shares outstanding
              
              
              24,531
              
              
              13,435
              
              
              9,430
              
              
              9,430
              
              
              9,198
  **At
                  December 31****2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002**
              
              
              **2001****(in
                  thousands)**Working
                  capital (deficit)
              
              $
              2,577
              
              $
              (1,804
              )
              $
              (2,892
              )
              $
              (2,006
              )
              $
              (1,472
              )Total
                  assets
              
              
              3,227
              
              
              872
              
              
              667
              
              
              1,308
              
              
              1,964Long-term
                  debt,net
                  of current portion and OID
              
              
              378
              
              
              2,355
              
              
              1,425
              
              
              962
              
              
              337Stockholders'
                  equity (deficit)
              
              
              2,384
              
              
              (3,967
              )
              
              (3,922
              )
              
              (2,303
              )
              
              (672
              )





(a)
            In
                2001, Management made a change in estimate that resulted in a $1.9
                million
                charge to direct costs of sales to write down inventory and capitalized
                software to estimated net realizable values. The amount of the charge
                applicable to inventory was $540,000 with the remaining $1.3 million
                applicable to capitalized software.




5


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






**ITEM** **7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**




Overview




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






Results
      of Operations




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




**Year
                ended December 31****2005**
            
            **2004**
            
            **2003**Net
                revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Direct
                cost of sales (a)
            
            
            90.1
            
            
            86.3
            
            
            94.2Gross
                margin
            
            
            9.9
            
            
            13.7
            
            
            5.8Other
                costs and expenses:Marketing
            
            
            77.1
            
            
            16.9
            
            
            34.8General
                and administrative
            
            
            182.4
            
            
            77.5
            
            
            125.1Engineering
                and development
            
            
            139.9
            
            
            58.9
            
            
            103.4Total
                other costs and expenses
            
            
            399.4
            
            
            153.3
            
            
            263.3Loss
                from operations
            
            
            (389.5
            )
            
            (139.6
            )
            
            (257.5
            )Loss
                on sales of assets
            
            
            -
            
            
            -
            
            
            (1.1
            )Other
                income
            
            
            8.5
            
            
            8.4
            
            
            13.6Interest
                income
            
            
            11.4
            
            
            -
            
            
            -Interest
                expense
            
            
            (20.8
            )
            
            (28.3
            )
            
            (57.7
            )Foreign
                currency translation gain (loss)
            
            
            (0.1
            )
            
            0.1
            
            
            0.3Loss
                from operations before income taxes
            
            
            (390.5
            )
            
            (159.4
            )
            
            (302.4
            )Benefit
                for income taxes
            
            
            -
            
            
            -
            
            
            -Net
                loss
            
            
            (390.5
            )%
            
            (159.4
            )%
            
            (302.4
            )%




(a)
            Direct
                cost of sales includes capitalized software amortization as a percentage
                of sales of 19.0%, 11.1%, and 30.2% in 2005, 2004 and 2003,
                respectively.






6




Year
      Ended December 31, 2005, compared to the year ended December 31,
      2004




Net
      revenues decreased $856,000 (55.5%) to $686,000 in 2005 from $1.5 million in
      2004. Net revenue is reported net of sales commission expense of approximately
      $10,000 in 2005 compared to $19,000 in 2004. The decrease was primarily due
      to
      decreased sales of the Company’s flat panel display inspection product. Sales
      from the flat panel display inspection product line accounted for approximately
      $666,000 and $1.4 million of the Company’s net revenue in 2005 and 2004,
      respectively. The Company’s revenue from other applications was approximately
      $152,000 in 2004. There was no such revenue in 2005. The Company’s revenue from
      software was approximately $16,000 and $33,000 in 2005 and 2004, respectively.
      The Company’s revenue from service activities was approximately $4,000 in 2005.
      There was no such revenue in 2004.




Direct
      costs of sales decreased $497,000 (44.6%) to $618,000 (approximately 90.1%
      of
      sales) in 2005 from $1.3 million (approximately 86.3% of sales) in 2004. This
      was primarily attributable to the lower sales volume.




Marketing
      costs increased 102.7%, or $268,000, to $529,000 in 2005 compared to $261,000
      in
      2004. This increase is primarily attributable to additional staffing due to
      an
      anticipated increase in sales activity. Employee related costs in the marketing
      division were $203,000 higher in 2005 compared to 2004 levels. Advertising
      costs
      were $59,000 higher in 2005 compared to 2004 levels.




General
      and administrative costs increased 4.7%, or $56,000, to $1.3 million in 2005
      compared to $1.2 million in 2004. Legal fees in the general and administrative
      division were $95,000 lower in 2005 compared to 2004 levels. Consulting fees
      increased $73,000 primarily as a result of payments made to Maxco, Inc. for
      providing consulting services to the Company. Prior to the fourth quarter of
      2004, Maxco did not charge for the providing of these services. Employee related
      costs in the general and administrative division were $57,000 higher in 2005
      compared to 2004 levels. Equipment costs were $20,000 higher in 2005 compared
      to
      2004.




Engineering
      and development expenditures increased 5.6%, or $51,000, to $960,000 in 2005
      compared to $909,000 in 2004. Employee
      related costs in the engineering and development division were $160,000 higher
      in 2005 compared to 2004 levels. This
      increase is primarily attributable to additional staffing due to an anticipated
      increase in sales activity. Other expenses were down $78,000. Outside services
      were $25,000 lower in 2005 compared to 2004 levels.




Other
      income was $59,000 and $129,000 in 2005 and 2004, respectively. The
      Company received approximately $17,000 in royalties in 2005 compared to $61,000
      in 2004.




Interest
      expense decreased $293,000 to $143,000 in 2005 compared to $436,000 in 2004.
      The
      decrease is primarily attributable to the repayment of or settlement by
      conversion into common stock, of Class 1, Class 2, and Class 3 Notes that
      occurred in the second quarter of 2005 (see Note C to consolidated financial
      statements).




Year
      Ended December 31, 2004, compared to the year ended December 31,
      2003




Net
      revenues increased $901,000 (141%) to $1.5 million in 2004 from $641,000 in
      2003. Net revenue is reported net of sales commission expense of approximately
      $19,000 in 2004 compared to $11,000 in 2003. The increase was primarily due
      to
      increased sales of the Company’s flat panel display inspection product. Sales
      from the flat panel display inspection product line accounted for approximately
      $1.4 million and $497,000 of the Company’s net revenue in 2004 and 2003,
      respectively. The Company’s revenue from other applications was approximately
      $152,000 and $85,000 in 2004 and 2003, respectively. The Company’s revenue from
      software was approximately $33,000 and $43,000 in 2004 and 2003, respectively.
      The Company’s revenue from service activities was approximately $18,000 in 2003.
      There was no such revenue in 2004.




Direct
      costs of sales increased $726,000 (120%) to $1.3 million (approximately 86.3%
      of
      sales) in 2004 from $604,000 (approximately 94.2% of sales) in 2003. This was
      primarily attributable to the higher sales volume. Management periodically
      performs an analysis of the net realizable value of capitalized patent costs.
      In
      2002, management determined that capitalized patent costs exceeded the estimated
      net realizable value of amounts capitalized and a write-down was necessary.
      In
      2002, $74,000 of additional amortization was included in costs of sales as
      a
      result of this determination.






7




Marketing
      costs increased 17.0%, or $38,000, to $261,000 in 2004 compared to $223,000
      in
      2003. This increase is primarily attributable to additional staffing due to
      increased sales activity. Employee related costs in the marketing division
      were
      $54,000 higher in 2004 compared to 2003 levels. Advertising costs were $15,000
      lower in 2004 compared to 2003 levels.




General
      and administrative costs increased 49.0%, or $393,000, to $1.2 million in 2004
      compared to $802,000 in 2003. This was primarily due to an increase in legal,
      stockholder relations, and professional fees totaling $183,000 in 2004. Employee
      related costs in the general and administrative division were $124,000 higher
      in
      2004 compared to 2003 levels.




Engineering
      and development expenditures increased 37.1%, or $246,000, to $909,000 in 2003
      compared to $663,000 in 2003. Employee related costs in the engineering and
      development division were $130,000 higher in 2004 compared to 2003 levels.
      Approximately $109,000 of this variance was attributable to engineering work
      done due to increased sales in the third quarter.




On
      September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global test
      equipment manufacturer DaTARIUS Technologies GmbH, purchased Integral Vision's
      assets related to inspection systems for the optical disc industry, including
      the names "Automatic Inspection Systems" and "AID." The sale included Integral
      Vision’s optical disc scanner products as well as its range of print and
      identification code products used to inspect the printing stage of disc
      manufacture. The consideration the Company received for the technology consisted
      of a non-refundable $100,000 advanced minimum royalty payment in addition to
      future royalties. The Company received approxmiately $61,000 in royalties in
      2004 and expects to receive additional royalties of approximately $30,000 in
      2005. Additionally, the Company received $25,000 from the sale of equipment
      to
      DaTARIUS. The
      Company recognized a gain on the transaction of approximately $112,000, which
      is
      included in gain on sale of assets in 2002, primarily attributable to the
      advanced minimum royalty payment received. The
      proceeds from the transaction were used primarily to fund current
      operations.




Other
      income(expense) was $129,000 in 2004 of which approximately $61,000 was royalty
      income.




Interest
      expense increased $66,000 to $436,000 in 2004 compared to $370,000 in 2003.
      The
      increase is primarily attributable to the interest on Class 1, Class 2, and
      Class 3 Notes that were placed subsequent to September 30, 2003 (see Note C
      to
      consolidated financial statements).




Quarterly
      Information




The
      following table sets forth Consolidated Statements of Operations data for each
      of the eight quarters in the two-year period ended December 31, 2005. The
      unaudited quarterly information has been prepared on the same basis as the
      annual information and, in management's opinion, includes all adjustments
      necessary for a fair presentation of the information for the quarters
      presented.




**Quarter
                Ended****2005**
            
            **2004****Dec
                31**
            
            **Sep
                30**
            
            **Jun
                30**
            
            **Mar
                31**
            
            **Dec
                31**
            
            **Sep
                30**
            
            **Jun
                30**
            
            **Mar
                31****(in
                thousands except per share data)**Net
                revenues
            
            $
            141
            
            $
            14
            
            $
            8
            
            $
            523
            
            $
            748
            
            $
            624
            
            $
            77
            
            $
            93Gross
                margin
            
            
            (69
            )
            
            (56
            )
            
            (72
            )
            
            265
            
            
            190
            
            
            121
            
            
            (70
            )
            
            (29
            )Net
                loss
            
            
            (708
            )
            
            (780
            )
            
            (737
            )
            
            (454
            )
            
            (505
            )
            
            (549
            )
            
            (776
            )
            
            (629
            )Basic
                and diluted lossper
                share:Net
                loss*
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.06
            )
            $
            (0.04
            )




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


8


Seasonality
      and Quarterly Fluctuations




The
      Company's revenues and operating results have varied substantially from quarter
      to quarter and management believes these fluctuations may continue. The
      Company's reliance on large orders has contributed to the variability of the
      Company's operating results.




Liquidity
      and Capital Resources




Operating
      activities for 2005 used cash of approximately $2.8 million primarily due to
      the
      Company’s loss from operations. Changes in working capital used cash of
      $245,000, which was primarily due to a decrease in accounts payable of $193,000.




The
      Company’s investing activities included primarily the purchase of approximately
      $104,000 of equipment in 2005 and $31,000 for legal and patent office fees
      for
      new patent applications.




The
      Company’s financing activities included net proceeds of $6.2 million from the
      issuance of Series A convertible preferred stock. Additionally, $1.9 million
      was
      received as a result of Class 1 and Class 2 warrants that were exercised. The
      Company received $435,000 from the issuance of Class 2 Notes. The Company made
      payments of approximately $1.3 million and $1.8 million on its Class 1 and
      Class
      2 Notes, respectively. The Company paid $106,000 of interest on Class 3 Notes.
      The Company made payments of approximately $111,000 on other long term notes.
      The Company also received $5,000 from the exercise of employee stock
      options.




On
      April
      12, 2005, pursuant to a Securities Purchase Agreement, the Company sold 7,000
      shares of Series A Convertible Preferred Stock at $1,000 per share, and as
      additional consideration under the Securities Purchase Agreement, issued Common
      Stock Warrants for the purchase of up to 3.5 million shares of common stock.
      Each share of the Series A Convertible Preferred Stock was converted into 1,000
      shares of unregistered common stock upon the approval of an increase in the
      Company’s authorized shares of common stock at a meeting of the stockholders on
      May 26, 2005. The Common Stock Warrants for the purchase of up to 3.5 million
      shares of common stock are exercisable at $1.60 per share for a period of five
      years. The Company used the net proceeds of the Securities Purchase Agreement
      to
      reduce certain Company debt, and for working capital. The Company has repaid
      all
      of the outstanding principal and interest on the Class 1 and Class 2 Notes.
      The
      note holders then exercised their warrants attached to the notes for which
      the
      exercise price of the warrant was $1.00 or less. This resulted in the issuance
      of 6,195,014 shares of restricted common stock. The Class 3 note holders
      converted their notes for which the conversion price was $1.00 or less,
      resulting in the issuance of 1,269,757 shares of restricted common stock. The
      outstanding interest on the Class 3 notes was paid. Additionally, the Company
      has repaid other obligations totaling approximately $190,000.





The
      following table outlines the source and (use) of proceeds from the sale (in
      thousands):





Sale
                of Series A Convertible Preferred Stock
            
            $
            7,000Class
                1 and Class 2 warrants exercised
            
            
            1,865Class
                1 Notes paid (principal and interest)
            
            
            (1,289
            )Class
                2 Notes paid (principal and interest)
            
            
            (1,823
            )Class
                3 accrued interest paid
            
            
            (106
            )Note
                and accrued interest due Maxco, Inc.
            
            
            (111
            )Michigan
                Single Business Tax liability
            
            
            (78
            )Fees
                to raise capital
            
            
            (637
            )Legal
                and other fees
            
            
            (100
            )Remaining
                net cash proceeds
            
            $
            4,721




The
      Company expects to use a portion of the proceeds to fund its growth plan and
      to
      better secure and deliver large orders, as well as offer units for demonstration
      and marketing purposes with larger Microdisplay and LCD OEMs which will increase
      expenditures beyond current levels.


The
      Company has sufficient remaining cash along with present sales levels to fund
      current operations through the first quarter of 2007. However, the Company’s
      continuation as a going concern is ultimately dependent upon achieving the
      necessary sales to attain profitability. The Company has several large companies
      as customers. These companies are working with new microdisplay technologies.
      Integral Vision’s success will be partly dependant on these large companies
      getting their emerging display technologies into high volume production and
      placing sales orders with the Company for inspection products to support that
      production.






9




For
      further discussion regarding the Company’s obligations, see Note A—Summary of
      Significant Accounting Policies—Stock Options and Warrants.




Impact
      of
      Inflation




The
      amounts presented in the financial statements do not provide for the effect
      of
      inflation on the Company’s operations or its financial position. Amounts shown
      for property, plant and equipment and for costs and expenses reflect historical
      cost and do not necessarily represent replacement cost or charges to operations
      based on replacement cost. The Company’s operations together with other sources
      are intended to provide funds to replace property, plant and equipment as
      necessary. Net income would be lower than reported if the effects of inflation
      were reflected either by charging operations with amounts that represent
      replacement costs or by using other inflation adjustments.




Recently
      Issued Accounting Standards




In
      December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” which
      replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and
      supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS
      123(R) will require all share-based payments to employees, including grants
      of
      employee stock options, to be recognized in the statement of operations based
      on
      their fair values. SFAS 123(R) offers alternative methods for determining the
      fair value. In April 2005, the SEC issued a new rule that allows companies
      to
      implement Statement No. 123(R) at the beginning of the next fiscal year, instead
      of the next reporting period, that begins after June 15, 2005. As a result,
      the
      Company will implement SFAS 123(R) in the reporting period starting January
      1,
      2006. While management expects that SFAS 123(R) will not have a significant
      impact on the Company’s financial statements, management has not completed its
      evaluation.




Management’s
      Discussion of Critical Accounting Policies




The
      Company’s consolidated financial statements are prepared in accordance with
      accounting principles generally accepted in the United States. The preparation
      of these financial statements requires Management to make estimates and
      judgments that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting 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, 2005, future events rarely develop exactly
      as forecast, and the best estimates routinely require adjustment. These policies
      are also discussed in Note A of the Notes to Consolidated Financial Statements
      included in Item 8 of this report.




*Revenue
      Recognition*




The
      Company recognizes revenue in accordance with SOP 97-2, Software Revenue
      Recognition, 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.




The
      Company accounts for certain product sales of its flat panel display inspection
      systems as multiple-element arrangements. If specific customer acceptance
      requirements are met, the Company recognizes revenue for a portion of the total
      contract price due and billable upon shipment, with the remainder recognized
      when it becomes due (generally upon acceptance). The Company recognizes all
      other product sales with customer acceptance provisions upon final customer
      acceptance. The Company recognizes revenue from the sale of spare parts upon
      shipment. Revenue from service contracts is recognized over the life of the
      contract. Revenue is reported net of sales commissions.






10




*Inventories*




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




*Impairment
      of Long-lived Assets*




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




*Contingencies
      and Litigation*




The
      Company makes an assessment of the probability of an adverse judgment resulting
      from current and threatened litigation. The Company accrues the cost of an
      adverse judgment if, in Management’s estimation, an adverse settlement is
      probable and Management can reasonably estimate the ultimate cost of such
      litigation. The Company has made no such accruals at December 31,
      2005.




**ITEM** **7a. Quantitative and Qualitative Disclosures about Market
      Risk**




The
      Company is exposed to market risk stemming from changes in foreign exchange
      rates, interest rates and prices of inventory purchased for assembly into
      finished products. Changes in these factors could cause fluctuations in earnings
      and cash flows. In the normal course of business, exposure to interest rates
      is
      managed by fixing the interest rates on the Company's long-term debt whenever
      possible. The Company does not generally enter into long-term purchase contracts
      but instead purchases inventory to fill specific sales contracts thereby
      minimizing risks with respect to inventory price fluctuations.




While
      sales are generally denominated in US dollars, from time to time the Company
      may
      denominate sales in the following additional currencies:




v  Pound
      Sterling


v  Euros


v  Yen




In
      management's opinion, as the currencies of Western Europe and the UK are
      generally stable, there is no significant exposure to losses due to currency
      fluctuations. However, because the Yen has not been stable over the past several
      years, the Company does enter into forward sales contracts equal to the future
      amount of Yen to be received at the time the order is accepted. These hedging
      transactions are on an order by order basis and at no time are they speculative
      in nature. At December 31, 2005, the Company had no open positions and had
      no
      sales denominated in a foreign currency.




**ITEM** **8. Financial Statements and Supplementary Data**




Financial
      statements and quarterly results of operations are submitted in separate
      sections of this report.






11




**ITEM** **9. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**




Consistent
      with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by
      Section 202 of the Sarbanes-Oxley Act of 2002, the Company is responsible for
      listing the non-audit services approved by the Company’s Audit Committee to be
      performed by Rehmann Robson, the Company’s independent registered public
      accounting firm. Non-audit services are defined as services other than those
      provided in connection with an audit or a review of the financial statements
      of
      the Company. In the period covered by this filing, the Audit Committee approved
      the following non-audit services currently being rendered to the Company by
      Rehmann Robson, or to be rendered to the Company by Rehmann Robson:




·
            preparation
                of income tax returns, and tax advice in preparing for and in connection
                therewith;




·
            review
                of 2005 preferred stock offering document and related assistance
                with
                correspondence to SEC;




·
            review
                of quarterly financial statements.






**ITEM** **9A. Controls and Procedures**




Controls
      and Procedures




a) 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 Securities Exchange Act of 1934 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 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.





b) 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** **9B. Other Information**




None


12


Part
      III






**ITEM** **10. Directors and Executive Officers of the Registrant**






Item
      10
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement to be filed within 120 days of December 31, 2005.






**ITEM** **11. Executive Compensation**






Item
      11
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement to be filed within 120 days of December 31, 2005.






**ITEM** **12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**






Item
      12
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement to be filed within 120 days of December 31, 2005.






**ITEM** **13. Certain Relationships and Related Transactions**






Maxco,
      Inc., an 8% owner of the Company, provides consulting services to the Company.
      These services include assistance with financial statement preparation,
      compliance with governmental filing requirements, and assistance with certain
      financing arrangements. The Company and Maxco have agreed on terms for payment
      to Maxco for these services. Prior to October 1, 2004, no charges were made
      by
      Maxco for the services to Integral Vision. The services for the six months
      ended
      March 31, 2005 were satisfied by the issuance of 42,000 shares of unregistered
      common stock in the Company. The amount charged to operations in the first
      quarter of 2005 for these services amounted to $37,000, which is based on the
      average closing price of the Company’s common stock over that period. Effective
      April 1, 2005 and through November 30, 2005, the Company began paying Maxco
      $8,750 per month for each month such services were rendered. The amount charged
      to operations in 2005 for such administrative services amounted to $70,000.
      The
      dependence on Maxco’s services has decreased and therefore beginning December 1,
      2005, the Company began compensating Maxco on an hourly basis.






Additional
      Item 13 information is hereby incorporated by reference from the Registrant’s
      definitive proxy statement to be filed within 120 days of December 31,
      2005.






**ITEM** **14. Principal Accountant Fees and Services**






Item
      13
      is hereby incorporated by reference from the Registrant’s definitive proxy
      statement to be filed within 120 days of December 31, 2005.












13


**PART
      IV**






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


(a)(1)
                    and (2)
                The
                    response to this portion of ITEM 15 is submitted as a separate
                    section of
                    this report.(3)
                Listing
                    of exhibits.
  Exhibit
                    Number
                Description
                    of Document3.1
                Articles
                    of Incorporation, as amended (filed as Exhibit 3.1 to the registrant's
                    Form 10-K for the year ended December 31, 1995, SEC file 0-12728,
                    and
                    incorporated herein by reference).3.2
                Bylaws
                    of the Registrant, as amended (filed as Exhibit 3.2 to the registrant's
                    Form 10-K for the year ended December 31, 1994, SEC file 0-12728,
                    and
                    incorporated herein by reference).4.1
                Note
                    and Warrant Purchase Agreement (filed as Exhibit 4.1 to the registrants
                    Form 8-K dated July 15, 1997, SEC file 0-12728, and incorporated
                    herein by
                    reference).4.3
                Form
                    of Integral Vision, Inc. Common Stock Purchase Warrant Certificate
                    (filed
                    as Exhibit 4.3 to registrants Form 8-K dated July 15, 1997, SEC
                    file
                    0-12728, and incorporated herein by reference).4.4
                Note
                    and Warrant Purchase Agreement dated March 29, 2001 including
                    Form of
                    Integral Vision, Inc. 15% Senior Subordinated Secured Note and
                    Integral
                    Vision, Inc. Common Stock Purchase Warrant Certificate (filed
                    as Exhibit
                    4.4 to registrant’s Form 10-K for the year ended December 31, 2000, SEC
                    file 0-12728, and incorporated herein by reference).4.5
                Form
                    of amended Note and Warrant Purchase Agreement including Form
                    of Integral
                    Vision, Inc. 10% Secured Note and Integral Vision, Inc. Common
                    Stock
                    Purchase Warrant Certificate (filed as Exhibit 4.5 to registrant’s Form
                    10-Q for the quarter ended June 30, 2001, SEC file 0-12728, and
                    incorporated herein by reference).4.6
                Form
                    of Second Amended Note and Warrant Purchase Agreement including
                    Form of
                    Integral Vision, Inc. Class 2 Note and Integral Vision, Inc.
                    Class 2
                    Common Stock Purchase Warrant Certificate (filed as Exhibit 4.6
                    to
                    registrant’s Form 10-Q for the quarter ended March 31, 2002, SEC file
                    0-12728, and incorporated herein by reference).4.7
                Consent
                    to Modifications dated March 17, 2003 modifying the terms of
                    the Second
                    Amended Note and Warrant Purchase Agreement (filed as Exhibit
                    4.7 to
                    registrant’s Form 10-K for the year ended December 31, 2002, SEC file
                    0-12728, and incorporated herein by reference).4.8
                Form
                    of Fourth Amended Note and Warrant Purchase Agreement including
                    Form of
                    Integral Vision, Inc. Class 3 Note (filed as Exhibit 4.8 to registrant’s
                    Form 10-K for the year ended December 31, 2003, SEC file 0-12728,
                    and
                    incorporated herein by reference).10.1
                Incentive
                    Stock Option Plan of the Registrant as amended (filed as Exhibit
                    10.4 to
                    the registrant's Form S-1 Registration Statement effective July
                    2, 1985,
                    SEC File 2-98085, and incorporated herein by reference).10.2
                Second
                    Incentive Stock Option Plan (filed as Exhibit 10.2 to the registrant's
                    Form 10-K for the year ended December 31, 1992, SEC File 0-12728,
                    and
                    incorporated herein by reference).10.3
                Non-qualified
                    Stock Option Plan (filed as Exhibit 10.3 to the registrant's
                    Form 10-K for
                    the year ended December 31, 1992, SEC File 0-12728, and incorporated
                    herein by reference).10.4
                Amendment
                    to Integral Vision, Inc. Incentive Stock Option Plan dated May
                    10, 1993
                    (filed as Exhibit 10.3 to the registrant's Form 10-K for the
                    year ended
                    December 31, 1993, SEC File 0-12728, and incorporated herein
                    by
                    reference).10.5
                Integral
                    Vision, Inc. Employee Stock Option Plan (filed as Exhibit 10.5
                    to the
                    registrant's Form 10-Q for the quarter ended September 30, 1995,
                    SEC file
                    0-12728, and incorporated herein by reference).10.6
                Form
                    of Confidentiality and Non-Compete Agreement Between the Registrant
                    and
                    its Employees (filed as Exhibit 10.4 to the registrant's Form
                    10-K for the
                    year ended December 31, 1992, SEC File 0-12728, and incorporated
                    herein by
                    reference).10.7
                Integral
                    Vision, Inc. 1999 Employee Stock Option Plan (filed as exhibit
                    10.5 to the
                    registrant’s Form 10-Q for the quarter ended June 30, 1999 and
                    incorporated herein by reference).
   14
  Exhibit
                  Number
                Description
                    of Document10.8*
                Patent
                    License Agreement dated October 4, 1995 by and between Integral
                    Vision,
                    Inc. and Square D Company (filed as Exhibit 10.24 to the registrant's
                    Form
                    10-Q for the quarter ended September 30, 1995, SEC File 0-12728,
                    and
                    incorporated herein by reference).10.9
                Asset
                    Sale Purchase Agreement between the registrant and n.v. DIMACO,
                    s.a.
                    (filed as exhibit 10.12 to the registrant’s Form 10-Q for the quarter
                    ended September 30, 2001 and incorporated herein by
                    reference).10.10
                Asset
                    Sale Purchase Agreement between the registrant and DaTARIUS Technologies,
                    Inc. (filed as exhibit 10.13 to the registrant’s Form 10-Q for the quarter
                    ended September 30, 2002 and incorporated herein by
                    reference).10.11
                Integral
                    Vision, Inc. 2004 Employee Stock Option Plan (filed as exhibit
                    10.11 to
                    the registrant’s Form 10-Q for the quarter ended June 30, 2004 and
                    incorporated herein by reference).16
                Letter
                    regarding change in certifying accountant (filed as Exhibit 16
                    to
                    registrant’s Form 10-K for the year ended December 31, 2002, SEC file
                    0-12728, and incorporated herein by reference).21
                Subsidiary
                    of the registrant.23.1
                Consent
                    of Rehmann Robson, independent registered public accounting
                    firm.31.1
                Certification
                    of Chief Executive Officer of periodic report pursuant to Rule
                    13a-15(e)
                    or Rule 15d-15(e).31.2
                Certification
                    of Chief Financial Officer of periodic report pursuant to Rule
                    13a-15(e)
                    or Rule 15d-15(e).32.1
                Certification
                    by Chief Executive Officer of Periodic Report Pursuant to 18
                    U.S.C.
                    Section 1350.32.2
                Certification
                    by Chief Financial Officer of Periodic Report Pursuant to 18
                    U.S.C.
                    Section 1350.(b)
                Exhibits
                    - The response to this portion of ITEM 15 is submitted as a separate
                    section of this report.(c)
                Financial
                    statement schedules - The response to this portion of ITEM 15
                    is submitted
                    as a separate section of this
                    report.




*
      The
      Company has been granted confidential treatment with respect to certain portions
      of this exhibit   pursuant to Rule 24b-2 under the Securities Exchange
      Act of 1934, as amended.




15




SIGNATURES






Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.






INTEGRAL
              VISION,
              INC**.**Date: April
              5, 2006
            By:
            /S/ CHARLES
              J. DRAKECharles
              J. Drake, Chairman of the Board and Chief Executive
              Officer


Date: April
                5, 2006
              By:
              /S/ MARK
                R.
                DOEDEMark
                R. Doede, President, Chief Operating Officer and Chief
                Financial Officer


Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.




/S/ CHARLES
                J. DRAKE
              Chairman
                of
                the Board, ChiefCharles J. Drake
              Executive
                Officer, and Director
  /S/ MAX
                  A.
                  COON
                Vice
                  Chairman,
                  Secretary and DirectorMax A. Coon
  /S/ VINCENT
                    SHUNKSY
                  Treasurer
                    and
                    DirectorVincent Shunsky
  /S/ WILLIAM
                      B. WALLACE
                    DirectorWilliam B. Wallace
  /S/ SAMUEL
                      O.
                      MALLORY
                    DirectorSamuel O. Mallory









16


Annual
      Report on Form 10K





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








List
      of
      Financial Statements and Financial Statement Schedules








Certain
      Exhibits








Financial
      Statement Schedules








Years
      Ended December 31, 2005, 2004, and 2003








INTEGRAL
      VISION, INC.








Wixom,
      Michigan





17


Form
      10-K
      - ITEM 15(a)(1) and (2)


Integral
      Vision, Inc. and Subsidiary





**List
      of Financial Statements and Financial Statement Schedules**




(a)(1)
              The
                  following consolidated financial statements of Integral Vision,
                  Inc. and
                  subsidiary are included in ITEM 8:
 
 Report
        of
        Rehmann Robson, Independent Registered Public Accounting Firm
 Consolidated
        Balance Sheets-December 31, 2005 and 2004
 Consolidated
        Statements of Operations-Years ended December 31, 2005, 2004 and
        2003
 Consolidated
        Statements of Stockholders' Equity (Deficit) -Years ended December 31, 2005,
        2004, and 2003
 Consolidated
        Statements of Cash Flows-Years ended December 31, 2005, 2004 and
        2003
 Notes
        to
        Consolidated Financial Statements
  (2)
              The
                  following Consolidated Financial Statement schedule of Integral
                  Vision,
                  Inc. and subsidiary is submitted
                  herewith:


Schedule
      II  Valuation
      and Qualifying Accounts





All
      other
      schedules for which provision is made in the applicable accounting regulations
      of the Securities and Exchange Commission are not required under the related
      instructions or are inapplicable, and therefore have been omitted.









18


Report
      of
      Independent Registered Public Accounting Firm








Stockholders
      and Board of Directors


Integral
      Vision, Inc.


Wixom,
      Michigan








We
      have
      audited the accompanying consolidated balance sheets of Integral Vision, Inc.
      and subsidiary as of December 31, 2005 and 2004, and the related consolidated
      statements of operations, stockholders' equity (deficit) and cash flows for
      each
      of the three years in the period ended December 31, 2005. Our audits also
      include the financial statement schedule for each of the three years in the
      period ended December 31, 2005, as listed in the accompanying index at item
      15(a). These consolidated financial statements and schedule are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements and the schedule based on
      our
      audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Integral
      Vision, Inc. and subsidiary as of December 31, 2005 and 2004, and the
      consolidated results of their operations and their cash flows for each of the
      three years in the period ended December 31, 2005 in conformity with accounting
      principles generally accepted in the United States of America. Also, in our
      opinion, the related financial statement schedule for each of the three years
      in
      the period ended December 31, 2005, when considered in relation to the basic
      consolidated financial statements taken as a whole, present fairly, in all
      material respects, the information set forth therein.





The
      accompanying consolidated financial statements and the schedule have been
      prepared assuming the Company will continue as a going concern. As described
      in
      Note M to the consolidated 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 M. The consolidated
      financial statements and the financial statement schedule do not include any
      adjustments that might result from the outcome of this uncertainty.





/S/
      Rehmann Robson


Troy,
      Michigan


March
      17,
      2006





19


**Consolidated
      Balance Sheets**


**Integral
      Vision, Inc. and Subsidiary**





**December
                31****2005**
            
            **2004****(in
                thousands)****Assets****Current
                assets**Cash
            
            $
            2,501
            
            $
            191Accounts
                receivable, less allowance of $0 ($2,000 in 2004)
            
            
            77
            
            
            45Inventories
            
            
            362
            
            
            401Other
                current assets
            
            
            102
            
            
            43**Total
                current assets**
            
            
            3,042
            
            
            680**Property
                and equipment**Leasehold
                improvements
            
            
            43
            
            
            43Building
                improvements
            
            
            2
            
            
            -Production
                and engineering equipment
            
            
            187
            
            
            134Furniture
                and fixtures
            
            
            80
            
            
            62Vehicles
            
            
            18
            
            
            18Computer
                equipment
            
            
            166
            
            
            135496
            
            
            392Less
                accumulated depreciation
            
            
            382
            
            
            371**Net
                property and equipment**
            
            
            114
            
            
            21**Other
                assets**Capitalized
                computer software development costs, less accumulated
                amortizationof
                $930,000 ($7,666,000 in 2004)
            
            
            38
            
            
            151Patents,
                less accumulated amortization of $506,000 ($457,000 in 2004)
            
            
            33
            
            
            2071
            
            
            171$
            3,227
            
            $
            872**Liabilities
                and Stockholders' Equity (Deficit)****Current
                liabilities**Notes
                payable
            
            $
            -
            
            $
            1,313Accounts
                payable
            
            
            48
            
            
            221Accrued
                compensation and related costs
            
            
            294
            
            
            283Accrued
                state income taxes
            
            
            -
            
            
            95Accrued
                interest
            
            
            15
            
            
            345Other
                accrued liabilities
            
            
            108
            
            
            227**Total
                current liabilities**
            
            
            465
            
            
            2,484**Long-term
              debt, less original issue discount -**
            
            
            378
            
            
            2,355**Total
                liabilities**
            
            
            843
            
            
            4,839**Stockholders'
                equity (deficit)**Preferred
                stock, 400,000 shares authorized; none issued
            
            
            -
            
            
            -Common
                stock, without par value, stated value $.20 per share; 41,000,000
                shares
                authorized; 29,491,409 shares issued and outstanding (14,877,638
                in
                2004)
            
            
            5,898
            
            
            2,976Additional
                paid-in capital
            
            
            39,126
            
            
            33,018Accumulated
                deficit
            
            
            (42,640
            )
            
            (39,961
            )**Total
                stockholders' equity (deficit)**
            
            
            2,384
            
            
            (3,967
            )$
            3,227
            
            $
            872


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


20


**Consolidated
      Statements of Operations**


**Integral
      Vision, Inc. and Subsidiary**





**Year
                ended December 31****2005**
            
            **2004**
            
            **2003****(in
                thousands, except per share data)**Net
                revenues
            
            $
            686
            
            $
            1,542
            
            $
            641Costs
                of revenues:Direct
                costs of revenues
            
            
            488
            
            
            1,115
            
            
            341Depreciation
                and amortization
            
            
            130
            
            
            215
            
            
            263Total
                costs of revenues
            
            
            618
            
            
            1,330
            
            
            604Gross
                margin
            
            
            68
            
            
            212
            
            
            37Other
                costs and expenses:Marketing
            
            
            529
            
            
            261
            
            
            223General
                and administrative
            
            
            1,251
            
            
            1,195
            
            
            802Engineering
                and development
            
            
            960
            
            
            909
            
            
            663Total
                other costs and expenses
            
            
            2,740
            
            
            2,365
            
            
            1,688Operating
                loss
            
            
            (2,672
            )
            
            (2,153
            )
            
            (1,651
            )Loss
                on sale of assets
            
            
            -
            
            
            -
            
            
            (7
            )Other
                income
            
            
            59
            
            
            129
            
            
            89Interest
                income
            
            
            78
            
            
            -
            
            
            -Interest
                expense
            
            
            (143
            )
            
            (436
            )
            
            (370
            )Foreign
                currency translation (loss) gain
            
            
            (1
            )
            
            1
            
            
            2Loss
                from operations before income taxes
            
            
            (2,679
            )
            
            (2,459
            )
            
            (1,937
            )Benefit
                for income taxes
            
            
            -
            
            
            -
            
            
            -Net
                loss
            
            $
            (2,679
            )
            $
            (2,459
            )
            $
            (1,937
            )Basic
                and diluted loss per share:Net
                loss
            
            $
            (0.11
            )
            $
            (0.18
            )
            $
            (0.21
            )Weighted
                average number of shares of common stock and common stock equivalents
                outstanding
            
            
            24,531
            
            
            13,435
            
            
            9,430




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





21


**Consolidated
      Statements of Stockholders' Equity (Deficit)**


**Integral
      Vision, Inc. and Subsidiary**





**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, 2003**
            
            
            9,429,901
            
            $
            1,886
            
            $
            -
            
            $
            31,376
            
            $
            (35,565
            )
            $
            (2,303
            )Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,937
            )
            
            (1,937
            )Issuance
                of warrants
            
            
            
            
            
            
            
            
            
            
            
            318
            
            
            
            
            
            318**Balances
                at December 31, 2003**
            
            
            9,429,901
            
            
            1,886
            
            
            -
            
            
            31,694
            
            
            (37,502
            )
            
            (3,922
            )Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,459
            )
            
            (2,459
            )Warrants
                exercised and notes converted into shares of common stock
            
            
            4,000,737
            
            
            800
            
            
            
            
            
            82
            
            
            
            
            
            882Stock
                options exercised
            
            
            224,000
            
            
            45
            
            
            
            
            
            (17
            )
            
            
            
            
            28Restricted
                shares issued
            
            
            1,223,000
            
            
            245
            
            
            
            
            
            1,259
            
            
            
            
            
            1,504**Balances
                at December 31, 2004**
            
            
            14,877,638
            
            $
            2,976
            
            $
            -
            
            $
            33,018
            
            $
            (39,961
            )
            $
            (3,967
            )Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,679
            )
            
            (2,679
            )Warrants
                exercised
            
            
            6,195,014
            
            
            1,239
            
            
            
            
            
            503
            
            
            
            
            
            1,742Class
                3 notes converted into shares of common stock
            
            
            1,269,757
            
            
            254
            
            
            
            
            
            724
            
            
            
            
            
            978Shares
                issued
            
            
            117,000
            
            
            23
            
            
            7,000
            
            
            (718
            )
            
            
            
            
            6,305Series
                A Preferred Stock converted into shares of common stock
            
            
            7,000,000
            
            
            1,400
            
            
            (7,000
            )
            
            5,600
            
            
            
            
            
            -Common
                stock options exercised
            
            
            32,000
            
            
            6
            
            
            
            
            
            (1
            )
            
            
            
            
            5**Balances
                at December 31, 2005**
            
            
            29,491,409
            
            $
            5,898
            
            $
            -
            
            $
            39,126
            
            $
            (42,640
            )
            $
            2,384







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





22


**Consolidated
      Statements of Cash Flows**


**Integral
      Vision, Inc. and Subsidiary**





**Year
                Ended December 31****2005**
            
            **2004**
            
            **2003****(in
                thousands)****Operating
                Activities**Net
                loss
            
            $
            (2,679
            )
            $
            (2,459
            )
            $
            (1,937
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            11
            
            
            21
            
            
            32Amortization
            
            
            147
            
            
            276
            
            
            333Net
                loss on disposal of assets
            
            
            -
            
            
            -
            
            
            7Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (32
            )
            
            (31
            )
            
            139Inventories
            
            
            39
            
            
            (233
            )
            
            160Other
                current assets
            
            
            (59
            )
            
            5
            
            
            33Accounts
                payable and other current liabilities
            
            
            (193
            )
            
            229
            
            
            (292
            )Net
                cash used in operating activities
            
            
            (2,766
            )
            
            (2,192
            )
            
            (1,525
            )**Investing
                Activities**Purchase
                of property and equipment
            
            
            (104
            )
            
            (15
            )
            
            (7
            )Other
            
            
            (31
            )
            
            (2
            )
            
            (4
            )Net
                cash used in investing activities
            
            
            (135
            )
            
            (17
            )
            
            (11
            )**Financing
                Activities**Issuance
                of preferred stock
            
            
            6,235
            
            
            -
            
            
            -Proceeds
                from exercise of warrants
            
            
            1,865
            
            
            -
            
            
            -Proceeds
                from sale of Class 2 Notes
            
            
            435
            
            
            775
            
            
            920Repayments
                on Class 1 Notes
            
            
            (1,289
            )
            
            -
            
            
            -Repayments
                on Class 2 Notes
            
            
            (1,823
            )
            
            (290
            )
            
            (254
            )Repayments
                on Class 3 Notes
            
            
            (106
            )
            
            -
            
            
            -Repayments
                on short term notes
            
            
            (111
            )
            
            -
            
            
            (70
            )Proceeds
                from sale of Class 3 Notes
            
            
            -
            
            
            478
            
            
            -Repayments
                on long term notes
            
            
            -
            
            
            (137
            )
            
            -Issuance
                of restricted common stock
            
            
            -
            
            
            1,504
            
            
            -Proceeds
                from sales of debentures, net of discount
            
            
            -
            
            
            -
            
            
            583Proceeds
                from sales of warrants in connection with Class 1 Notes
            
            
            -
            
            
            -
            
            
            318Proceeds
                from exercise of stock options
            
            
            5
            
            
            28
            
            
            -Net
                cash provided by financing activities
            
            
            5,211
            
            
            2,358
            
            
            1,497Increase
                (decrease) in cash
            
            
            2,310
            
            
            149
            
            
            (39
            )Cash
                at beginning of year
            
            
            191
            
            
            42
            
            
            81Cash
                at end of year
            
            $
            2,501
            
            $
            191
            
            $
            42




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


23


**Notes
      to Consolidated Financial Statements**


**Integral
      Vision, Inc. and Subsidiary**





Note
      A -
      Significant Accounting Policies




*Nature
      of Business*




Integral
      Vision, Inc. (or the "Company") develops, manufactures, and markets flat panel
      display inspection systems to ensure product quality in the display
      manufacturing process. The Company primarily inspects Microdisplays and small
      flat panel displays, though the technology used is scalable to allow inspection
      of full screen displays and components. Integral Vision’s customers and
      potential customers are primarily large companies with significant investment
      in
      the manufacture of displays. Nearly all of the Company’s sales originate in the
      United States, Asia, or Europe. The Company's 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.






*Principles
      of Consolidation*






The
      consolidated financial statements include the accounts of the Company and its
      100% owned subsidiary: Integral Vision LTD, United Kingdom (dissolved as of
      February 1, 2005). Upon consolidation, all significant intercompany accounts
      and
      transactions are eliminated.






*Use
      of Estimates*




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






*Translation
      of Foreign Currencies*




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






*Accounts
      Receivable*




Trade
      accounts receivable primarily represent amounts due from equipment manufacturers
      and end-users in North America, Asia and Europe. The Company maintains an
      allowance for the inability of our customers to make required payments. These
      estimates are based on historical data, the length of time the receivables
      are
      past due and other known factors.






*Major
      Customers*




The
      nature of the Company’s product offerings may produce sales to one or a small
      number of customers in excess of 10% of total 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
      the Company’s results of operations. For 2005, sales to two customers
      represented 21% and 71% of consolidated net sales, respectively. Approximately
      $75,000 was due from one of these customers at December 31, 2005. For 2004,
      sales to one customer represented 80% of consolidated net sales. There were
      no
      amounts due from this customer at December 31, 2004. For 2003, sales to three
      certain customers represented 63%, 14%, and 11% of consolidated net sales,
      respectively.




24




*Inventories*




Inventories
      are stated at the lower of first-in, first-out (“FIFO”) cost or market. Cost is
      computed using currently adjusted standards which approximates actual costs
      on a
      FIFO basis. The Company assesses the recoverability of all inventory to
      determine whether adjustments for impairment are required. At December 31,
      inventories consisted of the following amounts (net of obsolescence reserves
      of
      $97,000 in 2005 and $354,000 in 2004):






**2005**
            
            **2004*****(in
                thousands)***Raw
                materials
            
            $
            251
            
            $
            149Work
                in process
            
            
            55
            
            
            183Finished
                goods
            
            
            56
            
            
            69$
            362
            
            $
            401







Management
      periodically performs an analysis of the Company’s inventory to determine if its
      cost exceeds estimated net realizable value. Over the last several years, given
      the market conditions and the direction of the Company, management discontinued
      certain product lines and attempted to liquidate the remaining inventory related
      to those product lines.






*Property
      and Equipment*




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




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






*Impairment
      of Long-lived Assets*




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






*Capitalized
      Computer Software Development Costs*




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




No
      software development costs have been capitalized in the periods presented.
      Amortization of the costs capitalized prior to 2003 amounted to $113,000,
      $172,000, and $193,000 in 2005, 2004, and 2003, 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 the Company’s
      microdisplay inspection software toolbox including vision processing algorithms
      and the Company’s patented sequence development and execution software. These
      software components are used in the products sold by the Company. Fully
      amortized software development costs of $6.9 million were written off in
      2005.






*Patents*




Total
      patent costs incurred and capitalized by the Company were $30,000, $4,000,
      and
      $2,000 in 2005, 2004 and 2003, respectively. Patents are stated at cost less
      accumulated amortization. Amortization of the patents amounted to $18,000,
      $30,000, and $46,000 in 2005, 2004, and 2003, respectively. These costs are
      amortized on a straight-line basis over the estimated useful lives of the assets
      (not to exceed 5 years).






25




*Revenue
      Recognition*




The
      Company recognizes 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.




The
      Company accounts for certain product sales of its flat panel display inspection
      systems as multiple-element arrangements. If specific customer acceptance
      requirements are met, the Company recognizes revenue for a portion of the total
      contract price due and billable upon shipment, with the remainder recognized
      when it becomes due (generally upon acceptance). The Company recognizes all
      other product sales with customer acceptance provisions upon final customer
      acceptance. The Company recognizes revenue from the sale of spare parts upon
      shipment. Revenue from service contracts is recognized over the life of the
      contract. Revenue is reported net of sales commissions.






*Concentrations
      of Credit and Other Risk*






Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist principally of accounts receivable. A significant portion of the
      Company’s customers are located in Asia, primarily Japan, Taiwan, and Korea, and
      in Europe. Therefore, the Company’s sales to these countries may be adversely
      affected by the overall health of these economies, including the effects of
      currency exchange rate fluctuations and political risks. The Company generally
      does not require collateral for most of its trade accounts receivable. For
      sales
      to some of its customers in certain geographic regions, the Company requires
      letters of credit. Substantially all of the Company’s revenue is invoiced in
      U.S. dollars. For 2005, sales to two of the Company’s customers represented 92%
      of the Company’s total net revenue. The Company believes its credit evaluation
      and monitoring mitigates its credit risk.






*Advertising*




Advertising
      costs are expensed as incurred. Advertising costs were approximately $56,000,
      $0, and $13,000 in 2005, 2004, and 2003, respectively.






*Income
      Taxes*






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






*Fair
      Value Disclosure*




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




26




*Common
      Stock Options*






The
      Company continues to follow APB No. 25 “Accounting for Stock Issued to
      Employees” and related interpretations in accounting for its employee stock
      options. Under APB 25, because the exercise price of the Company’s employee
      stock options equals the market price of the underlying stock on the date of
      grant, no compensation expense is recognized. The Company has elected to adopt
      only the disclosure provisions of FASB Statement No. 123, “Accounting for
      Stock-Based Compensation”, as amended by FASB Statement No. 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure.” Pro forma information
      regarding net income and earnings per share is required by SFAS 123 and has
      been
      determined as if the Company had accounted for its employee stock options
      granted subsequent to September 30, 1995 under the fair value method of SFAS
      123
      (see Note H below).






*Reclassifications*




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






*Contingencies
      and Litigation*




The
      Company makes an assessment of the probability of an adverse judgment resulting
      from current and threatened litigation. The Company accrues the cost of an
      adverse judgment if, in management’s estimation, an adverse settlement is
      probable and management can reasonably estimate the ultimate cost of such
      litigation. The Company has made no such accruals at December 31,
      2005.






*Recently
      Issued Accounting Standards*




In
      December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” which
      replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and
      supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS
      123(R) will require all share-based payments to employees, including grants
      of
      employee stock options, to be recognized in the statement of operations based
      on
      their fair values. SFAS 123(R) offers alternative methods for determining the
      fair value. In April 2005, the SEC issued a new rule that allows companies
      to
      implement Statement No. 123(R) at the beginning of the next fiscal year, instead
      of the next reporting period, that begins after June 15, 2005. As a result,
      the
      Company will implement SFAS 123(R) in the reporting period starting January
      1,
      2006. While management expects that SFAS 123(R) will not have a significant
      impact on the Company’s financial statements, management has not completed its
      evaluation.






Note
      B -
      Sale of Welding Controls Division




The
      Company sold the assets of its Welding Controls division in 1999. The buyer
      assumed a liability to Square D in the amount of $1.8 million in accordance
      with
      the purchase agreement. This liability resulted from the settlement of patent
      litigation in 1994. The settlement required payments of $300,000 per year for
      ten years. In the event the buyer fails to make the required payments, Integral
      Vision may be obligated for those amounts due. As of December 31, 2005, no
      notifications have been made that the Company is obligated for any payments
      not
      made and management believes this obligation has been satisfied.






Note
      C -
      Long-Term Debt and Other Financing Arrangements




On
      April
      12, 2005, pursuant to a Securities Purchase Agreement, the Company sold 7,000
      shares of Series A Convertible Preferred Stock at $1,000 per share, and as
      additional consideration under the Securities Purchase Agreement, issued Common
      Stock Warrants for the purchase of up to 3.5 million shares of common stock.
      Each share of the Series A Convertible Preferred Stock was converted into 1,000
      shares of unregistered common stock upon the approval of an increase in the
      Company’s authorized shares of common stock at a meeting of the stockholders on
      May 26, 2005. The Common Stock Warrants for the purchase of up to 3.5 million
      shares of common stock are exercisable at $1.60 per share for a period of five
      years. The Company used the net proceeds of the Securities Purchase Agreement
      to
      reduce certain Company debt, and for working capital. The Company has repaid
      all
      of the outstanding principal and interest on the Class 1 and Class 2 Notes.
      The
      note holders then exercised their warrants attached to the notes for which
      the
      exercise price of the warrant was $1.00 or less. This resulted in the issuance
      of 6,195,014 shares of restricted common stock. The Class 3 note holders
      converted their notes for which the conversion price was $1.00 or less,
      resulting in the issuance of 1,269,757 shares of restricted common stock. The
      outstanding interest on the Class 3 notes was paid. Additionally, the Company
      has repaid other obligations totaling approximately $190,000.






27




Long
      term
      debt remaining at December 31, 2005 consists of $378,000 of convertible Class
      3
      Notes at a conversion price of $1.00. Interest on these Notes is paid
      semi-annually at a stated rate of 8.0%. The Class 3 Notes mature in April
      2008.




The
      following table outlines the source and (use) of proceeds from the sale (in
      thousands):




Sale
                of Series A Convertible Preferred Stock
            
            $
            7,000Class
                1 and Class 2 warrants exercised
            
            
            1,865Class
                1 Notes paid (principal and interest)
            
            
            (1,289
            )Class
                2 Notes paid (principal and interest)
            
            
            (1,823
            )Class
                3 accrued interest paid
            
            
            (106
            )Note
                and accrued interest due Maxco, Inc.
            
            
            (111
            )Michigan
                Single Business Tax liability
            
            
            (78
            )Fees
                to raise capital
            
            
            (637
            )Legal
                and other fees
            
            
            (100
            )Remaining
                net cash proceeds
            
            $
            4,721







The
      Company expects to use a portion of the proceeds to fund its growth plan and
      to
      better secure and deliver large orders, as well as offer units for demonstration
      and marketing purposes with larger Microdisplay and LCD OEMs which will increase
      expenditures beyond current levels.






Maxco,
      Inc. provides consulting services to the Company. These services include
      assistance with financial statement preparation, compliance with governmental
      filing requirements, and assistance with certain financing arrangements. The
      Company and Maxco have agreed on terms for payment to Maxco for these services.
      Prior to October 1, 2004, no charges were made by Maxco for the services to
      Integral Vision. The services for the six months ended March 31, 2005 were
      satisfied by the issuance of 42,000 shares of unregistered common stock in
      the
      Company. The amount charged to operations in the first quarter of 2005 for
      these
      services amounted to $37,000, which is based on the average closing price of
      the
      Company’s common stock over that period. Effective April 1, 2005 and through
      November 30, 2005, the Company began paying Maxco $8,750 per month for each
      month such services were rendered. The amount charged to operations in 2005
      for
      such administrative services amounted to $70,000. The dependence on Maxco’s
      services has decreased and therefore beginning December 1, 2005, the Company
      began compensating Maxco on an hourly basis.




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






**2005**
            
            **2004*****(in
                thousands)***Long
                Term Debt:Class
                3 Notes
            
            $
            378
            
            $
            1,355Face
                value Class 1 Notes
            
            
            -
            
            
            1,140Less
                Original Issue Discount (OID)
            
            
            -
            
            
            (140
            )Net
                Long Term Debt
            
            $
            378
            
            $
            2,355Short
                Term Debt:Class
                2 Notes
            
            $
            -
            
            $
            1,207Other
                Short Term Debt
            
            
            -
            
            
            106Total
                Short Term Debt
            
            $
            -
            
            $
            1,313





Interest
      paid in 2005 was approximately $473,000 compared to interest expensed of
      $143,000. The $330,000 difference primarily represents amounts paid for interest
      on the Notes that was accrued as of December 31, 2004. Interest paid in 2004
      was
      approximately $162,000 compared to interest expensed of $436,000. The $274,000
      difference primarily represents amounts accrued for interest on the Notes and
      the amount of discount on the debentures amortized in 2004. Interest paid in
      2003 was approximately $16,000 compared to interest expensed of $370,000. The
      $354,000 difference primarily represents amounts accrued for interest on the
      Notes and the amount of discount on the debentures amortized in 2003.






28


Note
      D -
      Income Taxes




The
      Company establishes valuation allowances in accordance with the provisions
      of
      FASB Statement No. 109, “Accounting for Income Taxes.” The Company continually
      reviews realizability of deferred tax assets and recognizes these benefits
      only
      as reassessment indicates that it is more likely than not that the benefits
      will
      be realized.




As
      of
      December 31, 2005, the Company has cumulative net operating loss carryforwards
      approximating $42.0 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, and $2.7 million in 2025) for federal income tax purposes available to
      reduce taxable income of future periods and unused investment, alternative
      minimum tax, and research and development tax credits approximating $331,000.
      Additionally, the Company’s subsidiary in 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 $915,000 in 2005, $815,000 in 2004, and $2.0
      million in 2003.




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:




**2005**
            
            **2004*****(in
                thousands)***Deferred
                tax liabilities:Deductible
                software development costs, net of amortization
            
            $
            13
            
            $
            51Total
                deferred tax liabilities
            
            
            13
            
            
            51Deferred
                tax assets:Net
                operating loss carryforwards
            
            
            14,309
            
            
            13,382Credit
                carryforwards
            
            
            331
            
            
            331Inventory
                reserve
            
            
            72
            
            
            130Other
            
            
            126
            
            
            118Total
                deferred tax assets
            
            
            14,838
            
            
            13,961Valuation
                allowance for deferred tax assets
            
            
            14,825
            
            
            13,910Net
                deferred tax assets
            
            
            13
            
            
            51Net
                deferred taxes
            
            $
            -
            
            $
            -




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




**2005**
            
            **2004**
            
            **2003*****(in
                thousands)***Consolidated
                net income (loss)
            
            $
            (2,679
            )
            $
            (2,459
            )
            $
            (1,937
            )Foreign
                net income (loss)
            
            
            -
            
            
            -
            
            
            3,928U.S.
                net income (loss)
            
            $
            (2,679
            )
            $
            (2,459
            )
            $
            (5,865
            )Tax
                provision (benefit) at U.S. statutory rates
            
            $
            (911
            )
            $
            (836
            )
            $
            (1,995
            )Change
                in valuation allowance
            
            
            904
            
            
            826
            
            
            1,977Nondeductible
                expenses
            
            
            7
            
            
            10
            
            
            18Other
            
            
            -
            
            
            -
            
            
            -$
            -
            
            $
            -
            
            $
            -




There
      were no income tax payments made in 2005, 2004, or 2003.






29




Note
      E -
      Loss per Share




The
      following table sets forth the computation of basic and diluted loss per
      share:




**2005**
            
            **2004**
            
            **2003*****(in
                thousands, except per share data)*****Numerator
                for basic and diluted loss per share - loss available to common
                stockholders**Net
                loss
            
            $
            (2,679
            )
            $
            (2,459
            )
            $
            (1,937
            )*there
                was no effect of dilutive securities, see below**Denominator
                for basic and diluted loss per share - weighted average
                shares**
            
            
            24,531
            
            
            13,435
            
            
            9,430*there
                was no effect of dilutive securities, see below**Basic
                and diluted loss per share:**Net
                loss
            
            $
            (0.11
            )
            $
            (0.18
            )
            $
            (0.21
            )




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






Note
      F -
      Employee Savings Plan




The
      Company has an Employee Savings Plan covering substantially all United States'
      employees. The Company contributes $.20 to the Plan for every dollar contributed
      by the employees up to 6% of their compensation. The Plan also provides for
      discretionary contributions by the Company as determined annually by the Board
      of Directors. Company contributions charged to operations under the Plan were
      $10,000, $8,000, and $6,000 for 2005, 2004 and 2003, respectively.






Note
      G -
      Lease Commitments and Contingencies




The
      Company uses equipment and office space under operating lease agreements
      requiring rental payments approximating $103,000 in 2006, $104,000 in 2007,
      $104,000 in 2008, $102,000 in 2009, and $103,000 in 2010. Included in the above
      numbers is the rent to be paid as a result of the lease agreement entered into
      on October 19, 2005 in connection with the Company’s relocation to its new Wixom
      facilities. Rent expense charged to operations approximated $85,000, $78,000,
      and $70,000 in 2005, 2004 and 2003, respectively.






Note
      H -
      Stock Options, Warrants, and Preferred Stock






The
      Company continues to follow APB No. 25 “Accounting for Stock Issued to
      Employees” and related interpretations in accounting for its employee stock
      options. Under APB 25, because the exercise price of the Company’s employee
      stock options equals the market price of the underlying stock on the date of
      grant, no compensation expense is recognized. The Company has elected to adopt
      only the disclosure provisions of FASB Statement No. 123, “Accounting for
      Stock-Based Compensation”, as amended by FASB Statement No. 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure.”




Pro
      forma
      information regarding net loss and loss per share is required by SFAS 123 and
      has been determined as if the Company had accounted for its employee stock
      options granted subsequent to September 30, 1995 under the fair value method
      of
      SFAS 123. The fair value of each option grant is estimated on the date of grant
      using the Black-Scholes option pricing model with the following weighted-average
      assumptions:




**May**
            
            **August****2005**
            
            **2004**
            
            **2004**
            
            **2003**Expected
                stock price volatility
            
            
            1.256
            
            
            1.330
            
            
            1.308
            
            
            1.172Risk
                free interest rate
            
            
            2.0
            %
            
            2.0
            %
            
            2.0
            %
            
            2.0
            %Expected
                life of options in years
            
            
            7.0
            
            
            7.0
            
            
            7.0
            
            
            7.0





30




For
      purposes of pro forma disclosures, the estimated fair value of the options
      is
      amortized to expense over the options’ vesting period. The Company’s pro forma
      information for 2005, 2004, and 2003 is as follows:




**2005**
            
            **2004**
            
            **2003*****(in
                thousands, except per share data)***Pro
                forma net loss
            
            $
            (2,929
            )
            $
            (2,659
            )
            $
            (1,960
            )Pro
                forma loss per share:Basic
                and Diluted
            
            $
            (0.12
            )
            $
            (0.20
            )
            $
            (0.21
            )







The
      Black-Scholes option valuation model was developed for use in estimating the
      fair value of traded options which have no vesting restrictions and are fully
      transferable. In addition, option valuation models require the input of highly
      subjective assumptions including the expected stock price volatility. Because
      the Company’s employee stock option plan has characteristics significantly
      different from those of traded options, and because changes in the subjective
      input assumptions can materially affect the fair value estimate, in management’s
      opinion, the existing models do not necessarily provide a reliable single
      measure of the fair value of such Company options. These proforma results
      reflect stock options granted only in 1995 through 2005 and may not be
      comparable with the results of applying the fair market value methodology to
      all
      stock options granted prior to the initial adoption of SFAS 123.




The
      estimated fair value per share of the options granted in 2005 was $1.27. The
      estimated fair value per share of the options granted in May 2004 and August
      2004 was $1.58 and $0.95, respectively. The estimated fair value per share
      of
      the options granted in 2003 was $0.13.




In
      May
      2003, the Compensation Committee of the Company’s Board of Directors resolved to
      grant 140,000 qualified stock options for the purchase of common shares with
      an
      exercise price equal to the market price at the close of trading on the grant
      date, $.15 per share. An additional 40,000 options were granted in May 2003
      with
      an exercise price equal to the market price at the close of trading on the
      grant
      date, $.16 per share. In order to facilitate this grant, Mr. Charles Drake,
      the
      Company’s Chairman, agreed to forfeit options on 156,000 shares so that they
      could be distributed to other key personnel.




In
      May
      2004, the Compensation Committee of the Company’s Board of Directors resolved to
      grant 124,000 qualified stock options for the purchase of common shares with
      an
      exercise price equal to the market price at the close of trading on the grant
      date, $1.71 per share. In August 2004, the Compensation Committee of the
      Company’s Board of Directors resolved to grant 100,000 qualified stock options
      for the purchase of common shares with an exercise price equal to the market
      price at the close of trading on the grant date, $1.03 per share.




In
      June
      2005, the Compensation Committee of the Company’s Board of Directors resolved to
      grant 160,000 qualified stock options for the purchase of common shares with
      an
      exercise price of $1.40 per share, which was the market price at the close
      of
      trading on the grant date.




At
      December 31, 2005, there were options outstanding to purchase 1.1 million shares
      of common stock at exercise prices ranging from $.10 to $6.25 per
      share.




A
      summary
      of the status of the Option Plans at December 31, 2005 is as
      follows:





**2004
                  Plan**
              
              **1999
                  Plan**
              
              **1995
                  Plan*****(in
                  thousands)***Options
                  outstanding
              
              
              384
              
              
              355
              
              
              375Options
                  exercisable
              
              
              224
              
              
              355
              
              
              375Options
                  granted during:2005
              
              
              160
              
              
              0
              
              
              02004
              
              
              224
              
              
              0
              
              
              02003
              
              
              0
              
              
              158
              
              
              222002
              
              
              0
              
              
              202
              
              
              982001
              
              
              0
              
              
              120
              
              
              2152000
              
              
              0
              
              
              0
              
              
              01999
              
              
              0
              
              
              400
              
              
              2061998
              
              
              0
              
              
              0
              
              
              01997
              
              
              0
              
              
              0
              
              
              2671996
              
              
              0
              
              
              0
              
              
              132Options
                  available for grant
              
              
              616
              
              
              3
              
              
              0









31




The
      Compensation Committee of the Board of Directors approves option grants. The
      option price is the market price on the date of the grant, and vesting generally
      occurs after one year and the expiration occurs ten years from the date of
      the
      grant.




A
      summary
      of option activity under all plans for the year ended December 31
      follows:




2005
            2004
            2003Shares
            Weighted
                Average Exercise Price
            Shares
            Weighted
                Average Exercise Price
            Shares
            Weighted
                Average Exercise Price(number
                of shares in thousands)Outstanding
                at beginning of year
            991
            $0.92
            1,005
            $0.73
            1,038
            $1.15Granted
            160
            1.40
            224
            1.41
            180
            0.15Exercised
            (32)
            0.17
            (224)
            0.12
            0
            0.00Canceled
            (5)
            8.50
            (14)
            7.75
            (213)
            2.31Outstanding
                at end of year($.10
                to $6.25 per share)
            1,114
            0.97
            991
            0.92
            1,005
            0.73Exercisable
                ($.10 to $6.25 per share)
            954
            $0.90
            767
            $0.77
            825
            $0.85




Additional
      information regarding the range of exercise prices and weighted average
      remaining life of options outstanding at December 31, 2005 follows:




**Range
                of Exercise Prices**
            **Number
                Outstanding**
            **Weighted
                Average Remaining Life**
            **Number
                Exercisable***(number
                of shares in thousands)*$.10
                to $1.71
            1,062
            6.9
            902$4.88
                to $6.25
            52
            1.1
            52$.10
                to $6.25
            1,114
            7.1
            954







As
      of
      December 31, 2005, the Company had $378,000 in outstanding Class 3 Notes payable
      that are convertible into the Company’s common stock at $1.00 per share.






A
      summary
      of the outstanding warrants, options, and shares available upon the conversion
      of debt at December 31, 2005 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
            
            
            4.3
            
            
            3,500Class
                3 Notes
            
            $
            1.00
            
            
            378
            
            
            2.3
            
            
            3781995
                Employee Stock Option Plan
            
            $
            1.21
            
            
            375
            
            
            4.5
            
            
            3751999
                Employee Stock Option Plan
            
            $
            0.27
            
            
            355
            
            
            6.3
            
            
            3552004
                Employee Stock Option Plan
            
            $
            1.40
            
            
            384
            
            
            8.9
            
            
            224$
            1.41
            
            
            4,992
            
            
            4.6
            
            
            4,832




The
      Company is authorized to issue up to 400,000 shares of preferred stock the
      terms
      of which are determined by the Board of Directors.  The
      Company sold 7,000 shares of Series A Convertible Preferred Stock in April
      2005.
      These shares were converted into 7,000,000 shares of common stock on May 27,
      2005.




32




Note
      I -
      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.




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




**Year
                Ended December 31****2005**
            
            **2004**
            
            **2003*****(in
                thousands)***Net
                revenues by geographic area:North
                America
            
            $
            650
            
            $
            243
            
            $
            556Europe
            
            
            17
            
            
            1,230
            
            
            5Asia
            
            
            19
            
            
            69
            
            
            80$
            686
            
            $
            1,542
            
            $
            641







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






Note
      J -
      Royalty Payments Received




The
      Company received approximately $17,000 and $61,000 in royalties in 2005 and
      2004, respectively.






Note
      K -
      Capitalized Software Costs




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




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






Note
      L -
      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
      M -
      Going Concern Matters




The
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates the realization of assets and the satisfaction
      of liabilities in the normal course of business. As shown in the consolidated
      financial statements, the Company has incurred losses from operations in 2005,
      2004, and 2003 of $2.7 million, $2.4 million, and $1.9 million, respectively.
      The continuing losses raise doubt about the Company's ability to continue as
      a
      going concern.




33




The
      Company is currently working with a number of large customers who are evaluating
      the Company’s products for use in their manufacture of products using new
      microdisplay technologies. The Company expects that additional sales orders
      will
      be placed by these customers in the second half of 2006 provided that markets
      for these products continue to grow and the customers continue to have interest
      in the Company’s technology-assisted inspection systems. Ultimately, the
      Company’s 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 the Company for inspection
      products to support that production.






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






For
      further discussion regarding the Company’s obligations, see Note C - Long-Term
      Debt and Other Financing Arrangements.






Note
      N -
      Supplemental Cash Flows Disclosure




Non-cash
      Investing and Financing Activities




During
      2005, the Company settled $1,140,000 of Class 1 Notes, $1,482,000 of Class
      2
      Notes, and $977,326 of Class 3 Notes in exchange for the issuance of 7,464,771
      shares of common stock in connection with the exercise of warrants and
      conversion of the notes.




During
      2004, the Company settled $985,000 of Class 1 Notes and $45,000 of Class 3
      Notes
      in exchange for the issuance of 4,000,737 shares of common stock in connection
      with the exercise of warrants and conversion of the notes.




Other
      Cash Flows Information




Interest
      of approximately $473,000, $162,000, and $16,000 was paid in 2005, 2004, and
      2003, respectively.




34




Schedule
      II - Valuation And Qualifying Accounts





Integral
      Vision, Inc. And Subsidiary





(in
      thousands)




**Column
                A**
            
            **Column
                B**
            
            **Column
                C**
            
            **Column
                D**
            
            **Column
                E****Additions****Description**
            
            **Balance
                at Beginning of Period**
            
            **Charged
                to Costs and Expenses**
            
            **Charged
                to Other Accounts-Describe**
            
            **Deductions
                - Describe**
            
            **Balance
                at End of Period**Year
                ended December 31, 2005:Accounts
                receivable allowance
            
            $
            2
            
            
            
            
            
            
            
            $
            2
            
            
            (2
            )
            $
            -Inventory
                obsolescence reserve
            
            
            354
            
            
            2
            
            
            
            
            
            259
            
            
            (1
            )
            
            97Deferred
                tax valuation allowance
            
            
            13,910
            
            
            915
            
            
            
            
            
            
            
            
            
            
            
            14,825$
            14,266
            
            $
            917
            
            $
            -
            
            $
            261
            
            
            
            
            $
            14,922Year
                ended December 31, 2004:Accounts
                receivable allowance
            
            $
            166
            
            $
            2
            
            
            
            
            $
            166
            
            
            (2
            )
            $
            2Inventory
                obsolescence reserve
            
            
            671
            
            
            56
            
            
            
            
            
            373
            
            
            (1
            )
            
            354Deferred
                tax valuation allowance
            
            
            13,095
            
            
            815
            
            
            
            
            
            
            
            
            
            
            
            13,910$
            13,932
            
            $
            873
            
            $
            -
            
            $
            539
            
            
            
            
            $
            14,266Year
                ended December 31, 2003:Accounts
                receivable allowance
            
            $
            170
            
            $
            5
            
            
            
            
            $
            9
            
            
            (2
            )
            $
            166Inventory
                obsolescence reserve
            
            
            561
            
            
            110
            
            
            
            
            
            
            
            
            
            
            
            671Deferred
                tax valuation allowance
            
            
            11,118
            
            
            1,977
            
            
            
            
            
            
            
            
            
            
            
            13,095$
            11,849
            
            $
            2,092
            
            $
            -
            
            $
            9
            
            
            
            
            $
            13,932


1)
      Write-off obsolete inventory


2)
      Net
      accounts receivable write-offs


35


Exhibits
      to Form 10K





Integral
      Vision, Inc.





Year
      Ended December 31, 2005





Commission
      File Number 0-12728





36





**Exhibit**
              **Number**
            **Exhibit
                Index Description**21
            Subsidiary
                of the Registrant.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