10-K

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

FORM 10-K

	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the fiscal year ended December 31, 2000.

	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	(I.R.S. Employer Identification Number)
organization)

38700 Grand River Avenue,
Farmington Hills, Michigan	48335
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (248) 471-2660

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

None

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

Common Stock, No Par Value, Stated Value $.20 Per Share
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days. YES      NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 2001:

Common Stock, No Par Value, Stated Value $.20 Per Share — $2,781,746

The number of shares outstanding on each of the issuer’s classes of common stock, as of February 28, 2001:

Common Stock, No Par Value, Stated Value $.20 Per Share — 9,029,901

Documents Incorporated By Reference: Portions of the proxy statement for the annual shareholders meeting to be held May 23, 2001 are incorporated by reference into Part III.

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TABLE OF CONTENTS

Note & Warrant Puchase Agreement

Subsidiaries of the Registrant

Consent of Ernst & Young LLP

Consent of Moore Stephens Doeren Mayhew

Part I

ITEM 1. Business

General

On June 30, 1999, the Company sold the assets of its Welding Controls division. As a result of the sale, the Company changed its name to Integral Vision. “Integral Vision” (or the “Company”), formerly known as Medar, Inc., is a Michigan corporation incorporated in 1978. Integral Vision develops, manufactures and markets microprocessor-based process monitoring and control systems for use in industrial manufacturing environments. The principle applications for the Company’s products include optical inspection systems and general purpose vision software and applications thereof (collectively “machine vision products”). The Company’s products are generally sold as capital goods. Depending on the application, machine vision systems have an indefinite life. Machine vision applications are more likely to require replacement due to possible technological obsolescence rather than physical wear.

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

Overview

Integral Vision is a supplier of machine vision systems and applications development software used to ensure product quality during the manufacturing process.

Machine vision has become a necessity for manufacturers who need to continually improve production efficiency to meet the increasing demand for high quality products. The Company’s vision systems automatically identify, gauge or inspect parts with speed and accuracy. Quantitative information about each part is evaluated to check for functional or cosmetic defects. Our systems can be configured to statistically monitor the production process and send data to other equipment in the manufacturing cell. Such data could be used for example, by a diverter to send defective parts to a reject bin, or by process controllers to automatically adjust process variables.

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

Products

Optical Disc Inspection
Compact disc inspection is considered an integral part of the replication process. Product quality has become an ever-growing concern among disc manufacturers during the evolution from CDs to DVDs and recordable media. Integral Vision has been serving the inspection needs of the optical disc inspection industry for over 12 years. During this time, we have seen many changes in the industry, including smaller in-line systems, faster production speeds, multiple inspections and many different disc formats. We have addressed these issues and much more with the introduction of our Series 2000 family of products.

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

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Omni is the base inspection scanner system for all disc formats, consisting of a CPU, monitor, keyboard, optics and software. Users can add optical inspection channels to customize the OMNI to inspect the DVD, recordable and rewritable media. The OMNI is intended for easy integration into any replication line.

CDiD safeguards against mixed product by verifying disc orientation codes during any stage of the production process. The system performs optical character verification (OCV), bar code reading, Show & Go or any combination of the above.

CDiP is designed for monitoring the consistency of printed labels on optical discs. CDiP controls print quality in screen, offset and pad printing technologies.

CDiA is designed for use on the in-feed of an automatic sleeving machine. The system provides rotational information to guarantee all discs are packaged in the exact same manner.

InteliCheck
The InteliCheck product line monitors the consistency of label printing, at the printing stage itself, or as the printed labels are being applied to product packaging. Consisting of a CPU, optical head and optional industrial cabinet, InteliCheck operates on-line to control print quality objectively and accurately.

InteliCheck monitors print quality for the screen, offset, pad printing and hot foil stamping technologies. Once an operator has completed the required production set up for a label, the vision system is trained to recognize the label print and registration using good sample labels. InteliCheck inspects each label as it is produced and can reject the label print quality and the quality of application if either fails to meet manufacturing specifications.

InteliCheck can detect typographical, batch/lot coding, color, or other label defects and can reject any label that is torn, creased or misaligned. This system is available for both color and monochrome label inspection of flat or oval products, or with a specially designed optical head for the inspection of cylindrical products.

Small Flat Panel Display Inspection
Integral Vision has over five years of experience in the display industry, with over 300 systems installed worldwide. Our initial product, LCI-Professional, is used for inspection of LCD Displays as components or final assemblies. Applications include cell phones, car radios, pagers, electronic organizers and hand-held video games. Integral Vision’s display inspection systems are designed to detect two classes of defects: cosmetic and functional. Cosmetic defects do not affect the functionality of the display, but they cause user annoyance and reduce product value. Functional defects are flaws that cause the device to be inoperable or have a significant effect on functionality.

In addition to our LCI Professional, we have recently begun delivering systems capable of inspecting LCOS (Liquid Crystal on Silicon) and other microdisplay devices. These technologies are applied to consumer products such as camcorders, rear projection computer monitors, digital still cameras, HDTV, projectors, video headsets and video telephones.

Other
The InCase M2000 is a powerful, configurable, automatic inspection system designed to monitor the “in case” bottle filling process. The system is designed to accommodate multiple “check stations” connected to a single processor, enabling cartons to be inspected before and after the filling process, if required. The InCase system does not require product specific operator set-up, meaning no lost production time when different products are being inspected.

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Production and Suppliers

The Company’s production process consists principally of assembling standard electrical, electronic and optical components and hardware subassemblies purchased from suppliers into finished products. When proprietary circuit boards are needed, the Company generally contracts for outside vendors to build the boards based on internal company designs.

The Company generally does not rely on a single source for parts and subassemblies, although certain components and subassemblies included in the Company’s products may only be obtained from a limited number of suppliers. Management believes alternative sources or designs could be developed for any of the components used in its products thereby mitigating any exposure to product interruption from shortages of parts or limited suppliers.

Intellectual Property

Management believes that the technology incorporated in its products gives it advantages over its competitors and prospective competitors. Protection of technology is attempted through a combination of patents, applied for patents, confidentiality agreements and trade secrets. The Company presently has 15 patents and has applied for 5 more. There can be no assurance that patents applied for will be granted, 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.

Product Development

The market for Machine Vision is characterized by rapid and continuous technological development and product innovation. The Company believes that continued and timely development of new products and enhancements to existing products is necessary to maintain its competitive position. Accordingly, the Company devotes a significant portion of its personnel and financial resources to product development programs and seeks to maintain close relationships with customers to remain responsive to their needs. The Company’s net engineering and development cost amounted to $2.7 million, $3.1 million, and $3.5 million for the years ended December 31, 2000, 1999, and 1998, respectively. The Company’s current product development efforts are primarily directed to Small Display Inspection products, enhancement and expansion of the InteliCheck product line and application software development tools for vision for use as part of Common VisionBlox.

Marketing

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

Environmental Factors

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

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Competition

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

Export Sales

Sales outside of the United States accounted for 61%, 54% and 70% of the Company’s net sales in 2000, 1999 and 1998. Management expects that such sales will continue to represent a significant percentage of its net sales. Most of the Company’s export billings are denominated in US dollars. Billings in the UK and Japan are generally in pound sterling and yen, respectively. On occasion other export billings are denominated in the currency of the customer’s country.

See 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 small number of customers in excess of 10% of total sales in any one year. It is possible that the specific customers reaching this threshold may change from year to year. Loss of any one of these customers could have a material impact on the Company’s result of operations. During the year ended December 31, 2000 sales to Machines Dubuit, Hanky America and Protronix Ltd represented 33% of sales. Amounts due from these customers amounted to 40% of the respective outstanding trade receivable balance at December 31, 2000.

Backlog

As of December 31, 2000, the Company had an order backlog of approximately $566,000 compared to $783,000 at December 31, 1999. Management expects that the Company will ship products representing this entire backlog in 2001.

Employees

As of February 28, 2001, the Company had approximately 67 permanent employees, as compared to 89 at February 29, 2000 and 107 at February 28, 1999. None of the Company’s employees are represented by a labor union.

ITEM 2. Properties

Manufacturing, engineering and administrative functions of Integral Vision are performed at an approximately 50,000 square foot facility owned by the Company in Farmington Hills, Michigan. In addition, Integral Vision LTD leases a 5,000 square foot facility in Bedford, England for sales and administrative functions.

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ITEM 3. Legal Proceedings

The Company is not currently involved in any material litigation.

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

None.

Part II

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

The Company’s common stock is traded on the over-the-counter market (NASDAQ) as a National Market Issue under the symbol INVI. As of February 28, 2001, there were approximately 4,500 stockholders of the Company including individual participants in security position listings.

Subsequent to December 31, 2000, the Company received notification from Nasdaq that it has failed to maintain a minimum bid price of $1.00 for 30 consecutive trading days as required by Nasdaq rules. If the Company is unable to maintain a bid price of at least $1.00 for 10 consecutive trading days before April 9, 2001, Nasdaq will send the Company written notification that its securities will be delisted, and would no longer be eligible to be quoted in the Nasdaq system. At that time, the Company would be permitted to appeal that decision to a Nasdaq Listing Qualifications Panel.

The table below shows the high and low sales prices for the Company’s common stock for each quarter in the past two years. The closing sales price for the Company’s common stock on February 28, 2001 was $0.438 per share.

			2000
	Mar 31		Jun 30		Sept 30		Dec 31
High	$	5.688	$	3.500	$	2.563	$	1.625
Low		2.000		1.375		1.188		0.281
			1999
High	$	2.688	$	3.250	$	2.688	$	2.250
Low		1.125		1.500		1.063		1.031

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.

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Item 6. Selected Financial Data

											Year ended December 31
		2000					1999							1998					1997					1996
										(restated)							(restated)							(restated)
							(in thousands, except per share data)
Net revenues		$	5,956			$		10,743					$		9,434			$		15,955			$		13,618
Gross margin			(534	)	(f	)		(105	)			(a	)		1,265		(c	)		4,313		(d	)		798
																	(d	)
Loss from continuing			(7,124	)				(5,671	)						(11,203	)	(e	)		(1,663	)				(4,792	)
operations
Income (loss) from discontinued operations(g)								1,030							19					1,519					2,813
Gain on disposal of
Welding division								8,749
Extraordinary charge from
early retirement of debt								(583	)
Net income (loss)			(7,124	)				3,525				(b	)		(11,184	)	(e	)		(144	)				(1,979	)
Basic and diluted earnings
	(loss) per share:
	Continuing operations		(.79	)				(.63	)						(1.24	)				(.19	)				(.54	)
	Discontinued Welding							.11												.17					.32
	operations
	Gain on disposal of							.97
	Welding division
	Extraordinary charge							(.06	)
	Net income (loss)	$	(.79	)		$		.39					$		(1.24	)		$		(.02	)			$	(.22	)
Weighted average shares			9,028					9,025							9,025					8,897					8,820

								At December 31
		2000			1999					1998				1997			1996
							(restated)					(restated)					(restated)
					(in thousands)
Working capital		$	964	$		5,810			$		2,641		$		3,478	$		17,041
Total assets			11,164			19,058					34,320				48,521			45,246
Long-term debt			1,967			2,000					20,123				22,592			19,784
	including current portion
Stockholders’ equity			6,936			14,325					10,861				22,003			21,302

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

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

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

Overview

On June 30, 1999, the Company sold the assets of its Welding Controls division. As a result of the sale, the Company changed its name to Integral Vision. Integral Vision develops, manufactures and markets microprocessor-based process monitoring and control products for use in industrial manufacturing environments. The Company’s revenues are primarily derived from the sale of optical inspection equipment and general purpose vision software. Optical inspection equipment is principally sold to end users and suppliers of CD-R and DVD disc manufacturing equipment. General-purpose vision software is sold into numerous applications in a wide variety of industries. 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 which could cause actual results to differ materially from those described in the forward-looking statements. Such factors and uncertainties include, but are not limited to: the impact of the level of the Company’s indebtedness; 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.

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Results of Operations

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

				Year ended December 31
			2000			1999			1998
									(restated)
Net revenues				100.0	%		100.0	%		100.0	%
Direct cost of sales (a) (e)				97.8			86.8			71.7
Specific inventory adjustment (b) (c) (d)				11.2			14.2			14.9
	Gross margin			(9.0	)		(1.0	)		13.4
Other costs and expenses:
	Marketing			39.2			22.9			25.6
	General and administrative			29.1			12.2			14.9
	Engineering and development:
		Expenditures		55.9			39.0			51.6
		Allocated to capitalized software and direct
		cost of sales		(10.7	)		(10.3	)		(14.6	)
		Net engineering and development expenses		45.2			28.7			37.0
	Product restructuring and other charges									45.0
		Total other costs and expenses		113.5			63.8			122.5
Loss from operations				(122.5	)		(64.8	)		(109.1	)
Other income							13.5
Interest income				5.8			3.5
Interest expense				(3.0	)		(5.0	)		(9.7	)
Loss from continuing operations before income taxes				(119.7	)		(52.8	)		(118.8	)
Provision (credit) for income taxes
Loss from continuing operations				(119.7	)		(52.8	)		(118.8	)
Income from discontinued welding operations, less
		applicable income taxes					9.6			0.2
Gain on disposal of discontinued Welding division, less
		applicable income taxes					81.4
Extraordinary charge for early retirement of debt less
		applicable income tax credit					(5.4	)
Net income (loss)				(119.7)	%		32.8	%		(118.6)	%

(a)	Net revenues included $1.5 million from the sale of patent technology in
	1998 which resulted in lower direct cost of sales as a percentage of sales.
(b)	In 1999, the Company charged-off inventory of $1.5 million resulting from a
	review of the marketability of inventory related to a previously discontinued
	product line.
(c)	In 1998, the Company charged-off inventory of $1.4 million as a result of
	Management’s decision to no longer pursue the sale of certain products for the
	audio CD market.
(d)	In 2000, Management made a change in estimate, primarily
	related to inventory, that resulted in a $666,000 charge to direct costs of
	sales.
(e)	Direct cost of sales includes capitalized software amortization as a
	percentage of sales of 27.9%, 11.0% and 15.1% in 2000, 1999 and 1998,
	respectively.

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

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

Direct costs of sales decreased to $6.5 million in 2000 from $10.8 million in 1999 and increased as a percentage of sales to 109% from 101%. In 2000, Management made a change in estimate, primarily related to inventory, that resulted in a $666,000 charge to direct costs of sales. The Company is in the process of liquidating the inventory related to previously discontinued product lines, however, due to disappointing results of the inventory liquidation effort to this point, Management decided that a change in estimate was necessary. The direct costs of sales for 1999 includes an inventory charge-off of $1.5 million resulting from a review of the marketability of remaining inventory related to a previously discontinued product line. Exclusive of the aforementioned adjustments, direct costs of sales as a percentage of sales would have been 97.8% in 2000 compared to 86.8% in 1999. The gross margin in 2000 was positively affected by a change in product mix as sales of our LCI and CDiD/CDiP products have less material cost than that of the OMNI systems. However, the gross margin in both periods was negatively affected by low sales volumes as fixed charges, depreciation, and amortization made up a significant portion of the costs of sales.

Marketing expense decreased slightly in dollar terms, but increased as a percentage of net revenues from 22.9% to 39.2%. The increase as a percentage of net revenues was primarily attributable to the decreased sales volume.

General and administrative expenses increased to $1.7 million from $1.3 million and as a percentage of net revenues from 12.2% to 29.1%. This was primarily due to the fact that a portion of the G&A was allocated to the Welding Controls division in 1999. The actual general and administrative expenditures decreased in 2000 compared to 1999.

Product development expenses decreased to $2.7 million from $3.1 million and increased as a percentage of net revenues from 28.7% to 45.2%. The reduction in development expenditures was primarily the result of the Company’s decision to focus its resources on a few specific projects in 2000.

In 1999, other income of $1.5 million and interest income of $374,000 ($347,000 in 2000) resulted from the sale of the Welding Controls division to Weltronic (WTC). The other income represents fees paid for services provided by Integral Vision for WTC during the transition period. These services included management services, use of facilities and software usage. The interest income represents the interest on the note receivable from WTC.

Interest expense decreased to $177,000 from $539,000 and as a percentage of net revenues to 3.0% from 5.0%. The decrease is a result of the pay-off of substantially all debt at June 30, 1999 using the proceeds from the sale of the Welding Controls division.

10

In 1999, the gain on disposal of the Welding division of $8.7 million, net of tax, resulted from the sale of substantially all of the assets of the Welding Controls division on June 30, 1999.

In 1999, the extraordinary charge of $583,000, net of tax credit, was a result of charges related to the early retirement of debt. These charges included unaccreted value assigned to warrants and unamortized discounts. The Company used proceeds from the sale of the Welding Controls division to pay-off substantially all outstanding debt on June 30, 1999.

Year Ended December 31, 1999, compared to the year ended December 31, 1998

Net revenues increased $1.3 million (13.9%) from $9.4 million in 1998 to $10.7 million in 1999. The increase resulted primarily from a recovery in optical inspection system revenues as the Company’s Series 2000 product lines became established in the field.

Direct costs of sales increased to $10.8 million in 1999 from $8.2 million in 1998 or as a percentage of sales to 101% from 86.6%. The direct costs of sales for 1999 includes an inventory charge-off of $1.5 million resulting from a review of the marketability of remaining inventory related to a previously discontinued product line. The direct costs of sales for 1998 includes an inventory charge-off of $1.4 million resulting from our decision to no longer sell inspection systems for the audio CD market. Additionally, in 1998, revenue of $1.5 million from the sale of patent technology was included in net revenue which resulted in a lower direct cost of sales as a percentage of sales. Exclusive of the aforementioned adjustments, direct costs of sales as a percentage of sales would have been 86.8% in 1999 compared to 86.1% in 1998. This is the result of lower margins in the CD-R inspection portion of the optical disc inspection product line.

Marketing expense stayed relatively constant in dollar terms, but decreased as a percentage of net revenues from 25.6% to 22.9%. This resulted principally from the fixed nature of these expenses.

General and administrative expenses decreased to $1.3 million from $1.4 million and as a percentage of net revenues from 14.9% to 12.2%. This resulted primarily from a reduction in the overall G&A structure after the sale of the Welding Controls division.

Product development expenses decreased to $3.1 million from $3.5 million and as a percentage of net revenues from 37.0% to 28.7%. Development of the Series 2000 product line was substantially completed in early 1999, resulting in a significant reduction in product development expenditures. The savings were partially, though not completely, offset by increased product development expenditures for the Small Display Inspection Systems product line and the InteliCheck product line.

Other income of $1.5 million and interest income of $374,000 resulted from the sale of the Welding Controls division to Weltronic (WTC). The other income represents fees paid for services provided by Integral Vision for WTC during the transition period. These services included management services, use of facilities and software usage. The interest income represents the interest on the note receivable from WTC.

Interest expense decreased to $539,000 from $915,000 and as a percentage of net revenues to 5.0% from 9.7%. The decrease is a result of the pay-off of substantially all debt at June 30, 1999 using the proceeds from the sale of the Welding Controls division.

The gain on disposal of the Welding division of $8.7 million, net of tax, resulted from the sale of substantially all of the assets of the Welding Controls division on June 30, 1999.

An extraordinary charge of $583,000, net of tax credit, was a result of charges related to the early retirement of debt. These charges included unaccreted value assigned to warrants and unamortized discounts. The Company used proceeds from the sale of the Welding Controls division to pay-off substantially all outstanding debt on June 30, 1999.

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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, 2000. 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
		2000
		Dec 31			Sep 30			Jun 30			Mar 31
		(in thousands except per share data)
Net revenues		$	672		$	1,535		$	1,785		$	1,964
Gross margin			(916	)		(65	)		(132	)		579
Income (loss) from continuing
operations			(2,557	)		(1,634	)		(1,854	)		(1,079	)
Income (loss) from
discontinued operations
Gain on disposal of Welding
division
Extraordinary charge from
early retirement of debt
Net income (loss)			(2,557	)		(1,634	)		(1,854	)		(1,079	)
Basic and diluted earnings
(loss) per share:
	Continuing operations		(.28	)		(.18	)		(.21	)		(.12	)
	Discontinued welding operations
	Disposal of Welding division
	Extraordinary charge
	Net income (loss)*	$	(.28	)	$	(.18	)	$	(.21	)	$	(.12	)

[Additional columns below]

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

		Quarter Ended
		1999
		Dec 31			Sep 30		Jun 30			Mar 31
										(restated)
		(in thousands except per share data)
Net revenues		$	2,661		$	3,975	$	2,409		$	1,698
Gross margin			(992	)		1,357		(165	)		(305	)
Income (loss) from continuing
operations			(1,879	)		24		(1,529	)		(2,287	)
Income (loss) from
discontinued operations								136			894
Gain on disposal of Welding
division			2,103			1,120		5,526
Extraordinary charge from
early retirement of debt								(583	)
Net income (loss)			224			1,144		3,550			(1,393	)
Basic and diluted earnings
(loss) per share:
	Continuing operations		(.21	)				(.17	)		(.25	)
	Discontinued welding operations							.01			.10
	Disposal of Welding division		.23			.12		.61
	Extraordinary charge							(.06	)
	Net income (loss)*	$	.02		$	.12	$	.39		$	(.15	)

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

            Seasonality and Quarterly Fluctuations

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

12

Liquidity and Capital Resources

Operating activities for 2000 used cash of approximately $1.3 million primarily due to the Company’s loss from continuing operations of $7.1 million. The cash used in operating activities was offset by a net decrease of $3.3 million in certain working capital items. The decrease is primarily attributable to a reduction in accounts receivable as a result of the lower sales volume in 2000 compared to 1999. The modest decrease in inventory and other assets was offset by the cash used for accounts payable and other current liabilities.

The Company’s investing activities included the receipt of $1.7 million in principal payments on the note receivable that resulted from the sale of the Welding Controls division. Additionally, $635,000 was invested in capitalized software development in 2000. Software is an integral part of the Company’s business as it is included with nearly all of the Company’s product offerings; therefore, investments in capitalized software development in the future will continue to be significant.

The Company’s financing activities included securing a revolving line of credit under which it could borrow up to $1.0 million on certain eligible accounts receivable. At December 31, 2000 the line was fully drawn at $270,000.

The Company’s current resources include the receipt of payments on the outstanding note receivable and anticipated cash provided by operating activities. These resources will not be sufficient to support the Company’s cash flow needs over the next twelve months. Management’s plans to obtain the additional cash needed to enable the Company to continue as a going concern include the sale of certain of its patented technologies, the sale of its building, reductions of its US and UK workforce, as well as pursuing possible joint ventures and other strategic alliances. There can be no assurance that Management will be able to successfully execute these plans before the Company has exhausted all of its resources. Further, the Company will need to secure immediate financing of approximately $900,000 in order to meet its obligations over the next three months while Management is attempting to execute its plans. Subsequent to December 31, 2000, the Company’s board of directors approved the issuance of up to $1.5 million of senior subordinated debentures (see Note M) which could provide, if placed timely, the immediate financing the Company needs over the next three months. At March 29, 2001, $120,000 of the debentures had been placed. Additional financing may or may not be available through banks. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.

Impact of Inflation

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

Recently Issued Accounting Standards

In 1998, the Financial Accounting Standards Board issued Statement No. 133 (amended by SFAS No. 137), Accounting for Derivative Instruments and Hedging Activities. Statement 133 is effective for fiscal years beginning after June 15, 2000. The Company adopted the new statement effective January 1, 2001. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. The Company believes there will be no material impact resulting from the application of SFAS No. 133.

13

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 provides guidance for revenue recognition under certain circumstances. The accounting and disclosures prescribed by SAB 101 will be effective for the fourth quarter of fiscal year 2001. The Company believes there will be no material impact resulting from the application of SAB 101.

In March 2000, the FASB issued Interpretation No. 44, (FIN44), Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB 25. This Interpretation clarified (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent that this Interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000 but before the effective date of July 1, 2000, the effects of applying this Interpretation are recognized on a prospective basis from July 1, 2000. The adoption of this interpretation on July 1, 2000 does not have any impact on the Company’s historical financial statements.

Item 7a. Quantitative and Qualitative Disclosures about Market Risks

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

Foreign Exchange Rates — The Company’s location outside the US is in the United Kingdom. This is a sales office with net non-current assets that are not significant. On a consolidated basis the Company denominates sales in the following currencies:

•      Japanese Yen

•      Pound Sterling

•      French Francs

•      Euros

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, 2000, the Company had no open positions.

Item 8. Financial Statements and Supplementary Data

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

Item 9. Changes in and Disagreements with Accountants and Financial Disclosure

None

14

Part III

Item 10. Directors and Executive Officers of the Registrant

The information contained in the Integral Vision, Inc. proxy statement (to be filed within 120 days of December 31, 2000), with respect to directors and executive officers of the Company, is incorporated herein by reference.

Item 11. Executive Compensation

The information contained in the Integral Vision, Inc. proxy statement (to be filed within 120 days of December 31, 2000), with respect to directors and executive officers of the Company, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information contained in the Integral Vision, Inc. proxy statement (to be filed within 120 days of December 31, 2000), with respect to directors and executive officers of the Company, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information contained in the Integral Vision, Inc. proxy statement (to be filed within 120 days of December 31, 2000), with respect to directors and executive officers of the Company, is incorporated herein by reference.

PART IV

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

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

(3) Listing of exhibits.

Exhibit
Number	Description of Document
3.1	Articles of Incorporation, as amended (filed as Exhibit 3.1 to the registrant’s Form 10-K for the year ended December 31, 1995, SEC file 0-12728, and incorporated herein by reference).
3.2	Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the registrant’s Form 10-K for the year ended December 31, 1994, SEC file 0-12728, and incorporated herein by reference).
4.1	Note and Warrant Purchase Agreement (filed as Exhibit 4.1 to the registrants Form 8-K dated July 15, 1997, SEC file 0-12728, and incorporated herein by reference).
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.
10.1	Amendment to Integral Vision, Inc. Incentive Stock Option Plan dated May 10, 1993 (filed as Exhibit 10.3 to the registrant’s Form 10-K for the year ended December 31, 1993, SEC File 0-12728, and incorporated herein by reference).
10.2	Non-qualified Stock Option Plan (filed as Exhibit 10.3 to the registrant’s Form 10-K for the year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).

15

Exhibit
Number	Description of Document
10.3	Integral Vision, Inc. Employee Stock Option Plan (filed as Exhibit 10.5 to the registrant’s Form 10-Q for the quarter ended September 30, 1995, SEC file 0-12728, and incorporated herein by reference).
10.4	Form of Confidentiality and Non-Compete Agreement Between the Registrant and its Employees (filed as Exhibit 10.4 to the registrant’s Form 10-K for the year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).
10.5	Integral Vision, Inc. 1999 Employee Stock Option Plan (filed as exhibit 10.5 to the registrant’s Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference).
10.6*	Patent License Agreement dated October 4, 1995 by and between Integral Vision, Inc. and Square D Company (filed as Exhibit 10.24 to the registrant’s Form 10-Q for the quarter ended September 30, 1995, SEC File 0-12728, and incorporated herein by reference).
10.7	Asset Purchase Agreement between the Registrant and Weltronic (filed as exhibit to the registrant’s Preliminary Schedule 14A – Rule 14A-101 dated May 6, 1999 and incorporated herein by reference).
10.8	Post Closing Adjustment and Settlement Agreement between Integral Vision, Inc. and Weltronic/Technitron, Inc. (filed as Exhibit 10.33 to the registrant’s Form 10-K for the year ended December 31, 1999, SEC File 0-12728, and incorporated herein by reference).
10.9	Loan agreement between National City Bank and Integral Vision, Inc. (filed as exhibit 10.9 to the registrant’s Form 10-Q for the quarter ended June 30, 2000, SEC File 0-12728, and incorporated herein by reference).
21	Subsidiary of the registrant.
23.1	Consent of Ernst & Young, LLP, independent auditors.
23.2	Consent of Moore Stephens Doeren Mayhew, independent auditors.
(b)	Reports on Form 8-K: None.
(c)	Exhibits – The response to this portion of ITEM 14 is submitted as a separate section of this report.
(d)	Financial statement schedules – The response to this portion of ITEM 14 is submitted as a separate section of this report.

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

16

SIGNATURES

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

Date:	March 29, 2001	INTEGRAL VISION, INC.
		By: /S/ CHARLES J. DRAKE
		Charles J. Drake, Chairman of the Board (Principal Executive Officer)
		By: /S/ VINCENT SHUNSKY
		Vincent Shunsky, Treasurer and Director (Acting Chief Financial Officer)

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

/S/ CHARLES J. DRAKE Charles J. Drake	Chairman of the Board (Principal Executive Officer) and Director
/S/ MAX A. COON Max A. Coon	Vice Chairman, Secretary and Director
/S/ VINCENT SHUNSKY Vincent Shunsky	Treasurer and Director (Acting Chief Financial Officer)
/S/ WILLIAM B. WALLACE William B. Wallace	Director

17

Annual Report on Form 10K

ITEM 14(a)(1) and (2), (c) and (d)

List of Financial Statements and Financial Statement Schedules

Certain Exhibits

Financial Statement Schedules

Year Ended December 31, 2000

INTEGRAL VISION, INC.

Farmington Hills, MI

18

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

List of Financial Statements and Financial Statement Schedules

(a)(1)	The following consolidated financial statements of Integral Vision, Inc. and subsidiary are included in ITEM 8:
	Report of Moore Stephens Doeren Mayhew, Independent Auditors
	Report of Ernst & Young LLP, Independent Auditors
	Consolidated Balance Sheets-December 31, 2000 and 1999
	Consolidated Statements of Operations-Years ended December 31, 2000, 1999 and 1998
	Consolidated Statements of Stockholders’ Equity-Years ended December 31, 2000, 1999, and 1998
	Consolidated Statements of Cash Flows-Years ended December 31, 2000, 1999 and 1998
	Notes to Consolidated Financial Statements-December 31, 2000
(2)	The following Consolidated Financial Statement schedule of Integral Vision, Inc. and subsidiary is submitted herewith:
	Schedule II      Valuation and qualifying accounts

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

19

Report of Independent Auditors

To the Board of Directors and Stockholders
Integral Vision, Inc.
Farmington Hills, MI

We have audited the accompanying consolidated balance sheets of Integral Vision, Inc. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2000. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules for 2000 and 1999 as listed in the accompanying index at ITEM 14(a). These consolidated financial statements and the financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedules based on our audits.

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

In our opinion, the 2000 and 1999 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, 2000 and 1999 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule for 2000 and 1999, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note L to the consolidated financial statements, the Company is suffering recurring losses from operations and its difficulties in generating sufficient cash flow to meet its obligations raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note L. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/S/ Moore Stephens Doeren Mayhew

Troy, Michigan
March 16, 2001, except for Note M,
as to which the date is March 29, 2001

20

Report of Independent Auditors

Board of Directors and Stockholders
Integral Vision, Inc. (Formerly Medar, Inc.)

We have audited the consolidated statements of operations, stockholders’ equity, and cash flows of Integral Vision, Inc. (formerly Medar, Inc.) and subsidiaries for the year ended December 31, 1998. Our audit included the financial statement schedule listed in the index at ITEM 14(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Integral Vision, Inc. (formerly Medar, Inc.) and subsidiaries for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information contained therein.

The accompanying 1998 financial statements have been prepared assuming that the company will continue as a going concern. As more fully described in the notes, as a result of recurring operating losses the Company has violated the provisions of certain of its loan agreements with regard to levels of tangible net worth. Consequently the revolver and term notes with the Bank, all mature in June 1999. The Company is currently exploring alternatives for financing its operations should the Bank elect not to extend the agreement. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are more fully described in the notes. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/S/ Ernst & Young LLP

Detroit, Michigan
February 23, 1999, except for Note D
as to which the date is March 31, 1999

21

Consolidated Balance Sheets
Integral Vision, Inc. and Subsidiary

			December 31
			2000			1999
			(in thousands)
Assets
Current assets
	Cash		$	78		$	391
	Accounts receivable, less allowance of $82,000 ($820,000 in 1999)			904			3,883
	Inventories — Note A			1,240			1,995
	Costs and estimated earnings in excess of billings on incomplete contracts — Note D			24			284
	Current maturities of notes from sale of Welding division — Note C			837			1,716
	Other current assets			183			309
Total current assets				3,266			8,578
Property and equipment
	Land and improvements			363			363
	Building and building improvements			3,684			3,740
	Production and engineering equipment			2,675			2,669
	Furniture and fixtures			878			872
	Vehicles			114			145
	Computer equipment			2,695			2,762
				10,409			10,551
	Less accumulated depreciation			7,002			6,289
				3,407			4,262
Other assets
	Capitalized computer software development costs, less accumulated amortization — Note A			3,257			4,327
	Patents, less accumulated amortization — Note A			330			259
	Note from sale of Welding division, less unamortized discount and current maturities — Note C			862			1,563
	Other			42			69
				4,491			6,218
			$	11,164		$	19,058
Liabilities and Stockholders’ Equity
Current liabilities
	Note payable — Note E		$	270		$	—
	Accounts payable			1,035			1,546
	Employee compensation			403			300
	Accrued and other liabilities			553			887
	Current maturities of long-term debt — Note E			41			35
Total current liabilities				2,302			2,768
Long-term debt, less current maturities — Note E				1,926			1,965
Stockholders’ equity — Notes G and I
		Common stock, without par value, stated value $.20 per share; 15,000,000 shares authorized; 9,029,901 shares (1999-9,024,901) issued and outstanding		1,806			1,805
	Additional paid-in capital			31,195			31,187
	Retained-earnings deficit			(25,227	)		(18,103	)
	Notes receivable from officers			(681	)		(602	)
	Accumulated translation adjustment — Note A			(157	)		38
Total stockholders’ equity				6,936			14,325
			$	11,164		$	19,058
See accompanying notes

22

Consolidated Statements of Operations
Integral Vision, Inc. and Subsidiary

			Year ended December 31
									1998
			2000			1999			(restated)
			(in thousands, except per share data)
Net revenues			$	5,956		$	10,743		$	9,434
Direct costs of sales				6,490			10,848			8,169
Gross margin — Note A				(534	)		(105	)		1,265
Other costs and expenses:
	Marketing			2,334			2,464			2,419
	General and administrative			1,733			1,306			1,410
	Engineering and development:
		Expenditures		3,328			4,190			4,868
		Allocated to capitalized software and direct cost of sales — Note A		(635	)		(1,109	)		(1,375	)
		Net expense		2,693			3,081			3,493
	Product restructuring and other charges — Note B									4,231
				6,760			6,851			11,553
Loss from operations				(7,294	)		(6,956	)		(10,288	)
Other income — Note C							1,450
Interest income — Note C				347			374
Interest expense — Note E				(177	)		(539	)		(915	)
Loss from continuing operations before income taxes				(7,124	)		(5,671	)		(11,203	)
Provision (credit) for income taxes — Note F				—			—			—
Loss from continuing operations				(7,124	)		(5,671	)		(11,203	)
Income from discontinued welding operations, less applicable income taxes of $-0- and $-0- years ended December 31, 1999 and 1998 respectively — Notes C and F							1,030			19
Gain on disposal of Welding division, less applicable income taxes of $300 — Note C							8,749
Extraordinary charge for early retirement of debt less applicable income tax credit of $200 — Note E							(583	)
Net income (loss)			$	(7,124	)	$	3,525		$	(11,184	)
Basic and diluted earnings per share:
	Continuing operations		$	(.79	)	$	(.63	)	$	(1.24	)
	Discontinued Welding operations						.11
	Disposal of Welding division						.97
	Extraordinary charge						(.06	)
	Net income (loss)		$	(.79	)	$	.39		$	(1.24	)
Weighted average number of shares of common stock and common stock equivalents outstanding				9,028			9,025			9,025
See accompanying notes

23

Consolidated Statements of Stockholders’ Equity
Integral Vision, Inc. and Subsidiary

														Accumulated
						Additional		Retained						Other
						Paid-In		Earnings			Officer			Comprehensive
				Common Stock		Capital		(Deficit)			Notes			Income(Loss)			Total
				(in thousands)
Balances at January 1, 1998				$	1,805	$	31,187	$	(10,444	)	$	(552	)	$	7		$	22,003
	Net loss for the year								(11,184	)								(11,184	)
	Translation adjustments														70			70
			Comprehensive loss															(11,114	)
	Loans to Officers											(28	)					(28	)
Balances at December 31, 1998					1,805		31,187		(21,628	)		(580	)		77			10,861
	Net income for the year								3,525									3,525
	Translation adjustments														(39	)		(39	)
			Comprehensive income															3,486
	Loans to Officers											(22	)					(22	)
Balances at December 31, 1999					1,805		31,187		(18,103	)		(602	)		38			14,325
	Net loss for the year								(7,124	)								(7,124	)
	Translation adjustments														(195	)		(195	)
		Comprehensive loss																(7,319	)
	Exercise of options to purchase 5,000 shares				1		8											9
	Loans to Officers											(79	)					(79	)
Balance at December 31, 2000				$	1,806	$	31,195	$	(25,227	)	$	(681	)	$	(157	)	$	6,936
See accompanying notes

24

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

			Year Ended December 31
									1998
			2000			1999			(restated)
			(in thousands)
Operating Activities
Net income (loss)			$	(7,124	)	$	3,525		$	(11,184	)
Income from discontinued operations							(1,030	)		(19	)
Gain on sale of welding division							(8,749	)
Extraordinary charge for early retirement of debt							583
Loss from continuing operations				(7,124	)		(5,671	)		(11,203	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
	Depreciation and amortization			2,482			2,374			2,374
	Restructuring charges									4,231
	Changes in operating assets and liabilities of continuing operations:
		Accounts receivable		2,979			(1,045	)		1,444
		Inventories		755			2,181			2,104
		Prepaid and other		307			117			313
		Accounts payable and other current liabilities		(742	)		(603	)		(590	)
Net cash used in operating activities				(1,343	)		(2,647	)		(1,327	)
Investing Activities
Proceeds from sale of Welding Controls division							22,394
Payments received on note receivable resulting from the sale of the Welding Controls division				1,719
Increase in property and equipment				(149	)		(290	)		(251	)
Investment in capitalized software				(635	)		(1,410	)		(1,283	)
Other				44			265			124
Net cash provided by (used in) investing activities				979			20,959			(1,410	)
Financing Activities
Repayments of revolving line of credit and other obligations				(33	)		(20,448	)		(19,664	)
Proceeds from draws on revolving line of credit				270						22,066
Proceeds from mortgage note payable							2,000
Proceeds from exercise of stock options				9
Net cash provided by (used in) financing activities				246			(18,448	)		2,402
Effect of exchange rate changes				(195	)		(39	)		70
Decrease in cash				(313	)		(175	)		(265	)
Cash at beginning of year				391			566			831
Cash at end of year			$	78		$	391		$	566
See accompanying notes

25

Notes to Consolidated Financial Statements

Integral Vision, Inc. and Subsidiary

Note A — Significant Accounting Policies

Nature of Business

On June 30, 1999, the Company sold the assets of its Welding Controls division. As a result of the sale, the Company changed its name to Integral Vision. “Integral Vision” (or the “Company”), formerly known as Medar, Inc., is a Michigan corporation incorporated in 1978. Integral Vision develops, manufactures and markets microprocessor-based process monitoring and control systems for use in industrial manufacturing environments. The principle applications for the Company’s products include optical inspection systems and general purpose vision software and applications thereof (collectively “machine vision products”). The Company’s products are generally sold as capital goods. Depending on the application, machine vision systems have an indefinite life. Machine vision applications are more likely to require replacement due to possible technological obsolescence rather than physical wear.

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

Principles of Consolidation

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

Use of Estimates

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

Translation of Foreign Currencies

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

Accounts Receivable

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

Major Customers

Customers to whom the Company had sales in excess of 10% of total sales in any one year include Machines Dubuit, Hanky America and Protronix Ltd. Sales to these customers represented 33% of total sales in 2000 and amounts due from these customers represented 40% of the respective outstanding trade receivable balance at December 31, 2000.

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Inventories

Inventories are stated at the lower of first-in, first-out cost or market, and at December 31 consisted of the following (net of obsolescence reserve of $1,484,000 in 2000 and $2,100,000 in 1999):

	2000		1999
	(in thousands)
Raw materials	$	853	$	1,502
Work in process		132		218
Finished goods		255		275
	$	1,240	$	1,995

In 2000, Management made a change in estimate, primarily related to inventory, that resulted in a $666,000 charge to direct costs of sales. The Company is in the process of liquidating the inventory related to previously discontinued product lines, however, due to disappointing results of the inventory liquidation effort to this point, Management decided that a change in estimate was necessary. In 1999, $1.5 million was charged to direct costs of sales to set up an additional obsolescence reserve as a result of the review of the marketability of remaining inventory related to a previously discontinued product line. In 1998, Management decided to no longer sell inspection systems for the audio CD market, as a result $1.4 million was charged to direct costs of sales to write-off the inventory related to the discontinued product line. A reconciliation of gross margin as reported to gross margin from operations is presented in the table below.

	2000			1999			1998
	(in thousands)
Net revenues	$	5,956		$	10,743		$	9,434
Gross margin as reported		(534	)		(105	)		1,265
Adjustments to reconcile gross margin from operations:
Specific inventory adjustments		666			1,525			1,402
Gross margin from operations	$	132		$	1,420		$	2,667

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. (See Note B).

Total software development costs incurred internally by the Company were $3,328,000, $4,190,000 and $4,868,000 in 2000, 1999 and 1998 respectively, of which $635,000, $1,109,000 and $1,375,000, respectively, were capitalized. Amortization of the capitalized costs amounted to $1,661,000, $1,182,000, and $1,420,000 in 2000, 1999 and 1998, respectively. Total accumulated amortization at December 31, 2000 and 1999, was $5,418,000 and $3,886,000, respectively.

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Property and Equipment

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

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

Patents

Total patent costs incurred and capitalized by the Company were $137,000, $106,000 and $155,000 in 2000, 1999 and 1998 respectively. Patents are stated at cost less accumulated amortization of $372,000 and $515,000 at December 31, 2000 and 1999, respectively. Amortization of the patents amounted to $54,000, $146,000 and $120,000 in 2000, 1999, and 1998, respectively. These costs are amortized on a straight-line basis over the estimated useful lives of the assets (not to exceed 5 years).

Revenue Recognition

Revenues are recorded at the time services are performed or when products are shipped, except for long-term contracts. Revenues on long-term contracts are recognized using the percentage of completion method. The effects of changes to estimated total contract costs are recognized in the year determined and losses, if any, are fully recognized when identified. Costs and estimated earnings recognized in excess of amounts billed are classified under current assets as costs and estimated earnings in excess of billings on incomplete contracts. Long-term contracts include a relatively high percentage of engineering costs and are generally less than one year in duration.

Advertising

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

Income Taxes

The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.”

Fair Value Disclosure

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

Comprehensive Income

The Company displays comprehensive income in the Consolidated Statements of Shareholders’ Equity. At December 31, 2000 and 1999, accumulated other comprehensive income (loss) consisted of unrealized income (loss) resulting from foreign currency translation adjustments.

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Stock Options

The Company has elected to follow APB No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options because, in management’s opinion, the alternative fair value provided for under FASB Statement No. 123, “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Reclassifications

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

Recently Issued Accounting Standards

In 1998, the Financial Accounting Standards Board issued Statement No. 133 (amended by SFAS No. 137), Accounting for Derivative Instruments and Hedging Activities. Statement 133 is effective for fiscal years beginning after June 15, 2000. The Company adopted the new statement effective January 1, 2001. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. The Company believes there will be no material impact resulting from the application of SFAS No. 133.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 provides guidance for revenue recognition under certain circumstances. The accounting and disclosures prescribed by SAB 101 will be effective for the fourth quarter of fiscal year 2001. The Company believes there will be no material impact resulting from the application of SAB 101.

In March 2000, the FASB issued Interpretation No. 44, (FIN44), Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB 25. This Interpretation clarified (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent that this Interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000 but before the effective date of July 1, 2000, the effects of applying this Interpretation are recognized on a prospective basis from July 1, 2000. The adoption of this interpretation on July 1, 2000 does not have any impact on the Company’s historical financial statements.

Note B — Restructuring of Operations

Early in the second quarter of 1998, Management completed an evaluation of competitive conditions and product offerings in vision. A charge of $5,633,000 was recorded as of March 31, 1998 to give effect to the impairment of assets identified in this review. The charge consisted of $4,231,000 related to capitalized software development costs and $1,402,000 related to inventory (included in direct costs of sales).

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Note C — Discontinued Operations

On June 30, 1999, the Company completed an agreement to sell substantially all the assets of its Welding Controls division for $25.7 million, net of costs of the sale, for cash, the assumption of certain liabilities, and a subordinated note.

The interest bearing portion of the note, approximately $1.9 million, carried an interest rate approximating prime plus 1% and required quarterly payments beginning on February 15, 2000, with a February 15, 2001 maturity date. The non-interest bearing portion of the note, $1.5 million, was discounted using an imputed interest rate of 9% and matured on February 15, 2001.

Subsequent to December 31, 2000, the acquiring company renegotiated the payment terms of the $1.7 million then outstanding under the note agreement. The amended agreement requires that interest be paid at a rate equal to prime plus 3% and has a maturity date of March 31, 2002 when a principal payment of approximately $862,000 is due. Additionally, in January 2001, the Company assigned approximately 19.8% of the $1.7 million then outstanding under the note agreement to two independent third parties in exchange for consideration of $300,000.

In connection with the sale, Integral Vision entered into an agreement to provide certain services to the purchaser for a fee totaling $1.5 million, all of which was paid in cash. These services, which were substantially concluded in 1999, included use of the Company’s personnel, facilities and software.

During the quarter ended December 31, 1999, the Company resolved certain post closing adjustments with the purchaser of the former Welding Controls division which produced the additional gain of $2.1 million recognized in the quarter. Part of the resolution with the purchaser included an agreement to pay amounts that previously had been contingent on shipments to a certain customer. This accounted for approximately $1.5 million of this additional gain recorded.

The results of operations for this segment have been reported separately as discontinued operations in the Consolidated Statements of Operations for the two prior periods presented.

		1999		1998
		(in thousands)
Net revenues		$	12,403	$	25,379
Costs and expenses			11,373		25,360
Income before income			1,030		19
	taxes
Income tax expense			—		—
Net income from discontinued operations		$	1,030	$	19

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Note D — Costs and Estimated Earnings in Excess of Billings on Incomplete Contracts

Contracts whose duration overlap an accounting quarter reporting period, are non-repetitive and exceed $100,000 are accounted for under the percentage-of-completion accounting method.

Costs and estimated earnings in excess of billings on incomplete contracts at December 31 are summarized as follows:

	2000		1999
	(in thousands)
Contract costs to date	$	46	$	500
Estimated contract earnings		91		863
		137		1,363
Less billings to date		113		1,079
Costs and estimated earnings in excess of billings on incomplete contracts	$	24	$	284

The Company anticipates that substantially all of the costs incurred on long-term contracts at December 31, 2000 will be billed and collected in 2001.

Note E — Long-Term Debt and Other Financing Arrangements

Long-term debt consisted only of a mortgage note payable that carries an interest rate of 8.9% and had an outstanding balance of $1,967,000 and $2,000,000 at December 31, 2000 and 1999, respectively. Current maturities on the mortgage totaled $41,000 and $35,000 at December 31, 2000 and 1999, respectively.

Maturities of long-term debt are $45,000 in 2002; $49,000 in 2003; $54,000 in 2004; $59,000 in 2005; $1,719,000 thereafter.

Short-term debt consisted of a revolving line of credit under which it could borrow up to $1.0 million on certain eligible accounts receivable. At December 31, 2000 the line was fully drawn at $270,000 and the interest rate was at the Bank’s prime rate plus 1-1/2%.

The Company used cash received as a result of the sale of the Welding Controls division to retire substantially all outstanding debt at June 30, 1999 (see Note C). An extraordinary charge of $583,000, net of tax credit, resulted from this early retirement of debt. These charges included unaccreted value assigned to warrants and unamortized discounts.

Interest paid approximates interest expensed for the years presented.

Note F — 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, 2000, the Company has cumulative net operating loss carryforwards approximating $23,600,000 (expiring: $6,934,000 in 2010, $3,894,000 in 2011, $3,812,000 in 2012, $2,333,000 in 2018 and $6,627,000 in 2020) for tax purposes available to reduce taxable income of future periods and unused investment, alternative minimum tax, and research and development tax credits approximating $331,000. Additionally, the Company’s subsidiary in the United Kingdom has cumulative net operating loss carryforwards approximating $4,800,000 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

31

allowance is necessary due to the uncertainty of future income estimates. The valuation allowance increased $2,318,000 in 2000 and decreased $1,478,000 in 1999 and increased $3,474,000 in 1998.

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:

		2000		1999
		(in thousands)
Deferred tax liabilities:
	Deductible software development costs, net of amortization	$	974	$	1,471
	Tax over book depreciation		612		664
	Percentage of completion		8		97
Total deferred tax liabilities			1,594		2,232
Deferred tax assets:
	Net operating loss carryforwards		8,032		5,771
	Credit carry forwards		331		331
	Inventory reserve		385		714
	Bad debt reserve		26		279
	Reserve for warranty		17		27
	Other		111		100
Total deferred tax assets			8,902		7,222
Valuation allowance for deferred tax assets			7,308		4,990
Net deferred tax assets			1,594		2,232
Net deferred tax		$	0	$	0

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

	2000			1999			1998
	(in thousands)
Consolidated net income (loss)	$	(7,124	)	$	3,525		$	(11,184	)
Foreign net income (loss)		(664	)		(985	)		(1,202	)
U.S. net income (loss)	$	(6,460	)	$	4,510		$	(9,982	)
Tax provision (credit) at U.S statutory rates	$	(2,196	)	$	1,534		$	(3,393	)
Change in valuation allowance		2,318			(1,478	)		3,474
Nondeductible expenses		25			30			38
Other		(147	)		(86	)		(119	)
	$	0		$	0		$	0

In 2000, the Company paid $100,000 for its 1999 alternative minimum tax liability. There were no income tax payments in 1999 or 1998.

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Note G — Earnings per Share

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

			2000			1999			1998
		(in thousands, except per share data)
Numerator for basic and diluted earnings per share -
Income(loss) available to common stockholders
	Loss from continuing operations		$	(7,124	)	$	(5,671	)	$	(11,203	)
	Income from discontinued Welding operations						1,030			19
	Gain on disposal of Welding division						8,749
	Extraordinary charge						(583	)
	Net Income (loss)		$	(7,124	)	$	3,525		$	(11,184	)
*there was no effect of dilutive securities see below
Denominator for basic and diluted earnings per share - weighted average shares				9,028			9,025			9,025
*there was no effect of dilutive securities see below
Basic and diluted earnings per share:
	Continuing operations		$	(0.79	)	$	(0.63	)	$	(1.24	)
	Discontinued Welding operations						0.11
	Disposal of Welding division						0.97
	Extraordinary charge						(0.06	)
	Net income (loss)		$	(0.79	)	$	0.39		$	(1.24	)

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

Note H — 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 $24,000, $30,000, and $30,000 for the years ended December 31, 2000, 1999 and 1998, respectively.

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Note I — Stock Options and Warrants

A summary of the status of the Option Plans at December 31, 2000 is as follows:

				Non-Qualified
		Qualified ISO		Stock Option
		Plan		Plan		1999 Plan		1995 Plan
		(in thousands)
Options outstanding			171		9		400		402
Options exercisable			171		9		100		305
Options granted during:
	2000		0		0		0		0
	1999		0		0		400		206
	1998		0		0		0		0
	1997		0		0		0		267
	1996		0		0		0		132
Options available for grant			0		0		100		8

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

A summary of option activity under all plans follows:

	2000					1999					1998
				Weighted					Weighted					Weighted
				Average Exercise					Average Exercise					Average
	Shares			Price		Shares			Price		Shares			Exercise Price
	(number of shares in thousands)
Outstanding at beginning of year		1,077		$	3.02		597		$	5.48		662		$	5.64
Granted		0			0		606			1.07		0			0
Exercised		(5	)		1.75		0			0		0			0
Canceled		(90	)		5.32		(126	)		6.10		(65	)		5.74
Outstanding at end of year ($1.07 to $9.25 per share)		982			2.82		1,077			3.02		597			5.48
Exercisable ($1.07 to $9.25 per share)		585		$	4.01		471		$	5.54		597		$	5.48

Additional information regarding the range of exercise prices and weighted average remaining life of options outstanding at December 31, 2000 follows:

					Weighted
Range of					Average
Exercise			Number		Remaining		Number
Prices			Outstanding		Life		Exercisable
			(number of shares in thousands)
		$1.07		591		8.8		194
	4.00 to 4.88			157		2.6		157
	5.00 to 5.63			110		6.6		110
	6.00 to 6.25			92		3.2		92
	8.25 to 9.25			32		4.1		32
$1.07 to 9.25				982		6.9		585

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The Company has elected to follow APB No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options because, in management’s opinion, the models required to be used by FASB Statement No. 123, “Accounting for Stock-Based Compensation,” were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. After adjusting for the proforma effect of stock compensation, the net loss in 2000 is estimated to be $7,124,000 ($.79 per share), the net income for 1999 was estimated to be $2,998,000 ($.33 per share) and the net loss for 1998 was estimated to be $11,532,000 ($1.28 per share), respectively. In 1999, the assumptions used in determining the proforma disclosure was a risk free interest rate of 6.00%, no dividend yields, .85 market price volatility, and 7.8-year weighted average life of options. These proforma results reflect only stock options granted in 1995 through 2000 (no options were issued during 2000 or 1998) and may not be comparable with the results of applying the fair market value methodology to all stock options granted prior to the initial adoption of this statement.

In connection with the private placement of $7.0 million of debentures in 1997, which were retired in 1999, the company issued warrants for the purchase of 1,400,000 Integral Vision common shares at $6.86 per share through June 30, 2004, all of which were outstanding at December 31, 2000.

Note J — Lease Commitments and Contingencies

The Company and its subsidiary use equipment and office space under long-term operating lease agreements requiring rental payments approximating $77,000 in 2001, $74,000 in 2002, $67,000 in 2003 and $65,000 in 2004. Rent expense charged to operations approximated $72,000, $65,000, and $60,000 in 2000, 1999 and 1998, respectively.

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Note K — Operations by Geographic Area

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

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

			Year Ended December 31
			2000			1999			1998
			(in thousands)
Net revenues from unaffiliated customers:
		United States	$	2,814		$	7,589		$	6,773
		United Kingdom		3,142			3,154			2,661
			$	5,956		$	10,743		$	9,434
Earnings (loss) from continuing operations before income taxes:
	United States		$	(6,460	)	$	(4,686	)	$	(5,740	)
	United Kingdom			(664	)		(985	)		(1,232	)
	Restructuring charges									(4,231	)
			$	(7,124	)	$	(5,671	)	$	(11,203	)
Identifiable assets:
	United States		$	13,315		$	21,556		$	20,270
	United Kingdom			1,684			1,337			1,608
	Eliminations			(3,835	)		(3,835	)		(3,835	)
	Net assets of discontinued operations									16,277
			$	11,164		$	19,058		$	34,320
Capital expenditures:
	United States		$	57		$	245		$	212
	United Kingdom			92			45			39
			$	149		$	290		$	251
Depreciation and amortization expense:
	United States		$	2,167		$	1,997		$	2,004
	United Kingdom			315			377			370
			$	2,482		$	2,374		$	2,374
Net revenues by geographic area:
	North America*		$	2,303		$	4,912		$	2,815
	Europe			2,981			3,154			3,361
	Asia			672			2,677			3,258
			$	5,956		$	10,743		$	9,434

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

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Note L — Going Concern Matters

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements during the years ended December 31, 2000, 1999 and 1998, the Company incurred losses from continuing operations of $7.1 million, $5.7 million and $11.2 million, respectively. The continuing losses, in addition to working capital deficiencies, recurring reductions in product sales, and cash flow deficiencies, among other factors, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability. The Company’s current resources include the receipt of payments on the outstanding note receivable and anticipated cash provided by operating activities. These resources will not be sufficient to support the Company’s cash flow needs over the next twelve months. Management’s plans to obtain the additional cash needed to enable the Company to continue as a going concern include the sale of certain of its patented technologies, the sale of its building, reductions of its US and UK workforce, as well as pursuing possible joint ventures and other strategic alliances. There can be no assurance that Management will be able to successfully execute these plans before the Company has exhausted all of its resources. Further, the Company will need to secure immediate financing of approximately $900,000 in order to meet its obligations over the next three months while Management is attempting to execute its plans. Subsequent to December 31, 2000, the Company’s board of directors approved the issuance of up to $1.5 million of senior subordinated debentures (see Note M) which could provide, if placed timely, the immediate financing the Company needs over the next three months. At March 29, 2001, $120,000 of the debentures had been placed. Additional financing may or may not be available through banks. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.

Note M — Subsequent Events

Subsequent to December 31, 2000, the Company received notification from Nasdaq that it has failed to maintain a minimum bid price of $1.00 for 30 consecutive trading days as required by Nasdaq rules. If the Company is unable to maintain a bid price of at least $1.00 for 10 consecutive trading days before April 9, 2001, Nasdaq will send the Company written notification that its securities will be delisted, and would no longer be eligible to be quoted in the Nasdaq system. At that time, the Company would be permitted to appeal that decision to a Nasdaq Listing Qualifications Panel.

Additionally, subsequent to December 31, 2000, the Company’s board of directors approved the issuance of up to $1.5 million of senior subordinated debentures. The debentures have maturities of up to four years and bear interest at 15%. The holders of the debentures will receive warrants for the purchase of 2 Integral Vision shares for each $1 in principal value of the debentures purchased. The warrants will have a conversion rate of $.50 a share and may be exercised until May 30, 2005. At March 29, 2001, $120,000 of the debentures had been placed, the buyer of which received warrants on 240,000 shares of Integral Vision stock.

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Schedule II — Valuation And Qualifying Accounts

Integral Vision, Inc. And Subsidiary

(in thousands)

Column A		Column B		Column C			Column D			Column E
				Additions
				Charged to		Charged To
		Balance at		Costs		Other				Balance at
		Beginning of		And		Accounts	Deductions			End
Description		Period		Expenses		Describe	Describe			of Period
Year ended December 31, 2000:
	Accounts receivable allowance	$	820	$	12	$	$	750	(3)	$	82
	Inventory obsolescence reserve		2,100		1,134			1,750	(1)		1,484
	Deferred tax valuation allowance		4,990		2,318						7,308
		$	7,910	$	3,464	$	$	2,500		$	8,874
Year ended December 31, 1999:
	Accounts receivable allowance	$	400	$	516		$	96	(3)	$	820
	Inventory obsolescence reserve		300		1,800						2,100
	Deferred tax valuation allowance		6,468					1,478	(2)		4,990
		$	7,168	$	2,316		$	1,574		$	7,910
Year ended December 31, 1998:
	Accounts receivable allowance	$	400	$	162		$	162	(3)	$	400
	Inventory obsolescence reserve		210		1,530			1,440	(1)		300
	Deferred tax valuation allowance		2,994		3,474						6,468
		$	3,604	$	5,166		$	1,602		$	7,168

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

38

Exhibits to Form 10K

Integral Vision, Inc.

Year Ended December 31, 2000

Commission File Number 0-12728

39

Exhibit
Number	Exhibit Index Description
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.
21	Subsidiary of the Registrant
23.1	Consent of Ernst & Young, LLP, independent auditors.
23.2	Consent of Moore Stephens Doeren Mayhew, independent auditors.

40 EX-4.4 2 k61388ex4-4.txt NOTE & WARRANT PUCHASE AGREEMENT 1 EXHIBIT 4.4 NOTE AND WARRANT PURCHASE AGREEMENT NOTE AND WARRANT PURCHASE AGREEMENT, dated effective as of March 29, 2001, by and among Integral Vision, Inc., a Michigan corporation (the "Company"), and Mid-State Industrial Services, Inc. and those subsequent purchasers listed on Exhibit A and whose names and signatures appear at the end of this Agreement (the "Subsequent Purchasers") (each individually a "Purchaser" and collectively, the "Purchasers", which term shall also include successors and assigns and any permitted transferees of the Notes or the Warrants) and Warren Cameron Faust & Asciutto, P.C., as Agent. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: SECTION 1. SALE AND PURCHASE OF NOTES AND WARRANTS (a) The Company agrees to sell to the Purchasers and, subject to the terms and conditions hereof and in reliance upon the representations and warranties of the Company contained herein or made pursuant hereto, the Purchasers agree to purchase from the Company on the Closing Date specified in Section 2 hereof, (i) a Note or Notes in the aggregate principal amount set forth opposite such Purchaser's name on Exhibit A hereto and (ii) a Warrant or Warrants for the number of shares of the Company's Common Stock set forth opposite such Purchaser's name on Exhibit A. The aggregate purchase price to be paid to the Company by the Purchasers for such Notes and such Warrants is 100% of the principal amount of the Notes to be purchased by the Purchasers, which amount will be allocated in accordance with Section 2(c) hereof. (b) As used herein, "Notes" means the aggregate in principal amount of the Company's 15% Senior Subordinated Secured Notes Due March 31, 2005, together with all Notes issued in exchange therefor or replacement thereof. Each Note will be substantially in the form of the Note set forth as Exhibit B hereto. Interest on the Notes shall accrue from the Closing Date and shall be payable quarterly on the 30th day of March, June, September and December of each year (the "Quarterly Payment Dates"), commencing in the case of Mid-State Industrial Services, Inc. on June 30, 2001 and as to each Subsequent Purchaser on the Quarterly Payment Date next following their Closing Date (which first interest payment shall be for the period from and including the Closing Date specified in Section 2 hereof through and including the next occurring Quarterly Payment Date) at the interest rates and in the manner specified in the form of Note attached hereto as Exhibit B. Principal on the Notes shall be paid in quarterly installments on the Quarterly Payment Dates beginning June 30, 2002 through and including March 30, 2005. (c) If all or a portion of (i) the principal amount of the Notes, (ii) the interest payable thereon or (iii) any fee or other amount payable hereunder or under any other Loan Document shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the Default Rate from the date of 2 such nonpayment until paid in full (both before and after judgment). (d) As used herein, "Warrants" means the aggregate of Common Stock Purchase Warrants evidenced by certificates substantially in the form of Exhibit C hereto, together with all Warrants issued in exchange therefor or replacement thereof. Such Warrants in the aggregate initially entitle the holders thereof to purchase 2 shares of Common Stock of the Company, no par value, for each $1 in value of the Notes issued to such holder at a purchase price of $0.50 per share, as set forth therein, such number and such price being subject to adjustment as provided in the form of Warrant attached hereto as Exhibit C. SECTION 2. THE CLOSING (a) Subject to the terms and conditions hereof, the closing (the "Closing") of the purchase and sale of the Notes and Warrants will take place at the offices of Warren Cameron Faust & Asciutto, P.C. on March 29, 2001 at 2:00 p.m. as to Mid-State Industrial Services, Inc. and at such time and date as shall be mutually agreed to by the Company and the Subsequent Purchasers. Such times and dates are herein referred to as the "Closing Dates" and individually as a "Closing Date." (b) Subject to the terms and conditions hereof, on each Closing Date (i) the Company will deliver to each Purchaser (A) a Note or Notes, substantially in the form of Exhibit B hereto, payable to such Purchaser (or its nominee as notified to the Company), and dated the Closing Date, in the aggregate principal amount set forth opposite such Purchaser's name on Exhibit A, and (B) a Warrant or Warrants evidenced by certificates substantially in the form of Exhibit C hereto and dated the Closing Date, for the number of shares of the Company's Common Stock set forth opposite such Purchaser's name on Exhibit A, and (ii) upon such Purchaser's receipt thereof, such Purchaser will deliver to the Company by wire transfer an amount equal to the purchase price for such Notes and Warrants (as specified in Section 1(a) hereof) payable to the order of the Company in immediately available funds. (c) The Purchasers acknowledge that the Notes and the Warrants constitute an investment unit" within the meaning of Section 1273(c)(2) of the Code and that the Company will allocate the "issue price" (within the meaning of Section 1273(b) of the Code) of such investment unit, for all Income Tax purposes, between the Notes and Warrants as follows: (i) the price at which each of the Warrants were sold by the Company is $0.10 and (ii) the price at which each $1 in principal of the Notes were sold was $0.90. Each Purchaser agrees to abide by Treasury Regulation ss. 1. 1273-2(h)(2) with respect to such allocation of the issue price. SECTION 3. DEFINITIONS (a) For purposes of the Loan Documents, the following definitions shall apply (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Accountants" means Doeren Mayhew & Co., P.C. or another independent certified public accounting firm selected by the Company and reasonably satisfactory to the Majority 3 Noteholders. "Affiliate", when used with respect to any Person, means (i) if such Person is a corporation, any officer or director thereof (other than a director nominated by one of the Purchasers) and any Person (other than one of the Purchasers) which is, directly or indirectly, the beneficial owner of more than ten percent (10%) of the Voting Stock thereof, and, if such beneficial owner is a partnership, any partner thereof, or if such beneficial owner is a corporation, any Person, directly or indirectly through one or more intermediaries, controlling, controlled by or under common control with such beneficial owner, or any officer or director of such beneficial owner or of any corporation occupying any such control relationship, (ii) if such Person is a partnership, any partner thereof, (iii) in all cases, any Person (other than one of the Purchasers) which, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such Person, and (iv) in all cases, any Person 10% or more of whose Voting Stock is beneficially owned, directly or indirectly through one or more intermediaries, by such Person. For purposes of this definition, "control" (including the correlative terms "controlling", "controlled by" and "under common control with"), with respect to any Person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Agent" means Warren Cameron Faust & Asciutto, P.C. or any successor agent appointed pursuant to Section 21.7 hereof "Aggregate Net Income" means the aggregate amount of positive annual net income after taxes for each fiscal year of the Company and its Subsidiary on a consolidated basis, as determined in accordance with GAAP, beginning with the fiscal year ending December 31, 2001 through the date of determination, without any offset for any negative net income during such period. Aggregate Net Income will only be adjusted as of the last day of each fiscal year. "Agreement" means this Agreement (together with exhibits and schedules) as from time to time assigned, supplemented or amended or as the terms hereof may be waived. "Bankruptcy Code" means the United States Bankruptcy Code and any successor thereto, and the rules and regulations issued thereunder. "Board" or "Board of Directors" means, with respect to any Person which is a corporation, a business trust or other entity, the board of directors or other group, however designated, which is charged with legal responsibility for the management of such Person, or any committee of such board of directors or group, however designated, which is authorized to exercise the power of such board or group in respect of the matter in question. "Business" means the business conducted by the Company in the vision industry and all other activities ancillary or related thereto. "Business Day" means any day other than a Saturday, Sunday or other day on which 4 banks in Detroit, Michigan are required to close. "Capital Expenditures" means for any period, the amount of all payments made by the Company during such period for the lease, purchase, improvement, construction or use of any Property, the value or cost of which under GAAP is required to be capitalized and appears on the Company's balance sheet in the category of property, plant or equipment, without regard to the manner in which such payments or the instrument pursuant to which they are made is characterized by the Company or any other Person, and shall include, without limitation, the principal components of payments for the installment purchase of Property and payments under Capitalized Leases. "Capitalized Leases" means any lease to which the Company or the Subsidiary is party as lessee, or by which it is bound, under which it leases any property (real, personal or mixed) from any lessor other than the Company or the Subsidiary, and which is required to be capitalized in accordance with GAAP, but also including any such lease, whether or not so capitalized, where the Company or a Subsidiary is treated as the owner of the leased property under the Code. "Change of Control Event" means the acquisition by any Person, or group of Persons (other than the shareholders of the Company as of the Closing Date) acting in concert, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act) of shares of capital stock of the Company the ownership of which entitles the holder(s) to cast more than 50% of the votes entitled to vote generally in the election of the Board of Directors of the Company. "Claims" has the meaning set forth in the definition of "Environmental Claim." "Closing" has the meaning set forth in Section 2(a) hereof. "Closing Date" has the meaning set forth in Section 2(a) hereof. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations and interpretations thereunder. "Collateral" means the Property upon which the Agent is granted the Security Interests, pursuant to the terms of the Collateral Assignment. "Collateral Assignment" means the Collateral Assignment of Proprietary Rights and Security Agreement to be entered into at the Closing by the Company and the Agent. "Commission" means the Securities and Exchange Commission and any other similar or successor agency of the federal government administering the Securities Act or the Securities Exchange Act. "Common Stock" means that class of stock or other equivalent evidences of ownership of a corporation, the holders of which are entitled to vote generally to elect the Board of Directors 5 of such corporation. "Company" means Integral Vision, Inc., a Michigan corporation, its successors and permitted assigns and also includes Integral Vision, Ltd., the wholly owned subsidiary of the Company. "Company's Obligations" means all loans, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), premiums, liabilities, obligations (including the performance of the covenants of the Company contained herein or in the Loan Documents), fees, lease payments, guaranties, covenants, and duties owing by the Company to the Purchasers or the Agent of any kind and description (whether pursuant to or evidenced by this Agreement, any of the other Loan Documents, or any other note or other instrument, or by any other agreement between the Purchasers or the Agent and the Company, and whether or not for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from the Company to others that the Purchasers or the Agent may have obtained by assignment or otherwise, and further including all interest not paid when due. "Consolidated," when used with reference to any financial term in this Agreement, means the aggregate for the Company and the Subsidiary of the amounts signified by such term for all such Persons, with intercompany items eliminated, and, with respect to earnings, after eliminating the portion of earnings properly attributable to minority interests, if any, in the capital of any such Person (other than in the capital of the Company) and otherwise as determined in accordance with GAAP. "Consolidated Cash Flow" means for any period, the Consolidated Net Income plus each of the following items, to the extent deducted from the revenues of the Company in the calculation of net income for such period: (i) Depreciation; (ii) amortization and other noncash charges; (iii) interest expense incurred and fees paid to the Senior Lender pursuant to the Loan Agreement; and (iv) Income Taxes determined as the accrued liability of the Company and the Subsidiary in respect of such period, regardless of what portion of such expense has actually been paid by the Company and the Subsidiary during such period; and after deduction for (A) Income Taxes, to the extent actually paid during such period; (B) all noncash income items recognized; (C) gain on the sale of property, plant or equipment; and (D) all Capital Expenditures paid by the Company and the Subsidiary. "Consolidated Coverage Ratio" means, as of any date of determination, the ratio of Consolidated Cash Flow to Consolidated Interest Expense. "Consolidated Interest Expense" means, for any period, the total interest payable during such period by the Company and the Subsidiary on account of Indebtedness. "Consolidated Liabilities" means, at any time, the total liabilities of the Company and its Subsidiary, determined in accordance with GAAP and after eliminating intercompany transactions among the Company and the Subsidiary. 6 "Consolidated Net Income" means, for any period for which the amount thereof is to be determined, the net income (net of any losses or expenses) or loss of the Company and the Subsidiary on a consolidated basis, during such period (such net income to be determined in accordance with GAAP) after Income Taxes actually paid, but excluding: (a) the earnings during such period of any Person to which the assets of the Company or any Subsidiary shall have been sold, transferred or disposed of, or into which the Company or such Subsidiary shall have merged, prior to the date of such transaction; (b) any extraordinary gain or loss during such period arising from the sale, exchange or other disposition of capital assets (such term to include all fixed assets, whether tangible or intangible, and all inventory sold in conjunction with the disposition of fixed assets); (c) any gain or loss during such period arising from the write-up or write-down of any asset; and (d) any earnings or gains during such period resulting from the receipt of any proceeds of any life insurance policy. "Consolidated Tangible Assets" means, at any time, the total assets of the Company and its Subsidiaries determined in accordance with GAAP excluding deferred assets, patents, copyrights, trademarks, goodwill, capitalized software development costs and other General Intangibles, and Investments. "Consolidated Net Worth " means, at any time, Consolidated Assets minus Consolidated Liabilities. "Contingent Liabilities" of any person means, as of any date, all obligations of such person or of others for which such person is contingently liable, as obligor, guarantor, surety or in any other capacity, or in respect of which obligations such person assures a creditor against loss or agrees to take any action to prevent any such loss (other than endorsements of negotiable instruments for collection in the ordinary course of business), including all reimbursement obligations of such person in respect of any letters of credit, surety bonds or similar obligations and all obligations of such person to advance funds to, or to purchase assets, property or services from, any other person in order to maintain the financial condition of such other person. "Default Rate" means a per annum rate equal to the interest rate on the Notes plus four percent (4%). "Depreciation" means, in respect of any period, all depreciation on Property taken during such period, as determined in accordance with GAAP. 7 "Earnings Available for Dividends" means the excess of (A) the sum of (x) 50% of aggregate Consolidated Net Income, if positive, for each fiscal year commencing on or after January 1, 2001 less 100% of aggregate Consolidated Net Income, if negative, for each fiscal year commencing on or after January 1, 2001 plus (y) net proceeds from the sale by the Company of Common Stock (other than pursuant to the Warrants) minus (B) all Restricted Payments and Restricted Investments made since the Closing Date. "Environment" means all air, surface water, groundwater, or land, including land surface or subsurface, including all fish, wildlife, biota and all other natural resources. "Environmental Auditors" has the meaning set forth in Section 7.14 hereof "Environmental Claim" means any and all administrative or judicial actions, suits, orders, claims, liens, notices, notices of violations, investigations, complaints, requests for information, proceedings, or other communication (written or oral), whether criminal or civil, (collectively, "Claims") pursuant to or relating to any applicable Environmental Law by any person (including but not limited to any Governmental or Regulatory Authority, private person and citizens' group) based upon, alleging, asserting, or claiming any actual or potential (i) violation of or liability under any Environmental Law, (ii) violation of any Environmental Permit, or (iii) liability for investigatory costs, cleanup costs, removal costs, remedial costs, response costs, natural resource damages, property damage, personal injury, fines, or penalties arising out of, based on, resulting from, or related to the presence, or Release into the Environment, of any Hazardous Materials at any location, including but not limited to any off-site location to which Hazardous Materials or materials containing Hazardous Materials were sent forth for handling, storage, treatment or disposal. "Environmental Clean-up Site" means any location which is listed or proposed for listing on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System, or on any similar state list of sites requiring investigation or cleanup, or which is the subject of any pending or threatened action, suit, proceeding, or investigation related to or arising from any alleged violation of any Environmental Law or the presence or Release of a Hazardous Material. "Environmental Law" means any and all current and future, federal, state, local, provincial and foreign, civil and criminal laws, statutes, ordinances, orders, codes, rules, regulations, Environmental Permits, policies, guidance documents, judgments, decrees, injunctions, or agreements with any Governmental or Regulatory Authority, relating to the protection of health and the Environment, worker health and safety, and/or governing the handling, use, generation, treatment, storage, transportation, disposal, manufacture, distribution, formulation, packaging, labeling, or Release of Hazardous Materials, whether now existing or subsequently amended or enacted, including but not limited to: the Clean Air Act, 42 U.S.C. ss. 7401 et seq.; the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. ss. 9601 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. ss. 1251 et seq; the Hazardous Material Transportation Act 49 U.S.C. ss. 1801 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act 7 U.S.C. ss. 136 et seq.; the Resource Conservation 8 and Recovery Act of 1976 ("RCRA"), 42 U.S.C. ss. 6901 et seq.; the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq.; the Occupational Safety & Health Act of 1970, 29 U.S.C. ss. 651 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 et seq.; and the state analogies thereto, all as amended or superseded from time to time; and any common law doctrine, including but not limited to, negligence, nuisance, trespass, personal injury, or property damage related to or arising out of the presence, Release, or exposure to a Hazardous Material. "Environmental Permit" means any federal, state, local, provincial, or foreign permits, licenses, approvals, consents or authorizations required by any Governmental or Regulatory Authority under or in connection with any Environmental Law and includes any and all orders, consent orders or binding agreements issued or entered into by a Governmental or Regulatory Authority under any applicable Environmental Law. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Affiliate" means each "person" (as defined in Section 3(9) of ERISA) which is under "common control" with the Company or any of its Subsidiaries (within the meaning of Section 414(b), (c), (m) or (o) of the Code). "Event of Default" has the meaning set forth in Section 14 hereof. "Fair Market Value" of any property means the fair market sale value which a willing buyer at retail would pay a willing seller, each under no compulsion to buy or sell and in full possession of all relevant facts. "GAAP" means generally accepted accounting principles, as in effect from time to time, which shall include the official interpretations thereof by the Financial Accounting Standards Board or any successor thereto, consistently applied. "General Intangibles" means all of the Company's and the Subsidiary's present and future general intangibles and other personal Property (including without limitation, any and all rights of the Company and the Subsidiary to all choses or things in action, tax refund claims, credits, claims, demands, goodwill, licenses, franchise agreements, subscription costs, patents, trade names, trademarks, service marks, copyrights, rights to royalties, blueprints, drawings, customer lists, purchase orders, computer programs, computer discs, computer tapes, literature, reports, catalogs, methods, sales literature, video tapes, confidential information and trade secrets, consulting agreements, employment agreements, leasehold interests in real and personal Property, insurance policies, deposits with insurers relating to workers' compensation liabilities, deposit accounts, tax refunds and proprietary rights in any equipment), other than "Equipment," "Inventory," "Accounts" and "Negotiable Instruments," as each such term is defined in the UCC, as well as the Company's and the Subsidiary's books and records of any kind relating to any of the foregoing, and all products and proceeds of the foregoing. "Governmental Regulations" means any and all laws, statutes, ordinances, rules, 9 regulations, judgments, writs, injunctions, decrees, orders, awards and standards, or any similar requirement, of the government of the United States or any foreign government or any state, province, municipality or other political subdivision thereof or therein or any court, agency, instrumentality, regulatory authority or commission of any of the foregoing. "Governmental or Regulatory Authority" means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision. "Hazardous Materials" means petroleum, petroleum hydrocarbons or petroleum products, petroleum by-products, radioactive materials, underground storage tanks, asbestos or asbestos-containing materials, gasoline, diesel fuel, pesticides, radon, urea formaldehyde, lead or lead-containing materials, polychlorinated biphenyls, ionizing and non-ionizing radiation including radon and electromagnetic frequency radiation; and any other chemicals, materials, substances or wastes in any amount or concentration which are now or hereafter become defined as or included in the definition of "hazardous substances," "hazardous materials," "hazardous wastes," "extremely hazardous waste," "restricted hazardous wastes," "toxic substances," "toxic pollutants "pollutants" "regulated substances," "solid wastes," or "contaminants" or words of similar import, under any Environmental Law. "Income Taxes" means all federal, state, local or foreign income, taxes, assessments, duties, fees, levies or other governmental charges, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. Indebtedness" means all liabilities, obligations and reserves, contingent or otherwise, which in accordance with GAAP, would be reflected as a liability on a balance sheet or would be required to be disclosed in a financial statement, including, without duplication: (i) all Indebtedness for Borrowed Money, (ii) all obligations secured by any Lien upon Property owned by the Company, irrespective of whether such obligation or liability is assumed; (iii) any obligation of the Company guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to the Company, but exclusive of obligations arising as the result of the endorsement by the Company of checks or other negotiable instruments in the ordinary course of the Company's business for purposes of depositing such items) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person; and (iv) liabilities in respect of unfunded vested benefits under any Single Employer Plan or in respect of withdrawal liabilities incurred under ERISA by the Company or any ERISA Affiliate to any Multiemployer Plan. "Indebtedness for Borrowed Money" means without duplication, all Indebtedness (i) in respect of money borrowed, (ii) evidenced by a note, debenture or other like written obligation to pay money (including, without limitation, all of the Company's Obligations and the Permitted Senior Indebtedness, and all reimbursement or other obligations of the Company in respect of letters of credit (except for commercial letters of credit up to $500,000), letter of credit guaranties, bankers acceptances, interest rate swaps, controlled disbursement accounts, or other financial products (except hedging transactions); (iii) in respect of Capitalized Leases or for the 10 deferred purchase price of Property (other than trade payables arising in the ordinary course of business that are not represented by promissory notes or by other written evidence other than invoices); or (iv) in respect of obligations under conditional sales or other title retention agreements, and all guaranties of any or all of the foregoing. "Indemnified Persons" has the meaning set forth in Section 18.2 hereof. "Investment" means, with respect to any Person: (i) the amount paid or committed to be paid, or the value of property or services contributed or committed to be contributed, by the Company for or in connection with the acquisition by the Company of any stock, bonds, notes, debentures, partnership or other ownership interests or other securities of such Person; and (ii) the amount of any advance, loan or extension of credit to, or guaranty or other similar obligation with respect to any Indebtedness of such Person by the Company and (without duplication) any amount committed to be advanced, loaned, or extended to, or the payment of which is committed to be assured by a guaranty or similar obligation for the benefit of, such Person by the Company. "Joint Venture" means a corporation, limited partnership or other limited liability business entity, formed in the ordinary course of business by the Company or any Subsidiary with Persons other than Affiliates. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security interest of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any financing lease or Capitalized Lease having substantially the same effect as any of the foregoing and any assignment or other conveyance of any right to receive income). "Loan Agreement" means the Commercial Note and related documents, dated as of June 7, 2000, as amended through the date hereof, between the Company and the Senior Lender. "Loan Documents" mean, collectively, the (i) Agreement; (ii) Notes; (iii) Warrants; (iv) Collateral Assignment; (v) UCC financing statements; and 11 (vi) such other instruments and documents as Purchasers may require to evidence and perfect the Security Interests and the Notes, and individually any one of them. As to each of the foregoing, together with all alterations, amendments, changes, extensions, modifications, refinancings, refundings, renewals, replacements, restatements or supplements thereto. "Losses" have the meaning set forth in Section 18.2 hereof. "Majority Noteholders" means the holders of Notes evidencing more than 50% of the principal amount of all Notes then outstanding. "Material Adverse Effect" means (i) a material adverse effect on the assets, properties, liabilities, business, affairs, results of operations, condition (financial or otherwise) or prospects of the Company and the Subsidiary on a consolidated basis, (ii) an effect which is prejudicial in any material respect to the holders of the Notes or the Warrants or (iii) an effect on the ability of the Company or the Subsidiary to perform its obligations under this Agreement, any Loan Document, the Notes or the Warrants. "Multiemployer Plan" shall mean any multiemployer plan (within the meaning of section 3(37) of ERISA) to which either the Company, the Subsidiary, or any ERISA Affiliate has an obligation to contribute. "Note" or "Notes" has the meaning set forth in Section l(b) hereof. "Outstanding" or "outstanding" means, when used with reference to the Notes or Warrants as of a particular time, all Notes or Warrants, as the case may be, theretofore duly issued except (i) Notes or Warrants theretofore reported as lost, stolen, mutilated or destroyed or surrendered for transfer, exchange or replacement, in respect of which new or replacement Notes or Warrants have been issued by the Company, (ii) Notes theretofore paid in full, (iii) Warrants theretofore fully exercised and (iv) Notes theretofore canceled by the Company, whether upon exercise of a Warrant in whole or in part or otherwise; except that for the purpose of determining whether holders of the requisite principal amount of Notes or Warrants have made or concurred in any declaration, waiver, consent, approval, notice, annulment of acceleration or other communication under this Agreement or under any Notes or Warrants, Notes or Warrants registered in the name of, as well as Notes or Warrants owned beneficially by, the Company, the Subsidiary or any of their Affiliates (other than one of the Purchasers) shall not be deemed to be outstanding. "PBGC" means the Pension Benefit Guaranty Corporation. "Permits" has the meaning set forth in Section 4.10 hereof 12 "Permitted Liens" means any of the following Liens: (i) the Senior Security Interests; (ii) the Security Interests; (iii) Liens for taxes not delinquent or for taxes being contested in good faith by appropriate proceedings and as to which adequate financial reserves have been established on its books and records; (iv) Liens (other than any Lien imposed by ERISA) created and maintained in the ordinary course of business which are not material in the aggregate, and which would not constitute or result in a Material Adverse Effect, and which constitute (A) pledges or deposits under worker's compensation laws, unemployment insurance laws or similar legislation, (B) good faith deposits in connection with bids, tenders, contracts or leases to which the Company or a Subsidiary is a party for a purpose other than borrowing money or obtaining credit, including rent security deposits, (C) Liens imposed by law, such as those of carriers, warehousemen and mechanics, if payment of the obligation secured thereby is not yet due or if such Liens are discharged within sixty (60) days of the date they are imposed, (D) Liens securing taxes, assessments or other governmental charges or levies not yet subject to penalties for nonpayment, and (E) pledges or deposits to secure public or statutory obligations of a Company or a Subsidiary, or surety, customs or appeal bonds to which the Company or a Subsidiary is a party; (v) Liens affecting real property which constitute minor survey exceptions or defects or irregularities in title, minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of such real property; provided, however, that all of the foregoing, in the aggregate, do not at any time materially detract from the value of said properties or materially impair their use in the operation of the businesses of the Company or the Subsidiary, as the case may be; and (vi) Purchase Money Liens securing purchase money Indebtedness; provide, however, that the aggregate outstanding amount of Indebtedness and secured by all such Purchase Money Liens for the Company and all Subsidiaries shall not exceed, on an aggregate basis, $500,000 at any time. "Permitted Senior Indebtedness" means (1) Senior Indebtedness in an amount up to $5 million and (ii) the interests of the lessor under any Capitalized Leases permitted to exist hereunder. "Person" means an individual, corporation, partnership, firm, limited liability company, association, trust, unincorporated organization, government, governmental body or political subdivision thereof. 13 "Plan" shall mean any employee benefit plan (within the meaning of section 3(3) of ERISA) maintained or contributed to by the Company, any Subsidiary, or any ERISA Affiliate, other than a Multiemployer Plan. "Potential Default" means a condition or event which, with notice or lapse of time or both, would constitute an Event of Default. "Prohibited Transaction" means any transaction involving any Plan which is proscribed by Section 406 of ERISA or Section 4975 of the Code. "Property" means all types of real, personal or mixed property and all types of tangible or intangible property. "Purchase Money Liens" means Liens securing purchase money Indebtedness incurred in connection with the acquisition of capital assets by the Company in the ordinary course of business; provided that (a) such Liens do not extend to or cover assets or properties other than those purchased in connection with the purchase in which such Indebtedness was incurred and (b) the obligation secured by any such Lien so created shall not exceed 100% of the cost of the property including transportation and installation costs, covered thereby. "Purchaser(s)" has the meaning set forth in the first paragraph hereof. "Real Estate" means all real estate and improvements located thereon owned by the Company. "Registration Demand" has the meaning set forth in Section 17 hereof. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing of a Hazardous Material into the Environment. "Reportable Event" shall mean, with respect to any Single Employer Plan, an event described in section 4043(b) of ERISA, other than an event as to which the notice requirement is waived under applicable PBGC regulations. "Restricted Investment" means any Investment other than (1) obligations of the United States government due within one year, (2) certificates of deposit and bankers acceptances due within one year of a United States domiciled commercial bank having capital funds of at least $100 million and whose long-term unsecured debt obligations have been given a rating of at least A by Standard & Poor's or A2 by Moody's, (3) commercial paper rated P-1 by Moody's or A-1 by Standard & Poor's and maturing not more than 270 days from the date of creation thereof, (4) debt of any state or political subdivision that is rated AA or better by Moody's or Aa2 or better by Standard and Poor's and maturing in less than one year, (5) investments in, and loans and advances to, Subsidiaries or entities that will, concurrently with such investment become 14 Subsidiaries, (6) trade credit extended in the ordinary course of the Company's business, (7) loans and advances made in the ordinary course of business to officers and employees of Company for relocation expenses, travel advances and similar expenses relating to their employment, (8) endorsements of instruments or items of payment for deposit to the Company's bank accounts, and (9) additional Investments not to exceed $ 100,000 in the aggregate. "Restricted Payment" means (i) every direct or indirect dividend or other distribution paid, made or declared by the Company on or in respect of any class of its capital stock or in respect of any partnership or Joint Venture, in all cases whether now or hereafter outstanding, interests and any payment under or with respect to anti-dilution provisions of any capital stock of the Company, (ii) every payment in connection with the redemption, purchase, retirement or other acquisition, direct or indirect, by or on behalf of the Company of any shares of the Company's capital stock, whether or not owned by the Company or any partnership or Joint Venture interests of the Company, or any warrants, rights or options to acquire such stock or partnership interests, (iii) every payment to or on behalf of any Affiliate of the Company on account of or with respect to any lease arrangements and (iv) every payment by or on behalf of the Company (whether as repayment or prepayment of principal or as interest or otherwise) on or with respect to (A) any obligation to repay money borrowed (other than the Notes) owing to any Affiliate of the Company or to any other holder of shares of the Company's Common Stock (other than such a holder which holds only Shares) or (B) any obligation to any Person, of any Affiliate of the Company or of any other holder of shares of the Company's Common Stock, which obligation is assumed or guaranteed by the Company; provided, however, (a) that the restrictions of the foregoing clauses (i) and (ii) shall not apply to any dividend, distribution, or other payment to the extent payable in shares of the Common Stock of the Company or in options, warrants or other rights to purchase such Common Stock, (b) that none of the foregoing clauses shall apply to any payments from a Subsidiary to the Company, (c) that none of the foregoing clauses shall apply to any purchases by the Company from a Wholly-Owned Subsidiary of additional capital stock of such Subsidiary and (d) that none of the foregoing clauses shall apply to any payments, distributions or other transfers or actions on or with respect to the Notes or Warrants. For purposes of this definition, "capital stock" shall also include warrants (other than the Warrants) and other rights and options to acquire shares of capital stock. "Securities Act" means the Securities Act of 1933, as amended, and the rules, regulations and interpretations thereunder. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules, regulations and interpretations thereunder. "Security Interest" means the Liens granted to the Agent for the benefit of the Purchasers pursuant to this Agreement and the Loan Documents. "Senior Indebtedness" means indebtedness to the Senior Lender. "Senior Lender" means National City Bank of Michigan/Illinois and its successors and assigns. 15 "Senior Security Interests" means Liens granted to the Senior Lender pursuant to the Loan Agreement and certain "Loan Documents" (as defined in the Loan Agreement), as in effect on the date hereof or amended so that the obligations thereunder constitute Senior Indebtedness. "Share" or "Shares" means shares of the Company's Common Stock, or other securities, which can be obtained or have been obtained by an exercise in whole or in part of any Warrant or the exchange of a Warrant for shares of the Company's Common Stock pursuant to the terms of the Warrants. In the event that any Shares are sold either in a public offering pursuant to an effective registration statement under Section 6 of the Securities Act or pursuant to Rule 144 (but if sold under Rule 144, only if sold in "brokers' transactions" within the meaning of Rule 144), then the transferees of such Shares shall not be entitled to any benefits under this Agreement with respect to such Shares and such Shares shall no longer be considered to be "Shares" for purposes of this Agreement. "Single Employer Plan" shall mean any Plan that is subject to Title IV of ERISA. "Solvent" has the meaning set forth in Section 4.19 hereto. "Subsidiary" means any corporation in which at least a majority of the shares (other than any directors' qualifying shares required by law) of each class of the capital stock (other than preferred stock), at the time as of which any determination is being made, is owned, beneficially and of record, directly or indirectly, by the Company or its Subsidiary, or both. "UCC" means the Uniform Commercial Code as in effect on the date hereof in the State of Michigan, as amended, or as in effect in any jurisdiction in which Collateral is located. "Voting Stock" means capital stock or a partnership or membership of any class or classes of a corporation, partnership or other limited liability entity, respectively, the holders of which are ordinarily entitled to elect the directors, or persons performing similar functions, of such corporation, partnership or entity. "Warrant" or "Warrants" has the meaning set forth in Section l(d) hereof. "Wholly-Owned Subsidiary" means any Subsidiary, all of the equity securities of which (other than directors' qualifying shares) are owned by the Company or one or more other Wholly-Owned Subsidiary of the Company. (e) For all purposes of the Loan Documents, except as otherwise expressly provided or unless the context otherwise requires: (i) the words "herein", "hereof" and "hereunder" and other words of similar import refer to the particular Loan Document as a whole and not to any particular Section or other subdivision thereof, (ii) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; 16 (iii) all computations provided for herein, if any, shall be made in accordance with GAAP, unless another method of computation is herein specified; (iv) any uses of the masculine, feminine or neuter gender shall also be deemed to include any other gender, as appropriate; and (v) the exhibits and schedules to this Agreement shall be deemed a part of this Agreement and any Exhibit, Annex or Schedule to any other Loan Document shall be deemed a part of such other Loan Document, as the case may be. SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants as follows as of the date hereof and as of the Closing Date: 4. 1. Corporate Existence and Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and is duly qualified to do business, and is in good standing, in all additional jurisdictions where such qualification is necessary under applicable law. The Company has all requisite corporate power to own or lease the properties used in its business and to carry on its business as now being conducted and as proposed to be conducted, and to execute and deliver this Agreement and the other Loan Documents to be executed and to engage in the transactions contemplated hereby and thereby. 4.2. Corporate Authority. The execution, delivery and performance by the Company of this Agreement and the other Loan Documents have been duly authorized by all necessary corporate action and are not in contravention of any applicable Governmental Regulation, or of the terms of the Company's charter or by-laws, or of any contract or undertaking to which the Company is a party or by which the Company or its property may be bound or affected and do not result in the imposition of any Lien, except for Permitted Liens. 4.3. Binding Effect. This Agreement is, and each of the Loan Documents to which the Company is a party when delivered hereunder will be, legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. 4.4. Subsidiaries. The only Subsidiary of the Company is Integral Vision Ltd., a company organized under the laws of England and Wales. The Company directly owns all of the issued and outstanding shares of the Subsidiary. 4.5. Financial Condition. The financial statements included in the documents delivered pursuant to Section 10.6, copies of which have been furnished to the Purchasers, fairly present, and the financial statements delivered pursuant to Section 7.4 will fairly present, the financial position of the Company and the Subsidiary as at the respective dates thereof, and the results of operations of the Company and the Subsidiary for the respective periods indicated, all on a 17 consolidated basis in accordance with GAAP (subject, in the case of interim statements, to normal, immaterial year-end audit adjustments). There is no material Contingent Liability of the Company or the Subsidiary that is not reflected in such consolidated statements or in the notes thereto. 4.6. Use of Loans. The Company will use the proceeds of the sale of the Notes and the Warrants for working capital and other general corporate purposes. The Company does not extend or maintain, in the ordinary course of business, credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Note will be used for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any such margin stock or maintaining or extending credit to others for such purpose. 4.7. Consents, Etc. Except for such consents, approvals, authorizations, declarations, registrations or filings delivered by the Company at or prior to the Closing pursuant to Section 10.5, if any, each of which is in full force and effect, and the consent of the Senior Lender, no consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person, including any creditor, lessor or shareholder of the Company or any Subsidiary, is required on the part of the Company or any Subsidiary in connection with the execution, delivery and performance of this Agreement and the other Loan Documents or the transactions contemplated hereby or thereby or as a condition to the legality, validity or enforceability of this Agreement and the other Loan Documents. 4.8. Taxes. Each of the Company and the Subsidiary has filed all tax returns (federal, state and local) required to be filed and have paid all taxes shown thereon to be due, including interest and penalties, or has established adequate financial reserves on its books and records for payment thereof. The Company does not know of any actual or proposed tax assessment or any basis therefor, and no extension of time for the assessment of deficiencies in any federal or state tax has been granted to the Company. 4.9. Title to Properties. Except as otherwise disclosed in the latest consolidated balance sheet delivered pursuant to Section 4.5, the Company and the Subsidiary have a valid and indefeasible ownership interest in all of the properties and assets reflected in the consolidated balance sheet of the Company and the Subsidiary or subsequently acquired by the Company or the Subsidiary. All of such properties and assets are free and clear of any Lien, except for Permitted Liens. 4.10. Compliance with Governmental Relations. To the best of the Company's knowledge, the Company and the Subsidiary is in compliance in all material respects with all Governmental Regulations (including Environmental Laws) applicable to such person or its business or properties. Without limiting the generality of the foregoing, all licenses, permits, orders or approvals which are required under any Governmental Regulation in connection with any of the businesses or properties of the Company or the Subsidiary ("Permits") are in full force and effect, no notice of any violation has been received in respect of any such Permits and no proceeding is pending or, to the knowledge of the Company, threatened to terminate, revoke or 18 limit any such Permits. 4.11. ERISA. To the best of the Company's knowledge, the Company and its Plans are in compliance in all material respects with those provisions of ERISA and of the Code which are applicable with respect to any Plan. No Prohibited Transaction and no Reportable Event has occurred with respect to any such Plan. The Company is not an employer with respect to any Multiemployer Plan. The Company has met the minimum funding requirements under ERISA and the Code with respect to its Plans, if any, and have not incurred any liability to the PBGC or any Plan. There is no material unfunded benefit liability, determined in accordance with Section 400 1 (a)(1 8) of ERISA, with respect to any Plan of the Company. 4.12. Environmental Matters. Without limiting the generality of Section 4.10: (a) No written demand, claim, notice, suit, suit in equity, action, administrative action, investigation or inquiry whether brought by any governmental authority, private person or otherwise, arising under, relating to or in connection with any Environmental Laws is pending or, to the best of the Company's knowledge, threatened against Company, the Subsidiary any Property or any past or present operation of the Company or the Subsidiary which could result in a Material Adverse Effect. (b) The Company does not have any knowledge that any other person has ever received any notice, claim or allegation of any violation, and the Company is not aware of any existing violation, of Environmental Laws at or about any Property, and the Company does not have any knowledge of any actions commenced or threatened by any party for or related to or arising out of non-compliance with Environmental Laws which apply to any Property, activities at any Property or Hazardous Materials at, from or affecting any Property. (c) None of the Property appears on the National Priority List (as defined under federal law) or any state listing which identifies sites for remedial clean-up or investigatory actions. To the best of the Company's knowledge, none of the Property has been contaminated with substances which give rise to a clean-up obligation under any Environmental Law or common law. 4.13. Investment Company Act. Neither Company nor the Subsidiary is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 4.14. Disclosure. No report or other information furnished in writing by or on behalf of the Company to any Purchaser in connection with the negotiation or administration of this Agreement contains any material misstatement of fact or omits to state any material fact or any fact necessary to make the statements contained therein not misleading. Neither this Agreement, 19 the other Loan Documents, nor any other document, certificate, or report or statement or other information furnished to any Purchaser by or on behalf of the Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact in order to make the statements contained herein and therein not misleading. There is no fact known to the Company which materially and adversely affects, or which in the future may (so far as the Company can now foresee) materially and adversely affect, the business, properties, operations, condition, financial or otherwise, or prospects of the Company or the Subsidiary, which has not been set forth in this Agreement or in the other documents, certificates, statements, reports or other information furnished in writing to any Purchaser by or on behalf of the Company in connection with the transactions contemplated hereby. 4.15. Stock Ownership. The authorized capital stock of the Company consists of (i) 15,000,000 shares of Common Stock, without par value, of which 9,029,901 shares are outstanding, and (ii) 400,000 shares of Preferred Stock, without par value, none of which are outstanding. Such outstanding shares of Common Stock are duly authorized, validly issued and outstanding and fully paid and nonassessable. Except for the Warrants and options to purchase 982,600 shares of Common Stock granted to employees of the Company pursuant to the Company's stock option plans, there are no outstanding options, warrants, rights, convertible securities or other agreements or plans under which the Company may become obligated to issue, sell or transfer shares of its capital stock or other securities. 4.16. No Defaults or Conflicts. (a) No Event of Default or Potential Default has occurred and is continuing. (b) The execution, delivery and performance by the Company of this Agreement and of the Loan Documents to which it is a party and any of the transactions contemplated hereby or thereby (including, without limitation, the issuance of the Notes, the Warrants and the Shares as contemplated herein or therein) do not and will not (i) violate or conflict with, with or without the giving of notice or the passage of time or both, any provision of (A) the Articles of Incorporation or By-Laws of the Company or (B) any law, rule, regulation, order, judgment, writ, injunction, decree, agreement, indenture or other instrument applicable to the Company or the Subsidiary or any of their respective properties (or to which the Company of the Subsidiary is a party or by which any of their respective properties may be bound), (ii) other than pursuant to this Agreement or the Loan Documents, result in the creation of any Lien upon any of the Company's or the Subsidiary's Properties, (iii) require the consent, waiver, approval, order or authorization of, or declaration, registration, qualification or filing with, any Person (whether or not a governmental authority and including, without limitation any shareholder approval) other than (A) the consent of the Senior Lender (B) any registration, qualification or filing with the Securities and Exchange Commission or any state securities commission necessary in connection with the Company's obligations under Section 17 hereof and (C) the Company's routine filing obligations under the Securities Exchange Act or (iv) cause anti-dilution clauses of any outstanding securities to become operative or give rise to any preemptive rights. No such provision referred to in the preceding clause (i) will have a Material Adverse Effect. 20 4.17. Offering of Notes. Neither the Company nor any agent nor any other Person acting on their behalf, directly or indirectly, (i) offered any of the Notes, Warrants or any similar security of the Company (A) by any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) or (B) for sale to or solicited offer to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any Person other than the Purchasers and additional potential investors in compliance with Regulation D under the Securities Act or (ii) has done, or caused to be done (or has omitted to do or to cause to be done) any act which act (or which omission) would result in bringing the issuance or sale of the Notes, Warrants or Shares within the provisions of Section 5 of the Securities Act. 4.18. Outstanding Securities. All securities (as defined in the Securities Act) of each of the Company have been offered, issued, sold and delivered in compliance with, or pursuant to exemptions from, all applicable federal and state laws, and the rules and regulations of federal and state regulatory bodies governing the offering, issuance, sale and delivery of securities. 4.19. Solvency. The Company is and has been experiencing cash flow difficulties such that it would likely not meet a definition of "solvency" meaning that it can pay its debts as they mature. However, the assets of the Company, at a fair valuation, exceed its total liabilities (including contingent, subordinated, uni-natured and unliquidated liabilities) and the Company does not have an unreasonably small capital with which to engage in its anticipated business. Assuming all $1,500,000 of the Notes are purchased, the Company believes that it will have sufficient cash flow to meet its obligation and to enable it to put in place its business plans. 4.20. Chief Executive Office. The chief executive office of the Company and its records with respect to the Collateral are located at Farmington Hills, Michigan. SECTION 5. REPRESENTATIONS OF THE PURCHASERS Each Purchaser severally represents and warrants, but only as to itself, to the Company that: 5.1. Power and Authority. Such Purchaser has all requisite power, authority and legal right to execute, deliver, enter into, consummate and perform this Agreement and the Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and the Loan Documents to which it is a party by such Purchaser have been duly authorized by all required corporate and other actions. Such Purchaser has duly executed and delivered this Agreement and the Loan Documents to which it is a party, and this Agreement and the Loan Documents to which it is a party constitute the legal, valid and binding obligation of such Purchaser enforceable against such Purchaser in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to the rights of creditors generally and subject to the availability of equitable remedies and the application of equitable principles. 5.2. Purchase for Investment. Such Purchaser is capable of evaluating the risk of its investment in the Notes and Warrants being purchased by it and is able to bear the economic risk of such investment. Such Purchaser is purchasing the Notes and Warrants to be purchased by it 21 for its own account, and the Notes and Warrants are being purchased by it for investment and not with a present view to any distribution thereof. Such Purchaser is an "accredited investor" as defined in Rule 501(a) under the Securities Act. It is understood that the disposition of such Purchaser's property shall, subject to the terms of this Agreement, at all times be within such Purchaser's control. If such Purchaser should in the future decide to dispose of any of its Notes, Warrants or Shares, it is understood that it may do so only in compliance with the Securities Act and this Agreement. SECTION 6. PREPAYMENTS AND REPAYMENTS 6.1. Prepayment at Holder's Option. (a) In the event of a Change of Control Event, each holder of a Note or Notes shall have the right, at such holder's option, to require the Company to prepay such holder's Note or Notes in whole at a price equal to (i) 100% of the aggregate principal amount of Notes to be prepaid plus (ii) all accrued interest on the Notes to the date of prepayment. Such option shall be exercised by written notice to the Company under Section 6.1(b) hereof given at any time from and after the Change of Control Event. As soon as possible after a Change of Control Event occurs, or the Company has knowledge that it is likely to occur, the Company shall give written notice to each holder of a Note or Notes notifying each such holder of the occurrence or likely occurrence of such Change of Control Event and informing each such holder of its right to exercise an option to require a prepayment under this Section 6.1(a). (b) In order to exercise its rights to require a prepayment under this Section 6.1, a holder requiring such prepayment shall send to the Company a written notice demanding prepayment under this Section 6.1 and specifying the date of such prepayment (which must be a Business Day and which shall not be less than thirty (30) days after receipt of such notice by the Company, but in no event earlier than such Change of Control Event). (c) In the event that on any date for prepayment pursuant to this Section 6.1 the Company, for whatever reason, does not pay in full the prepayment amount or amounts due to any holder or holders of Notes who have requested prepayment, then the amount actually prepaid by the Company to all holders of Notes pursuant to this Section 6.1 shall be allocated among all such holders of Notes in proportion, as nearly as practicable, to the respective unpaid principal amount of Notes then held by each such holder; provided, however, such non-payment in full shall nonetheless constitute a Potential Default. 6.2. Optional Prepayments. (a) At any time after April 1, 2002 (but not before) the Company may at its option (subject to the other provisions of this Section 6.2) prepay all or part of the principal amount of outstanding Notes, at a price equal to the aggregate principal amount of the outstanding Notes to be prepaid plus accrued interest thereon to the date of prepayment. 22 (b) The aggregate amount of each prepayment of the principal amount of Notes pursuant to this Section 6.2 shall be allocated among all Notes at the time outstanding, in proportion, as nearly as practicable, to the respective unpaid principal amounts of such Notes. (c) The right of the Company to prepay Notes pursuant to this Section 6.2 shall be conditioned upon its giving notice of prepayment, signed by a principal financial officer, to the holders of Notes not less than thirty (30) days and not more than sixty (60) days prior to the date upon which the prepayment is to be made specifying (i) the registered holder of each Note to be prepaid, (ii) the aggregate principal amount being prepaid, (iii) the date of such prepayment (which must be a Business Day), (iv) the accrued and unpaid interest (to but not including the date upon which the prepayment is to be made) and (v) that the prepayment of Notes is being made pursuant to this Section 6.2. Notice of prepayment having been so given, the aggregate principal amount of the Notes so specified in such notice, and all accrued and unpaid interest thereon, shall become due and payable on the specified prepayment date, but the right to apply any or all of the Notes as payment to exercise any Warrant or Warrants shall continue to, but not including, the date of such prepayment. 6.3. Obligations Unconditional. The Company hereby agrees and confirms that its obligations under the Notes shall be deemed to constitute for all Purposes obligations for the payment of indebtedness for borrowed money and shall accordingly be absolute and unconditional in accordance with the terms of the Notes and this Agreement and shall not be affected by (and the Company agrees not to assert) any right the Company may now or at any time hereafter have, including any right to terminate, cancel, quit or surrender this Agreement or any Note except in accordance with the express terms thereof. SECTION 7. AFFIRMATIVE COVENANTS The Company covenants and agrees that, until payment in full of the principal of and accrued interest on the Notes and the payment or performance of all other obligations under the Loan Documents, the Company shall: 7.1. Preservation of Corporate Existence; Etc. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except to the extent permitted by Section 8.5, and its qualification as a foreign corporation in good standing in each jurisdiction in which such qualification is necessary under applicable law, and the rights, licenses, permits (including those required under Environmental Laws), franchises, patents, copyrights, trademarks and trade names material to the conduct of its businesses; and defend all of the foregoing against all claims, actions, demands, suits or proceedings at law or in equity or by or before any governmental instrumentality or other agency or regulatory authority. 7.2. Compliance with Laws, Etc. Comply with all Governmental Regulations (including ERISA, the Code and Environmental Laws), in effect from time to time; and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income, revenues or property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might 23 give rise to any Lien upon such properties or any portion thereof, except to the extent that payment of any of the foregoing is then being contested in good faith by appropriate legal proceedings and with respect to which adequate financial reserves have been established on the books and records of the Company. 7.3. Maintenance of Properties; Insurance. Maintain, preserve and protect all property that is material to the conduct of its business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times in accordance with customary and prudent business practices for similar businesses; and maintain in full force and effect insurance with responsible and reputable insurance companies or associations in such amounts, on such terms and covering such risks, including fire and other risks insured against by extended coverage, as is usually carried by companies engaged in similar businesses and owning similar properties similarly situated and maintain in full force and effect public liability insurance, business interruption insurance, insurance against claims for personal injury or death or property damage occurring in connection with any of its activities or any properties owned, occupied or controlled by it, in such amounts as it shall reasonably deem necessary, and maintain such other insurance as may be required by Governmental Regulations or as may be reasonably requested by the Majority Noteholders. Upon request, the Company shall deliver to each Purchaser copies of all or any of such insurance policies or the related certificates of insurance. 7.4. Reporting Requirements. Furnish to each Purchaser the following: (a) promptly and in any event within five (5) calendar days after becoming aware of the occurrence of (A) any Potential Default or Event of Default, (B) the commencement of any material litigation against, by or affecting the Company or any Subsidiary, and any material developments therein, or (C) any development in the business or affairs of the Company which has resulted in or which is likely, in the reasonable judgment of the Company, to result in a Material Adverse Effect, a statement of the chief financial officer of the Company setting forth details of such Potential Default or Event of Default or such litigation or such event or condition and the action which the affected person has taken and proposes to take with respect thereto; (b) as soon as available and in any event within 30 days after the end of each fiscal month of the Company, the consolidated balance sheet of the Company as of the end of each such month and consolidated income statement of the Company for each such month and for the period commencing at the end of the previous fiscal year and ending with the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, all in reasonable detail and duly certified (subject to normal, immaterial year-end audit adjustments) by the chief financial officer or controller of the Company as having been prepared in accordance with GAAP, together with a certificate of the chief financial officer or controller of the Company (A) stating that no Potential Default or Event of Default has occurred and is continuing or, if any Potential Default or Event of Default has occurred 24 and is continuing a statement setting forth the details thereof and the action which the applicable person has taken and proposes to take with respect thereto, and (B) setting forth a computation (which computation shall accompany such certificate and shall be in reasonable detail) showing compliance with Sections 8.1 and 8.4 in conformity with the terms of this Agreement; (c) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, a copy of the annual audited consolidated financial statements of the Company for such fiscal year, with a customary audit report the Accountants, and a certificate of the chief financial officer or controller of the Company (A) stating that no Potential Default or Event of Default has occurred or is continuing or if any Potential Default or Event of Default has occurred and is continuing, a statement setting forth the details thereof and the action which the applicable person has taken and proposes to take with respect thereto, and (B) setting forth a computation (which computation shall accompany such certificate and shall be in reasonable detail) showing compliance with Sections 8.1and 8.4 in conformity with the terms of this Agreement; (d) as soon as available, and in any event no later than 30 days prior to the beginning of each fiscal year of the Company and prior to the final approval by its Board of Directors, a budget for such fiscal year presented on a monthly basis regarding the Company's operations and capital expenditures on a consolidated basis, including a balance sheet and statements of income and cash flow for each month, together with an analysis of such budget prepared in reasonable detail by the chief financial officer or the President of the Company, and, within fifteen (15) days following their preparation, (1) any operating budget of the Company otherwise prepared and submitted to its Board and (2) any revisions or amendments made by the Company (and submitted to its Board) to any budget delivered under this clause (d); (e) promptly after receipt thereof by the Company, copies of any audit or management reports submitted to it by independent accountants in connection with any audit, interim audit or other report submitted to the board of directors of the Company; (f) promptly after the same are available, copies of each annual report, proxy or financial statement or other communication sent to the Company's stockholders and copies of all annual, regular, periodic and special reports and registration statements which the Company may file or be required to file with the Securities and Exchange Commission or with any securities exchange or the National Association of Securities Dealers, Inc.; and (g) promptly, such other information respecting the business, properties, operations or condition, financial or otherwise, of the Company as any Purchaser may from time to time reasonably request upon reasonable notice. Without limiting the foregoing provisions of this Section 7.4, the Company agrees that, if expressly requested in writing by any holder of Notes or Warrants, it will not deliver to such 25 holder (until otherwise instructed by such holder) (x) any information or materials regarding the Company (whether described in this Section 7.4 or otherwise) that is nonpublic and (y) any information (whether or not included in clause (x)) which such holder specifies it does not want to receive. Each holder of Notes and Warrants hereby acknowledges that it is aware of the restrictions imposed by federal and state securities laws on a person possessing material nonpublic information about a company. In this regard, each such holder hereby agrees that (i) while it is in possession of material nonpublic information with respect to the Company and its Subsidiaries, such holder will not purchase or sell any securities of the Company, or communicate such information to any third party, in violation of any such laws and (ii) it will keep all such nonpublic information confidential. 7.5. Accounting; Access to Records, Books; Etc. Maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in accordance with GAAP and to comply with the requirements of this Agreement and, at any reasonable time and from time to time, (i) permit the Agent to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, such person and to discuss the affairs, finances and accounts of such person with their respective directors, officers, employees and independent auditors, and by this provision the Company does hereby authorize the same, and (ii) permit the Agent to conduct a comprehensive field audit of its books, records, properties and assets. 7.6. Further Assurances. Execute and deliver promptly after request therefor by any Purchaser, all further instruments and documents and take all further action that may be necessary or desirable, or that any Purchaser may request, in order to give effect to, and to aid in the exercise and enforcement of the rights and remedies of any Purchaser under, this Agreement and the other Loan Documents. 7.7. Use of Proceeds. The Company will use the net proceeds realized from the sale of the Notes and Warrants for working capital and other general corporate purposes. No portion of such proceeds will be used for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying, within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time, any "margin stock" as defined in said Regulation U, or any "margin stock" as defined in Regulation G of the Board of Governors of the Federal Reserve System, as amended from time to time, or for the purpose of purchasing, carrying or trading in securities within the meaning of Regulation T of the Board of Governors of the Federal Reserve System, as amended from time to time, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase any such margin stock or other securities. 7.8. Inspection. The Company will permit the Agent to visit and inspect any of the properties of the Company and its Subsidiaries, to examine their respective books of account and to discuss their business, affairs, finances and accounts with their officers, all at such reasonable times (during normal business hours and after notice to the Company) and as often as may be reasonably requested and, if there is no Event of Default or Potential Default continuing, at such 26 holder's expense, otherwise at the Company's expense. 7.9. Office for Payment, Exchange and Registration. So long as any of the Notes or Warrants are outstanding, the Company will maintain an office or agency where Notes or Warrants may be presented for payment, exchange, exercise or registration of transfer as provided in this Agreement or in the Warrants. Such office or agency initially shall be the office of the Company set forth in Section 22 hereof, which place may from time to time be changed by notice to the holders of all Notes and Warrants then outstanding. 7.10. Notices. The Company will give notice to each holder of a Note or Warrant promptly after it learns (other than by notice from all of such holders) of the existence of any default under any Senior Indebtedness or any material default under any other evidence of Indebtedness or under any indenture, mortgage or other agreement relating to any evidence of Indebtedness in respect of which the Company or any Subsidiary is liable. 7.11. Fiscal Year. The fiscal year of the Company for tax, accounting and any other purposes shall end on December 31 of each calendar year. 7.12. Communication with Accountants. The Company hereby authorizes the Agent (on behalf of the Purchasers) to communicate directly with the independent certified public accountants for the Company and authorizes such accountants to disclose to the Agent any and all financial statements and any other information of any kind that they may have with respect to the assets, properties, liabilities, business, affairs, results of operations, condition (financial or otherwise) or prospects of the Company; provided, that the Company be informed of any such disclosures and participate in any conversations between such accountants and the Agent (and the Company agrees that it will not fail to cooperate in arranging or unreasonably delay any such conversations); and further provided that the Agent shall not incur charges from such accountants in exercise of such rights for more than ten (10) hours per calendar year without the Company's prior written consent. The Company shall deliver a letter addressed to such accountants instructing them to comply with the provisions of this Section 7.12. 7.13. Environmental Matters. The Company agrees to indemnify, defend, protect and hold harmless Purchasers, their officers, directors, shareholders, employees, and agents from and against any and all liability, loss, damage, cost and expense, including, but not limited to, attorneys' and consultants fees and disbursements arising from any breach of representations and warranties set forth in Section 4.12 or covenants set forth in Section 7.2 herein, the Release or presence of Hazardous Materials on, under, about, adjacent to, from or at any properties or facilities currently or previously owned, operated or leased by the Company or any Subsidiary, any predecessors of the Company or any Subsidiary or any entities previously owned by the Company or any Subsidiary, or at any off-site location to which Hazardous Materials generated by the Company or any Subsidiary, any predecessors of the Company or any Subsidiary or any entities previously owned by the Company or any Subsidiary were sent for handling, treatment, storage, or disposal or any violation of any Environmental Law or Environmental Permit by the Company or any Subsidiary or any entity previously owned by the Company or any Subsidiary. The obligations of the Company under this Section shall survive the Closing indefinitely. 27 In the event the Company receives notice of violation of any Environmental Claim and does not take prompt action to do so, the Agent (on behalf of the Purchasers) shall have the right to designate such persons ("Environmental Auditors") as the Agent may select to visit, inspect and have access to any of the properties, facilities, products or wastes owned, leased or operated by the Company (including, without limitation, any location where records and documents created or maintained in connection with Environmental Laws may be located) for the purpose of investigating actual or potential Environmental Claims or any condition which could result in any liability, cost or expense to the Purchasers. Such investigation may include, among other things, above and below ground testing of air, soil, groundwater and surface water, for the presence of Hazardous Materials and such other tests as may be necessary or advisable in the opinion of the Agent or the Environmental Auditors. The Company will supply to the Environmental Auditors such historical and operational information, including without limitation analytical records and results, correspondence with governmental authorities and environmental audits or reviews regarding properties, products and wastes of the Company (including such information respecting Environmental Cleanup Sites) as are within its possession, custody or control, or which are available to it, and will make available for meetings with the Environmental Auditors, appropriate employees of the Company having knowledge of such matters. 7.14. Taxes. All payments to a holder of Notes or to a partner of a holder (or to a partner of such a partner) (any of the foregoing referred to herein as a "recipient") of principal of, and interest on, the Notes and all other amounts payable under this Agreement and any other Loan Document shall be made free and clear of, and without deduction for, any present or future income, stamp or other taxes, fees, duties, withholding or other charges of any nature whatsoever imposed by any taxing authority, other than taxes imposed on or measured by the net income of such recipient (such non-excluded items being herein called "Taxes"). In the event that any withholding or deduction from any payment to be made hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Company will: (a) pay to the relevant authority the full amount required to be so withheld or deducted; and (b) promptly forward to such recipient an official receipt or other documentation satisfactory to such recipient evidencing such payment to such authority. 7.15. Delivery of Information for Rule 144A Transactions. If a holder of Notes proposes to transfer any such Notes pursuant to Rule 144A under the Securities Act (as in effect from time to time), the Company agrees to provide (upon the request of such holder or the prospective transferee) to such holder and (if requested) to the prospective transferee any financial or other information concerning the Company which is required to be delivered by such holder to any transferee of such Notes pursuant to such Rule 144A. SECTION 8. NEGATIVE COVENANTS The Company further covenants and agrees that it will not: 28 8.1. Minimum Net Worth. Permit its Consolidated Tangible Net Worth to be less than $2,500,000 as of the end of each fiscal quarter of the Company beginning March 31, 2001 and thereafter. 8.2. Liens. Create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except Permitted Liens. 8.3. Merger and Acquisition. Consolidate with or merge with or into any Person, or acquire directly or indirectly all or substantially all of the capital stock of any Person; provided that, so long as no Event of Default or Potential Default is continuing, a merger after which the Company is the surviving corporation and which does not cause a Potential Default or Event of Default shall be permitted if either the Company is the surviving corporation or, if not, the surviving corporation assumes all of the Company's obligations under the Loan Documents in a manner satisfactory to the Purchasers. 8.4. Contingent Liabilities. Assume, guarantee, endorse, contingently agree to purchase, become liable in respect of any letter of credit, or otherwise become liable upon the obligation of any Person, except (i) liabilities arising from the endorsement of letters of credit, notes, drafts, instruments or documents for deposit or collection or similar transactions in the ordinary course of business, (ii) deposit account guaranties of the Subsidiaries not in excess of (pound)100,000 in the aggregate in the United Kingdom, and (iii) other Contingent Liabilities not in excess of $500,000 in the aggregate. 8.5. Restricted Payments. Make any Restricted Payment or Restricted Investment, except from Earnings Available for Dividends. 8.6. Sale or Transfer of Assets. Sell, lease, assign, transfer or otherwise dispose of any Property except for disposition of (i) inventory in the ordinary course of business, (ii) unusable, obsolete or uneconomic items or equipment the proceeds of which, in the ordinary course of the Company's business, are used to purchase new items or equipment of like function and comparable value to the replaced items or equipment when the same were new; provided, however, that such replacement items and equipment shall become subject to the Security Interests, (iii) other Property disposed of on an arm's length basis in any twelve month period which did not account for more than 10% of the Company's Consolidated Net Income for the prior fiscal year, or (iv) Collateral upon payment to the Purchasers of 50% of the net proceeds received by the Company from the sale of such Collateral, up to the full amount of the Company's Obligations to the Purchasers. 8.7. Amendment of Charter. Amend, modify or waive any term or provision of its corporate charter, unless required by law. 8.8. Issuance of Stock. Issue or cause to be issued or sell any shares of capital stock or, except for the Warrants, any securities convertible into or exercisable for any shares of capital stock of the Company which will result in the occurrence of a Change of Control Event. 29 8.9. Corporate Offices; Corporate Name; Corporate Records. Transfer its executive offices or change its corporate name or maintain records (including computer printouts and programs) with respect to the Collateral at any locations other than those at which the same are presently kept or maintained, except upon the Majority Noteholders' prior written consent and after the delivery to the Agent of financing statements in form satisfactory to the Noteholders. 8.10. Private Placement Status. Neither the Company nor any agent nor any other Person acting on the Company's behalf will do or cause to be done (or will omit to do or to cause to be done) any act which act (or which omission) would result in bringing the issuance or sale of the Notes, Warrants or Shares within the provisions of Section 5 of the Securities Act (other than in accordance with a registration and qualification of Shares under Section 17 hereof). 8.11. Amendments to Other Agreements. Without the prior written consent of the Majority Noteholders, which consent will not be unreasonably withheld, consent to or request any amendment, modification, supplement or waiver of any of the provisions of any agreement or instrument evidencing (A) the rights of stockholders' of the Company or (B) the terms of (including the purchase and sale of) any form of capital stock of the Company. 8.12. Transactions with Affiliates. Enter into, or permit or suffer to exist, any transaction or arrangement with any Affiliate, except on terms which are no less favorable to the Company than could be obtained from persons who are not Affiliates. SECTION 9. SUBORDINATION Each holder of a Note, whether upon original issue or upon transfer or assignment thereof, by his acceptance thereof agrees that the Notes shall be subject to the rights of the Senior Lender. SECTION 10. CONDITIONS TO PURCHASERS' OBLIGATIONS The Purchasers' obligations to purchase a Note or Notes and a Warrant or Warrants hereunder is subject to satisfaction of the following conditions at the Closing (any of which may be waived by the Purchasers): 10.1. Accuracy of Representations and Warranties. The representations and warranties of the Company in this Agreement and in the Loan Documents or in any certificate or document delivered pursuant hereto or thereto shall be correct and complete on and as of the Closing Date with the same effect as though made on and as of the Closing Date (after giving effect to the transactions contemplated by this Agreement). 10.2. Compliance with Agreements; No Defaults. The Company performed and complied in all material respects with all agreements, covenants and conditions contained in this Agreement or the Loan Documents and any other document contemplated hereby or thereby which are required to be performed or complied with by the Company on or before the Closing Date. On the Closing Date (after giving effect to the transactions contemplated hereby), there 30 shall be no Event of Default or Potential Default. 10.3. Proceedings. All corporate and other proceedings in connection with the transactions contemplated by the Loan Documents, and all documents incident thereto, shall be in form and substance satisfactory to the Purchasers and their counsel, and the Purchasers shall have received all such originals or certified or other copies of such documents as the Purchasers or their counsel may reasonably request. 10.4. Legality; Governmental and Other Authorization. The purchase of and payment for the Notes and Warrants shall not be prohibited by any law or governmental order, rule, ruling, regulation, release, interpretation or opinion applicable to the Purchasers and shall not subject the Purchasers to any penalty, tax, liability or other onerous condition. Any necessary consents, approvals, licenses, permits, orders and authorizations of, and registrations or qualifications with, any governmental or administrative agency, the Senior Lender or other Person, with respect to the transactions contemplated by the Loan Documents shall have been obtained or made and shall be in full force and effect. The Company shall have delivered to the Purchasers, upon their reasonable request setting forth what is required, factual certificates or other evidence, in form and substance satisfactory to the Purchasers and their counsel, to enable the Purchasers to establish compliance with this condition. 10.5. No Change in Law, etc. No legislation, order, rule, ruling or regulation shall have been proposed, enacted or made by or on behalf of any governmental body, department or agency, and no legislation shall have been introduced in either House of Congress, and no investigation by any governmental authority or administrative body shall have been commenced or threatened, and no action, suit or proceeding shall have been commenced before, and no decision shall have been rendered by, any court, other governmental body or arbitrator, which, in any such case, in the Purchasers' reasonable judgment could adversely affect, restrain, prevent or change the transactions contemplated by this Agreement and the Loan Documents (including without limitation the issuance of the Notes and the Warrants hereunder or the issuance of Shares upon exercise of the Warrants) or materially and adversely affect the business, affairs, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company on a consolidated basis. 10.6. Delivery of Additional Disclosure Documents. The Company shall have delivered a copy of its most recent Form 10-K and any interim reports, including financial statements, as filed with the Commission. 10.7 Related Agreements. The Company shall have delivered to the Purchasers executed original copies of the Collateral Assignment. 10.8 Security Interests. All filings of UCC financing statements and all other filings and actions necessary to perfect the Security Interests as second, valid and perfected Liens in the Property covered thereby, subject only to Permitted Liens in effect on the date hereof, shall have been filed or taken and confirmation thereof shall have been received by the Agent. 31 10.9 Searches. The results of tax lien, litigation, UCC, bankruptcy, and judgment searches with respect to the Company obtained by the Purchasers shall be acceptable. 10.10. Material Agreements. Review and approval by the Purchasers, at their option and expense, of all material agreements to which the Company is a party, including without limitation, all such documents in respect of the borrowing of money, all joint venture agreements, supply agreements or requirements contracts, royalty agreements, license agreements, employment/management incentive agreements, and product warranties. 10.11 Insurance. The Purchasers shall have received such evidence satisfactory to them as they have requested that the Company and the Subsidiaries have in effect such casualty, hazard, public liability, product liability and other insurance policies required by the Purchasers, written by insurers and in amounts and forms satisfactory to the Purchasers. 10.12 Other Documents and Opinions. The Purchasers shall have received such other certificates, documents and opinions, in form and substance satisfactory to the Purchasers and their counsel, relating to matters incident to the transactions contemplated hereby as the Purchasers may reasonably request. SECTION 11. AMENDMENT AND WAIVER 11.1. Amendments and Waivers. This Agreement and any Loan Document may be amended (or any provision hereof or thereof waived) only with the written consent of (i) the Majority Noteholders, and (ii) the holder or holders of Warrants or Shares representing at least a majority of the sum of the Shares then outstanding and the Shares then obtainable upon the exercise of all Warrants then outstanding, if any; provided, however, that no such amendment or waiver shall (i) change the fixed maturity of any Note, the rate or the time of payment of interest thereon, the principal amount thereof, the premium thereon, the currency in which the Notes are payable, the prepayment provisions of Section 6 hereof, the current exercise price of a Warrant or the registration rights under Section 17 hereof, without the consent of the holder of each Note, Warrant or Share so affected or (ii) reduce the aforesaid percentage of Notes, or reduce the aforesaid percentage of Warrants or Shares, the holders of which are required to consent to any such amendment or waiver, without the consent of the holders of all the Notes, or, as the case may be, the holders of all Warrants and Shares, then outstanding or (iii) exchange the definition of "Majority Noteholders" without the consent of the holders of all the Notes then outstanding or (iv) increase the percentage of the amount of the Notes, the holders of which may declare the Notes to be due and payable under Section 14 hereof, without the consent of the holders of all the Notes then outstanding. 11.2. Notice of Proposed Amendments and Waivers. The Company agrees that all holders of Notes, Warrants or Shares shall be notified by the Company in advance of any proposed amendment or waiver of any Loan Document, but failure to give such notice shall not in any way affect the validity of any such amendment or waiver. In addition, promptly after obtaining the written consent of the holders herein provided, the Company shall transmit a copy of any amendment or waiver which has been adopted to all holders of Notes, Warrants or Shares then 32 outstanding, but failure to transmit copies shall not in any way affect the validity of any such Amendment or waiver. 11.3. All Holders Bound by Amendments and Waivers. The Company and each holder of a Note, Warrant or Share then or thereafter outstanding shall be bound by any amendment or waiver effected in accordance with the provisions of this Section 11, whether or not such Note, Warrant or Share shall have been marked to indicate such modification, but any Note, Warrant or Share issued thereafter shall bear a notation as to any such modification (but the failure to bear any such notation shall not affect the validity of any such subsequently issued Note, Warrant or Share, which shall be enforceable in accordance with its terms subject to any such modification). SECTION 12. EXCHANGE OF NOTES AND WARRANTS; CANCELLATION OF SURRENDERED NOTES 12.1. Exchange of Notes. Subject to Section 16 hereof, at any time at the request of any holder of one or more of the Notes to the Company at its office provided under Section 7.9 hereof, the Company at its expense (except for any transfer tax or any other tax arising out of the exchange) will issue and deliver to or upon the order of the holder in exchange therefor new Notes, in such denomination or denominations as such holder may request (which must be in denominations of no less than $ 10,000 plus one Note in a lesser denomination, if required), in aggregate principal amount equal to the unpaid principal amount of the Note or Notes surrendered and substantially in the form thereof, dated as of the date to which interest has been paid on the Note or Notes surrendered (or, if no interest has yet been so paid thereon, then dated the date of the Note or Notes so surrendered) and payable to such Person or Persons or order as may be designated by such holder. Any such new Note shall bear any notation required by Section 11 hereof. 12.2. Exchange of Warrants. Subject to Section 16 hereof, at any time at the request of any holder of one or more of the Warrants to the Company at its office provided under Section 7.9 hereof, the Company at its expense (except for any transfer tax or any other tax arising out of the exchange) will issue and deliver to or upon the order of the holder in exchange therefor a new Warrant certificate or certificates of like tenor, in such amount or amounts as such holder may request and calling in the aggregate on the face or faces thereof for the number of Shares which are called for on the face or faces of the Warrant certificate or certificates so surrendered, and in the name of such holder or as such holder may direct. Any such new Warrant certificate shall bear any notation required by Section 11 hereof. 12.3. Percent of Interest on Surrendered Notes. In the event that any Note is surrendered to the Company upon the exercise of all or a portion of any Warrant using the principal amount of, or accrued and unpaid interest on, the Notes in accordance with the terms of the Warrants, or upon a prepayment under Section 6 hereof, the Company shall pay all accrued and unpaid interest on such Note or such portion thereof and interest shall cease to accrue upon that portion of the principal amount of such Note used for such exercise or which was prepaid, and the right to 33 receive, and any right or obligation to make, any prepayment on such portion of the principal amount pursuant to Section 6 hereof shall terminate all upon the date of such exercise or prepayment and upon presentation and surrender of such Note to the Company. 12.4. Surrender of Note in Exercise of Warrants. Upon the exercise in whole or in part of any Warrant using the principal amount of, or accrued and unpaid interest on, the Notes in accordance with the terms of the Warrants or upon any prepayment under Section 6 hereof, if only a portion of the principal amount of a Note is used in such exercise or prepayment, then such Note shall be surrendered to the Company and the Company shall simultaneously execute and deliver to or on the order of the holder thereof, at the expense of the Company, a new Note or Notes in principal amount equal to the unused portion of such Note. 12.5. Cancellation of Surrendered Notes. All Notes or portions thereof which have been used to exercise all or a portion of a Warrant, or which have been prepaid under Section 6 hereof, shall be canceled by the Company and no Notes shall be issued in lieu of the principal amount so used for such exercise or prepayment. SECTION 13. REGISTRATION; REPLACEMENT OF NOTES AND WARRANTS 13.1. Registration of Transfers. The Company shall keep a register in which provisions shall be made for the registration of the Notes and Warrants and the registration of transfers of the Notes and Warrants. The register shall be kept at the office of the Company provided under Section 7.9 hereof. Upon surrender for registration of transfer of any Note or Warrant at the office of the Company, the Company shall execute and deliver, in the name of the designated transferee or transferees, one or more new Notes or Warrants, as the case may be, of a like aggregate principal amount of Notes or number of Shares. Each new Note issued upon transfer shall be in a principal amount of at least $10,000 and in integral multiples of $10,000 and dated the date or dates to which interest on the Notes or Warrants surrendered shall have been paid. Each new Warrant issued upon transfer shall be for at least 5% of the total number of Shares and dated the date of the original Warrant. All Notes or Warrants issued upon any registration of transfer of Notes or Warrants, as the case may be, shall be the valid obligations of the Company evidencing the same respective obligations, and entitled to the same security and benefits under this Agreement and the other Loan Documents, as the Notes or Warrants surrendered upon such registration of transfer. The Company shall make a notation on each new Note of the amount of all payments of principal previously made on the old Notes with respect to which such new Note is issued and the date to which interest accrued on such old Note has been paid. 13.2. Replacement of Notes and Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note or Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Company, or in the case of any such mutilation, upon surrender of such Note or Warrant (which surrendered Note or Warrant shall be canceled by the Company), the Company will, without charge, issue a new Note or Warrant, as the case may be, of like tenor in lieu of such lost, stolen, destroyed or mutilated Note or Warrant as if the lost, stolen, destroyed or mutilated Note or Warrant were then surrendered for exchange. 34 SECTION 14. DEFAULTS 14.1. Events of Default. Any of the following shall constitute an "Event of Default" (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the Company defaults in the payment (whether or not such payment is prohibited under Section 9 hereof) of (A) any part of the principal of any Note, when the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise, or (B) the interest on any Note, when the same shall become due and payable, and such default in the payment of interest shall have continued for ten (10) days or (C) the Company fails to pay any other amount due hereunder or under any Loan Document and such default shall have continued for ten (10) Business Days after notice thereof from the Agent; (b) Any representation or warranty made by Borrower in this Agreement or in any Loan Document or in any certificate, report, financial statement other document furnished by or on behalf of the Company in connection with this Agreement, shall prove to have been incorrect in any material respect when made or deemed made; (c) Any term, covenant or agreement contained in Section 8 shall be breached; (d) Any term, covenant or agreement contained in this Agreement or any other Loan Document (other than in Section 8 hereof or with regard to payments) shall be breached, and such breach shall remain unremedied for thirty (30) calendar days after receipt by the Company of written notice thereof; (e) The Company shall fall to pay any part of the principal of, the premium, if any, or the interest on, or any other payment of money due under, any of its Indebtedness (other than Indebtedness under this Agreement), beyond any period of grace provided with respect thereto, which individually or together with other such Indebtedness as to which any such failure exists has an aggregate outstanding principal amount in excess of $100,000; or the Company shall fail to perform or observe any other term, covenant or agreement contained in any agreement, document or instrument evidencing or securing any Indebtedness in an aggregate outstanding principal amount in excess of $100,000, or under which any such Indebtedness was issued or created, beyond any period of grace, if any, if the effect of such failure is to cause, or permit the holders of such Indebtedness (or a trustee on behalf of such holders) to cause, any payment in respect of such Indebtedness to become due prior to its due date. (f) One or more judgments or orders for the payment of money in an aggregate amount of $250,000 or more shall be rendered against any of the Company, or any other judgment or order (whether or not for the payment of money) shall be rendered against or shall affect Company which causes or could cause a Material Adverse Effect or which does or could have an adverse effect on the legality, validity or enforceability of this Agreement or any other Loan Document 35 and either (i) such judgment or order shall have remained unsatisfied and the Company shall not have taken action necessary to stay enforcement thereof by reason of pending appeal or otherwise, prior to the expiration of the applicable period of limitations for taking such action or, if such action shall have been taken, a final order denying such stay shall have been rendered, or (ii) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order; provided that no final judgment shall be included in the calculation under this subsection to the extent that the claim underlying such judgment is covered by insurance and defense of such claim has been tendered to and accepted by the insurer without reservation. (g) The occurrence of a Reportable Event that results in or could result in liability of the Company or its ERISA Affiliates to the PBGC or to any Plan in excess of $50,000 and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof, or the occurrence of any Reportable Event which could constitute grounds for termination of any Plan of the Company or its ERISA Affiliates by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof, or the filing by the Company, or any of its ERISA Affiliates of a notice of intent to terminate a Plan or the institution of other proceedings to terminate a Plan; or the Company or any of its ERISA Affiliates shall fail to pay when due any liability to the PBGC or to a Plan in excess of $50,000; or the PBGC shall have instituted proceedings to terminate, or to cause a trustee to be appointed to administer, any Plan of the Company or its ERISA Affiliates; or any person engages in a Prohibited Transaction with respect to any Plan which results in or could result in liability of the Company, any of its ERISA Affiliates, any Plan of the Company, or its ERISA Affiliates or any fiduciary of any such Plan in excess of $50,000; or failure by the Company, or any of its ERISA Affiliates to make a required installment or other payment to any Plan within the meaning of Section 302(o) of ERISA or Section 412(n) of the Code that results in or could result in liability of the Company or any of its ERISA Affiliates to the PBGC or any Plan in excess of $50,000; or the withdrawal of the Company or any of its ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001 (a)(2) of ERISA; or the Company or any of its ERISA Affiliates becomes an employer with respect to any Multiemployer Plan without the prior written consent of the Purchasers. (h) The Company shall be dissolved or liquidated (or any judgment, order or decree therefor shall be entered); or shall make a general assignment for the benefit of creditors; or shall institute, or there shall be instituted against the Company any proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order for relief, or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its assets, rights, revenues or property, and, if such proceeding is instituted against the Company and is being contested by the Company in good faith by appropriate proceedings, such proceeding shall remain undismissed or unstayed for a period of 60 days; or shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection. 36 (i) This Agreement or any of the other Loan Documents shall, at any time after their respective execution and delivery, and for any reason, cease to be in full force and effect or shall be declared null and void, or be revoked or terminated, or the validity or enforceability thereof or hereof shall be contested by the Company or any stockholder of the Company, or the Company shall deny that it has any further liability or obligation thereunder or hereunder, as the case may be. 14.2. Acceleration of Notes. If an Event of Default occurs, then and in each such event the Majority Noteholders may at any time (unless all such Events of Default shall theretofore have been waived or remedied) at its or their option, by written notice or notices to the Company, declare all the Notes to be due and payable in full. Upon any such declaration or upon the occurrence of an Event of Default pursuant to clause (h) of Section 14.1 hereof (in which case no declaration is required), all Notes shall forthwith immediately mature and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived. However, if, at any time after the principal of the Notes shall so become due and payable and prior to the date of maturity stated in the Notes, all arrears (without giving effect to any such acceleration) of principal and interest on the Notes (with interest at the rate specified in the Notes on any overdue principal and, to the extent legally enforceable, on any overdue interest) shall be paid by or for the account of the Company, then the Majority Noteholders, by written notice or notices to the Company, may rescind or annul such declaration. If any holder of a Note shall give any notice or take any other action with respect to a claimed default, the Company, forthwith upon receipt of such notice or obtaining knowledge of such other action, will give written notice thereof to all other holders of the Notes then outstanding, describing such notice or other action and the nature of the claimed default. SECTION 15. REMEDIES 15. 1. Enforcement of Rights; Exercise of Remedies. In case any one or more Events of Default shall occur and be continuing, the holder of a Note or Warrant then outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Loan Document, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or for any other remedy (including, without limitation, damages). In addition, the Agent may: (a) without notice to or demand upon the Company, make such payments and do such acts as the Agent considers necessary or reasonable to protect interest in the Collateral. The Company agrees to assemble the Collateral if the Agent so requires, and to make the Collateral available to the Agent as the Agent may designate. The Company authorizes the Agent to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien that in the Agent's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of the Company's owned premises, the Company hereby grants the Agent a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days in 37 order to exercise any of the Agent's rights or remedies provided herein, at law, in equity, or otherwise; (b) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. The Agent is hereby granted a license or other right to use, without charge, the Company's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, and the goodwill associated with any of the foregoing, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and the Company's rights under all licenses and all franchise agreements shall inure to the Agent's benefit; (c) sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including the Company's premises) as the Agent determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (d) give notice of the disposition of the Collateral as follows: (i) the Agent shall give the Company and each holder of a security interest in the Collateral who has filed with the Agent a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, then the time on or after which the private sale or other disposition is to be made; (ii) the notice shall be personally delivered or mailed, postage prepaid, to the Company as provided in Section 22, at least ten (10) calendar days before the date fixed for the sale, or at least ten (10) calendar days before the date on or after which the private sale or other disposition is to be made, unless the Collateral is perishable or threatens to decline speedily in value. Notice to persons other than the Company claiming an interest in the Collateral shall be sent to such addresses as they have furnished to the Agent; (iii) if the sale is to be a public sale, the Agent also shall give notice of the time and place by publishing a notice one time at least ten (10) calendar days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (d) the Agent or any Purchaser may bid and purchase at any public or private sale and can offset the Company's Obligations against the purchase price; and (e) any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by the Company. Any excess will be returned, without interest and subject to the rights of third parties, by the Agent to the Company. 38 15.2. Payment of Expenses of Enforcement and Collection. In case of a default in the, payment of any principal of or interest on any Note, or default in the payment of amounts owing under this Agreement or any Loan Document, or default in the observance of any other agreement or covenant of the Company contained in this Agreement or any Loan Document, the Company will pay to the holder thereof or party thereto, in addition to any interest or premium otherwise required, such further amount as shall be sufficient to cover any and all costs and expenses of enforcement and collection, including, without limitation, reasonable attorneys' fees and expenses. 15.3. Delay Not a Waiver. No course of dealing and no delay on the part of the Agent, any holder of any Note or Warrant or any party to this Agreement or any Loan Document in exercising any rights or remedies shall operate as a waiver thereof or otherwise prejudice such holder's or party's rights. No right or remedy conferred hereby or by any Loan Document shall be exclusive of any other right or remedy referred to herein or therein or available at law, in equity, by statute or otherwise. To the extent permitted under any applicable law, the Company hereby irrevocably waives and relinquishes the benefit of any valuation, stay, appraisal, extension or redemption laws, whether such laws presently exist or may exist in the future, which laws might, but for this Section 15.3, be applicable to any sale of any or all of the assets of the Company (including without limitation the Collateral) made pursuant to any judgment, order or decree of any court, or otherwise based on any claim relating to or arising out of this Agreement or of any of the Loan Documents. 15.4. Specific Enforcement. The Purchasers shall, in addition to other remedies provided by law, have the right and remedy to have the provisions of this Agreement and any Loan Document specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any breach or threatened breach of the provisions of this Agreement or any Loan Document will cause irreparable injury to the Purchasers and that money damages will not provide an adequate remedy. Nothing contained herein shall be construed as prohibiting the Purchasers from pursuing any other remedies available to the Purchasers for such breach or threatened breach, including, without limitation, the recovery of damages from the Company. 15.5. Certain Waivers. Except as may be otherwise specifically provided herein or in any other agreement between the Purchasers and the Company which may be applicable, the Company waives any right, to the extent applicable law permits, to receive prior notice of or a judicial or other hearing with respect to (i) any action or prejudgment remedy or proceeding by the Agent to take possession, exercise control over, or dispose of any item of the Collateral in any instance (regardless of where the same may be located) where such action is permitted under the terms of this Agreement, any other Loan Document or by applicable law, and (ii) of the time, place or terms of sale in connection with the exercise of the Agent's rights hereunder. The Company also waives, to the extent permitted by law, any bonds, security or sureties required by any statute, rule or otherwise by law as an incident to any taking of possession by the Agent of Property subject to the Agent's Lien. The Company also waives any damages (direct, indirect, consequential or otherwise) occasioned by the enforcement of the Agent's rights under this Agreement including the taking of possession of any Collateral or the giving of notice to any account debtor, all to the extent that such waiver is permitted by law. The Company also 39 consents that the Agent may enter upon any premises owned by or leased to the Company without obligation to pay rent or other compensation or for use and occupancy, through self help, without judicial process and without having first given notice to the Company or obtained an order of any court. These waivers and all other waivers provided for in this Agreement, the other Loan Documents and any other agreements or instruments executed in connection herewith have been negotiated by the parties and the Company acknowledges that it has been represented by counsel of its own choice and has consulted such counsel with respect to its rights hereunder. SECTION 16. RESTRICTIONS ON TRANSFER Each holder of a Note or Warrant by acceptance thereof agrees that it will not sell or otherwise dispose of any Notes, Warrants or Shares unless such Notes, Warrants or Shares have been registered under, or have been sold pursuant to an exemption from registration under, the Securities Act. As a condition to the Company's obligation to issue a new Note or Warrant to a transferee thereof which (x) is not a holder of a Note or Warrant, the transferor must certify to the Company the facts on which the transferor is relying for such exemption and (y) is a holder of a Note or Warrant, the transferor must represent to the Company in writing that the transfer is so exempt. SECTION 17. REGISTRATION RIGHTS 17.1. Piggyback Rights. If the Company shall at any time propose to file a registration statement under the Securities Act for any sales of shares of the Company's Common Stock (or any warrants, units, convertibles, rights or other securities related or linked to any shares of the Company's Common Stock) on behalf of the Company or otherwise, the Company shall give written notice of such registration no later than 60 days before its filing with the Commission to all holders of Warrants or Shares; provided that registrations relating solely to securities to be issued by the Company in connection with any employee stock option or employee stock purchase or savings plan on Form S-8 (or successor forms) under the Securities Act shall not be subject to this Section 17.1. If holders of Warrants or Shares so request within thirty (30) days of receipt of such notice, the Company shall include in any such registration the Shares held or to be held after exercise of Warrants by such holders and requested to be included in such registration. 17.2. Expenses. Subject to the limitations contained in this Section 17.2 and except as otherwise specifically provided in this Section 17, the entire costs and expenses of any registration and qualification pursuant to Section 17.1 hereof shall be borne by the Company. Such costs and expenses shall include, without limitation, the fees and expenses of counsel for the Company and of its accountants, all other costs, fees and expenses of the Company incident to the preparation, printing and filing under the Securities Act of the registration statement and all amendments and supplements thereto, the reasonable fees and expenses of one counsel to the holders of Warrants or Shares relating to such registration and qualification, the cost of furnishing copies of each preliminary prospectus, each final prospectus and each amendment or supplement thereto to underwriters (if any), dealers and other purchasers of the Shares and the costs and expenses (including fees and disbursements of counsel) incurred in connection with the qualification of the Shares under the securities laws of various jurisdictions. The Company shall 40 not, however, pay underwriting fees or commissions to the extent related to the sale of Shares sold in any registration and qualification. 17.3. Procedures. (a) In the case of each registration or qualification pursuant to Section 17.1, the Company will keep all holders of Warrants or Shares advised in writing as to the initiation of proceedings for such registration and qualification and as to the completion thereof, and will advise any such holder, upon request, of the progress of such proceedings. (b) At the Company's expense, the Company will keep each registration and qualification under this Section 17 effective (and in compliance with the Securities Act) by such action as may be necessary or appropriate for a period of one hundred twenty (120) days after the effective date of such registration statement, including, without limitation, the filing of posteffective amendments and supplements to any registration statement or prospectus necessary to keep the registration statement current and the further qualification under any applicable state securities laws to permit such sale or distribution, all as requested by such holder or holders, provided, that such 120-day period shall be extended by the number of days (i) that a stop order or similar proceeding is in effect which prohibits the distribution of the Shares registered pursuant to this Section 17 and (ii) from and including the date that each holder on whose behalf Shares have been registered pursuant to this Section 17 shall have received a notice delivered pursuant to paragraph (c) below until the date on which such holders shall have received a reasonable number of copies of a supplement to or an amendment of the prospectus so that the prospectus thereafter shall not include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; in light of the circumstances then existing. (c) The Company will immediately notify each holder on whose behalf Shares have been registered pursuant to this Section 17 at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. (d) If any registration under this Section 17 is in connection with an underwritten offering, the Company will furnish to each holder on whose behalf Shares have been registered pursuant to this Section 17 a signed counterpart, addressed to such holder, of (i) an opinion of counsel for the Company, dated the effective date of such registration statement, and (ii) a so called "cold comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, and such opinion of counsel and accountants' letter shall cover substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are 41 customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in connection with underwritten public offerings of securities. (e) Without limiting any other provision hereof, in connection with any registration of Shares under this Section 17, the Company will comply with the Securities Act, the Securities Exchange Act and all applicable rules and regulations of the Commission, and will make generally available to its securities holders, as soon as reasonably practicable, an earnings statement covering a period of at least twelve (12) months, beginning with the first month of the first fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. (f) In connection with any registration of Shares under this Section 17, the Company will provide a transfer agent and registrar for the Shares not later than the effective date of such registration statement. (g) In connection with any underwritten registration of Shares under this Section 17, the Company will, if requested by the underwriters for any Shares included in such registration, enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, provisions relating to indemnification and contribution. The holders on whose behalf Shares are to be distributed by such underwriters shall be parties to any such underwriting agreement, and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Warrants or Shares and the conditions precedent to the obligations of such underwriters under such underwriting agreement shall be conditions precedent to the obligations of such holders of Warrants or Shares. The Company shall cooperate with such holders of Warrants or Shares in order to limit any representations or warranties to, or agreements with, the Company or such underwriters to be made by such holders only to those representations, warranties or agreements regarding such holder, such holder's Shares and such holder's intended method of distribution and any other representation required by law. Such underwriting agreement shall comply with Section 17.4 hereof. (h) Upon request by any holder of Warrants or Shares who has requested that their shares be included in a registration, the Company will give such holder and their underwriters, if any, and their respective counsel and accountants, (i) such information regarding the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, as such holder may specify, and (ii) opportunities to discuss the business of the Company with its officers, its counsel and the independent public accountants who have certified its financial statements, as shall be necessary, in the opinion of such holders or such underwriters or their respective counsel, in order to conduct a reasonable and diligent investigation within the meaning of the Securities Act. Without limiting the foregoing, each registration statement, prospectus, amendment, supplement or any other document filed with respect to a registration under this Section 17 shall be subject to review and reasonable approval by the holders registering Shares in such registration and by their counsel. 42 (i) The Company will cause all of the Shares registered pursuant to this Section 17 to be accepted for quotation as a National Market Security on The NASDAQ Stock Market to the same extent as similar securities issued by the Company. 17.4. Provision of Documents. The Company will, at the expense of the Company, furnish to each holder of Warrants or Shares with respect to which registration has been effected, such number of registration statements, prospectuses, offering circulars and other documents incident to any registration or qualification referred to in Section 17.1 as such holder from time to time may reasonably request. 17.5. Indemnification. The Company will indemnify and hold harmless, to the extent permitted by law, each holder of Warrants or Shares and any underwriter (as defined in the Securities Act) for such holder and each person, if any, who controls the holder or underwriter within the meaning of the Securities Act or the Exchange Act and each of their respective directors, officers, general partners and members against any losses, claims, damages or liabilities, joint or several, and expenses (including reasonable attorneys' fees and expenses and reasonable costs of investigation) to which the holder or underwriter or such controlling person may be subject, under the Securities Act or otherwise, insofar as any thereof arise out of or are base&upon (i) any untrue statement or alleged untrue statement of a material fact contained in (A) any registration statement under which such Shares were registered under the Securities Act pursuant to Section 17.1 hereof (including all documents incorporated therein by reference), any prospectus or preliminary prospectus contained therein, or any amendment or supplement thereto, or (B) any other document incident to the registration of the Shares under the Securities Act or the qualification of the Shares under any state securities laws, or (ii) the omission or alleged omission to state in any item referred to in the preceding clause a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act or any other federal or state securities law, rule or regulation applicable to the Company and relating to action or inaction by the Company in connection with any such registration or qualification, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished to the Company in writing by such holder or by any underwriter for such holder expressly for use therein (with respect to which information such holder or underwriter shall so indemnify and hold harmless the Company, any underwriter for the Company and each person, if any, who controls the Company or such underwriter within the meaning of the Securities Act or the Exchange Act and each of their respective directors, officers, general partners and members). The Company will enter into an underwriting agreement and other agreements with the underwriter or underwriters for any offering registered under the Securities Act pursuant to Section 17.1 hereof and with the holders of Securities selling Shares pursuant to such offering, and such underwriting agreement and other agreements shall contain customary provisions with respect to indemnification and contribution which shall, at a minimum, provide the indemnification set forth above. 17.6. Periodic Payments. The indemnification provided for in Section 17.5 shall be made 43 by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred, upon the presentation by the indemnified party to the indemnifying party of a statement showing the amount of expense, loss, damage or liability for which payment is then requested. 17.7. Indemnification Procedure. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding involving a claim referred to in Section 17.5, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 17.5 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal fees and expenses subsequently incurred by the latter in connection with the defense thereof, unless in such indemnified party's reasonable judgment an actual or potential conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim. The indemnifying party will not, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such indemnified party or any Person who controls such indemnified party is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability arising out of such claim, action, suit or proceeding. Notwithstanding anything to the contrary set forth herein, and without limiting any of the rights set forth above, in any event any party will have the right to retain, at its own expense, counsel with respect to the defense of a claim. 17.8. Contribution. If the indemnification provided for in Section 17.5 is unavailable (for any reason other than a determination of its inapplicability by a court of competent jurisdiction) to hold harmless an indemnified party under such Section, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to in Section 17.5 in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand, and the indemnified party on the other, in connection with statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations, including without limitation the relative benefits received by each party from the offering of the securities covered by such registration statement, the parties' relative knowledge and access to information concerning the matter with respect to which the claim was asserted and the opportunity to correct and prevent any statement or omission. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to 44 information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statements or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 17.8 were to be determined by pro rata or per capita allocation (even if the underwriters, if any, were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the first and second sentences of this Section 17.8. The Company and each holder of Warrants or Shares agrees with each other and any underwriters of the Shares, if requested by such underwriters, that (i) the underwriters' portion of such contribution shall not exceed the underwriting discount and (ii) that the amount of such contribution shall not exceed an amount equal to the net proceeds actually received by such indemnifying party from the sale of securities in the offering to which the losses, liabilities, claims, damages or expenses of the indemnified parties relate. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 17.9. Certain Limitations in Connection with Future Grants of Registration Rights. (a) From and after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any of its Common Stock providing for the granting to such holder of demand registration rights unless such agreement includes provisions to the effect that (i) the Company will give the holders of Warrants and Shares notice at least thirty (30) days prior to the filing of a registration statement pursuant to the exercise of such rights and (ii) notwithstanding Section 17.1 hereof, if a holder of Warrants or Shares requests inclusion of Shares (whether such Shares are held directly or through the right to obtain such Shares upon the conversion of Warrants held by such holder) and requests priority for such Shares in such registration statement within thirty (30) days after receipt of such notice, then such holder's Shares requested to be so included will be given priority over the securities sought to be registered by the holders of such demand registration rights if marketing factors require a limitation on the number of securities to be included in such registration statement If a holder of Warrants or Shares requests inclusion of its Shares (whether such Shares are held directly or through the right to obtain such Shares upon conversion of Warrants held by such holder), but does not request such priority for such Shares in such registration, then such Shares shall be included in such registration statement in the manner described in Section 17.1 hereof. (b) From and after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any of its Common Stock providing for the granting to such holder of incidental or "piggyback" registration rights unless such agreement includes provisions to the effect that, in the case of a registered underwritten public offering of the Company's Common Stock to which Section 17.1 hereof applies, such agreement gives the following priority to holders of Warrants or Shares if marketing factors require a limitation on the number of shares of Common Stock to be included in such offering the holders of Warrants or Shares and other holders of securities of the Company having piggyback registration rights shall have an equal right to include securities in such registration (beyond the amount to be included on behalf of the Company) in proportion to their relative holdings of shares of Common 45 Stock of the Company (whether held directly or obtainable upon conversion or the exercise of warrants or other rights). SECTION 18. INDEMNIFICATION 18.1. Indemnification. Whether or not the transactions contemplated by this Agreement are consummated, the Company hereby agrees to indemnify and hold each Purchaser and each holder of a Note or Warrant or Share harmless (including any of such Purchaser's or holder's affiliated companies) and any of such Purchaser's or holder's directors, officers, employees, or agents and any person controlling (within the meaning of Section 20(a) of the Securities Exchange Act) such Purchaser or holder or any of its affiliated companies (collectively, the "Indemnified Persons") from and against any and all losses, claims, damages, liabilities, securities law penalties, and expenses whatsoever (including, but not limited to, any and all reasonable fees and expenses whatsoever incurred by an Indemnified Person and its attorneys in investigating, preparing for, defending against, acting as a witness, providing evidence, producing documents, or taking any other action in respect of any litigation or proceeding, commenced or threatened, or any claim whatsoever), (collectively, the "Losses") arising out of or in connection with this Agreement or any Loan Document, other than to the extent Losses result from the gross negligence or wilful misconduct of the Indemnified Person. The foregoing indemnity shall be in addition to any other rights which the Indemnified Persons may have against the Company otherwise than under this paragraph. If a court shall hold for any reason that the preceding indemnification is unavailable to any Indemnified Person as to any matter for which it would be available if enforceable in accordance with its terms, the Company on the one hand and the Indemnified Person on the other agree to contribute to such loss in such proportion as is appropriate to reflect the relative benefits and the relative fault of the Company on the one hand and of the Indemnified Person on the other in connection with the statements, actions, or omissions which results in such Loss, as well as any other relevant equitable considerations. 18.2. Indemnification Procedures. If any Indemnified Party is entitled to indemnification hereunder, such Indemnified Party shall give prompt notice to the Company of any claim or of the commencement of any proceeding with respect to which such Indemnified Party seeks indemnification pursuant hereto and of which such Indemnified Party knew or reasonably should have known; provided, however, that the failure so to notify the Company shall not relieve the Company from any obligation or liability except to the extent that the amount owed by the Company has been increased by such failure. The Company shall have the right, exercisable by giving written notice to an Indemnified Person within 20 Business Days after receipt of written notice from such Indemnified Person of such claim or proceeding, to assume, at its expense, the defense of any such claim or proceeding; provided, however, that an Indemnified Person shall have the right to employ separate counsel in any such claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless: (1) the Company agrees to pay such fees and expenses; or (2) the Company fails promptly to assume, or to diligently pursue, the defense of such claim or proceeding; or (3) the named parties to any such claim or proceeding (including any impleaded parties) include both such Indemnified Person and one or more of the Company or an Affiliate of the Company, and such Indemnified Person shall have been advised by counsel that there may be 46 one or more material defenses available to such Indemnified Person which are different from or additional to those available to the Company or such Affiliate; or (4) an Event of Default is continuing; or (5) the claim or proceeding seeks to impose criminal penalties against the Indemnified Person (in which case if such Indemnified Person notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense thereof, it being understood, however, that the Company shall not, in connection with any one such claim or proceeding or separate but substantially similar or related claims or proceedings in the same jurisdiction, arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for such Indemnified Person). Whether or not such defense is assumed by the Company, such Indemnified Person will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld or delayed). SECTION 19. DIRECT PAYMENTS As long as the Purchaser or any payee named in the Notes delivered to the Purchaser on the Closing Date, or any institutional holder which is a direct or indirect transferee from the Purchaser or such payee, shall be the holder of any Note, the Company will make payments (whether at maturity, upon mandatory or optional prepayment, upon repurchase or otherwise) of principal, interest and premium, if any, (i) by check payable to the order of the holder of any such Note duly mailed or delivered to such address as the Purchaser or such other holder may designate in writing or (ii) if requested by the Purchaser or such other holder, by wire transfer to the Purchaser's or such other holder's (or its nominee's) account at any bank or trust company in the United States of America, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. IF THE PURCHASER HAS PROVIDED AN ADDRESS ON EXHIBIT A HERETO FOR PAYMENTS BY WIRE TRANSFER, THEN THE PURCHASER SHALL BE DEEMED TO HAVE REQUESTED WIRE TRANSFER PAYMENTS UNDER THE PRECEDING CLAUSE (ii). All such payments shall be made in federal or other immediately available funds and shall arrive by 2:00 p.m. local time at the place of payment on the day when due. SECTION 20. SECURITY INTEREST The Company shall grant to the Agent for the benefit of the Purchasers a security interest in the Collateral pursuant to the Collateral Assignment. SECTION 21. THE AGENT 21.1. Appointment. Each Purchaser hereby irrevocably designates and appoints the Agent as the agent of such Purchaser under this Agreement and the Loan Documents, and each such Purchaser irrevocably authorizes the Agent, as the agent for such Purchaser, to take such action on its behalf under the provisions of this Agreement and the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the Loan Documents, together with such other powers as are 47 reasonably incidental thereto. 21.2. Application of Proceeds of the Collateral. All Collateral shall be held or administered by the Agent for the ratable benefit of the Purchasers. Any proceeds received by the Agent from the foreclosure, sale, lease or other disposition of any of the Collateral and any other proceeds received pursuant to the terms of the Loan Documents shall be applied, first, to the cost of any such foreclosure, sale, lease or other disposition and, second, to the payment in full of the remaining Company's Obligations pro rata in proportion to the amount of the Company's Obligations owed to each Person. 21.3. Delegation of Duties. The Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. 21.4. Reliance by Agent. The Agent may deem and treat the registered owner of any Note as the owner thereof for all purposes. The Agent shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first receive such advice or concurrence of the Majority Noteholders as it deems appropriate. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement, the Notes or any Loan Document in accordance with a request of the Majority Noteholders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Purchasers and all future holders of the Notes. 21.5. Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default hereunder unless the Agent has received notice from the Company referring to this Agreement, describing such Potential Default or Event of Default and stating that such notice is a "notice of default". The Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Potential Default or Event of Default as it shall deem advisable and in the best interests of the Purchasers. 21.6. Agent in Its Individual Capacity. The Agent and its Affiliates may make loans to and generally engage in any kind of business with the Company as though the Agent were not the Agent hereunder. With respect to any Note issued to it, the Agent shall have the same rights and powers under this Agreement as any Purchaser and may exercise the same as though it were not the Agent, and the terms "Purchaser" and "Purchasers" shall include the Agent in its individual capacity. 21.7. Successor Agent. The Agent may resign as Agent upon 20 days notice to the Purchasers. If the Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Purchasers on whose behalf such Agent is acting shall appoint a successor agent for the Purchasers, whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to 48 this Agreement or any Loan Document or any holders of the Notes. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 21 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. The Agent shall use its best efforts to notify the Company of any such resignation; provided, however, neither the Agent nor the Purchasers shall be held liable in any respect for the failure to provide such notice; and further provided, however, that until the Company receives notice of the Agent's resignation and of the appointment of a successor agent, the Company shall be entitled to rely upon the Agent as the Agent hereunder. SECTION 22. NOTICES Unless otherwise expressly specified or permitted by the terms hereof, all notices, requests, demands, consents and other communications hereunder or under the Loan Documents shall be in writing and shall be delivered by hand or shall be sent by telex or telecopy (confirmed by registered, certified or overnight mail or courier, postage and delivery charges prepaid or shall be sent by overnight mail or courier (postage and delivery charges prepaid), to the following addresses: (a) if to the Purchaser, at the Purchaser's address as set forth in Exhibit A hereto, or at such other address as may have been furnished to the Company by the Purchaser in writing; or (b) if to any other holder of a Note or Warrant, at such address as the payee or registered holder thereof shall have designated to the Company in writing; or (c) if to the Company, at 38700 Grand River Avenue, Farmington Hills, MI 48335-1563, Attention: Charles J. Drake, telephone: 248-471-2660, fax: 248-615-2971 or at such other address as may have been furnished in writing by the Company to the Agent, the Purchasers and the other holders of Notes or Warrants; or (d) if to the Agent, at 2161 Commons Parkway, Okemos, MI 48864, Attention: J. Michael Warren, telephone: 517-349-8600, fax: 517-349-3311 or at such other address as may have been furnished in writing by the Agent to the Company, the Purchasers and the other holders of Notes or Warrants. Whenever any notice is required to be given hereunder, such notice shall be deemed given and such requirement satisfied only when such notice is delivered or, if sent by telex or telecopier, when received, unless otherwise expressly specified or permitted by the terms hereof SECTION 23. MISCELLANEOUS 23.1. Entire Agreement. This Agreement and the Loan Documents, together with any further agreements entered into by the Purchaser and the Company at the Closing, contain the entire agreement between the Purchaser and the Company, and supersede any prior oral or written agreements, commitments, terms or understandings, regarding the subject matter hereof. 49 23.2. Survival. All agreements, representations and warranties contained herein in an; Loan Document or any document or certificate delivered pursuant hereto or thereto shall survive, and shall continue in effect following, the execution and delivery of this Agreement and of such Loan Documents, the closings hereunder and thereunder, any investigation at any time made by the Purchasers or on their behalf or by any other Person, the issuance, sale and delivery of the Notes and the Warrants, any disposition thereof, any payment or cancellation of the Notes, and any exercise of the Warrants; provided, that Sections 7 and 8 shall terminate upon the payment in full of all outstanding Notes. All statements contained in any certificate or other document delivered by or on behalf of the Company pursuant hereto shall constitute representations and warranties by the Company hereunder. 23.3. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument, and all signatures need not appear on any one counterpart. 23.4. Headings. The headings and captions in this Agreement are for convenience of reference only and shall not define, limit or otherwise affect any of the terms or provisions hereof. 23.5. Binding Effect and Assignment. (a) The terms of this Agreement shall be binding upon, and inure to the benefit of, the parties and their respective successors and permitted assigns whether so expressed or not. (b) The Company may not assign any of its obligations, duties or rights under any of the Loan Documents, except pursuant to Section 8.5 hereof or with the Majority Noteholders' consent, which shall not be unreasonably withheld. (c) In addition to any assignment by operation of law, a Purchaser may assign, in whole or in part, any or all of its rights (and/or obligations) under this Agreement and any of the Loan Documents to any transferee of any or all of its Notes, Warrants or Shares, subject to the terms of Section 16 hereof, and (unless such assignment expressly provides otherwise) any such assignment shall not diminish the rights the Purchaser would otherwise have under this Agreement or with respect to any remaining Notes, Warrants or Shares held by the Purchaser. 23.6. Severability. Any provision of this Agreement or of any Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereby waive any provision of law which may render any provision hereof prohibited or unenforceable in any respect. 50 23.7. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Michigan (other than any conflict of laws rule which might result in the application of the laws of any other jurisdiction). 23.8. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. THE PARTIES HEREBY CONSENT TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF MICHIGAN AND IRREVOCABLY AGREE THAT ALL ACTIONS OR PROCEEDINGS RELATING TO THE LOAN DOCUMENTS MAY BE LITIGATED IN SUCH COURTS. THE PARTIES ACCEPT GENERALLY AND UNCONDITIONALLY THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVE ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LOAN DOCUMENTS. THE PARTIES HEREBY AGREE THAT SERVICE UPON THEM BY MAIL AT THE ADDRESSES PROVIDED IN SECTION 22 HEREOF SHALL CONSTITUTE SUFFICIENT NOTICE AND SERVICE OF PROCESS IN ANY SUCH PROCEEDING. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 23.9. WAIVER OF JURY TRIAL. THE COMPANY AND THE PURCHASERS HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY LOAN DOCUMENT, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION. THE COMPANY AND THE PURCHASERS ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE PURCHASERS. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND THE PURCHASERS FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT PAYMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO (OR ASSIGNMENTS OF) ANY LOAN DOCUMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL (WITHOUT A JURY) BY THE COURT. IN WITNESS WHEREOF, the parties hereto have caused this Note and Warrant Purchase Agreement to be executed as of the date first above written. 51 Integral Vision, Inc. -------------------------- Charles J. Drake Chairman of the Board Mid-State Industrial Services, Inc. ---------------------------- Vincent Shunsky Treasurer Warren Cameron Faust & Asciutto, P.C. As Agent for the Purchasers ------------------------------ J. Michael Warren President 52 EXHIBIT A List of Purchasers

Principal Name and Address Amount Of Note Number of Warrants - ---------------- -------------- ------------------ Mid-State Industrial Services, Inc. $120,000 240,000 1118 Centennial Way Lansing, MI 48917 Attn: Vincent Shunsky Tele: 517-321-3130 Fax: 517-321-1022

53 EXHIBIT B Form of Note THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE REGULATION OF ANY STATE AND IS NOT TRANSFERABLE EXCEPT UPON THE CONDITIONS SPECIFIED IN SECTION 16 OF THE PURCHASE AGREEMENT REFERRED TO HEREIN. RIGHTS OF THE HOLDER TO RECEIVE PAYMENT AND ITS LIENS SECURING SUCH PAYMENT ARE SUBJECT AND SUBORDINATE TO THE PRIOR PAYMENT OF ALL OBLIGATIONS OF THE COMPANY TO NATIONAL CITY BANK OF MICHIGAN/ILLINOIS AND TO THE LIENS OF NATIONAL CITY BANK OF MICHIGAN/ILLINOIS. INTEGRAL VISION, INC. 15% Senior Subordinated Secured Note Due March 31, 2005 Dated March 29, 2001 Farmington Hills, Michigan No. __ FOR VALUE RECEIVED, the undersigned INTEGRAL VISION, INC., a Michigan corporation (herein, together with any successor, referred to as the("Company"), hereby promises to pay to Mid-State Industrial Services, Inc., a Michigan corporation of 1118 Centennial Way, Lansing, MI 48917, (the "Payee") or registered assigns, the principal sum of One Hundred Twenty Thousand Dollars ($120,00.00) in quarterly installments of principal of Ten Thousand Dollars ($10,000.00) beginning on June 30, 2002 and thereafter on the 30th day of September, December, March and June of each year to and including March 30, 2005, and shall pay in full the remaining principal amount of all Notes then outstanding on the maturity date of March 31, 2005, plus interest (computed on the basis of the actual number of days elapsed over a 360-day year) on the unpaid balance of such principal sum from the date hereof at the interest rate of 15% per annum, payable quarterly on the 30th day of March, June, September and December of each year, commencing June 30, 2001 (which first interest payment shall be for the period from and including the date hereof through and including June 30, 2001) until the entire principal amount hereof shall have become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or declaration or otherwise, and at the Default Rate on any overdue installment of principal (including any overdue prepayment of principal) and on any overdue premium and (to the extent permitted by law) on any overdue installment of interest until paid. The Default Rate shall be equal to the per annum interest rate on this Note, plus four percent (4%). Capitalized terms not otherwise defined herein shall have the meaning ascribed thereto in 54 the Note and Warrant Purchase Agreement dated effective as of March 29, 2001 (the "Purchase Agreement"), by and among the Company, the Agent, the Payee and the other Purchasers named therein. If any payment due hereunder becomes due and payable on a day which is not a Business Day, the due date thereof shall be the next day which is a Business Day, and the interest payable on such next Business Day shall be the interest accruing through such actual date of payment. Payments of principal and interest shall be made in lawful money of the United States of America at the principal office of the Company at Farmington Hills, Michigan, or at such other place as the Company shall have designated for such purpose to the holder thereof in writing, and may be paid by check mailed, or shall be made by wire transfer, all as provided in the Purchase Agreement, to the address or account designated by the holder hereof for such purpose. This Note is one of a duly authorized issue of Notes issued to the Purchasers pursuant to the Purchase Agreement. This Note is subject to the provisions of and is entitled to the benefits of the Purchase Agreement. Each holder of this Note, by accepting the same, agrees to and shall be bound by the provisions of the Purchase Agreement. The obligations of the Company under this Note (and under the Purchase Agreement) are secured by the Collateral. The existence of such Collateral does not in any way reduce or restrict the rights and remedies available to a holder of this Note whether such rights and remedies arise under this Note, the Purchase Agreement or otherwise. This Note is transferable only upon the terms and conditions specified in the Purchase Agreement. In case an Event of Default shall occur and be continuing, all amounts then remaining unpaid on this Note shall become or may be declared due and payable in the manner and with the effect provided in the Purchase Agreement. No reference herein to the Purchase Agreement and no provision hereof or thereof shall alter or impair the obligations of the Company, which are absolute and unconditional, to pay the principal hereof and interest hereon at the respective times and places specified herein and in the Purchase Agreement. This Note is delivered in and shall be construed and enforced in accordance with and governed by the laws of the State of Michigan (other than any conflict of laws rules which might result in the application of laws of any other jurisdiction). Subject to the provisions of the Purchase Agreement, the Company may treat the person in whose name this Note is registered as the owner and holder of this Note for the purpose of receiving payment of principal of, premium, if any, and interest on this Note and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary (except that the Company shall comply with the provisions of the Purchase Agreement regarding the 55 issuance of a new Note or Notes to permitted transferees). INTEGRAL VISION, INC. has caused this Note to be dated and to be executed and issued on its behalf by its officer thereto duly authorized. (Signed on the next page) INTEGRAL VISION, INC. By_____________________________ Name: Charles J. Drake Title: Chairman of the Board 56 EXHIBIT C Form of Warrant No. __ THIS WARRANT CERTIFICATE (AND THE COMMON STOCK OR OTHER SECURITIES ISSUABLE UPON EXERCISE HEREOF) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY APPLICABLE REGULATION OF ANY STATE AND ARE NOT TRANSFERABLE EXCEPT UPON THE CONDITIONS SPECIFIED IN SECTION 16 OF THE PURCHASE AGREEMENT REFERRED TO HEREIN. INTEGRAL VISION, INC. Common Stock Purchase Warrant Certificate Dated March 29, 2001 Farmington Hills, Michigan FOR VALUE RECEIVED, the undersigned INTEGRAL VISION, INC., a Michigan corporation (herein referred to as the "Company"), hereby certifies and agrees that Mid-State Industrial Services, Inc., a Michigan corporation of 1118 Centennial Way, Lansing, MI 48917 or registered assigns, is entitled to purchase from the Company up to an aggregate of Two Hundred Forty Thousand (240,000) duly authorized, validly issued, fully paid and nonassessable shares of the Company's Common Stock, no par value, or any stock into which such Common Stock shall have been changed or any stock or other securities resulting from a reclassification thereof (all such shares, stock or other securities which may be purchased by this, and all other, Warrants are herein known as the "Shares") at a purchase price per Share of $0.50 at any time and from time to time from the date hereof until 5:00 p.m. on May 30, 2005. The foregoing agreement and rights are all subject to the terms, conditions and adjustments (in both the number of Shares and the purchase price per Share) set forth below in this Warrant Certificate. This Warrant Certificate is one of the Common Stock Purchase Warrant Certificates (the "Warrants", which term includes all Warrants issued in substitution therefor) originally issued in connection with the issue and sale by the Company of its Senior Subordinated Secured Notes (the "Notes"). The Warrants and the Notes have been issued pursuant to the Note and Warrant Purchase Agreement dated effective as of March 29, 2001 (the "Purchase Agreement") among the Company, and the Purchasers named therein. The Warrants originally so issued evidence rights to purchase an aggregate of 240,000 shares at an exercise price of $0.50 per share, subject to adjustment as provided herein. This Warrant is subject to the provisions, and is entitled to the benefits, of the Purchase Agreement, including, without limitation, the registration rights provisions contained therein. The Company represents that all Shares to which the holders of the Warrants shall be entitled upon the exercise thereof (i) are duly authorized by the Articles of Incorporation of the Company in accordance with the laws of the State of Michigan, (ii) have been duly authorized to be issued upon the exercise of the Warrants from time to time in whole or in part, (iii) will be, 57 when issued in accordance with the terms of the Warrants, duly authorized and validly issued and fully paid and nonassessable and free and clear of all Liens and rights of others whatsoever (other than Liens and rights of others claiming by, through or under the holder hereof) and (iv) will not be at the time of such exercise subject to any restrictions on transfer or sale except as provided by applicable laws. Section 1. Exercise of Warrant. 1. 1. Manner of Exercise. (a) This Warrant may be exercised by the holder hereof, in whole or in part, during normal business hours on any Business Day by surrender of this Warrant, together with the form of subscription attached as Annex A hereto (or a reasonable facsimile thereof) duly executed by such holder in substantially such form, to the Company at its office designated pursuant to the Purchase Agreement (or, if such exercise is in connection with an underwritten public offering of Shares subject to this Warrant, at the location at which the underwriting agreement requires that such Shares be delivered). (b) Payment of the exercise price for Shares shall be made, at the option of the holder (i) as provided in Section 1.5 hereof, or (ii) by check or wire transfer payable to the order of the Company, in any case, in an amount equal to (A) the number of Shares specified in such form of subscription, multiplied by (B) the then current exercise price. Such holder shall thereupon be entitled to receive the number of Shares specified in such form of subscription (plus cash in lieu of any fractional share as provided in Section 1.3 hereof). 1.2. Effective Date. Each exercise of this Warrant pursuant to Section 1. 1 (a) hereof shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant is surrendered to the Company as provided in Section 1. 1 hereof (except that if such exercise is in connection with an underwritten public offering of Shares subject to this Warrant, then such exercise shall be deemed to have been effected upon such surrender of this Warrant), and such exercise shall be at the current exercise price in effect at such time. On each such day that an exercise of this Warrant is deemed effected, the Person or Persons in whose name or names any certificate or certificates for Shares are issuable upon such exercise (as provided in Section 1.3 hereof) shall be deemed to have become the holder or holders of record thereof. 1.3. Share Certificates; Cash for Fractional Shares; and Reissuance of Warrants. As promptly as practicable after the exercise of this Warrant, in whole or in part, and in any event within five (5) Business Days thereafter (unless such exercise shall be in connection with a public offering of Shares subject to this Warrant, in which event concurrently with such exercise), the Company at its expense (including the payment by it of any applicable issue, stamp or other taxes) will cause to be issued in the name of and delivered to the holder hereof or such other person as such holder may direct: (a) a certificate or certificates for the number of Shares to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would 58 otherwise be entitled, cash in an amount equal to the same fraction of the Market Price per Share (determined in accordance with Section 2.2(f) hereof) on the effective date of such exercise; and (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in, the aggregate on the face or faces thereof for the number (which may be fractional) of Shares (without giving effect to any adjustment therein) equal to the number of such Shares called for on the face of this Warrant minus the number of Shares which could have been obtained upon such exercise for the exercise price paid if the current exercise price had been $0.50 per Share. 1.4. Acknowledgment of Obligation. The Company will, at the time of or at any thereafter each exercise of this Warrant, upon the request of the holder hereof or of any Shares issued upon such exercise, acknowledge in writing its continuing obligation to afford to such holder all rights (including, without limitation, any rights to registration of any such Shares pursuant to the Purchase Agreement) to which such holder shall continue to be entitled under this Warrant and the Purchase Agreement; provided, that if any such holder shall fail to make any such request, the failure shall not affect the continuing obligation of the Company to afford such rights to such holder. 1.5. Notes. The holder shall have the option, but not the obligation, upon any exercise of this Warrant, to apply to the payment required by Section 1. 1 hereof all or any part of the accrued and unpaid interest on, or principal of, any Notes at the time held by the holder. The Company will accept the amount of accrued and unpaid interest or principal, if such election is selected, specified in the form of subscription in satisfaction of the exercise price for such Shares to be purchased. The holder shall have the right to apply all or any portion of such accrued and unpaid interest or principal to exercise all or any portion of this Warrant whether or not payment on the Notes is otherwise prohibited. 1.6. Restriction. The holder acknowledges that the Shares acquired upon exercise of the Warrant will be "restricted securities" as that term is defined under the regulations promulgated under the Securities Act, will not be saleable in the absence of an effective registration statement under the Securities Act or an exemption from registration, and accordingly may be required to be held for an indefinite period of time. The holder agrees that Shares issued pursuant hereto may contain the following legend on the face thereof: "This security has not been registered pursuant to the Securities Act of 1933, as amended, and each holder of this security by the acceptance hereof agrees that this security shall not be transferred in violation of said Act." The Company agrees that such legend shall be removed from any Shares which are no longer subject to such restrictions. Each holder of a Warrant by acceptance thereof agrees that it will not sell or otherwise dispose of any Warrants or Shares unless such Warrants or Shares have been registered under, or have been sold pursuant to an exemption from registration under, the Securities Act. As a condition to the Company's obligation to issue a new Warrant to a transferee thereof which (x) is not a holder of a Warrant, the transferor must certify to the Company the facts on which the transferor is relying for such exemption or (y) is a holder of a Warrant, the transferor must represent to the Company in writing that the transfer is so exempt. 59 Section 2. Current Exercise Price and Adjustments. 2.1 Current Exercise Price. The term "current exercise price" shall mean initially $0.50 per Share, subject to adjustment from time to time as hereinafter provided, in effect at any given time. In determining the current exercise price, the result shall be expressed to the nearest $.01, but any such lesser amount shall be carried forward and shall be considered at the time of and together with the next subsequent adjustment which, together with any adjustments being carried forward, shall amount to $.01 per Share or more. 2.2. Adjustment of Current Exercise Price. The current exercise price shall be subject to adjustment, from time to time (but not below zero), as follows: (a) Adjustments for Stock Dividends, Recapitalization. etc. In the event the Company shall, after the Closing Date, issue any shares of Common Stock (i) by stock dividend or any other distribution upon the stock of the Company payable in Common Stock or in securities convertible into or exercisable or exchangeable for shares of Common Stock or (ii) in subdivision of its outstanding Common Stock, by reclassification or otherwise, the current exercise price then in effect shall be reduced proportionately; and, in like manner, in the event of any combination of shares of Common Stock, by reclassification or otherwise, the current exercise price then in effect shall be increased proportionately. An adjustment made pursuant to this Section 2.2(a) shall become effective retroactively immediately after the record date in the case of a dividend or other distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) Adjustments for Issuance of Additional Stock. Subject to the exception referred to in Section 2.2(e) hereof and except as otherwise provided for in Section 2.2(a) hereof, in case the Company shall at any time or from time to time after the Closing Date issue any additional shares of its Common Stock ("Additional Common Stock") either (i) for consideration per share less than the then current Market Price per share of the Company's Common Stock (determined as provided in Section 2.2(f) hereof) immediately prior to the issuance of such Additional Common Stock, or (ii) for a consideration per share less than the then current exercise price immediately prior to the issuance of such Additional Common Stock, or (iii) without consideration, then (in the case of either clause (i), (ii) or (iiii)), and thereafter successively upon each such issuance, the current exercise price shall forthwith be reduced to a price determined by multiplying such current exercise price by a fraction, of which (A) the numerator shall be (i) the number of shares of the Company's Common Stock outstanding immediately prior to such issuance of shares of Additional Common Stock plus (ii) the number of shares of the Company's Common Stock which the aggregate amount of consideration, if any, received by the Company for the total number of shares of Additional Common Stock so issued would purchase at the greater of (x) the Market Price per share of the Company's Common Stock in effect immediately prior to such issuance of shares of Additional Common Stock or (y) the exercise price per Share in effect immediately prior to such 60 issuance of shares of Additional Common Stock, and (B) the denominator shall be the number of shares of the Company's Common Stock outstanding immediately after such issuance of shares of Additional Common Stock, provided, however, that such adjustment shall be made only if the current exercise price determined from the aforesaid fraction shall be less than the current exercise price in effect immediately prior to the issuance of such Additional Common Stock. The adjustment described in this Section 2.2(b) shall be made whenever such Common Stock is issued, and shall become effective retroactively immediately after the date on which the Company committed to make such issuance. (c) Certain Rules in Applying the Adjustment for Additional Stock Issuances. For purposes of any adjustment as provided in Section 2.2(b), the following provisions shall also be applicable: (1) Cash Consideration. In case of the issuance of Additional Common Stock for cash, the consideration received by the Company therefor shall be deemed to be the net cash proceeds received by the Company for such Additional Common Stock after deducting any commissions or other expenses paid or incurred by the Company for any underwriting of, or otherwise in connection with the issuance of, such Additional Common Stock. (2) Non-Cash Consideration. In case of the issuance (other than application of obligations of the Company) of Additional Common Stock for a consideration other than cash, or a consideration a part of which shall be other than cash, the amount of the consideration other than cash so received or to be received by the Company shall be deemed to be the value of such consideration at the time of its receipt by the Company as determined in good faith by the Board of Directors of the Company, provided, that where the non-cash consideration consists of the cancellation, surrender or exchange of outstanding obligations of the Company (or where such obligations are otherwise converted into shares of the Company's Common Stock), the value of the non-cash consideration shall be deemed to be the amount, including principal and any accrued interest, as of the time of the Company's receipt, of the obligations canceled, surrendered, satisfied, exchanged or converted. If the Company receives consideration, part or all of which consists of publicly traded securities, the value of such non-cash consideration shall be the aggregate market value of such securities (based on the latest reported trades) as of the close of the day immediately preceding the date of their receipt by the Company. (3) Options, Warrants, Convertibles, etc. In case of the issuance (other than by way of a Distribution on Common Stock pursuant to Section 2.2(b) hereof), whether by distribution or sale to holders of its Common Stock or to others, by the Company of (i) any security that is convertible into the Company's Common Stock or (ii) any rights, options or warrants to purchase the Company's Common Stock (except for the Warrants), if inclusion thereof would result in a current exercise price lower than if excluded, the Company shall be deemed to have issued, for the consideration described below, the number of shares of the Company's Common Stock into 61 which such convertible security may be converted when first convertible, or the number of shares of the Company's Common Stock deliverable upon the exercise of such rights, options or warrants when first exercisable, as the case may be (and such shares shall be deemed to be Additional Common Stock for purposes of Section 2.2(b) hereof). The consideration deemed to be received by the Company at the time of the issuance of such convertible securities or such rights, options or warrants shall be the consideration so received determined as provided in Sections 2.2(c)(1) and (2) hereof deducting any commissions or other expenses paid or incurred by the Company for any underwriting of, or otherwise in connection with, the issuance of such convertible securities or rights, options or warrants, plus (x) any consideration or adjustment payment to be received by the Company in connection with such conversion, or, as applicable, (y) the aggregate price at which shares of the Company's Common Stock are to be delivered upon the exercise of such rights, options or warrants when first exercisable (or, if no price is specified and such shares are to be delivered at an option price related to the Market Price of the subject Common Stock, an aggregate option price bearing the same relation to the Market Price of the subject Common Stock at the time such rights, options or warrants were granted). In case any such securities, rights, options or warrants shall be issued in connection with the issue or sale of other securities of the Company comprising one integral transaction in which no specific consideration is allocated to such securities, rights, options or warrants, such securities, rights, options or warrants shall be deemed to have been issued without consideration. If, subsequently, (1) such number of shares into which such convertible security is convertible, or which are deliverable upon the exercise of such right, options or warrants, is increased or (2) the conversion or exercise price of such convertible security, rights, options or warrants is decreased, then the calculations under the preceding two sentences (and any resulting adjustment to the current exercise price under 2.2(b) hereof) with respect to such convertible security, rights, options or warrants, as the case may be, shall be recalculated as of the time of such issuance but giving effect to such changes (but any such recalculation shall not result in the current exercise price being higher than that which would be calculated without regard to such issuance). On the expiration or termination of such rights, options or warrants, or rights to convert, the current exercise price hereunder shall be readjusted (up or down as the case may be) to such current exercise price as would have been obtained had the adjustments made upon the issuance of such rights, options, warrants or convertible securities been made upon the basis of the delivery of only the number of shares of the Company's Common Stock actually delivered upon the exercise of such rights, options or warrants or upon the conversion of any such securities and at the actual exercise or conversion prices (but any such recalculation shall not result in the current exercise price being higher than that which would be calculated without regard to such issuance). (4) Number of Shares Outstanding. The number of shares of the Company's Common Stock as at the time outstanding shall exclude all shares of the Company's Common Stock then owned or held by or for the account of the Company or any of its Subsidiaries but shall include the aggregate number of shares of the Company's Common Stock at the time deliverable in respect of the convertible securities, rights, options and warrants referred to in Section 2.2(c)(3 )); provided, that to the extent that such rights, options, warrants or conversion privileges are not exercised, such shares of Common Stock shall be deemed to be outstanding only until the expiration dates of the rights, warrants, options or conversion privileges or the prior cancellation thereof. 62 (d) Exclusions from the Adjustment for Additional Stock Issuances. No adjustment of the current exercise price under Section 2.2(b) hereof shall be made as a result of or in connection with the issuance of Shares upon exercise of the Warrants or the exercise of options to purchase 982,600 shares of the Company's Common Stock pursuant to options previously granted to certain officers of the Company pursuant to the Company's stock option plans. To the extent that the issuance (or deemed issuance) of the Company's Common Stock shall not result in any adjustment of the current exercise price pursuant to the provisions of this Section 2.2(d), then such Common Stock shall not be taken into account for purposes of determining any fraction referred to in Section 2.2(b) hereof. (e) Accountants' Certification. Whenever the current exercise price is adjusted as provided in this Section 2.2, the Company will promptly obtain a certificate of a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who may be the regular auditors of the Company) setting forth the current exercise price as so adjusted, the computation of such adjustment and a brief statement of facts accounting for such adjustment, and will mail to the holders of the Warrants a copy of such certificate from such firm of independent public accountants. (f) Determination of Market Price. The current "Market Price" per share of the Company's Common Stock on any date shall be deemed to be the average of the daily closing prices for the twenty (20) consecutive trading dates ending on the trading day before such date. The closing price for each day shall be the last reported sale price or, in case no such sale takes place on such day, the average of the closing bid and asked prices, in either case on the principal national United States securities exchange on which the Company's Common Stock is listed or admitted to trading, or if the Company's Common Stock is not listed or admitted to trading on any such national securities exchange, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers Inc., Automated Quotation System Level I, or comparable system. If the closing price cannot be so determined, the Market Price shall be determined: (x) by the written agreement of the Company and the holders of Warrants representing a majority of the Shares then obtainable from the exercise of outstanding Warrants (the "Majority Holders"); or (y) in the event that no such agreement is reached within fifteen (15) days after the event giving rise to the need to determine the Market Price, by a nationally recognized U.S. investment banking firm, selected by the Company ("Company Appraiser") not more than 5 Business Days after the end of such 15 day period. Any appraiser appointed pursuant to this paragraph shall be instructed to make its determination as promptly as possible and in any event within 30 days of appointment. If no such selection is made within such period, then the Majority Holders shall as promptly as possible select such a firm whose determination shall be final and binding. If such selection is timely made by the Company, and the Majority Holders do not object to the Market Price as determined by the Company Appraiser within 10 days of receipt of notice thereof by all holders of Warrants, then the Market Price as determined by the Company 63 Appraiser shall be the Market Price. If the Majority Holders do so object to the Company Appraiser's determination of Market Price, then the Majority Holders can select a nationally recognized U.S. investment banking firm ("Alternate Appraiser") to review the Company Appraiser's report and other relevant information. Within 10 days after receipt by the Alternate Appraiser of such report and such other information as is reasonably requested by the Alternate Appraiser, the Company Appraiser and Alternate Appraiser shall communicate and/or meet to resolve any questions or differences with respect to the Market Price. If such appraisers agree on a Market Price, such Market Price shall be the Market Price. If no agreement is reached then the Company Appraiser and Alternate Appraiser shall select a third nationally recognized firm ("Third Appraiser"). If the Company Appraiser and the Alternate Appraiser cannot agree on a Third Appraiser within 20 days of the end of such 10 day period, either may apply to the American Arbitration Association to appoint the Third Appraiser. The Third Appraiser shall, within 30 days of its hire, issue a report with its determination of Market Price which shall be conclusive and binding. All expenses of the Company Appraiser shall be borne by the Company. All expenses of the Alternate Appraiser shall be borne by the holders of the Warrants. All expenses of the Third Appraiser shall be borne equally by the Company and the holders of the Warrants. Market Price shall be determined on the basis of the fair market value of the Company as if it were sold as a going concern on the date of valuation and without regard to the lack of any trading market for, or the lack of liquidity in, the Common Stock of the Company. The Company shall cooperate, and shall provide all necessary information and assistance, to permit any determination under the preceding clause (x) or (y). Each Appraiser shall be instructed to use its best efforts to give the Company and all holders reasonable advance notice of the Market Price and the contents of its report (by delivering a draft report) before the report is delivered in final form. Any communications or reports by an Appraiser to either the Company or any of the holders regarding Market Price shall be given simultaneously to both the Company and all of the holders. (g) Antidilution Adjustments Under Other Securities. Without limiting any other rights available hereunder to the holders of Warrants, if there is an antidilution adjustment (x) under any security which is convertible into Common Stock of the Company whether issued prior to or after the date hereof or (y) under any rights, options or warrants to purchase Common Stock of the Company whether issued prior to or after the date hereof (except for the Warrants and except as stated in Section 2.2(d) hereof) which (in the case of the preceding clause (x) or (y)) results in a reduction in the exercise or purchase price with respect to such security or rights or results in an increase in the number of shares obtainable under such security or rights, then an adjustment 64 shall be made under this Section 2.2(g) to the current exercise price hereunder. Any such adjustment under this Section 2.2(g) shall be whichever of the following results in a lower current exercise price: (A) a reduction in the current exercise price equal to the percentage reduction in such exercise or purchase price with respect to such security or rights or (B) a reduction in the current exercise price which will result in the same percentage increase in the number of Shares available hereunder as the percentage increase in the number of Shares available under such security or rights. Any such adjustment under this Section 2.2(g) shall only be made if it would result in a lower current exercise price than that which would be determined pursuant to any other antidilution adjustment otherwise required hereunder as a result of the event or circumstance which triggered the adjustment to the security or rights described in clause (x) or (y) above (and if any such adjustment is so made under this Section 2.2(g), then such other antidilution adjustment otherwise required hereunder shall not be made as a result of such event or circumstance). (h) Reorganization Adjustments. In case of any capital reorganization or reclassification of the capital stock of the Company (other than a change in par value or a stock split-up), the holder of this Warrant shall thereafter be entitled to purchase for the current exercise price the securities and property receivable upon such capital reorganization or reclassification by a holder of the number of shares of Common Stock which this Warrant entitled the holder hereof to purchase immediately prior to such capital reorganization or reclassification. In the event that at any time, as a result of an adjustment made pursuant to this Section 2.2(h), the holder of this Warrant shall become entitled to purchase any other securities or property other than Common Stock, thereafter the number of such other securities or property so purchasable upon exercise of this Warrant and the current exercise price shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section 2.2. (i) Other Adjustments. Without limiting any provisions of this Section 2.2 or any other provisions of this Warrant, in case any event shall occur as to which any of the provisions of this Section 2.2 are not strictly applicable but the failure to make any adjustment would not fairly protect the exercise rights represented by the Warrants in accordance with the intent and principles of this Section 2.2, the Company shall at its expense appoint a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who may be the regular auditors of the Company), and reasonably satisfactory to the Majority Holders, which shall give their opinion upon the adjustment, if any, on a basis consistent with the intent and principles established in this Section 2.2, necessary to preserve, without dilution, the economic and other rights represented by the Warrants. Upon receipt of such opinion, the Company will promptly mail copies thereof to the holders of the Warrants and shall make the adjustments described therein. (j) Meaning of "Issuance". References in this Warrant to "issuance" of stock by the Company include issuances by the Company of previously unissued shares and issuances, sales or other transfers by the Company of treasury stock. Section 3. Company's Consolidation or Merger. If the Company shall at any time 65 consolidate with or merge into another entity (where the Company is not the continuing corporation after such merger or consolidation), the holder of a Warrant shall thereafter be entitled to receive, upon the exercise thereof in whole or in part, the securities or other property to which (and upon the same terms and with the same rights as) a holder of the number of Shares then deliverable upon the exercise thereof would have been entitled upon such consolidation or merger (subject to adjustments under Section 2.2 hereof), and the Company shall take such steps in connection with such consolidation or merger as may be necessary to assure such holder that the provisions of the Warrants and the Purchase Agreement shall thereafter be applicable in relation to any securities or property thereafter deliverable upon the exercise of this Warrant, including, but not limited to, obtaining a written acknowledgment from the continuing entity of its obligation to supply such securities or property upon such exercise and to be so bound by the Warrant and the Purchase Agreement. A sale, transfer or lease (in one, or a series of related, transactions) of all or substantially all of the assets of the Company to another person shall be deemed a consolidation or merger for the foregoing purposes. Section 4. Notice to Holders of Warrants. In case at any time: (i) the Company shall take any action which would require an adjustment in the current exercise price pursuant to Section 2.2(a), (b), (j), (h) or (i); or (ii) there shall be any capital reorganization or reclassification of the Company's Common Stock (other than a change in par value or from par value to no par value or from no par value to par value of the Common Stock), or any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or any sale, transfer or lease (in one, or a series of related, transactions) of all or substantially all of the assets of the Company; or (iii) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more of said cases, the Company shall give written notice to the holders of the Warrants, not less than twenty (20) days before any record date or other date set for definitive action, of the date on which such action, reorganization, reclassification, sale, transfer, lease, consolidation, merger, dissolution, liquidation or winding-up, as the case may be, and the terms thereof. Section 5. Number of Shares. Upon any adjustment of the current exercise price, the holder of this Warrant shall thereafter (until another such adjustment) be entitled to purchase at the current exercise price the number of Shares, calculated to the nearest 1/100 of a Share, obtained by multiplying the current exercise price in effect immediately prior to such adjustment by the number of Shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the new current exercise price resulting from such adjustment. 66 Section 6. Specific Performance. The Company stipulates that the remedies at law of a holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. Section 7. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be construed as conferring upon the holder hereof any rights as a stockholder of the Company (prior to exercise of all or a portion of this Warrant) or as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise. Section 8. Ownership; Transfer. The Company may treat the Person in whose name this Warrant is registered pursuant to the Purchase Agreement as the owner and holder of this Warrant for all purposes, and the Company shall not be affected by any notice to the contrary (except that the Company shall comply with the provisions of the Purchase Agreement regarding the issuance of a new Warrant or Warrants to transferees). This Warrant is transferable upon the conditions specified in the Purchase Agreement. Section 9. Covenants 9.1. Information Requirements. The Company will provide to each holder of Warrants or Shares, promptly after the same are available, copies of each annual report, proxy or financial statement or other communication sent to the Company's or a Subsidiary's stockholders and copies of all annual, regular, periodic and special reports and registration statements which the Company may file or be required to file with the Securities and Exchange Commission or with any securities exchange or the National Association of Securities Dealers, Inc. 9.2. Reservation of Shares. There have been reserved, and the Company shall at all times keep reserved, out of its authorized Common Stock, a number of shares of Common Stock sufficient to provide for the exercise of the rights of purchase represented by the then outstanding Warrants. 9.3. No Dilution or Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant. The Company will at all times in good faith assist in the carrying out of all such terms, and in the taking of all such action, as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not permit the par value of any shares of Common Stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of the Company's Common Stock, free from all taxes, 67 Liens and charges with respect to the issue thereof, upon the exercise of this Warrant from time to time outstanding and (c) will not take any action which results in any adjustment of this current exercise price under this Warrant if the total number of shares of the Company's Common Stock (or other securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock (or other securities) then authorized by the Company's Certificate of Incorporation and available for the purpose of issue upon such exercise. 9.4. Listing of Shares. If the Company shall list any shares of its Common Stock on any national securities exchange, it will take such action as may be necessary, from time to time, to list the Shares, subject to issuance, on such exchange. 9.5. Securities Exchange Act Registration. At any time that the Company either files and such filing becomes effective, or is required to file, a registration statement with respect to Common Stock of the Company under Section 5 of the Securities Act or Section 12(b) or Section 12(g) of the Securities Exchange Act, then thereafter: (a) The Company will maintain effective a registration statement (containing such information and documents as the Commission shall specify and otherwise complying with the Securities Exchange Act) with respect to the Common Stock of the Company under Section 12(b) or Section 12(g), whichever is applicable, of the Securities Exchange Act and will file on time such information, documents and reports as the Commission may require or prescribe for companies whose stock has been registered pursuant to such Section 12(b) or Section 12(g), whichever is applicable. (b) The Company will, upon the request of the holder hereof or of any Shares, make whatever other filings with the Commission, or otherwise make generally available to the public such financial and other information, as any such holder may deem reasonably necessary or desirable in order to enable such holder to be permitted to sell Shares pursuant to the provisions of Rule 144 under the Securities Act (or any successor statute, rule or regulation to Rule 144). 9.6. Delivery of Information for Rule 144A Transactions. If a holder of Warrants or Shares proposes to transfer any such Warrants or Shares pursuant to Rule 144A under the Securities Act (as in effect from time to time), the Company agrees to provide (upon the request of such holder or the prospective transferee) to such holder and (if requested) to the prospective transferee any financial or other information concerning the Company and its Subsidiaries which is required to be delivered by such holder to any transferee of such Warrants or Shares pursuant to such Rule 144A. Section 10. Headings. The headings and captions in this Warrant are for convenience of reference only and shall not define, limit or otherwise affect any of the terms or provisions hereof. Section 11. Governing Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of Michigan (other than any conflict of laws rule which 68 might result in the application of the laws of any other jurisdiction). Section 12. Survival. The obligations of the Company under this Warrant shall survive its full exercise. Section 13. Definitions. Terms not otherwise defined herein are defined in the Purchase Agreement and are used herein with the same definition. INTEGRAL VISION, INC. has caused this Warrant to be dated and to be executed and issued on its behalf by its officer thereunto duly authorized. Integral Vision, Inc. By:_________________________ Name: Charles J. Drake Title: Chairman of the Board EX-21 3 k61388ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Subsidiary of the Registrant Integral Vision, Inc. and Subsidiary Integral Vision LTD Incorporated in the United Kingdom EX-23.1 4 k61388ex23-1.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement 33-61977 on Form S-8 dated August 21, 1995, Registration Statement 33-61979 on Form S-8 dated August 21, 1995, Registration Statement 33-12571 on Form S-8 dated March 11, 1987 and Registration Statement 33-593 on Form S-8 dated October 1, 1985, of our report dated February 25, 1999, (except for Note D, as to which the date is March 31, 1999), with respect to the consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1998 of Integral Vision, Inc. and subsidiary (formerly Medar, Inc. and subsidiaries) included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /S/ Ernst & Young, LLP Detroit, Michigan March 28, 2001 EX-23.2 5 k61388ex23-2.txt CONSENT OF MOORE STEPHENS DOEREN MAYHEW 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement 33-61977 on Form S-8 dated August 21, 1995, Registration Statement 33-61979 on Form S-8 dated August 21, 1995, Registration Statement 33-12571 on Form S-8 dated March 11, 1987 and Registration Statement 33-593 on Form S-8 dated October 1, 1985, of our report dated March 16, 2001 (except for Note M, as to which the date is March 29, 2001), with respect to the consolidated balance sheets as of December 31, 2000 and 1999 and the consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2000, and the financial statement schedule for each of the respective periods, of Integral Vision, Inc. and subsidiary (formerly Medar, Inc. and subsidiaries) included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /S/ Moore Stephens Doeren Mayhew Troy, Michigan March 29, 2001 GRAPHIC 6 k61388pi5-178.gif begin 775 pi5-178.gif M1TE&.#EA#``,`/?^``````$!`0("`@,#`P0$!`4%!08&!@<'!P@("`D)"0H* M"@L+"PP,#`T-#0X.#@\/#Q`0$!$1$1(2$A,3$Q04%!45%186%A<7%Q@8&!D9 M&1H:&AL;&QP<'!T='1X>'A\?'R`@("$A(2(B(B,C(R0D)"4E)28F)B7IZ>GM[>WQ\?'U]?7Y^?G]_?X"`@(&!@8*" M@H.#@X2$A(6%A8:&AH>'AXB(B(F)B8J*BHN+BXR,C(V-C8Z.CH^/CY"0D)&1 MD9*2DI.3DY24E)65E9:6EI>7EYB8F)F9F9J:FIN;FYRGI^?GZ"@ MH*&AH:*BHJ.CHZ2DI*6EI::FIJ>GIZBHJ*FIJ:JJJJNKJZRLK*VMK:ZNKJ^O MK["PL+&QL;*RLK.SL[2TM+6UM;:VMK>WM[BXN+FYN;JZNKN[N[R\O+V]O;Z^ MOK^_O\#`P,'!P<+"PL/#P\3$Q,7%Q<;&QL?'Q\C(R,G)RWM_?W^#@X.'AX>+BXN/CX^3DY.7EY>;FYN?GY^CHZ.GIZ>KJZNOK MZ^SL[.WM[>[N[N_O[_#P\/'Q\?+R\O/S\_3T]/7U]?;V]O?W]_CX^/GY^?KZ M^OO[^_S\_/W]_?[^_O___R'Y!`$``/X`+``````,``P`!PA>`/]%8T:PH,%_ M&0`H7,@0(3UF_R)&C*8N`T)P"O1(1"4@F$6+UB@0^H=*P2V$*/]94\!$P$F4 J%B/^`1!%XL>('#-EC'BSY,F0(S]& GRAPHIC 7 k61388pi5-110.gif begin 775 pi5-110.gif M1TE&.#EA#``,`/?^``````$!`0("`@,#`P0$!`4%!08&!@<'!P@("`D)"0H* M"@L+"PP,#`T-#0X.#@\/#Q`0$!$1$1(2$A,3$Q04%!45%186%A<7%Q@8&!D9 M&1H:&AL;&QP<'!T='1X>'A\?'R`@("$A(2(B(B,C(R0D)"4E)28F)B7IZ>GM[>WQ\?'U]?7Y^?G]_?X"`@(&!@8*" M@H.#@X2$A(6%A8:&AH>'AXB(B(F)B8J*BHN+BXR,C(V-C8Z.CH^/CY"0D)&1 MD9*2DI.3DY24E)65E9:6EI>7EYB8F)F9F9J:FIN;FYRGI^?GZ"@ MH*&AH:*BHJ.CHZ2DI*6EI::FIJ>GIZBHJ*FIJ:JJJJNKJZRLK*VMK:ZNKJ^O MK["PL+&QL;*RLK.SL[2TM+6UM;:VMK>WM[BXN+FYN;JZNKN[N[R\O+V]O;Z^ MOK^_O\#`P,'!P<+"PL/#P\3$Q,7%Q<;&QL?'Q\C(R,G)RWM_?W^#@X.'AX>+BXN/CX^3DY.7EY>;FYN?GY^CHZ.GIZ>KJZNOK MZ^SL[.WM[>[N[N_O[_#P\/'Q\?+R\O/S\_3T]/7U]?;V]O?W]_CX^/GY^?KZ M^OO[^_S\_/W]_?[^_O___R'Y!`$``/X`+``````,``P`!P@Z`/\)'$APX)L? M"!,J_/<#F;B'$!\:8"BNX,`#%"T*Q/BCHD:.'BV"U/AOY,>,)SN2Y&C@@,N7 &+@$$!``[ ` end -----END PRIVACY-ENHANCED MESSAGE-----

EX-4.4

   1
                                                                     EXHIBIT 4.4


                       NOTE AND WARRANT PURCHASE AGREEMENT


         NOTE AND WARRANT PURCHASE AGREEMENT, dated effective as of March 29,
2001, by and among Integral Vision, Inc., a Michigan corporation (the
"Company"), and Mid-State Industrial Services, Inc. and those subsequent
purchasers listed on Exhibit A and whose names and signatures appear at the end
of this Agreement (the "Subsequent Purchasers") (each individually a "Purchaser"
and collectively, the "Purchasers", which term shall also include successors and
assigns and any permitted transferees of the Notes or the Warrants) and Warren
Cameron Faust & Asciutto, P.C., as Agent.

         NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

SECTION 1. SALE AND PURCHASE OF NOTES AND WARRANTS

         (a) The Company agrees to sell to the Purchasers and, subject to the
terms and conditions hereof and in reliance upon the representations and
warranties of the Company contained herein or made pursuant hereto, the
Purchasers agree to purchase from the Company on the Closing Date specified in
Section 2 hereof, (i) a Note or Notes in the aggregate principal amount set
forth opposite such Purchaser's name on Exhibit A hereto and (ii) a Warrant or
Warrants for the number of shares of the Company's Common Stock set forth
opposite such Purchaser's name on Exhibit A. The aggregate purchase price to be
paid to the Company by the Purchasers for such Notes and such Warrants is 100%
of the principal amount of the Notes to be purchased by the Purchasers, which
amount will be allocated in accordance with Section 2(c) hereof.

         (b) As used herein, "Notes" means the aggregate in principal amount of
the Company's 15% Senior Subordinated Secured Notes Due March 31, 2005, together
with all Notes issued in exchange therefor or replacement thereof. Each Note
will be substantially in the form of the Note set forth as Exhibit B hereto.
Interest on the Notes shall accrue from the Closing Date and shall be payable
quarterly on the 30th day of March, June, September and December of each year
(the "Quarterly Payment Dates"), commencing in the case of Mid-State Industrial
Services, Inc. on June 30, 2001 and as to each Subsequent Purchaser on the
Quarterly Payment Date next following their Closing Date (which first interest
payment shall be for the period from and including the Closing Date specified in
Section 2 hereof through and including the next occurring Quarterly Payment
Date) at the interest rates and in the manner specified in the form of Note
attached hereto as Exhibit B. Principal on the Notes shall be paid in quarterly
installments on the Quarterly Payment Dates beginning June 30, 2002 through and
including March 30, 2005.

         (c) If all or a portion of (i) the principal amount of the Notes, (ii)
the interest payable thereon or (iii) any fee or other amount payable hereunder
or under any other Loan Document shall not be paid when due (whether at the
stated maturity, by acceleration or otherwise), such overdue amount shall bear
interest at a rate per annum equal to the Default Rate from the date of




   2

such nonpayment until paid in full (both before and after judgment).

         (d) As used herein, "Warrants" means the aggregate of Common Stock
Purchase Warrants evidenced by certificates substantially in the form of Exhibit
C hereto, together with all Warrants issued in exchange therefor or replacement
thereof. Such Warrants in the aggregate initially entitle the holders thereof to
purchase 2 shares of Common Stock of the Company, no par value, for each $1 in
value of the Notes issued to such holder at a purchase price of $0.50 per share,
as set forth therein, such number and such price being subject to adjustment as
provided in the form of Warrant attached hereto as Exhibit C.

SECTION 2. THE CLOSING

         (a) Subject to the terms and conditions hereof, the closing (the
"Closing") of the purchase and sale of the Notes and Warrants will take place at
the offices of Warren Cameron Faust & Asciutto, P.C. on March 29, 2001 at 2:00
p.m. as to Mid-State Industrial Services, Inc. and at such time and date as
shall be mutually agreed to by the Company and the Subsequent Purchasers. Such
times and dates are herein referred to as the "Closing Dates" and individually
as a "Closing Date."

         (b) Subject to the terms and conditions hereof, on each Closing Date
(i) the Company will deliver to each Purchaser (A) a Note or Notes,
substantially in the form of Exhibit B hereto, payable to such Purchaser (or its
nominee as notified to the Company), and dated the Closing Date, in the
aggregate principal amount set forth opposite such Purchaser's name on Exhibit
A, and (B) a Warrant or Warrants evidenced by certificates substantially in the
form of Exhibit C hereto and dated the Closing Date, for the number of shares of
the Company's Common Stock set forth opposite such Purchaser's name on Exhibit
A, and (ii) upon such Purchaser's receipt thereof, such Purchaser will deliver
to the Company by wire transfer an amount equal to the purchase price for such
Notes and Warrants (as specified in Section 1(a) hereof) payable to the order of
the Company in immediately available funds.

         (c) The Purchasers acknowledge that the Notes and the Warrants
constitute an investment unit" within the meaning of Section 1273(c)(2) of the
Code and that the Company will allocate the "issue price" (within the meaning of
Section 1273(b) of the Code) of such investment unit, for all Income Tax
purposes, between the Notes and Warrants as follows: (i) the price at which each
of the Warrants were sold by the Company is $0.10 and (ii) the price at which
each $1 in principal of the Notes were sold was $0.90. Each Purchaser agrees to
abide by Treasury Regulation ss.  1. 1273-2(h)(2) with respect to such
allocation of the issue price.

SECTION 3. DEFINITIONS

         (a) For purposes of the Loan Documents, the following definitions shall
apply (such definitions to be equally applicable to both the singular and plural
forms of the terms defined):

         "Accountants" means Doeren Mayhew & Co., P.C. or another independent
certified public accounting firm selected by the Company and reasonably
satisfactory to the Majority


   3

Noteholders.

         "Affiliate", when used with respect to any Person, means (i) if such
Person is a corporation, any officer or director thereof (other than a director
nominated by one of the Purchasers) and any Person (other than one of the
Purchasers) which is, directly or indirectly, the beneficial owner of more than
ten percent (10%) of the Voting Stock thereof, and, if such beneficial owner is
a partnership, any partner thereof, or if such beneficial owner is a
corporation, any Person, directly or indirectly through one or more
intermediaries, controlling, controlled by or under common control with such
beneficial owner, or any officer or director of such beneficial owner or of any
corporation occupying any such control relationship, (ii) if such Person is a
partnership, any partner thereof, (iii) in all cases, any Person (other than one
of the Purchasers) which, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with
such Person, and (iv) in all cases, any Person 10% or more of whose Voting Stock
is beneficially owned, directly or indirectly through one or more
intermediaries, by such Person. For purposes of this definition, "control"
(including the correlative terms "controlling", "controlled by" and "under
common control with"), with respect to any Person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.

         "Agent" means Warren Cameron Faust & Asciutto, P.C. or any successor
agent appointed pursuant to Section 21.7 hereof

         "Aggregate Net Income" means the aggregate amount of positive annual
net income after taxes for each fiscal year of the Company and its Subsidiary on
a consolidated basis, as determined in accordance with GAAP, beginning with the
fiscal year ending December 31, 2001 through the date of determination, without
any offset for any negative net income during such period. Aggregate Net Income
will only be adjusted as of the last day of each fiscal year.

         "Agreement" means this Agreement (together with exhibits and schedules)
as from time to time assigned, supplemented or amended or as the terms hereof
may be waived.

         "Bankruptcy Code" means the United States Bankruptcy Code and any
successor thereto, and the rules and regulations issued thereunder.

         "Board" or "Board of Directors" means, with respect to any Person which
is a corporation, a business trust or other entity, the board of directors or
other group, however designated, which is charged with legal responsibility for
the management of such Person, or any committee of such board of directors or
group, however designated, which is authorized to exercise the power of such
board or group in respect of the matter in question.

         "Business" means the business conducted by the Company in the vision
industry and all other activities ancillary or related thereto.

         "Business Day" means any day other than a Saturday, Sunday or other day
on which


   4

banks in Detroit, Michigan are required to close.

         "Capital Expenditures" means for any period, the amount of all payments
made by the Company during such period for the lease, purchase, improvement,
construction or use of any Property, the value or cost of which under GAAP is
required to be capitalized and appears on the Company's balance sheet in the
category of property, plant or equipment, without regard to the manner in which
such payments or the instrument pursuant to which they are made is characterized
by the Company or any other Person, and shall include, without limitation, the
principal components of payments for the installment purchase of Property and
payments under Capitalized Leases.

         "Capitalized Leases" means any lease to which the Company or the
Subsidiary is party as lessee, or by which it is bound, under which it leases
any property (real, personal or mixed) from any lessor other than the Company or
the Subsidiary, and which is required to be capitalized in accordance with GAAP,
but also including any such lease, whether or not so capitalized, where the
Company or a Subsidiary is treated as the owner of the leased property under the
Code.

         "Change of Control Event" means the acquisition by any Person, or group
of Persons (other than the shareholders of the Company as of the Closing Date)
acting in concert, in one or more transactions, of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Securities Exchange Act) of
shares of capital stock of the Company the ownership of which entitles the
holder(s) to cast more than 50% of the votes entitled to vote generally in the
election of the Board of Directors of the Company.

         "Claims" has the meaning set forth in the definition of "Environmental
Claim."

         "Closing" has the meaning set forth in Section 2(a) hereof.

         "Closing Date" has the meaning set forth in Section 2(a) hereof.

         "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the regulations and interpretations thereunder.

         "Collateral" means the Property upon which the Agent is granted the
Security Interests, pursuant to the terms of the Collateral Assignment.

         "Collateral Assignment" means the Collateral Assignment of Proprietary
Rights and Security Agreement to be entered into at the Closing by the Company
and the Agent.

         "Commission" means the Securities and Exchange Commission and any other
similar or successor agency of the federal government administering the
Securities Act or the Securities Exchange Act.

         "Common Stock" means that class of stock or other equivalent evidences
of ownership of a corporation, the holders of which are entitled to vote
generally to elect the Board of Directors


   5

of such corporation.

         "Company" means Integral Vision, Inc., a Michigan corporation, its
successors and permitted assigns and also includes Integral Vision, Ltd., the
wholly owned subsidiary of the Company.

         "Company's Obligations" means all loans, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), premiums, liabilities, obligations (including the
performance of the covenants of the Company contained herein or in the Loan
Documents), fees, lease payments, guaranties, covenants, and duties owing by the
Company to the Purchasers or the Agent of any kind and description (whether
pursuant to or evidenced by this Agreement, any of the other Loan Documents, or
any other note or other instrument, or by any other agreement between the
Purchasers or the Agent and the Company, and whether or not for the payment of
money), whether direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising, and including any debt, liability, or
obligation owing from the Company to others that the Purchasers or the Agent may
have obtained by assignment or otherwise, and further including all interest not
paid when due.

         "Consolidated," when used with reference to any financial term in this
Agreement, means the aggregate for the Company and the Subsidiary of the amounts
signified by such term for all such Persons, with intercompany items eliminated,
and, with respect to earnings, after eliminating the portion of earnings
properly attributable to minority interests, if any, in the capital of any such
Person (other than in the capital of the Company) and otherwise as determined in
accordance with GAAP.

         "Consolidated Cash Flow" means for any period, the Consolidated Net
Income plus each of the following items, to the extent deducted from the
revenues of the Company in the calculation of net income for such period: (i)
Depreciation; (ii) amortization and other noncash charges; (iii) interest
expense incurred and fees paid to the Senior Lender pursuant to the Loan
Agreement; and (iv) Income Taxes determined as the accrued liability of the
Company and the Subsidiary in respect of such period, regardless of what portion
of such expense has actually been paid by the Company and the Subsidiary during
such period; and after deduction for (A) Income Taxes, to the extent actually
paid during such period; (B) all noncash income items recognized; (C) gain on
the sale of property, plant or equipment; and (D) all Capital Expenditures paid
by the Company and the Subsidiary.

         "Consolidated Coverage Ratio" means, as of any date of determination,
the ratio of Consolidated Cash Flow to Consolidated Interest Expense.

         "Consolidated Interest Expense" means, for any period, the total
interest payable during such period by the Company and the Subsidiary on account
of Indebtedness.

         "Consolidated Liabilities" means, at any time, the total liabilities of
the Company and its Subsidiary, determined in accordance with GAAP and after
eliminating intercompany transactions among the Company and the Subsidiary.


   6

         "Consolidated Net Income" means, for any period for which the amount
thereof is to be determined, the net income (net of any losses or expenses) or
loss of the Company and the Subsidiary on a consolidated basis, during such
period (such net income to be determined in accordance with GAAP) after Income
Taxes actually paid, but excluding:

         (a)      the earnings during such period of any Person to which the
                  assets of the Company or any Subsidiary shall have been sold,
                  transferred or disposed of, or into which the Company or such
                  Subsidiary shall have merged, prior to the date of such
                  transaction;

         (b)      any extraordinary gain or loss during such period arising from
                  the sale, exchange or other disposition of capital assets
                  (such term to include all fixed assets, whether tangible or
                  intangible, and all inventory sold in conjunction with the
                  disposition of fixed assets);

         (c)      any gain or loss during such period arising from the write-up
                  or write-down of any asset; and

         (d)      any earnings or gains during such period resulting from the
                  receipt of any proceeds of any life insurance policy.

         "Consolidated Tangible Assets" means, at any time, the total assets of
the Company and its Subsidiaries determined in accordance with GAAP excluding
deferred assets, patents, copyrights, trademarks, goodwill, capitalized software
development costs and other General Intangibles, and Investments.

         "Consolidated Net Worth " means, at any time, Consolidated Assets minus
Consolidated Liabilities.

         "Contingent Liabilities" of any person means, as of any date, all
obligations of such person or of others for which such person is contingently
liable, as obligor, guarantor, surety or in any other capacity, or in respect of
which obligations such person assures a creditor against loss or agrees to take
any action to prevent any such loss (other than endorsements of negotiable
instruments for collection in the ordinary course of business), including all
reimbursement obligations of such person in respect of any letters of credit,
surety bonds or similar obligations and all obligations of such person to
advance funds to, or to purchase assets, property or services from, any other
person in order to maintain the financial condition of such other person.

         "Default Rate" means a per annum rate equal to the interest rate on the
Notes plus four percent (4%).

         "Depreciation" means, in respect of any period, all depreciation on
Property taken during such period, as determined in accordance with GAAP.


   7

         "Earnings Available for Dividends" means the excess of (A) the sum of
(x) 50% of aggregate Consolidated Net Income, if positive, for each fiscal year
commencing on or after January 1, 2001 less 100% of aggregate Consolidated Net
Income, if negative, for each fiscal year commencing on or after January 1, 2001
plus (y) net proceeds from the sale by the Company of Common Stock (other than
pursuant to the Warrants) minus (B) all Restricted Payments and Restricted
Investments made since the Closing Date.

         "Environment" means all air, surface water, groundwater, or land,
including land surface or subsurface, including all fish, wildlife, biota and
all other natural resources.

         "Environmental Auditors" has the meaning set forth in Section 7.14
hereof

         "Environmental Claim" means any and all administrative or judicial
actions, suits, orders, claims, liens, notices, notices of violations,
investigations, complaints, requests for information, proceedings, or other
communication (written or oral), whether criminal or civil, (collectively,
"Claims") pursuant to or relating to any applicable Environmental Law by any
person (including but not limited to any Governmental or Regulatory Authority,
private person and citizens' group) based upon, alleging, asserting, or claiming
any actual or potential (i) violation of or liability under any Environmental
Law, (ii) violation of any Environmental Permit, or (iii) liability for
investigatory costs, cleanup costs, removal costs, remedial costs, response
costs, natural resource damages, property damage, personal injury, fines, or
penalties arising out of, based on, resulting from, or related to the presence,
or Release into the Environment, of any Hazardous Materials at any location,
including but not limited to any off-site location to which Hazardous Materials
or materials containing Hazardous Materials were sent forth for handling,
storage, treatment or disposal.

         "Environmental Clean-up Site" means any location which is listed or
proposed for listing on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System, or on any
similar state list of sites requiring investigation or cleanup, or which is the
subject of any pending or threatened action, suit, proceeding, or investigation
related to or arising from any alleged violation of any Environmental Law or the
presence or Release of a Hazardous Material.

         "Environmental Law" means any and all current and future, federal,
state, local, provincial and foreign, civil and criminal laws, statutes,
ordinances, orders, codes, rules, regulations, Environmental Permits, policies,
guidance documents, judgments, decrees, injunctions, or agreements with any
Governmental or Regulatory Authority, relating to the protection of health and
the Environment, worker health and safety, and/or governing the handling, use,
generation, treatment, storage, transportation, disposal, manufacture,
distribution, formulation, packaging, labeling, or Release of Hazardous
Materials, whether now existing or subsequently amended or enacted, including
but not limited to: the Clean Air Act, 42 U.S.C. ss. 7401 et seq.; the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), 42 U.S.C. ss. 9601 et seq.; the Federal Water Pollution Control Act,
33 U.S.C. ss. 1251 et seq; the Hazardous Material Transportation Act 49 U.S.C.
ss. 1801 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act 7
U.S.C. ss. 136 et seq.; the Resource Conservation



   8

and Recovery Act of 1976 ("RCRA"), 42 U.S.C. ss. 6901 et seq.; the Toxic
Substances Control Act, 15 U.S.C. ss. 2601 et seq.; the Occupational Safety &
Health Act of 1970, 29 U.S.C. ss. 651 et seq.; the Oil Pollution Act of 1990, 33
U.S.C. ss. 2701 et seq.; and the state analogies thereto, all as amended or
superseded from time to time; and any common law doctrine, including but not
limited to, negligence, nuisance, trespass, personal injury, or property damage
related to or arising out of the presence, Release, or exposure to a Hazardous
Material.

         "Environmental Permit" means any federal, state, local, provincial, or
foreign permits, licenses, approvals, consents or authorizations required by any
Governmental or Regulatory Authority under or in connection with any
Environmental Law and includes any and all orders, consent orders or binding
agreements issued or entered into by a Governmental or Regulatory Authority
under any applicable Environmental Law.

         "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, or any successor statute.

         "ERISA Affiliate" means each "person" (as defined in Section 3(9) of
ERISA) which is under "common control" with the Company or any of its
Subsidiaries (within the meaning of Section 414(b), (c), (m) or (o) of the
Code).

         "Event of Default" has the meaning set forth in Section 14 hereof.

         "Fair Market Value" of any property means the fair market sale value
which a willing buyer at retail would pay a willing seller, each under no
compulsion to buy or sell and in full possession of all relevant facts.

         "GAAP" means generally accepted accounting principles, as in effect
from time to time, which shall include the official interpretations thereof by
the Financial Accounting Standards Board or any successor thereto, consistently
applied.

         "General Intangibles" means all of the Company's and the Subsidiary's
present and future general intangibles and other personal Property (including
without limitation, any and all rights of the Company and the Subsidiary to all
choses or things in action, tax refund claims, credits, claims, demands,
goodwill, licenses, franchise agreements, subscription costs, patents, trade
names, trademarks, service marks, copyrights, rights to royalties, blueprints,
drawings, customer lists, purchase orders, computer programs, computer discs,
computer tapes, literature, reports, catalogs, methods, sales literature, video
tapes, confidential information and trade secrets, consulting agreements,
employment agreements, leasehold interests in real and personal Property,
insurance policies, deposits with insurers relating to workers' compensation
liabilities, deposit accounts, tax refunds and proprietary rights in any
equipment), other than "Equipment," "Inventory," "Accounts" and "Negotiable
Instruments," as each such term is defined in the UCC, as well as the Company's
and the Subsidiary's books and records of any kind relating to any of the
foregoing, and all products and proceeds of the foregoing.

         "Governmental Regulations" means any and all laws, statutes,
ordinances, rules,



   9

regulations, judgments, writs, injunctions, decrees, orders, awards and
standards, or any similar requirement, of the government of the United States or
any foreign government or any state, province, municipality or other political
subdivision thereof or therein or any court, agency, instrumentality, regulatory
authority or commission of any of the foregoing.

         "Governmental or Regulatory Authority" means any court, tribunal,
arbitrator, authority, agency, commission, official or other instrumentality of
the United States, any foreign country or any domestic or foreign state, county,
city or other political subdivision.

         "Hazardous Materials" means petroleum, petroleum hydrocarbons or
petroleum products, petroleum by-products, radioactive materials, underground
storage tanks, asbestos or asbestos-containing materials, gasoline, diesel fuel,
pesticides, radon, urea formaldehyde, lead or lead-containing materials,
polychlorinated biphenyls, ionizing and non-ionizing radiation including radon
and electromagnetic frequency radiation; and any other chemicals, materials,
substances or wastes in any amount or concentration which are now or hereafter
become defined as or included in the definition of "hazardous substances,"
"hazardous materials," "hazardous wastes," "extremely hazardous waste,"
"restricted hazardous wastes," "toxic substances," "toxic pollutants
"pollutants" "regulated substances," "solid wastes," or "contaminants" or words
of similar import, under any Environmental Law.

         "Income Taxes" means all federal, state, local or foreign income,
taxes, assessments, duties, fees, levies or other governmental charges, whether
disputed or not, together with any interest, penalties, additions to tax or
additional amounts with respect thereto.

         Indebtedness" means all liabilities, obligations and reserves,
contingent or otherwise, which in accordance with GAAP, would be reflected as a
liability on a balance sheet or would be required to be disclosed in a financial
statement, including, without duplication: (i) all Indebtedness for Borrowed
Money, (ii) all obligations secured by any Lien upon Property owned by the
Company, irrespective of whether such obligation or liability is assumed; (iii)
any obligation of the Company guaranteeing or intended to guarantee (whether
guaranteed, endorsed, co-made, discounted, or sold with recourse to the Company,
but exclusive of obligations arising as the result of the endorsement by the
Company of checks or other negotiable instruments in the ordinary course of the
Company's business for purposes of depositing such items) any indebtedness,
lease, dividend, letter of credit, or other obligation of any other Person; and
(iv) liabilities in respect of unfunded vested benefits under any Single
Employer Plan or in respect of withdrawal liabilities incurred under ERISA by
the Company or any ERISA Affiliate to any Multiemployer Plan.

         "Indebtedness for Borrowed Money" means without duplication, all
Indebtedness (i) in respect of money borrowed, (ii) evidenced by a note,
debenture or other like written obligation to pay money (including, without
limitation, all of the Company's Obligations and the Permitted Senior
Indebtedness, and all reimbursement or other obligations of the Company in
respect of letters of credit (except for commercial letters of credit up to
$500,000), letter of credit guaranties, bankers acceptances, interest rate
swaps, controlled disbursement accounts, or other financial products (except
hedging transactions); (iii) in respect of Capitalized Leases or for the

   10

deferred purchase price of Property (other than trade payables arising in the
ordinary course of business that are not represented by promissory notes or by
other written evidence other than invoices); or (iv) in respect of obligations
under conditional sales or other title retention agreements, and all guaranties
of any or all of the foregoing.

         "Indemnified Persons" has the meaning set forth in Section 18.2 hereof.

         "Investment" means, with respect to any Person:

         (i)      the amount paid or committed to be paid, or the value of
                  property or services contributed or committed to be
                  contributed, by the Company for or in connection with the
                  acquisition by the Company of any stock, bonds, notes,
                  debentures, partnership or other ownership interests or other
                  securities of such Person; and

         (ii)     the amount of any advance, loan or extension of credit to, or
                  guaranty or other similar obligation with respect to any
                  Indebtedness of such Person by the Company and (without
                  duplication) any amount committed to be advanced, loaned, or
                  extended to, or the payment of which is committed to be
                  assured by a guaranty or similar obligation for the benefit
                  of, such Person by the Company.

         "Joint Venture" means a corporation, limited partnership or other
limited liability business entity, formed in the ordinary course of business by
the Company or any Subsidiary with Persons other than Affiliates.

         "Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), or preference, priority or
other security interest of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement and any
financing lease or Capitalized Lease having substantially the same effect as any
of the foregoing and any assignment or other conveyance of any right to receive
income).

         "Loan Agreement" means the Commercial Note and related documents, dated
as of June 7, 2000, as amended through the date hereof, between the Company and
the Senior Lender.

         "Loan Documents" mean, collectively, the

         (i)      Agreement;

         (ii)     Notes;

         (iii)    Warrants;

         (iv)     Collateral Assignment;

         (v)      UCC financing statements; and
   11

         (vi)     such other instruments and documents as Purchasers may require
                  to evidence and perfect the Security Interests and the Notes,

         and individually any one of them.

         As to each of the foregoing, together with all alterations, amendments,
changes, extensions, modifications, refinancings, refundings, renewals,
replacements, restatements or supplements thereto.

         "Losses" have the meaning set forth in Section 18.2 hereof.

         "Majority Noteholders" means the holders of Notes evidencing more than
50% of the principal amount of all Notes then outstanding.

         "Material Adverse Effect" means (i) a material adverse effect on the
assets, properties, liabilities, business, affairs, results of operations,
condition (financial or otherwise) or prospects of the Company and the
Subsidiary on a consolidated basis, (ii) an effect which is prejudicial in any
material respect to the holders of the Notes or the Warrants or (iii) an effect
on the ability of the Company or the Subsidiary to perform its obligations under
this Agreement, any Loan Document, the Notes or the Warrants.

         "Multiemployer Plan" shall mean any multiemployer plan (within the
meaning of section 3(37) of ERISA) to which either the Company, the Subsidiary,
or any ERISA Affiliate has an obligation to contribute.

         "Note" or "Notes" has the meaning set forth in Section l(b) hereof.

         "Outstanding" or "outstanding" means, when used with reference to the
Notes or Warrants as of a particular time, all Notes or Warrants, as the case
may be, theretofore duly issued except (i) Notes or Warrants theretofore
reported as lost, stolen, mutilated or destroyed or surrendered for transfer,
exchange or replacement, in respect of which new or replacement Notes or
Warrants have been issued by the Company, (ii) Notes theretofore paid in full,
(iii) Warrants theretofore fully exercised and (iv) Notes theretofore canceled
by the Company, whether upon exercise of a Warrant in whole or in part or
otherwise; except that for the purpose of determining whether holders of the
requisite principal amount of Notes or Warrants have made or concurred in any
declaration, waiver, consent, approval, notice, annulment of acceleration or
other communication under this Agreement or under any Notes or Warrants, Notes
or Warrants registered in the name of, as well as Notes or Warrants owned
beneficially by, the Company, the Subsidiary or any of their Affiliates (other
than one of the Purchasers) shall not be deemed to be outstanding.

         "PBGC" means the Pension Benefit Guaranty Corporation.

         "Permits" has the meaning set forth in Section 4.10 hereof


   12

         "Permitted Liens" means any of the following Liens:

         (i)      the Senior Security Interests;

         (ii)     the Security Interests;

         (iii)    Liens for taxes not delinquent or for taxes being contested in
                  good faith by appropriate proceedings and as to which adequate
                  financial reserves have been established on its books and
                  records;

         (iv)     Liens (other than any Lien imposed by ERISA) created and
                  maintained in the ordinary course of business which are not
                  material in the aggregate, and which would not constitute or
                  result in a Material Adverse Effect, and which constitute (A)
                  pledges or deposits under worker's compensation laws,
                  unemployment insurance laws or similar legislation, (B) good
                  faith deposits in connection with bids, tenders, contracts or
                  leases to which the Company or a Subsidiary is a party for a
                  purpose other than borrowing money or obtaining credit,
                  including rent security deposits, (C) Liens imposed by law,
                  such as those of carriers, warehousemen and mechanics, if
                  payment of the obligation secured thereby is not yet due or if
                  such Liens are discharged within sixty (60) days of the date
                  they are imposed, (D) Liens securing taxes, assessments or
                  other governmental charges or levies not yet subject to
                  penalties for nonpayment, and (E) pledges or deposits to
                  secure public or statutory obligations of a Company or a
                  Subsidiary, or surety, customs or appeal bonds to which the
                  Company or a Subsidiary is a party;

         (v)      Liens affecting real property which constitute minor survey
                  exceptions or defects or irregularities in title, minor
                  encumbrances, easements or reservations of, or rights of
                  others for, rights of way, sewers, electric lines, telegraph
                  and telephone lines and other similar purposes, or zoning or
                  other restrictions as to the use of such real property;
                  provided, however, that all of the foregoing, in the
                  aggregate, do not at any time materially detract from the
                  value of said properties or materially impair their use in the
                  operation of the businesses of the Company or the Subsidiary,
                  as the case may be; and

         (vi)     Purchase Money Liens securing purchase money Indebtedness;
                  provide, however, that the aggregate outstanding amount of
                  Indebtedness and secured by all such Purchase Money Liens for
                  the Company and all Subsidiaries shall not exceed, on an
                  aggregate basis, $500,000 at any time.

         "Permitted Senior Indebtedness" means (1) Senior Indebtedness in an
amount up to $5 million and (ii) the interests of the lessor under any
Capitalized Leases permitted to exist hereunder.

         "Person" means an individual, corporation, partnership, firm, limited
liability company, association, trust, unincorporated organization, government,
governmental body or political subdivision thereof.


   13

         "Plan" shall mean any employee benefit plan (within the meaning of
section 3(3) of ERISA) maintained or contributed to by the Company, any
Subsidiary, or any ERISA Affiliate, other than a Multiemployer Plan.

         "Potential Default" means a condition or event which, with notice or
lapse of time or both, would constitute an Event of Default.

         "Prohibited Transaction" means any transaction involving any Plan which
is proscribed by Section 406 of ERISA or Section 4975 of the Code.

         "Property" means all types of real, personal or mixed property and all
types of tangible or intangible property.

         "Purchase Money Liens" means Liens securing purchase money Indebtedness
incurred in connection with the acquisition of capital assets by the Company in
the ordinary course of business; provided that (a) such Liens do not extend to
or cover assets or properties other than those purchased in connection with the
purchase in which such Indebtedness was incurred and (b) the obligation secured
by any such Lien so created shall not exceed 100% of the cost of the property
including transportation and installation costs, covered thereby.

         "Purchaser(s)" has the meaning set forth in the first paragraph hereof.

         "Real Estate" means all real estate and improvements located thereon
owned by the Company.

         "Registration Demand" has the meaning set forth in Section 17 hereof.

         "Release" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, or disposing of a
Hazardous Material into the Environment.

         "Reportable Event" shall mean, with respect to any Single Employer
Plan, an event described in section 4043(b) of ERISA, other than an event as to
which the notice requirement is waived under applicable PBGC regulations.

         "Restricted Investment" means any Investment other than (1) obligations
of the United States government due within one year, (2) certificates of deposit
and bankers acceptances due within one year of a United States domiciled
commercial bank having capital funds of at least $100 million and whose
long-term unsecured debt obligations have been given a rating of at least A by
Standard & Poor's or A2 by Moody's, (3) commercial paper rated P-1 by Moody's or
A-1 by Standard & Poor's and maturing not more than 270 days from the date of
creation thereof, (4) debt of any state or political subdivision that is rated
AA or better by Moody's or Aa2 or better by Standard and Poor's and maturing in
less than one year, (5) investments in, and loans and advances to, Subsidiaries
or entities that will, concurrently with such investment become



   14

Subsidiaries, (6) trade credit extended in the ordinary course of the Company's
business, (7) loans and advances made in the ordinary course of business to
officers and employees of Company for relocation expenses, travel advances and
similar expenses relating to their employment, (8) endorsements of instruments
or items of payment for deposit to the Company's bank accounts, and (9)
additional Investments not to exceed $ 100,000 in the aggregate.

         "Restricted Payment" means (i) every direct or indirect dividend or
other distribution paid, made or declared by the Company on or in respect of any
class of its capital stock or in respect of any partnership or Joint Venture, in
all cases whether now or hereafter outstanding, interests and any payment under
or with respect to anti-dilution provisions of any capital stock of the Company,
(ii) every payment in connection with the redemption, purchase, retirement or
other acquisition, direct or indirect, by or on behalf of the Company of any
shares of the Company's capital stock, whether or not owned by the Company or
any partnership or Joint Venture interests of the Company, or any warrants,
rights or options to acquire such stock or partnership interests, (iii) every
payment to or on behalf of any Affiliate of the Company on account of or with
respect to any lease arrangements and (iv) every payment by or on behalf of the
Company (whether as repayment or prepayment of principal or as interest or
otherwise) on or with respect to (A) any obligation to repay money borrowed
(other than the Notes) owing to any Affiliate of the Company or to any other
holder of shares of the Company's Common Stock (other than such a holder which
holds only Shares) or (B) any obligation to any Person, of any Affiliate of the
Company or of any other holder of shares of the Company's Common Stock, which
obligation is assumed or guaranteed by the Company; provided, however, (a) that
the restrictions of the foregoing clauses (i) and (ii) shall not apply to any
dividend, distribution, or other payment to the extent payable in shares of the
Common Stock of the Company or in options, warrants or other rights to purchase
such Common Stock, (b) that none of the foregoing clauses shall apply to any
payments from a Subsidiary to the Company, (c) that none of the foregoing
clauses shall apply to any purchases by the Company from a Wholly-Owned
Subsidiary of additional capital stock of such Subsidiary and (d) that none of
the foregoing clauses shall apply to any payments, distributions or other
transfers or actions on or with respect to the Notes or Warrants. For purposes
of this definition, "capital stock" shall also include warrants (other than the
Warrants) and other rights and options to acquire shares of capital stock.

         "Securities Act" means the Securities Act of 1933, as amended, and the
rules, regulations and interpretations thereunder.

         "Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules, regulations and interpretations thereunder.

         "Security Interest" means the Liens granted to the Agent for the
benefit of the Purchasers pursuant to this Agreement and the Loan Documents.

         "Senior Indebtedness" means indebtedness to the Senior Lender.

         "Senior Lender" means National City Bank of Michigan/Illinois and its
successors and assigns.


   15

         "Senior Security Interests" means Liens granted to the Senior Lender
pursuant to the Loan Agreement and certain "Loan Documents" (as defined in the
Loan Agreement), as in effect on the date hereof or amended so that the
obligations thereunder constitute Senior Indebtedness.

         "Share" or "Shares" means shares of the Company's Common Stock, or
other securities, which can be obtained or have been obtained by an exercise in
whole or in part of any Warrant or the exchange of a Warrant for shares of the
Company's Common Stock pursuant to the terms of the Warrants. In the event that
any Shares are sold either in a public offering pursuant to an effective
registration statement under Section 6 of the Securities Act or pursuant to Rule
144 (but if sold under Rule 144, only if sold in "brokers' transactions" within
the meaning of Rule 144), then the transferees of such Shares shall not be
entitled to any benefits under this Agreement with respect to such Shares and
such Shares shall no longer be considered to be "Shares" for purposes of this
Agreement.

         "Single Employer Plan" shall mean any Plan that is subject to Title IV
of ERISA.

         "Solvent" has the meaning set forth in Section 4.19 hereto.

         "Subsidiary" means any corporation in which at least a majority of the
shares (other than any directors' qualifying shares required by law) of each
class of the capital stock (other than preferred stock), at the time as of which
any determination is being made, is owned, beneficially and of record, directly
or indirectly, by the Company or its Subsidiary, or both.

         "UCC" means the Uniform Commercial Code as in effect on the date hereof
in the State of Michigan, as amended, or as in effect in any jurisdiction in
which Collateral is located.

         "Voting Stock" means capital stock or a partnership or membership of
any class or classes of a corporation, partnership or other limited liability
entity, respectively, the holders of which are ordinarily entitled to elect the
directors, or persons performing similar functions, of such corporation,
partnership or entity.

         "Warrant" or "Warrants" has the meaning set forth in Section l(d)
hereof.

         "Wholly-Owned Subsidiary" means any Subsidiary, all of the equity
securities of which (other than directors' qualifying shares) are owned by the
Company or one or more other Wholly-Owned Subsidiary of the Company.

         (e) For all purposes of the Loan Documents, except as otherwise
expressly provided or unless the context otherwise requires:

                  (i) the words "herein", "hereof" and "hereunder" and other
                  words of similar import refer to the particular Loan Document
                  as a whole and not to any particular Section or other
                  subdivision thereof,

                  (ii) all accounting terms not otherwise defined herein have
                  the meanings assigned to them in accordance with GAAP;


   16

                  (iii) all computations provided for herein, if any, shall be
                  made in accordance with GAAP, unless another method of
                  computation is herein specified;

                  (iv) any uses of the masculine, feminine or neuter gender
                  shall also be deemed to include any other gender, as
                  appropriate; and

                  (v) the exhibits and schedules to this Agreement shall be
                  deemed a part of this Agreement and any Exhibit, Annex or
                  Schedule to any other Loan Document shall be deemed a part of
                  such other Loan Document, as the case may be.

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company represents and warrants as follows as of the date hereof
and as of the Closing Date:

         4. 1. Corporate Existence and Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and is duly qualified to do business, and is
in good standing, in all additional jurisdictions where such qualification is
necessary under applicable law. The Company has all requisite corporate power to
own or lease the properties used in its business and to carry on its business as
now being conducted and as proposed to be conducted, and to execute and deliver
this Agreement and the other Loan Documents to be executed and to engage in the
transactions contemplated hereby and thereby.

         4.2. Corporate Authority. The execution, delivery and performance by
the Company of this Agreement and the other Loan Documents have been duly
authorized by all necessary corporate action and are not in contravention of any
applicable Governmental Regulation, or of the terms of the Company's charter or
by-laws, or of any contract or undertaking to which the Company is a party or by
which the Company or its property may be bound or affected and do not result in
the imposition of any Lien, except for Permitted Liens.

         4.3. Binding Effect. This Agreement is, and each of the Loan Documents
to which the Company is a party when delivered hereunder will be, legal, valid
and binding obligations of the Company, enforceable against the Company in
accordance with their respective terms.

         4.4. Subsidiaries. The only Subsidiary of the Company is Integral
Vision Ltd., a company organized under the laws of England and Wales. The
Company directly owns all of the issued and outstanding shares of the
Subsidiary.

         4.5. Financial Condition. The financial statements included in the
documents delivered pursuant to Section 10.6, copies of which have been
furnished to the Purchasers, fairly present, and the financial statements
delivered pursuant to Section 7.4 will fairly present, the financial position of
the Company and the Subsidiary as at the respective dates thereof, and the
results of operations of the Company and the Subsidiary for the respective
periods indicated, all on a


   17

consolidated basis in accordance with GAAP (subject, in the case of interim
statements, to normal, immaterial year-end audit adjustments). There is no
material Contingent Liability of the Company or the Subsidiary that is not
reflected in such consolidated statements or in the notes thereto.

         4.6. Use of Loans. The Company will use the proceeds of the sale of the
Notes and the Warrants for working capital and other general corporate purposes.
The Company does not extend or maintain, in the ordinary course of business,
credit for the purpose, whether immediate, incidental, or ultimate, of buying or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
Note will be used for the purpose, whether immediate, incidental, or ultimate,
of buying or carrying any such margin stock or maintaining or extending credit
to others for such purpose.

         4.7. Consents, Etc. Except for such consents, approvals,
authorizations, declarations, registrations or filings delivered by the Company
at or prior to the Closing pursuant to Section 10.5, if any, each of which is in
full force and effect, and the consent of the Senior Lender, no consent,
approval or authorization of or declaration, registration or filing with any
governmental authority or any nongovernmental person, including any creditor,
lessor or shareholder of the Company or any Subsidiary, is required on the part
of the Company or any Subsidiary in connection with the execution, delivery and
performance of this Agreement and the other Loan Documents or the transactions
contemplated hereby or thereby or as a condition to the legality, validity or
enforceability of this Agreement and the other Loan Documents.

         4.8. Taxes. Each of the Company and the Subsidiary has filed all tax
returns (federal, state and local) required to be filed and have paid all taxes
shown thereon to be due, including interest and penalties, or has established
adequate financial reserves on its books and records for payment thereof. The
Company does not know of any actual or proposed tax assessment or any basis
therefor, and no extension of time for the assessment of deficiencies in any
federal or state tax has been granted to the Company.

         4.9. Title to Properties. Except as otherwise disclosed in the latest
consolidated balance sheet delivered pursuant to Section 4.5, the Company and
the Subsidiary have a valid and indefeasible ownership interest in all of the
properties and assets reflected in the consolidated balance sheet of the Company
and the Subsidiary or subsequently acquired by the Company or the Subsidiary.
All of such properties and assets are free and clear of any Lien, except for
Permitted Liens.

         4.10. Compliance with Governmental Relations. To the best of the
Company's knowledge, the Company and the Subsidiary is in compliance in all
material respects with all Governmental Regulations (including Environmental
Laws) applicable to such person or its business or properties. Without limiting
the generality of the foregoing, all licenses, permits, orders or approvals
which are required under any Governmental Regulation in connection with any of
the businesses or properties of the Company or the Subsidiary ("Permits") are in
full force and effect, no notice of any violation has been received in respect
of any such Permits and no proceeding is pending or, to the knowledge of the
Company, threatened to terminate, revoke or



   18

limit any such Permits.

         4.11. ERISA. To the best of the Company's knowledge, the Company and
its Plans are in compliance in all material respects with those provisions of
ERISA and of the Code which are applicable with respect to any Plan. No
Prohibited Transaction and no Reportable Event has occurred with respect to any
such Plan. The Company is not an employer with respect to any Multiemployer
Plan. The Company has met the minimum funding requirements under ERISA and the
Code with respect to its Plans, if any, and have not incurred any liability to
the PBGC or any Plan. There is no material unfunded benefit liability,
determined in accordance with Section 400 1 (a)(1 8) of ERISA, with respect to
any Plan of the Company.

         4.12. Environmental Matters. Without limiting the generality of Section
4.10:

                  (a)      No written demand, claim, notice, suit, suit in
                           equity, action, administrative action, investigation
                           or inquiry whether brought by any governmental
                           authority, private person or otherwise, arising
                           under, relating to or in connection with any
                           Environmental Laws is pending or, to the best of the
                           Company's knowledge, threatened against Company, the
                           Subsidiary any Property or any past or present
                           operation of the Company or the Subsidiary which
                           could result in a Material Adverse Effect.

                  (b)      The Company does not have any knowledge that any
                           other person has ever received any notice, claim or
                           allegation of any violation, and the Company is not
                           aware of any existing violation, of Environmental
                           Laws at or about any Property, and the Company does
                           not have any knowledge of any actions commenced or
                           threatened by any party for or related to or arising
                           out of non-compliance with Environmental Laws which
                           apply to any Property, activities at any Property or
                           Hazardous Materials at, from or affecting any
                           Property.

                  (c)      None of the Property appears on the National Priority
                           List (as defined under federal law) or any state
                           listing which identifies sites for remedial clean-up
                           or investigatory actions. To the best of the
                           Company's knowledge, none of the Property has been
                           contaminated with substances which give rise to a
                           clean-up obligation under any Environmental Law or
                           common law.

         4.13. Investment Company Act. Neither Company nor the Subsidiary is an
"investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.

         4.14. Disclosure. No report or other information furnished in writing
by or on behalf of the Company to any Purchaser in connection with the
negotiation or administration of this Agreement contains any material
misstatement of fact or omits to state any material fact or any fact necessary
to make the statements contained therein not misleading. Neither this Agreement,

   19

the other Loan Documents, nor any other document, certificate, or report or
statement or other information furnished to any Purchaser by or on behalf of the
Company in connection with the transactions contemplated hereby contains any
untrue statement of a material fact or omits to state a material fact in order
to make the statements contained herein and therein not misleading. There is no
fact known to the Company which materially and adversely affects, or which in
the future may (so far as the Company can now foresee) materially and adversely
affect, the business, properties, operations, condition, financial or otherwise,
or prospects of the Company or the Subsidiary, which has not been set forth in
this Agreement or in the other documents, certificates, statements, reports or
other information furnished in writing to any Purchaser by or on behalf of the
Company in connection with the transactions contemplated hereby.

         4.15. Stock Ownership. The authorized capital stock of the Company
consists of (i) 15,000,000 shares of Common Stock, without par value, of which
9,029,901 shares are outstanding, and (ii) 400,000 shares of Preferred Stock,
without par value, none of which are outstanding. Such outstanding shares of
Common Stock are duly authorized, validly issued and outstanding and fully paid
and nonassessable. Except for the Warrants and options to purchase 982,600
shares of Common Stock granted to employees of the Company pursuant to the
Company's stock option plans, there are no outstanding options, warrants,
rights, convertible securities or other agreements or plans under which the
Company may become obligated to issue, sell or transfer shares of its capital
stock or other securities.

         4.16. No Defaults or Conflicts.

         (a) No Event of Default or Potential Default has occurred and is
continuing.

         (b) The execution, delivery and performance by the Company of this
Agreement and of the Loan Documents to which it is a party and any of the
transactions contemplated hereby or thereby (including, without limitation, the
issuance of the Notes, the Warrants and the Shares as contemplated herein or
therein) do not and will not (i) violate or conflict with, with or without the
giving of notice or the passage of time or both, any provision of (A) the
Articles of Incorporation or By-Laws of the Company or (B) any law, rule,
regulation, order, judgment, writ, injunction, decree, agreement, indenture or
other instrument applicable to the Company or the Subsidiary or any of their
respective properties (or to which the Company of the Subsidiary is a party or
by which any of their respective properties may be bound), (ii) other than
pursuant to this Agreement or the Loan Documents, result in the creation of any
Lien upon any of the Company's or the Subsidiary's Properties, (iii) require the
consent, waiver, approval, order or authorization of, or declaration,
registration, qualification or filing with, any Person (whether or not a
governmental authority and including, without limitation any shareholder
approval) other than (A) the consent of the Senior Lender (B) any registration,
qualification or filing with the Securities and Exchange Commission or any state
securities commission necessary in connection with the Company's obligations
under Section 17 hereof and (C) the Company's routine filing obligations under
the Securities Exchange Act or (iv) cause anti-dilution clauses of any
outstanding securities to become operative or give rise to any preemptive
rights. No such provision referred to in the preceding clause (i) will have a
Material Adverse Effect.


   20

         4.17. Offering of Notes. Neither the Company nor any agent nor any
other Person acting on their behalf, directly or indirectly, (i) offered any of
the Notes, Warrants or any similar security of the Company (A) by any form of
general solicitation or general advertising (within the meaning of Regulation D
under the Securities Act) or (B) for sale to or solicited offer to buy any
thereof from, or otherwise approached or negotiated with respect thereto with,
any Person other than the Purchasers and additional potential investors in
compliance with Regulation D under the Securities Act or (ii) has done, or
caused to be done (or has omitted to do or to cause to be done) any act which
act (or which omission) would result in bringing the issuance or sale of the
Notes, Warrants or Shares within the provisions of Section 5 of the Securities
Act.

         4.18. Outstanding Securities. All securities (as defined in the
Securities Act) of each of the Company have been offered, issued, sold and
delivered in compliance with, or pursuant to exemptions from, all applicable
federal and state laws, and the rules and regulations of federal and state
regulatory bodies governing the offering, issuance, sale and delivery of
securities.

         4.19. Solvency. The Company is and has been experiencing cash flow
difficulties such that it would likely not meet a definition of "solvency"
meaning that it can pay its debts as they mature. However, the assets of the
Company, at a fair valuation, exceed its total liabilities (including
contingent, subordinated, uni-natured and unliquidated liabilities) and the
Company does not have an unreasonably small capital with which to engage in its
anticipated business. Assuming all $1,500,000 of the Notes are purchased, the
Company believes that it will have sufficient cash flow to meet its obligation
and to enable it to put in place its business plans.

         4.20. Chief Executive Office. The chief executive office of the Company
and its records with respect to the Collateral are located at Farmington Hills,
Michigan.

SECTION 5. REPRESENTATIONS OF THE PURCHASERS

         Each Purchaser severally represents and warrants, but only as to
itself, to the Company that:

         5.1. Power and Authority. Such Purchaser has all requisite power,
authority and legal right to execute, deliver, enter into, consummate and
perform this Agreement and the Loan Documents to which it is a party. The
execution, delivery and performance of this Agreement and the Loan Documents to
which it is a party by such Purchaser have been duly authorized by all required
corporate and other actions. Such Purchaser has duly executed and delivered this
Agreement and the Loan Documents to which it is a party, and this Agreement and
the Loan Documents to which it is a party constitute the legal, valid and
binding obligation of such Purchaser enforceable against such Purchaser in
accordance with their respective terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to the rights of
creditors generally and subject to the availability of equitable remedies and
the application of equitable principles.

         5.2. Purchase for Investment. Such Purchaser is capable of evaluating
the risk of its investment in the Notes and Warrants being purchased by it and
is able to bear the economic risk of such investment. Such Purchaser is
purchasing the Notes and Warrants to be purchased by it



   21

for its own account, and the Notes and Warrants are being purchased by it for
investment and not with a present view to any distribution thereof. Such
Purchaser is an "accredited investor" as defined in Rule 501(a) under the
Securities Act.

         It is understood that the disposition of such Purchaser's property
shall, subject to the terms of this Agreement, at all times be within such
Purchaser's control. If such Purchaser should in the future decide to dispose of
any of its Notes, Warrants or Shares, it is understood that it may do so only in
compliance with the Securities Act and this Agreement.

SECTION 6. PREPAYMENTS AND REPAYMENTS

         6.1. Prepayment at Holder's Option.

         (a) In the event of a Change of Control Event, each holder of a Note or
Notes shall have the right, at such holder's option, to require the Company to
prepay such holder's Note or Notes in whole at a price equal to (i) 100% of the
aggregate principal amount of Notes to be prepaid plus (ii) all accrued interest
on the Notes to the date of prepayment. Such option shall be exercised by
written notice to the Company under Section 6.1(b) hereof given at any time from
and after the Change of Control Event. As soon as possible after a Change of
Control Event occurs, or the Company has knowledge that it is likely to occur,
the Company shall give written notice to each holder of a Note or Notes
notifying each such holder of the occurrence or likely occurrence of such Change
of Control Event and informing each such holder of its right to exercise an
option to require a prepayment under this Section 6.1(a).

         (b) In order to exercise its rights to require a prepayment under this
Section 6.1, a holder requiring such prepayment shall send to the Company a
written notice demanding prepayment under this Section 6.1 and specifying the
date of such prepayment (which must be a Business Day and which shall not be
less than thirty (30) days after receipt of such notice by the Company, but in
no event earlier than such Change of Control Event).

         (c) In the event that on any date for prepayment pursuant to this
Section 6.1 the Company, for whatever reason, does not pay in full the
prepayment amount or amounts due to any holder or holders of Notes who have
requested prepayment, then the amount actually prepaid by the Company to all
holders of Notes pursuant to this Section 6.1 shall be allocated among all such
holders of Notes in proportion, as nearly as practicable, to the respective
unpaid principal amount of Notes then held by each such holder; provided,
however, such non-payment in full shall nonetheless constitute a Potential
Default.

         6.2. Optional Prepayments.

         (a) At any time after April 1, 2002 (but not before) the Company may at
its option (subject to the other provisions of this Section 6.2) prepay all or
part of the principal amount of outstanding Notes, at a price equal to the
aggregate principal amount of the outstanding Notes to be prepaid plus accrued
interest thereon to the date of prepayment.


   22

         (b) The aggregate amount of each prepayment of the principal amount of
Notes pursuant to this Section 6.2 shall be allocated among all Notes at the
time outstanding, in proportion, as nearly as practicable, to the respective
unpaid principal amounts of such Notes.

         (c) The right of the Company to prepay Notes pursuant to this Section
6.2 shall be conditioned upon its giving notice of prepayment, signed by a
principal financial officer, to the holders of Notes not less than thirty (30)
days and not more than sixty (60) days prior to the date upon which the
prepayment is to be made specifying (i) the registered holder of each Note to be
prepaid, (ii) the aggregate principal amount being prepaid, (iii) the date of
such prepayment (which must be a Business Day), (iv) the accrued and unpaid
interest (to but not including the date upon which the prepayment is to be made)
and (v) that the prepayment of Notes is being made pursuant to this Section 6.2.
Notice of prepayment having been so given, the aggregate principal amount of the
Notes so specified in such notice, and all accrued and unpaid interest thereon,
shall become due and payable on the specified prepayment date, but the right to
apply any or all of the Notes as payment to exercise any Warrant or Warrants
shall continue to, but not including, the date of such prepayment.

         6.3. Obligations Unconditional. The Company hereby agrees and confirms
that its obligations under the Notes shall be deemed to constitute for all
Purposes obligations for the payment of indebtedness for borrowed money and
shall accordingly be absolute and unconditional in accordance with the terms of
the Notes and this Agreement and shall not be affected by (and the Company
agrees not to assert) any right the Company may now or at any time hereafter
have, including any right to terminate, cancel, quit or surrender this Agreement
or any Note except in accordance with the express terms thereof.

SECTION 7. AFFIRMATIVE COVENANTS

         The Company covenants and agrees that, until payment in full of the
principal of and accrued interest on the Notes and the payment or performance of
all other obligations under the Loan Documents, the Company shall:

         7.1. Preservation of Corporate Existence; Etc. Do or cause to be done
all things necessary to preserve, renew and keep in full force and effect its
legal existence, except to the extent permitted by Section 8.5, and its
qualification as a foreign corporation in good standing in each jurisdiction in
which such qualification is necessary under applicable law, and the rights,
licenses, permits (including those required under Environmental Laws),
franchises, patents, copyrights, trademarks and trade names material to the
conduct of its businesses; and defend all of the foregoing against all claims,
actions, demands, suits or proceedings at law or in equity or by or before any
governmental instrumentality or other agency or regulatory authority.

         7.2. Compliance with Laws, Etc. Comply with all Governmental
Regulations (including ERISA, the Code and Environmental Laws), in effect from
time to time; and pay and discharge promptly when due all taxes, assessments and
governmental charges or levies imposed upon it or upon its income, revenues or
property, before the same shall become delinquent or in default, as well as all
lawful claims for labor, materials and supplies or otherwise, which, if unpaid,
might



   23

give rise to any Lien upon such properties or any portion thereof, except to the
extent that payment of any of the foregoing is then being contested in good
faith by appropriate legal proceedings and with respect to which adequate
financial reserves have been established on the books and records of the
Company.

         7.3. Maintenance of Properties; Insurance. Maintain, preserve and
protect all property that is material to the conduct of its business and keep
such property in good repair, working order and condition and from time to time
make, or cause to be made, all needful and proper repairs, renewals, additions,
improvements and replacements thereto necessary in order that the business
carried on in connection therewith may be properly conducted at all times in
accordance with customary and prudent business practices for similar businesses;
and maintain in full force and effect insurance with responsible and reputable
insurance companies or associations in such amounts, on such terms and covering
such risks, including fire and other risks insured against by extended coverage,
as is usually carried by companies engaged in similar businesses and owning
similar properties similarly situated and maintain in full force and
effect public liability insurance, business interruption insurance, insurance
against claims for personal injury or death or property damage occurring in
connection with any of its activities or any properties owned, occupied or
controlled by it, in such amounts as it shall reasonably deem necessary, and
maintain such other insurance as may be required by Governmental Regulations or
as may be reasonably requested by the Majority Noteholders. Upon request, the
Company shall deliver to each Purchaser copies of all or any of such insurance
policies or the related certificates of insurance.

         7.4. Reporting Requirements. Furnish to each Purchaser the following:

         (a) promptly and in any event within five (5) calendar days after
         becoming aware of the occurrence of (A) any Potential Default or Event
         of Default, (B) the commencement of any material litigation against, by
         or affecting the Company or any Subsidiary, and any material
         developments therein, or (C) any development in the business or affairs
         of the Company which has resulted in or which is likely, in the
         reasonable judgment of the Company, to result in a Material Adverse
         Effect, a statement of the chief financial officer of the Company
         setting forth details of such Potential Default or Event of Default or
         such litigation or such event or condition and the action which the
         affected person has taken and proposes to take with respect thereto;

         (b) as soon as available and in any event within 30 days after the end
         of each fiscal month of the Company, the consolidated balance sheet of
         the Company as of the end of each such month and consolidated income
         statement of the Company for each such month and for the period
         commencing at the end of the previous fiscal year and ending with the
         end of such month, setting forth in each case in comparative form the
         corresponding figures for the corresponding date or period of the
         preceding fiscal year, all in reasonable detail and duly certified
         (subject to normal, immaterial year-end audit adjustments) by the chief
         financial officer or controller of the Company as having been prepared
         in accordance with GAAP, together with a certificate of the chief
         financial officer or controller of the Company (A) stating that no
         Potential Default or Event of Default has occurred and is continuing
         or, if any Potential Default or Event of Default has occurred



   24

         and is continuing a statement setting forth the details thereof and the
         action which the applicable person has taken and proposes to take with
         respect thereto, and (B) setting forth a computation (which computation
         shall accompany such certificate and shall be in reasonable detail)
         showing compliance with Sections 8.1 and 8.4 in conformity with the
         terms of this Agreement;

         (c) as soon as available and in any event within 90 days after the end
         of each fiscal year of the Company, a copy of the annual audited
         consolidated financial statements of the Company for such fiscal year,
         with a customary audit report the Accountants, and a certificate of the
         chief financial officer or controller of the Company (A) stating that
         no Potential Default or Event of Default has occurred or is continuing
         or if any Potential Default or Event of Default has occurred and is
         continuing, a statement setting forth the details thereof and the
         action which the applicable person has taken and proposes to take with
         respect thereto, and (B) setting forth a computation (which computation
         shall accompany such certificate and shall be in reasonable detail)
         showing compliance with Sections 8.1and 8.4 in conformity with the
         terms of this Agreement;

         (d) as soon as available, and in any event no later than 30 days prior
         to the beginning of each fiscal year of the Company and prior to the
         final approval by its Board of Directors, a budget for such fiscal year
         presented on a monthly basis regarding the Company's operations and
         capital expenditures on a consolidated basis, including a balance sheet
         and statements of income and cash flow for each month, together with an
         analysis of such budget prepared in reasonable detail by the chief
         financial officer or the President of the Company, and, within fifteen
         (15) days following their preparation, (1) any operating budget of the
         Company otherwise prepared and submitted to its Board and (2) any
         revisions or amendments made by the Company (and submitted to its
         Board) to any budget delivered under this clause (d);

         (e) promptly after receipt thereof by the Company, copies of any audit
         or management reports submitted to it by independent accountants in
         connection with any audit, interim audit or other report submitted to
         the board of directors of the Company;

         (f) promptly after the same are available, copies of each annual
         report, proxy or financial statement or other communication sent to the
         Company's stockholders and copies of all annual, regular, periodic and
         special reports and registration statements which the Company may file
         or be required to file with the Securities and Exchange Commission or
         with any securities exchange or the National Association of Securities
         Dealers, Inc.; and

         (g) promptly, such other information respecting the business,
         properties, operations or condition, financial or otherwise, of the
         Company as any Purchaser may from time to time reasonably request upon
         reasonable notice.

         Without limiting the foregoing provisions of this Section 7.4, the
Company agrees that, if expressly requested in writing by any holder of Notes or
Warrants, it will not deliver to such


   25

holder (until otherwise instructed by such holder) (x) any information or
materials regarding the Company (whether described in this Section 7.4 or
otherwise) that is nonpublic and (y) any information (whether or not included in
clause (x)) which such holder specifies it does not want to receive.

         Each holder of Notes and Warrants hereby acknowledges that it is aware
of the restrictions imposed by federal and state securities laws on a person
possessing material nonpublic information about a company. In this regard, each
such holder hereby agrees that (i) while it is in possession of material
nonpublic information with respect to the Company and its Subsidiaries, such
holder will not purchase or sell any securities of the Company, or communicate
such information to any third party, in violation of any such laws and (ii) it
will keep all such nonpublic information confidential.

         7.5. Accounting; Access to Records, Books; Etc. Maintain a system of
accounting established and administered in accordance with sound business
practices to permit preparation of financial statements in accordance with GAAP
and to comply with the requirements of this Agreement and, at any reasonable
time and from time to time, (i) permit the Agent to examine and make copies of
and abstracts from the records and books of account of, and visit the properties
of, such person and to discuss the affairs, finances and accounts of such person
with their respective directors, officers, employees and independent auditors,
and by this provision the Company does hereby authorize the same, and (ii)
permit the Agent to conduct a comprehensive field audit of its books, records,
properties and assets.

         7.6. Further Assurances. Execute and deliver promptly after request
therefor by any Purchaser, all further instruments and documents and take all
further action that may be necessary or desirable, or that any Purchaser may
request, in order to give effect to, and to aid in the exercise and enforcement
of the rights and remedies of any Purchaser under, this Agreement and the other
Loan Documents.

         7.7. Use of Proceeds. The Company will use the net proceeds realized
from the sale of the Notes and Warrants for working capital and other general
corporate purposes. No portion of such proceeds will be used for the purpose,
whether immediate, incidental or ultimate, of purchasing or carrying, within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System,
as amended from time to time, any "margin stock" as defined in said Regulation
U, or any "margin stock" as defined in Regulation G of the Board of Governors of
the Federal Reserve System, as amended from time to time, or for the purpose of
purchasing, carrying or trading in securities within the meaning of Regulation T
of the Board of Governors of the Federal Reserve System, as amended from time to
time, or for the purpose of reducing or retiring any indebtedness which was
originally incurred to purchase any such margin stock or other securities.

         7.8. Inspection. The Company will permit the Agent to visit and inspect
any of the properties of the Company and its Subsidiaries, to examine their
respective books of account and to discuss their business, affairs, finances and
accounts with their officers, all at such reasonable times (during normal
business hours and after notice to the Company) and as often as may be
reasonably requested and, if there is no Event of Default or Potential Default
continuing, at such


   26

holder's expense, otherwise at the Company's expense.

         7.9. Office for Payment, Exchange and Registration. So long as any of
the Notes or Warrants are outstanding, the Company will maintain an office or
agency where Notes or Warrants may be presented for payment, exchange, exercise
or registration of transfer as provided in this Agreement or in the Warrants.
Such office or agency initially shall be the office of the Company set forth in
Section 22 hereof, which place may from time to time be changed by notice to the
holders of all Notes and Warrants then outstanding.

         7.10. Notices. The Company will give notice to each holder of a Note or
Warrant promptly after it learns (other than by notice from all of such holders)
of the existence of any default under any Senior Indebtedness or any material
default under any other evidence of Indebtedness or under any indenture,
mortgage or other agreement relating to any evidence of Indebtedness in respect
of which the Company or any Subsidiary is liable.

         7.11. Fiscal Year. The fiscal year of the Company for tax, accounting
and any other purposes shall end on December 31 of each calendar year.

         7.12. Communication with Accountants. The Company hereby authorizes the
Agent (on behalf of the Purchasers) to communicate directly with the independent
certified public accountants for the Company and authorizes such accountants to
disclose to the Agent any and all financial statements and any other information
of any kind that they may have with respect to the assets, properties,
liabilities, business, affairs, results of operations, condition (financial or
otherwise) or prospects of the Company; provided, that the Company be informed
of any such disclosures and participate in any conversations between such
accountants and the Agent (and the Company agrees that it will not fail to
cooperate in arranging or unreasonably delay any such conversations); and
further provided that the Agent shall not incur charges from such accountants in
exercise of such rights for more than ten (10) hours per calendar year without
the Company's prior written consent. The Company shall deliver a letter
addressed to such accountants instructing them to comply with the provisions of
this Section 7.12.

         7.13. Environmental Matters. The Company agrees to indemnify, defend,
protect and hold harmless Purchasers, their officers, directors, shareholders,
employees, and agents from and against any and all liability, loss, damage, cost
and expense, including, but not limited to, attorneys' and consultants fees and
disbursements arising from any breach of representations and warranties set
forth in Section 4.12 or covenants set forth in Section 7.2 herein, the Release
or presence of Hazardous Materials on, under, about, adjacent to, from or at any
properties or facilities currently or previously owned, operated or leased by
the Company or any Subsidiary, any predecessors of the Company or any Subsidiary
or any entities previously owned by the Company or any Subsidiary, or at any
off-site location to which Hazardous Materials generated by the Company or any
Subsidiary, any predecessors of the Company or any Subsidiary or any entities
previously owned by the Company or any Subsidiary were sent for handling,
treatment, storage, or disposal or any violation of any Environmental Law or
Environmental Permit by the Company or any Subsidiary or any entity previously
owned by the Company or any Subsidiary. The obligations of the Company under
this Section shall survive the Closing indefinitely.


   27

         In the event the Company receives notice of violation of any
Environmental Claim and does not take prompt action to do so, the Agent (on
behalf of the Purchasers) shall have the right to designate such persons
("Environmental Auditors") as the Agent may select to visit, inspect and have
access to any of the properties, facilities, products or wastes owned, leased or
operated by the Company (including, without limitation, any location where
records and documents created or maintained in connection with Environmental
Laws may be located) for the purpose of investigating actual or potential
Environmental Claims or any condition which could result in any liability, cost
or expense to the Purchasers. Such investigation may include, among other
things, above and below ground testing of air, soil, groundwater and surface
water, for the presence of Hazardous Materials and such other tests as may be
necessary or advisable in the opinion of the Agent or the Environmental
Auditors. The Company will supply to the Environmental Auditors such historical
and operational information, including without limitation analytical records and
results, correspondence with governmental authorities and environmental audits
or reviews regarding properties, products and wastes of the Company (including
such information respecting Environmental Cleanup Sites) as are within its
possession, custody or control, or which are available to it, and will make
available for meetings with the Environmental Auditors, appropriate employees of
the Company having knowledge of such matters.

         7.14. Taxes. All payments to a holder of Notes or to a partner of a
holder (or to a partner of such a partner) (any of the foregoing referred to
herein as a "recipient") of principal of, and interest on, the Notes and all
other amounts payable under this Agreement and any other Loan Document shall be
made free and clear of, and without deduction for, any present or future income,
stamp or other taxes, fees, duties, withholding or other charges of any nature
whatsoever imposed by any taxing authority, other than taxes imposed on or
measured by the net income of such recipient (such non-excluded items being
herein called "Taxes"). In the event that any withholding or deduction from any
payment to be made hereunder is required in respect of any Taxes pursuant to any
applicable law, rule or regulation, then the Company will:

         (a) pay to the relevant authority the full amount required to be so
         withheld or deducted; and

         (b) promptly forward to such recipient an official receipt or other
         documentation satisfactory to such recipient evidencing such payment to
         such authority.

         7.15. Delivery of Information for Rule 144A Transactions. If a holder
of Notes proposes to transfer any such Notes pursuant to Rule 144A under the
Securities Act (as in effect from time to time), the Company agrees to provide
(upon the request of such holder or the prospective transferee) to such holder
and (if requested) to the prospective transferee any financial or other
information concerning the Company which is required to be delivered by such
holder to any transferee of such Notes pursuant to such Rule 144A.

SECTION 8. NEGATIVE COVENANTS

         The Company further covenants and agrees that it will not:


   28

         8.1. Minimum Net Worth. Permit its Consolidated Tangible Net Worth to
be less than $2,500,000 as of the end of each fiscal quarter of the Company
beginning March 31, 2001 and thereafter.

         8.2. Liens. Create, incur, assume or suffer to exist any Lien upon any
of its Property, whether now owned or hereafter acquired, except Permitted
Liens.

         8.3. Merger and Acquisition. Consolidate with or merge with or into any
Person, or acquire directly or indirectly all or substantially all of the
capital stock of any Person; provided that, so long as no Event of Default or
Potential Default is continuing, a merger after which the Company is the
surviving corporation and which does not cause a Potential Default or Event of
Default shall be permitted if either the Company is the surviving corporation
or, if not, the surviving corporation assumes all of the Company's obligations
under the Loan Documents in a manner satisfactory to the Purchasers.

         8.4. Contingent Liabilities. Assume, guarantee, endorse, contingently
agree to purchase, become liable in respect of any letter of credit, or
otherwise become liable upon the obligation of any Person, except (i)
liabilities arising from the endorsement of letters of credit, notes, drafts,
instruments or documents for deposit or collection or similar transactions in
the ordinary course of business, (ii) deposit account guaranties of the
Subsidiaries not in excess of (pound)100,000 in the aggregate in the United
Kingdom, and (iii) other Contingent Liabilities not in excess of $500,000 in the
aggregate.

         8.5. Restricted Payments. Make any Restricted Payment or Restricted
Investment, except from Earnings Available for Dividends.

         8.6. Sale or Transfer of Assets. Sell, lease, assign, transfer or
otherwise dispose of any Property except for disposition of (i) inventory in the
ordinary course of business, (ii) unusable, obsolete or uneconomic items or
equipment the proceeds of which, in the ordinary course of the Company's
business, are used to purchase new items or equipment of like function and
comparable value to the replaced items or equipment when the same were new;
provided, however, that such replacement items and equipment shall become
subject to the Security Interests, (iii) other Property disposed of on an arm's
length basis in any twelve month period which did not account for more than 10%
of the Company's Consolidated Net Income for the prior fiscal year, or (iv)
Collateral upon payment to the Purchasers of 50% of the net proceeds received by
the Company from the sale of such Collateral, up to the full amount of the
Company's Obligations to the Purchasers.

         8.7. Amendment of Charter. Amend, modify or waive any term or provision
of its corporate charter, unless required by law.

         8.8. Issuance of Stock. Issue or cause to be issued or sell any shares
of capital stock or, except for the Warrants, any securities convertible into or
exercisable for any shares of capital stock of the Company which will result in
the occurrence of a Change of Control Event.


   29

         8.9. Corporate Offices; Corporate Name; Corporate Records. Transfer its
executive offices or change its corporate name or maintain records (including
computer printouts and programs) with respect to the Collateral at any locations
other than those at which the same are presently kept or maintained, except upon
the Majority Noteholders' prior written consent and after the delivery to the
Agent of financing statements in form satisfactory to the Noteholders.

         8.10. Private Placement Status. Neither the Company nor any agent nor
any other Person acting on the Company's behalf will do or cause to be done (or
will omit to do or to cause to be done) any act which act (or which omission)
would result in bringing the issuance or sale of the Notes, Warrants or Shares
within the provisions of Section 5 of the Securities Act (other than in
accordance with a registration and qualification of Shares under Section 17
hereof).

         8.11. Amendments to Other Agreements. Without the prior written consent
of the Majority Noteholders, which consent will not be unreasonably withheld,
consent to or request any amendment, modification, supplement or waiver of any
of the provisions of any agreement or instrument evidencing (A) the rights of
stockholders' of the Company or (B) the terms of (including the purchase and
sale of) any form of capital stock of the Company.

         8.12. Transactions with Affiliates. Enter into, or permit or suffer to
exist, any transaction or arrangement with any Affiliate, except on terms which
are no less favorable to the Company than could be obtained from persons who are
not Affiliates.

SECTION 9. SUBORDINATION

         Each holder of a Note, whether upon original issue or upon transfer or
assignment thereof, by his acceptance thereof agrees that the Notes shall be
subject to the rights of the Senior Lender.

SECTION 10. CONDITIONS TO PURCHASERS' OBLIGATIONS

         The Purchasers' obligations to purchase a Note or Notes and a Warrant
or Warrants hereunder is subject to satisfaction of the following conditions at
the Closing (any of which may be waived by the Purchasers):

         10.1. Accuracy of Representations and Warranties. The representations
and warranties of the Company in this Agreement and in the Loan Documents or in
any certificate or document delivered pursuant hereto or thereto shall be
correct and complete on and as of the Closing Date with the same effect as
though made on and as of the Closing Date (after giving effect to the
transactions contemplated by this Agreement).

         10.2. Compliance with Agreements; No Defaults. The Company performed
and complied in all material respects with all agreements, covenants and
conditions contained in this Agreement or the Loan Documents and any other
document contemplated hereby or thereby which are required to be performed or
complied with by the Company on or before the Closing Date. On the Closing Date
(after giving effect to the transactions contemplated hereby), there


   30

shall be no Event of Default or Potential Default.

         10.3. Proceedings. All corporate and other proceedings in connection
with the transactions contemplated by the Loan Documents, and all documents
incident thereto, shall be in form and substance satisfactory to the Purchasers
and their counsel, and the Purchasers shall have received all such originals or
certified or other copies of such documents as the Purchasers or their counsel
may reasonably request.

         10.4. Legality; Governmental and Other Authorization. The purchase of
and payment for the Notes and Warrants shall not be prohibited by any law or
governmental order, rule, ruling, regulation, release, interpretation or opinion
applicable to the Purchasers and shall not subject the Purchasers to any
penalty, tax, liability or other onerous condition. Any necessary consents,
approvals, licenses, permits, orders and authorizations of, and registrations or
qualifications with, any governmental or administrative agency, the Senior
Lender or other Person, with respect to the transactions contemplated by the
Loan Documents shall have been obtained or made and shall be in full force and
effect. The Company shall have delivered to the Purchasers, upon their
reasonable request setting forth what is required, factual certificates or other
evidence, in form and substance satisfactory to the Purchasers and their
counsel, to enable the Purchasers to establish compliance with this condition.

         10.5. No Change in Law, etc. No legislation, order, rule, ruling or
regulation shall have been proposed, enacted or made by or on behalf of any
governmental body, department or agency, and no legislation shall have been
introduced in either House of Congress, and no investigation by any governmental
authority or administrative body shall have been commenced or threatened, and no
action, suit or proceeding shall have been commenced before, and no decision
shall have been rendered by, any court, other governmental body or arbitrator,
which, in any such case, in the Purchasers' reasonable judgment could adversely
affect, restrain, prevent or change the transactions contemplated by this
Agreement and the Loan Documents (including without limitation the issuance of
the Notes and the Warrants hereunder or the issuance of Shares upon exercise of
the Warrants) or materially and adversely affect the business, affairs, assets,
properties, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company on a consolidated basis.

         10.6. Delivery of Additional Disclosure Documents. The Company shall
have delivered a copy of its most recent Form 10-K and any interim reports,
including financial statements, as filed with the Commission.

         10.7 Related Agreements. The Company shall have delivered to the
Purchasers executed original copies of the Collateral Assignment.

         10.8 Security Interests. All filings of UCC financing statements and
all other filings and actions necessary to perfect the Security Interests as
second, valid and perfected Liens in the Property covered thereby, subject only
to Permitted Liens in effect on the date hereof, shall have been filed or taken
and confirmation thereof shall have been received by the Agent.


   31

         10.9 Searches. The results of tax lien, litigation, UCC, bankruptcy,
and judgment searches with respect to the Company obtained by the Purchasers
shall be acceptable.

         10.10. Material Agreements. Review and approval by the Purchasers, at
their option and expense, of all material agreements to which the Company is a
party, including without limitation, all such documents in respect of the
borrowing of money, all joint venture agreements, supply agreements or
requirements contracts, royalty agreements, license agreements,
employment/management incentive agreements, and product warranties.

         10.11 Insurance. The Purchasers shall have received such evidence
satisfactory to them as they have requested that the Company and the
Subsidiaries have in effect such casualty, hazard, public liability, product
liability and other insurance policies required by the Purchasers, written by
insurers and in amounts and forms satisfactory to the Purchasers.

         10.12 Other Documents and Opinions. The Purchasers shall have received
such other certificates, documents and opinions, in form and substance
satisfactory to the Purchasers and their counsel, relating to matters incident
to the transactions contemplated hereby as the Purchasers may reasonably
request.

SECTION 11. AMENDMENT AND WAIVER

         11.1. Amendments and Waivers. This Agreement and any Loan Document may
be amended (or any provision hereof or thereof waived) only with the written
consent of (i) the Majority Noteholders, and (ii) the holder or holders of
Warrants or Shares representing at least a majority of the sum of the Shares
then outstanding and the Shares then obtainable upon the exercise of all
Warrants then outstanding, if any; provided, however, that no such amendment or
waiver shall (i) change the fixed maturity of any Note, the rate or the time of
payment of interest thereon, the principal amount thereof, the premium thereon,
the currency in which the Notes are payable, the prepayment provisions of
Section 6 hereof, the current exercise price of a Warrant or the registration
rights under Section 17 hereof, without the consent of the holder of each Note,
Warrant or Share so affected or (ii) reduce the aforesaid percentage of Notes,
or reduce the aforesaid percentage of Warrants or Shares, the holders of which
are required to consent to any such amendment or waiver, without the consent of
the holders of all the Notes, or, as the case may be, the holders of all
Warrants and Shares, then outstanding or (iii) exchange the definition of
"Majority Noteholders" without the consent of the holders of all the Notes then
outstanding or (iv) increase the percentage of the amount of the Notes, the
holders of which may declare the Notes to be due and payable under Section 14
hereof, without the consent of the holders of all the Notes then outstanding.

         11.2. Notice of Proposed Amendments and Waivers. The Company agrees
that all holders of Notes, Warrants or Shares shall be notified by the Company
in advance of any proposed amendment or waiver of any Loan Document, but failure
to give such notice shall not in any way affect the validity of any such
amendment or waiver. In addition, promptly after obtaining the written consent
of the holders herein provided, the Company shall transmit a copy of any
amendment or waiver which has been adopted to all holders of Notes, Warrants or
Shares then



   32

outstanding, but failure to transmit copies shall not in any way affect the
validity of any such Amendment or waiver.

         11.3. All Holders Bound by Amendments and Waivers. The Company and each
holder of a Note, Warrant or Share then or thereafter outstanding shall be bound
by any amendment or waiver effected in accordance with the provisions of this
Section 11, whether or not such Note, Warrant or Share shall have been marked to
indicate such modification, but any Note, Warrant or Share issued thereafter
shall bear a notation as to any such modification (but the failure to bear any
such notation shall not affect the validity of any such subsequently issued
Note, Warrant or Share, which shall be enforceable in accordance with its terms
subject to any such modification).

SECTION 12. EXCHANGE OF NOTES AND WARRANTS; CANCELLATION OF
         SURRENDERED NOTES

         12.1. Exchange of Notes. Subject to Section 16 hereof, at any time at
the request of any holder of one or more of the Notes to the Company at its
office provided under Section 7.9 hereof, the Company at its expense (except for
any transfer tax or any other tax arising out of the exchange) will issue and
deliver to or upon the order of the holder in exchange therefor new Notes, in
such denomination or denominations as such holder may request (which must be in
denominations of no less than $ 10,000 plus one Note in a lesser denomination,
if required), in aggregate principal amount equal to the unpaid principal amount
of the Note or Notes surrendered and substantially in the form thereof, dated as
of the date to which interest has been paid on the Note or Notes surrendered
(or, if no interest has yet been so paid thereon, then dated the date of the
Note or Notes so surrendered) and payable to such Person or Persons or order as
may be designated by such holder. Any such new Note shall bear any notation
required by Section 11 hereof.

         12.2. Exchange of Warrants. Subject to Section 16 hereof, at any time
at the request of any holder of one or more of the Warrants to the Company at
its office provided under Section 7.9 hereof, the Company at its expense (except
for any transfer tax or any other tax arising out of the exchange) will issue
and deliver to or upon the order of the holder in exchange therefor a new
Warrant certificate or certificates of like tenor, in such amount or amounts as
such holder may request and calling in the aggregate on the face or faces
thereof for the number of Shares which are called for on the face or faces of
the Warrant certificate or certificates so surrendered, and in the name of such
holder or as such holder may direct. Any such new Warrant certificate shall bear
any notation required by Section 11 hereof.

         12.3. Percent of Interest on Surrendered Notes. In the event that any
Note is surrendered to the Company upon the exercise of all or a portion of any
Warrant using the principal amount of, or accrued and unpaid interest on, the
Notes in accordance with the terms of the Warrants, or upon a prepayment under
Section 6 hereof, the Company shall pay all accrued and unpaid interest on such
Note or such portion thereof and interest shall cease to accrue upon that
portion of the principal amount of such Note used for such exercise or which was
prepaid, and the right to


   33

receive, and any right or obligation to make, any prepayment on such portion of
the principal amount pursuant to Section 6 hereof shall terminate all upon the
date of such exercise or prepayment and upon presentation and surrender of such
Note to the Company.

         12.4. Surrender of Note in Exercise of Warrants. Upon the exercise in
whole or in part of any Warrant using the principal amount of, or accrued and
unpaid interest on, the Notes in accordance with the terms of the Warrants or
upon any prepayment under Section 6 hereof, if only a portion of the principal
amount of a Note is used in such exercise or prepayment, then such Note shall be
surrendered to the Company and the Company shall simultaneously execute and
deliver to or on the order of the holder thereof, at the expense of the Company,
a new Note or Notes in principal amount equal to the unused portion of such
Note.

         12.5. Cancellation of Surrendered Notes. All Notes or portions thereof
which have been used to exercise all or a portion of a Warrant, or which have
been prepaid under Section 6 hereof, shall be canceled by the Company and no
Notes shall be issued in lieu of the principal amount so used for such exercise
or prepayment.

SECTION 13. REGISTRATION; REPLACEMENT OF NOTES AND WARRANTS

         13.1. Registration of Transfers. The Company shall keep a register in
which provisions shall be made for the registration of the Notes and Warrants
and the registration of transfers of the Notes and Warrants. The register shall
be kept at the office of the Company provided under Section 7.9 hereof. Upon
surrender for registration of transfer of any Note or Warrant at the office of
the Company, the Company shall execute and deliver, in the name of the
designated transferee or transferees, one or more new Notes or Warrants, as the
case may be, of a like aggregate principal amount of Notes or number of Shares.
Each new Note issued upon transfer shall be in a principal amount of at least
$10,000 and in integral multiples of $10,000 and dated the date or dates to
which interest on the Notes or Warrants surrendered shall have been paid. Each
new Warrant issued upon transfer shall be for at least 5% of the total number of
Shares and dated the date of the original Warrant. All Notes or Warrants issued
upon any registration of transfer of Notes or Warrants, as the case may be,
shall be the valid obligations of the Company evidencing the same respective
obligations, and entitled to the same security and benefits under this Agreement
and the other Loan Documents, as the Notes or Warrants surrendered upon such
registration of transfer. The Company shall make a notation on each new Note of
the amount of all payments of principal previously made on the old Notes with
respect to which such new Note is issued and the date to which interest accrued
on such old Note has been paid.

         13.2. Replacement of Notes and Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Note or Warrant and, in the case of any such loss, theft or
destruction, upon delivery of an indemnity agreement reasonably satisfactory to
the Company, or in the case of any such mutilation, upon surrender of such Note
or Warrant (which surrendered Note or Warrant shall be canceled by the Company),
the Company will, without charge, issue a new Note or Warrant, as the case may
be, of like tenor in lieu of such lost, stolen, destroyed or mutilated Note or
Warrant as if the lost, stolen, destroyed or mutilated Note or Warrant were then
surrendered for exchange.


   34

SECTION 14. DEFAULTS

         14.1. Events of Default. Any of the following shall constitute an
"Event of Default" (whether any such event shall be voluntary or involuntary or
come about or be effected by operation of law or pursuant to or in compliance
with any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):

         (a) the Company defaults in the payment (whether or not such payment is
prohibited under Section 9 hereof) of (A) any part of the principal of any Note,
when the same shall become due and payable, whether at maturity or at a date
fixed for prepayment or by acceleration or otherwise, or (B) the interest on any
Note, when the same shall become due and payable, and such default in the
payment of interest shall have continued for ten (10) days or (C) the Company
fails to pay any other amount due hereunder or under any Loan Document and such
default shall have continued for ten (10) Business Days after notice thereof
from the Agent;

         (b) Any representation or warranty made by Borrower in this Agreement
or in any Loan Document or in any certificate, report, financial statement other
document furnished by or on behalf of the Company in connection with this
Agreement, shall prove to have been incorrect in any material respect when made
or deemed made;

         (c) Any term, covenant or agreement contained in Section 8 shall be
breached;

         (d) Any term, covenant or agreement contained in this Agreement or any
other Loan Document (other than in Section 8 hereof or with regard to payments)
shall be breached, and such breach shall remain unremedied for thirty (30)
calendar days after receipt by the Company of written notice thereof;

         (e) The Company shall fall to pay any part of the principal of, the
premium, if any, or the interest on, or any other payment of money due under,
any of its Indebtedness (other than Indebtedness under this Agreement), beyond
any period of grace provided with respect thereto, which individually or
together with other such Indebtedness as to which any such failure exists has an
aggregate outstanding principal amount in excess of $100,000; or the Company
shall fail to perform or observe any other term, covenant or agreement contained
in any agreement, document or instrument evidencing or securing any Indebtedness
in an aggregate outstanding principal amount in excess of $100,000, or under
which any such Indebtedness was issued or created, beyond any period of grace,
if any, if the effect of such failure is to cause, or permit the holders of such
Indebtedness (or a trustee on behalf of such holders) to cause, any payment in
respect of such Indebtedness to become due prior to its due date.

         (f) One or more judgments or orders for the payment of money in an
aggregate amount of $250,000 or more shall be rendered against any of the
Company, or any other judgment or order (whether or not for the payment of
money) shall be rendered against or shall affect Company which causes or could
cause a Material Adverse Effect or which does or could have an adverse effect on
the legality, validity or enforceability of this Agreement or any other Loan
Document


   35
and either (i) such judgment or order shall have remained unsatisfied and the
Company shall not have taken action necessary to stay enforcement thereof by
reason of pending appeal or otherwise, prior to the expiration of the applicable
period of limitations for taking such action or, if such action shall have been
taken, a final order denying such stay shall have been rendered, or (ii)
enforcement proceedings shall have been commenced by any creditor upon any such
judgment or order; provided that no final judgment shall be included in the
calculation under this subsection to the extent that the claim underlying such
judgment is covered by insurance and defense of such claim has been tendered to
and accepted by the insurer without reservation.

         (g) The occurrence of a Reportable Event that results in or could
result in liability of the Company or its ERISA Affiliates to the PBGC or to any
Plan in excess of $50,000 and such Reportable Event is not corrected within
thirty (30) days after the occurrence thereof, or the occurrence of any
Reportable Event which could constitute grounds for termination of any Plan of
the Company or its ERISA Affiliates by the PBGC or for the appointment by the
appropriate United States District Court of a trustee to administer any such
Plan and such Reportable Event is not corrected within thirty (30) days after
the occurrence thereof, or the filing by the Company, or any of its ERISA
Affiliates of a notice of intent to terminate a Plan or the institution of other
proceedings to terminate a Plan; or the Company or any of its ERISA Affiliates
shall fail to pay when due any liability to the PBGC or to a Plan in excess of
$50,000; or the PBGC shall have instituted proceedings to terminate, or to cause
a trustee to be appointed to administer, any Plan of the Company or its ERISA
Affiliates; or any person engages in a Prohibited Transaction with respect to
any Plan which results in or could result in liability of the Company, any of
its ERISA Affiliates, any Plan of the Company, or its ERISA Affiliates or any
fiduciary of any such Plan in excess of $50,000; or failure by the Company, or
any of its ERISA Affiliates to make a required installment or other payment to
any Plan within the meaning of Section 302(o) of ERISA or Section 412(n) of the
Code that results in or could result in liability of the Company or any of its
ERISA Affiliates to the PBGC or any Plan in excess of $50,000; or the withdrawal
of the Company or any of its ERISA Affiliates from a Plan during a plan year in
which it was a "substantial employer" as defined in Section 4001 (a)(2) of
ERISA; or the Company or any of its ERISA Affiliates becomes an employer with
respect to any Multiemployer Plan without the prior written consent of the
Purchasers.

         (h) The Company shall be dissolved or liquidated (or any judgment,
order or decree therefor shall be entered); or shall make a general assignment
for the benefit of creditors; or shall institute, or there shall be instituted
against the Company any proceeding or case seeking to adjudicate it a bankrupt
or insolvent or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief or protection of
debtors or seeking the entry of an order for relief, or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its assets, rights, revenues or property, and, if such
proceeding is instituted against the Company and is being contested by the
Company in good faith by appropriate proceedings, such proceeding shall remain
undismissed or unstayed for a period of 60 days; or shall take any action
(corporate or other) to authorize or further any of the actions described above
in this subsection.



   36

         (i) This Agreement or any of the other Loan Documents shall, at any
time after their respective execution and delivery, and for any reason, cease to
be in full force and effect or shall be declared null and void, or be revoked or
terminated, or the validity or enforceability thereof or hereof shall be
contested by the Company or any stockholder of the Company, or the Company shall
deny that it has any further liability or obligation thereunder or hereunder, as
the case may be.

         14.2. Acceleration of Notes. If an Event of Default occurs, then and in
each such event the Majority Noteholders may at any time (unless all such Events
of Default shall theretofore have been waived or remedied) at its or their
option, by written notice or notices to the Company, declare all the Notes to be
due and payable in full. Upon any such declaration or upon the occurrence of an
Event of Default pursuant to clause (h) of Section 14.1 hereof (in which case no
declaration is required), all Notes shall forthwith immediately mature and
become due and payable, together with interest accrued thereon, without
presentment, demand, protest or notice, all of which are hereby waived. However,
if, at any time after the principal of the Notes shall so become due and payable
and prior to the date of maturity stated in the Notes, all arrears (without
giving effect to any such acceleration) of principal and interest on the Notes
(with interest at the rate specified in the Notes on any overdue principal and,
to the extent legally enforceable, on any overdue interest) shall be paid by or
for the account of the Company, then the Majority Noteholders, by written notice
or notices to the Company, may rescind or annul such declaration. If any holder
of a Note shall give any notice or take any other action with respect to a
claimed default, the Company, forthwith upon receipt of such notice or obtaining
knowledge of such other action, will give written notice thereof to all other
holders of the Notes then outstanding, describing such notice or other action
and the nature of the claimed default.

SECTION 15. REMEDIES

         15. 1. Enforcement of Rights; Exercise of Remedies. In case any one or
more Events of Default shall occur and be continuing, the holder of a Note or
Warrant then outstanding may proceed to protect and enforce the rights of such
holder by an action at law, suit in equity or other appropriate proceeding,
whether for the specific performance of any agreement contained herein or in any
Loan Document, or for an injunction against a violation of any of the terms
hereof or thereof, or in aid of the exercise of any power granted hereby or
thereby or by law or for any other remedy (including, without limitation,
damages). In addition, the Agent may:

         (a) without notice to or demand upon the Company, make such payments
and do such acts as the Agent considers necessary or reasonable to protect
interest in the Collateral. The Company agrees to assemble the Collateral if the
Agent so requires, and to make the Collateral available to the Agent as the
Agent may designate. The Company authorizes the Agent to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or Lien that in the Agent's determination appears to be
prior or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of the Company's owned premises, the
Company hereby grants the Agent a license to enter into possession of such
premises and to occupy the same, without charge, for up to one hundred twenty
(120) days in


   37

order to exercise any of the Agent's rights or remedies provided herein, at law,
in equity, or otherwise;

         (b) ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. The Agent is hereby granted a license or other right to use, without
charge, the Company's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
and the goodwill associated with any of the foregoing, or any property of a
similar nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and the Company's rights under
all licenses and all franchise agreements shall inure to the Agent's benefit;

         (c) sell the Collateral at either a public or private sale, or both, by
way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including the Company's premises) as the Agent
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;

         (d) give notice of the disposition of the Collateral as follows:

                  (i) the Agent shall give the Company and each holder of a
                  security interest in the Collateral who has filed with the
                  Agent a written request for notice, a notice in writing of the
                  time and place of public sale, or, if the sale is a private
                  sale or some other disposition other than a public sale is to
                  be made of the Collateral, then the time on or after which the
                  private sale or other disposition is to be made;

                  (ii) the notice shall be personally delivered or mailed,
                  postage prepaid, to the Company as provided in Section 22, at
                  least ten (10) calendar days before the date fixed for the
                  sale, or at least ten (10) calendar days before the date on or
                  after which the private sale or other disposition is to be
                  made, unless the Collateral is perishable or threatens to
                  decline speedily in value. Notice to persons other than the
                  Company claiming an interest in the Collateral shall be sent
                  to such addresses as they have furnished to the Agent;

                  (iii) if the sale is to be a public sale, the Agent also shall
                  give notice of the time and place by publishing a notice one
                  time at least ten (10) calendar days before the date of the
                  sale in a newspaper of general circulation in the county in
                  which the sale is to be held;

         (d) the Agent or any Purchaser may bid and purchase at any public or
private sale and can offset the Company's Obligations against the purchase
price; and

         (e) any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by the Company. Any excess will be
returned, without interest and subject to the rights of third parties, by the
Agent to the Company.



   38


         15.2. Payment of Expenses of Enforcement and Collection. In case of a
default in the, payment of any principal of or interest on any Note, or default
in the payment of amounts owing under this Agreement or any Loan Document, or
default in the observance of any other agreement or covenant of the Company
contained in this Agreement or any Loan Document, the Company will pay to the
holder thereof or party thereto, in addition to any interest or premium
otherwise required, such further amount as shall be sufficient to cover any and
all costs and expenses of enforcement and collection, including, without
limitation, reasonable attorneys' fees and expenses.

         15.3. Delay Not a Waiver. No course of dealing and no delay on the part
of the Agent, any holder of any Note or Warrant or any party to this Agreement
or any Loan Document in exercising any rights or remedies shall operate as a
waiver thereof or otherwise prejudice such holder's or party's rights. No right
or remedy conferred hereby or by any Loan Document shall be exclusive of any
other right or remedy referred to herein or therein or available at law, in
equity, by statute or otherwise. To the extent permitted under any applicable
law, the Company hereby irrevocably waives and relinquishes the benefit of any
valuation, stay, appraisal, extension or redemption laws, whether such laws
presently exist or may exist in the future, which laws might, but for this
Section 15.3, be applicable to any sale of any or all of the assets of the
Company (including without limitation the Collateral) made pursuant to any
judgment, order or decree of any court, or otherwise based on any claim relating
to or arising out of this Agreement or of any of the Loan Documents.

         15.4. Specific Enforcement. The Purchasers shall, in addition to other
remedies provided by law, have the right and remedy to have the provisions of
this Agreement and any Loan Document specifically enforced by any court having
equity jurisdiction, it being acknowledged and agreed that any breach or
threatened breach of the provisions of this Agreement or any Loan Document will
cause irreparable injury to the Purchasers and that money damages will not
provide an adequate remedy. Nothing contained herein shall be construed as
prohibiting the Purchasers from pursuing any other remedies available to the
Purchasers for such breach or threatened breach, including, without limitation,
the recovery of damages from the Company.

         15.5. Certain Waivers. Except as may be otherwise specifically provided
herein or in any other agreement between the Purchasers and the Company which
may be applicable, the Company waives any right, to the extent applicable law
permits, to receive prior notice of or a judicial or other hearing with respect
to (i) any action or prejudgment remedy or proceeding by the Agent to take
possession, exercise control over, or dispose of any item of the Collateral in
any instance (regardless of where the same may be located) where such action is
permitted under the terms of this Agreement, any other Loan Document or by
applicable law, and (ii) of the time, place or terms of sale in connection with
the exercise of the Agent's rights hereunder. The Company also waives, to the
extent permitted by law, any bonds, security or sureties required by any
statute, rule or otherwise by law as an incident to any taking of possession by
the Agent of Property subject to the Agent's Lien. The Company also waives any
damages (direct, indirect, consequential or otherwise) occasioned by the
enforcement of the Agent's rights under this Agreement including the taking of
possession of any Collateral or the giving of notice to any account debtor, all
to the extent that such waiver is permitted by law. The Company also



   39

consents that the Agent may enter upon any premises owned by or leased to the
Company without obligation to pay rent or other compensation or for use and
occupancy, through self help, without judicial process and without having first
given notice to the Company or obtained an order of any court. These waivers and
all other waivers provided for in this Agreement, the other Loan Documents and
any other agreements or instruments executed in connection herewith have been
negotiated by the parties and the Company acknowledges that it has been
represented by counsel of its own choice and has consulted such counsel with
respect to its rights hereunder.

SECTION 16. RESTRICTIONS ON TRANSFER

         Each holder of a Note or Warrant by acceptance thereof agrees that it
will not sell or otherwise dispose of any Notes, Warrants or Shares unless such
Notes, Warrants or Shares have been registered under, or have been sold pursuant
to an exemption from registration under, the Securities Act. As a condition to
the Company's obligation to issue a new Note or Warrant to a transferee thereof
which (x) is not a holder of a Note or Warrant, the transferor must certify to
the Company the facts on which the transferor is relying for such exemption and
(y) is a holder of a Note or Warrant, the transferor must represent to the
Company in writing that the transfer is so exempt.

SECTION 17. REGISTRATION RIGHTS

         17.1. Piggyback Rights. If the Company shall at any time propose to
file a registration statement under the Securities Act for any sales of shares
of the Company's Common Stock (or any warrants, units, convertibles, rights or
other securities related or linked to any shares of the Company's Common Stock)
on behalf of the Company or otherwise, the Company shall give written notice of
such registration no later than 60 days before its filing with the Commission to
all holders of Warrants or Shares; provided that registrations relating solely
to securities to be issued by the Company in connection with any employee stock
option or employee stock purchase or savings plan on Form S-8 (or successor
forms) under the Securities Act shall not be subject to this Section 17.1. If
holders of Warrants or Shares so request within thirty (30) days of receipt of
such notice, the Company shall include in any such registration the Shares held
or to be held after exercise of Warrants by such holders and requested to be
included in such registration.

         17.2. Expenses. Subject to the limitations contained in this Section
17.2 and except as otherwise specifically provided in this Section 17, the
entire costs and expenses of any registration and qualification pursuant to
Section 17.1 hereof shall be borne by the Company. Such costs and expenses shall
include, without limitation, the fees and expenses of counsel for the Company
and of its accountants, all other costs, fees and expenses of the Company
incident to the preparation, printing and filing under the Securities Act of the
registration statement and all amendments and supplements thereto, the
reasonable fees and expenses of one counsel to the holders of Warrants or Shares
relating to such registration and qualification, the cost of furnishing copies
of each preliminary prospectus, each final prospectus and each amendment or
supplement thereto to underwriters (if any), dealers and other purchasers of the
Shares and the costs and expenses (including fees and disbursements of counsel)
incurred in connection with the qualification of the Shares under the securities
laws of various jurisdictions. The Company shall


   40

not, however, pay underwriting fees or commissions to the extent related to the
sale of Shares sold in any registration and qualification.


         17.3. Procedures.

         (a) In the case of each registration or qualification pursuant to
Section 17.1, the Company will keep all holders of Warrants or Shares advised in
writing as to the initiation of proceedings for such registration and
qualification and as to the completion thereof, and will advise any such holder,
upon request, of the progress of such proceedings.

         (b) At the Company's expense, the Company will keep each registration
and qualification under this Section 17 effective (and in compliance with the
Securities Act) by such action as may be necessary or appropriate for a period
of one hundred twenty (120) days after the effective date of such registration
statement, including, without limitation, the filing of posteffective amendments
and supplements to any registration statement or prospectus necessary to keep
the registration statement current and the further qualification under any
applicable state securities laws to permit such sale or distribution, all as
requested by such holder or holders, provided, that such 120-day period shall be
extended by the number of days (i) that a stop order or similar proceeding is in
effect which prohibits the distribution of the Shares registered pursuant to
this Section 17 and (ii) from and including the date that each holder on whose
behalf Shares have been registered pursuant to this Section 17 shall have
received a notice delivered pursuant to paragraph (c) below until the date on
which such holders shall have received a reasonable number of copies of a
supplement to or an amendment of the prospectus so that the prospectus
thereafter shall not include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading; in light of the circumstances then existing.

         (c) The Company will immediately notify each holder on whose behalf
Shares have been registered pursuant to this Section 17 at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing.

         (d) If any registration under this Section 17 is in connection with an
underwritten offering, the Company will furnish to each holder on whose behalf
Shares have been registered pursuant to this Section 17 a signed counterpart,
addressed to such holder, of (i) an opinion of counsel for the Company, dated
the effective date of such registration statement, and (ii) a so called "cold
comfort" letter signed by the independent public accountants who have certified
the Company's financial statements included in such registration statement, and
such opinion of counsel and accountants' letter shall cover substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are

   41

customarily covered in opinions of issuer's counsel and in accountants' letters
delivered to underwriters in connection with underwritten public offerings of
securities.

         (e) Without limiting any other provision hereof, in connection with any
registration of Shares under this Section 17, the Company will comply with the
Securities Act, the Securities Exchange Act and all applicable rules and
regulations of the Commission, and will make generally available to its
securities holders, as soon as reasonably practicable, an earnings statement
covering a period of at least twelve (12) months, beginning with the first month
of the first fiscal quarter after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.

         (f) In connection with any registration of Shares under this Section
17, the Company will provide a transfer agent and registrar for the Shares not
later than the effective date of such registration statement.

         (g) In connection with any underwritten registration of Shares under
this Section 17, the Company will, if requested by the underwriters for any
Shares included in such registration, enter into an underwriting agreement with
such underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, provisions relating
to indemnification and contribution. The holders on whose behalf Shares are to
be distributed by such underwriters shall be parties to any such underwriting
agreement, and the representations and warranties by, and the other agreements
on the part of, the Company to and for the benefit of such underwriters shall
also be made to and for the benefit of such holders of Warrants or Shares and
the conditions precedent to the obligations of such underwriters under such
underwriting agreement shall be conditions precedent to the obligations of such
holders of Warrants or Shares. The Company shall cooperate with such holders of
Warrants or Shares in order to limit any representations or warranties to, or
agreements with, the Company or such underwriters to be made by such holders
only to those representations, warranties or agreements regarding such holder,
such holder's Shares and such holder's intended method of distribution and any
other representation required by law. Such underwriting agreement shall comply
with Section 17.4 hereof.

         (h) Upon request by any holder of Warrants or Shares who has requested
that their shares be included in a registration, the Company will give such
holder and their underwriters, if any, and their respective counsel and
accountants, (i) such information regarding the preparation of such registration
statement, each prospectus included therein or filed with the Commission, and
each amendment thereof or supplement thereto, as such holder may specify, and
(ii) opportunities to discuss the business of the Company with its officers, its
counsel and the independent public accountants who have certified its financial
statements, as shall be necessary, in the opinion of such holders or such
underwriters or their respective counsel, in order to conduct a reasonable and
diligent investigation within the meaning of the Securities Act. Without
limiting the foregoing, each registration statement, prospectus, amendment,
supplement or any other document filed with respect to a registration under this
Section 17 shall be subject to review and reasonable approval by the holders
registering Shares in such registration and by their counsel.
   42

         (i) The Company will cause all of the Shares registered pursuant to
this Section 17 to be accepted for quotation as a National Market Security on
The NASDAQ Stock Market to the same extent as similar securities issued by the
Company.

         17.4. Provision of Documents. The Company will, at the expense of the
Company, furnish to each holder of Warrants or Shares with respect to which
registration has been effected, such number of registration statements,
prospectuses, offering circulars and other documents incident to any
registration or qualification referred to in Section 17.1 as such holder from
time to time may reasonably request.

         17.5. Indemnification. The Company will indemnify and hold harmless, to
the extent permitted by law, each holder of Warrants or Shares and any
underwriter (as defined in the Securities Act) for such holder and each person,
if any, who controls the holder or underwriter within the meaning of the
Securities Act or the Exchange Act and each of their respective directors,
officers, general partners and members against any losses, claims, damages or
liabilities, joint or several, and expenses (including reasonable attorneys'
fees and expenses and reasonable costs of investigation) to which the holder or
underwriter or such controlling person may be subject, under the Securities Act
or otherwise, insofar as any thereof arise out of or are base&upon (i) any
untrue statement or alleged untrue statement of a material fact contained in (A)
any registration statement under which such Shares were registered under the
Securities Act pursuant to Section 17.1 hereof (including all documents
incorporated therein by reference), any prospectus or preliminary prospectus
contained therein, or any amendment or supplement thereto, or (B) any other
document incident to the registration of the Shares under the Securities Act or
the qualification of the Shares under any state securities laws, or (ii) the
omission or alleged omission to state in any item referred to in the preceding
clause a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any violation or alleged violation
by the Company of the Securities Act, the Securities Exchange Act or any other
federal or state securities law, rule or regulation applicable to the Company
and relating to action or inaction by the Company in connection with any such
registration or qualification, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
alleged untrue statement or omission or alleged omission based upon information
furnished to the Company in writing by such holder or by any underwriter for
such holder expressly for use therein (with respect to which information such
holder or underwriter shall so indemnify and hold harmless the Company, any
underwriter for the Company and each person, if any, who controls the Company or
such underwriter within the meaning of the Securities Act or the Exchange Act
and each of their respective directors, officers, general partners and members).
The Company will enter into an underwriting agreement and other agreements with
the underwriter or underwriters for any offering registered under the Securities
Act pursuant to Section 17.1 hereof and with the holders of Securities selling
Shares pursuant to such offering, and such underwriting agreement and other
agreements shall contain customary provisions with respect to indemnification
and contribution which shall, at a minimum, provide the indemnification set
forth above.

         17.6. Periodic Payments. The indemnification provided for in Section
17.5 shall be made


   43

by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred, upon the presentation by the indemnified party
to the indemnifying party of a statement showing the amount of expense, loss,
damage or liability for which payment is then requested.

         17.7. Indemnification Procedure. Promptly after receipt by an
indemnified party hereunder of written notice of the commencement of any action
or proceeding involving a claim referred to in Section 17.5, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action;
provided that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under Section
17.5 except to the extent that the indemnifying party is actually prejudiced by
such failure to give notice. In case any such action is brought against an
indemnified party, the indemnifying party will be entitled to participate in and
to assume the defense thereof, jointly with any other indemnifying party
similarly notified, to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal fees and expenses subsequently incurred by the latter in connection
with the defense thereof, unless in such indemnified party's reasonable judgment
an actual or potential conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim. The indemnifying party
will not, without the prior written consent of each indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not such indemnified party or any Person who
controls such indemnified party is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of such indemnified party from all liability arising out
of such claim, action, suit or proceeding. Notwithstanding anything to the
contrary set forth herein, and without limiting any of the rights set forth
above, in any event any party will have the right to retain, at its own expense,
counsel with respect to the defense of a claim.

         17.8. Contribution. If the indemnification provided for in Section 17.5
is unavailable (for any reason other than a determination of its inapplicability
by a court of competent jurisdiction) to hold harmless an indemnified party
under such Section, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of the losses, claims,
damages, liabilities or expenses referred to in Section 17.5 in such proportion
as is appropriate to reflect the relative fault of the indemnifying party on the
one hand, and the indemnified party on the other, in connection with statements
or omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations, including
without limitation the relative benefits received by each party from the
offering of the securities covered by such registration statement, the parties'
relative knowledge and access to information concerning the matter with respect
to which the claim was asserted and the opportunity to correct and prevent any
statement or omission. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to


   44

information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statements or omission. The parties hereto agree
that it would not be just and equitable if contributions pursuant to this
Section 17.8 were to be determined by pro rata or per capita allocation (even if
the underwriters, if any, were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the first and second sentences of this Section
17.8. The Company and each holder of Warrants or Shares agrees with each other
and any underwriters of the Shares, if requested by such underwriters, that (i)
the underwriters' portion of such contribution shall not exceed the underwriting
discount and (ii) that the amount of such contribution shall not exceed an
amount equal to the net proceeds actually received by such indemnifying party
from the sale of securities in the offering to which the losses, liabilities,
claims, damages or expenses of the indemnified parties relate. No Person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.

         17.9. Certain Limitations in Connection with Future Grants of
Registration Rights.

         (a) From and after the date of this Agreement, the Company shall not
enter into any agreement with any holder or prospective holder of any of its
Common Stock providing for the granting to such holder of demand registration
rights unless such agreement includes provisions to the effect that (i) the
Company will give the holders of Warrants and Shares notice at least thirty (30)
days prior to the filing of a registration statement pursuant to the exercise of
such rights and (ii) notwithstanding Section 17.1 hereof, if a holder of
Warrants or Shares requests inclusion of Shares (whether such Shares are held
directly or through the right to obtain such Shares upon the conversion of
Warrants held by such holder) and requests priority for such Shares in such
registration statement within thirty (30) days after receipt of such notice,
then such holder's Shares requested to be so included will be given priority
over the securities sought to be registered by the holders of such demand
registration rights if marketing factors require a limitation on the number of
securities to be included in such registration statement If a holder of Warrants
or Shares requests inclusion of its Shares (whether such Shares are held
directly or through the right to obtain such Shares upon conversion of Warrants
held by such holder), but does not request such priority for such Shares in such
registration, then such Shares shall be included in such registration statement
in the manner described in Section 17.1 hereof.

         (b) From and after the date of this Agreement, the Company shall not
enter into any agreement with any holder or prospective holder of any of its
Common Stock providing for the granting to such holder of incidental or
"piggyback" registration rights unless such agreement includes provisions to the
effect that, in the case of a registered underwritten public offering of the
Company's Common Stock to which Section 17.1 hereof applies, such agreement
gives the following priority to holders of Warrants or Shares if marketing
factors require a limitation on the number of shares of Common Stock to be
included in such offering the holders of Warrants or Shares and other holders of
securities of the Company having piggyback registration rights shall have an
equal right to include securities in such registration (beyond the amount to be
included on behalf of the Company) in proportion to their relative holdings of
shares of Common

   45

Stock of the Company (whether held directly or obtainable upon conversion or the
exercise of warrants or other rights).

SECTION 18. INDEMNIFICATION

         18.1. Indemnification. Whether or not the transactions contemplated by
this Agreement are consummated, the Company hereby agrees to indemnify and hold
each Purchaser and each holder of a Note or Warrant or Share harmless (including
any of such Purchaser's or holder's affiliated companies) and any of such
Purchaser's or holder's directors, officers, employees, or agents and any person
controlling (within the meaning of Section 20(a) of the Securities Exchange Act)
such Purchaser or holder or any of its affiliated companies (collectively, the
"Indemnified Persons") from and against any and all losses, claims, damages,
liabilities, securities law penalties, and expenses whatsoever (including, but
not limited to, any and all reasonable fees and expenses whatsoever incurred by
an Indemnified Person and its attorneys in investigating, preparing for,
defending against, acting as a witness, providing evidence, producing documents,
or taking any other action in respect of any litigation or proceeding, commenced
or threatened, or any claim whatsoever), (collectively, the "Losses") arising
out of or in connection with this Agreement or any Loan Document, other than to
the extent Losses result from the gross negligence or wilful misconduct of the
Indemnified Person. The foregoing indemnity shall be in addition to any other
rights which the Indemnified Persons may have against the Company otherwise than
under this paragraph. If a court shall hold for any reason that the preceding
indemnification is unavailable to any Indemnified Person as to any matter for
which it would be available if enforceable in accordance with its terms, the
Company on the one hand and the Indemnified Person on the other agree to
contribute to such loss in such proportion as is appropriate to reflect the
relative benefits and the relative fault of the Company on the one hand and of
the Indemnified Person on the other in connection with the statements, actions,
or omissions which results in such Loss, as well as any other relevant equitable
considerations.

         18.2. Indemnification Procedures. If any Indemnified Party is entitled
to indemnification hereunder, such Indemnified Party shall give prompt notice to
the Company of any claim or of the commencement of any proceeding with respect
to which such Indemnified Party seeks indemnification pursuant hereto and of
which such Indemnified Party knew or reasonably should have known; provided,
however, that the failure so to notify the Company shall not relieve the Company
from any obligation or liability except to the extent that the amount owed by
the Company has been increased by such failure. The Company shall have the
right, exercisable by giving written notice to an Indemnified Person within 20
Business Days after receipt of written notice from such Indemnified Person of
such claim or proceeding, to assume, at its expense, the defense of any such
claim or proceeding; provided, however, that an Indemnified Person shall have
the right to employ separate counsel in any such claim or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Person unless: (1) the Company
agrees to pay such fees and expenses; or (2) the Company fails promptly to
assume, or to diligently pursue, the defense of such claim or proceeding; or (3)
the named parties to any such claim or proceeding (including any impleaded
parties) include both such Indemnified Person and one or more of the Company or
an Affiliate of the Company, and such Indemnified Person shall have been advised
by counsel that there may be


   46
one or more material defenses available to such Indemnified Person which are
different from or additional to those available to the Company or such
Affiliate; or (4) an Event of Default is continuing; or (5) the claim or
proceeding seeks to impose criminal penalties against the Indemnified Person (in
which case if such Indemnified Person notifies the Company in writing that it
elects to employ separate counsel at the expense of the Company, the Company
shall not have the right to assume the defense thereof, it being understood,
however, that the Company shall not, in connection with any one such claim or
proceeding or separate but substantially similar or related claims or
proceedings in the same jurisdiction, arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys (together with appropriate local counsel) at any
time for such Indemnified Person). Whether or not such defense is assumed by the
Company, such Indemnified Person will not be subject to any liability for any
settlement made without its consent (but such consent will not be unreasonably
withheld or delayed).

SECTION 19. DIRECT PAYMENTS

         As long as the Purchaser or any payee named in the Notes delivered to
the Purchaser on the Closing Date, or any institutional holder which is a direct
or indirect transferee from the Purchaser or such payee, shall be the holder of
any Note, the Company will make payments (whether at maturity, upon mandatory or
optional prepayment, upon repurchase or otherwise) of principal, interest and
premium, if any, (i) by check payable to the order of the holder of any such
Note duly mailed or delivered to such address as the Purchaser or such other
holder may designate in writing or (ii) if requested by the Purchaser or such
other holder, by wire transfer to the Purchaser's or such other holder's (or its
nominee's) account at any bank or trust company in the United States of America,
notwithstanding any contrary provision herein or in any Note with respect to the
place of payment. IF THE PURCHASER HAS PROVIDED AN ADDRESS ON EXHIBIT A HERETO
FOR PAYMENTS BY WIRE TRANSFER, THEN THE PURCHASER SHALL BE DEEMED TO HAVE
REQUESTED WIRE TRANSFER PAYMENTS UNDER THE PRECEDING CLAUSE (ii). All such
payments shall be made in federal or other immediately available funds and shall
arrive by 2:00 p.m. local time at the place of payment on the day when due.

SECTION 20. SECURITY INTEREST

         The Company shall grant to the Agent for the benefit of the Purchasers
a security interest in the Collateral pursuant to the Collateral Assignment.

SECTION 21. THE AGENT

         21.1. Appointment. Each Purchaser hereby irrevocably designates and
appoints the Agent as the agent of such Purchaser under this Agreement and the
Loan Documents, and each such Purchaser irrevocably authorizes the Agent, as the
agent for such Purchaser, to take such action on its behalf under the provisions
of this Agreement and the Loan Documents and to exercise such powers and perform
such duties as are expressly delegated to the Agent by the terms of this
Agreement and the Loan Documents, together with such other powers as are

   47
reasonably incidental thereto.

         21.2. Application of Proceeds of the Collateral. All Collateral shall
be held or administered by the Agent for the ratable benefit of the Purchasers.
Any proceeds received by the Agent from the foreclosure, sale, lease or other
disposition of any of the Collateral and any other proceeds received pursuant to
the terms of the Loan Documents shall be applied, first, to the cost of any such
foreclosure, sale, lease or other disposition and, second, to the payment in
full of the remaining Company's Obligations pro rata in proportion to the amount
of the Company's Obligations owed to each Person.

         21.3. Delegation of Duties. The Agent may execute any of its duties
under this Agreement by or through agents or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.

         21.4. Reliance by Agent. The Agent may deem and treat the registered
owner of any Note as the owner thereof for all purposes. The Agent shall be
fully justified in failing or refusing to take any action under this Agreement
unless it shall first receive such advice or concurrence of the Majority
Noteholders as it deems appropriate. The Agent shall in all cases be fully
protected in acting, or in refraining from acting, under this Agreement, the
Notes or any Loan Document in accordance with a request of the Majority
Noteholders, and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Purchasers and all future holders of the
Notes.

         21.5. Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Potential Default or Event of
Default hereunder unless the Agent has received notice from the Company
referring to this Agreement, describing such Potential Default or Event of
Default and stating that such notice is a "notice of default". The Agent may
(but shall not be obligated to) take such action, or refrain from taking such
action, with respect to such Potential Default or Event of Default as it shall
deem advisable and in the best interests of the Purchasers.

         21.6. Agent in Its Individual Capacity. The Agent and its Affiliates
may make loans to and generally engage in any kind of business with the Company
as though the Agent were not the Agent hereunder. With respect to any Note
issued to it, the Agent shall have the same rights and powers under this
Agreement as any Purchaser and may exercise the same as though it were not the
Agent, and the terms "Purchaser" and "Purchasers" shall include the Agent in its
individual capacity.

         21.7. Successor Agent. The Agent may resign as Agent upon 20 days
notice to the Purchasers. If the Agent shall resign as Agent under this
Agreement and the other Loan Documents, then the Purchasers on whose behalf such
Agent is acting shall appoint a successor agent for the Purchasers, whereupon
such successor agent shall succeed to the rights, powers and duties of the
Agent, and the term "Agent" shall mean such successor agent effective upon its
appointment, and the former Agent's rights, powers and duties as Agent shall be
terminated, without any other or further act or deed on the part of such former
Agent or any of the parties to
   48
this Agreement or any Loan Document or any holders of the Notes. After any
retiring Agent's resignation hereunder as Agent, the provisions of this Section
21 shall inure to its benefit as to any actions taken or omitted to be taken by
it while it was Agent under this Agreement and the other Loan Documents. The
Agent shall use its best efforts to notify the Company of any such resignation;
provided, however, neither the Agent nor the Purchasers shall be held liable in
any respect for the failure to provide such notice; and further provided,
however, that until the Company receives notice of the Agent's resignation and
of the appointment of a successor agent, the Company shall be entitled to rely
upon the Agent as the Agent hereunder.

SECTION 22. NOTICES

         Unless otherwise expressly specified or permitted by the terms hereof,
all notices, requests, demands, consents and other communications hereunder or
under the Loan Documents shall be in writing and shall be delivered by hand or
shall be sent by telex or telecopy (confirmed by registered, certified or
overnight mail or courier, postage and delivery charges prepaid or shall be sent
by overnight mail or courier (postage and delivery charges prepaid), to the
following addresses:

         (a) if to the Purchaser, at the Purchaser's address as set forth in
Exhibit A hereto, or at such other address as may have been furnished to the
Company by the Purchaser in writing; or

         (b) if to any other holder of a Note or Warrant, at such address as the
payee or registered holder thereof shall have designated to the Company in
writing; or

         (c) if to the Company, at 38700 Grand River Avenue, Farmington Hills,
MI 48335-1563, Attention: Charles J. Drake, telephone: 248-471-2660, fax:
248-615-2971 or at such other address as may have been furnished in writing by
the Company to the Agent, the Purchasers and the other holders of Notes or
Warrants; or

         (d) if to the Agent, at 2161 Commons Parkway, Okemos, MI 48864,
Attention: J. Michael Warren, telephone: 517-349-8600, fax: 517-349-3311 or at
such other address as may have been furnished in writing by the Agent to the
Company, the Purchasers and the other holders of Notes or Warrants.

         Whenever any notice is required to be given hereunder, such notice
shall be deemed given and such requirement satisfied only when such notice is
delivered or, if sent by telex or telecopier, when received, unless otherwise
expressly specified or permitted by the terms hereof

SECTION 23. MISCELLANEOUS

         23.1. Entire Agreement. This Agreement and the Loan Documents, together
with any further agreements entered into by the Purchaser and the Company at the
Closing, contain the entire agreement between the Purchaser and the Company, and
supersede any prior oral or written agreements, commitments, terms or
understandings, regarding the subject matter hereof.
   49

         23.2. Survival. All agreements, representations and warranties
contained herein in an; Loan Document or any document or certificate delivered
pursuant hereto or thereto shall survive, and shall continue in effect
following, the execution and delivery of this Agreement and of such Loan
Documents, the closings hereunder and thereunder, any investigation at any time
made by the Purchasers or on their behalf or by any other Person, the issuance,
sale and delivery of the Notes and the Warrants, any disposition thereof, any
payment or cancellation of the Notes, and any exercise of the Warrants;
provided, that Sections 7 and 8 shall terminate upon the payment in full of all
outstanding Notes. All statements contained in any certificate or other document
delivered by or on behalf of the Company pursuant hereto shall constitute
representations and warranties by the Company hereunder.

         23.3. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument, and all signatures need not appear on any one
counterpart.

         23.4. Headings. The headings and captions in this Agreement are for
convenience of reference only and shall not define, limit or otherwise affect
any of the terms or provisions hereof.

         23.5. Binding Effect and Assignment.

         (a) The terms of this Agreement shall be binding upon, and inure to the
benefit of, the parties and their respective successors and permitted assigns
whether so expressed or not.

         (b) The Company may not assign any of its obligations, duties or rights
under any of the Loan Documents, except pursuant to Section 8.5 hereof or with
the Majority Noteholders' consent, which shall not be unreasonably withheld.

         (c) In addition to any assignment by operation of law, a Purchaser may
assign, in whole or in part, any or all of its rights (and/or obligations) under
this Agreement and any of the Loan Documents to any transferee of any or all of
its Notes, Warrants or Shares, subject to the terms of Section 16 hereof, and
(unless such assignment expressly provides otherwise) any such assignment shall
not diminish the rights the Purchaser would otherwise have under this Agreement
or with respect to any remaining Notes, Warrants or Shares held by the
Purchaser.

         23.6. Severability. Any provision of this Agreement or of any Loan
Document which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
thereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
To the extent permitted by applicable law, the parties hereby waive any
provision of law which may render any provision hereof prohibited or
unenforceable in any respect.
   50
         23.7. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Michigan (other than any conflict
of laws rule which might result in the application of the laws of any other
jurisdiction).

         23.8. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. THE PARTIES
HEREBY CONSENT TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN
THE STATE OF MICHIGAN AND IRREVOCABLY AGREE THAT ALL ACTIONS OR PROCEEDINGS
RELATING TO THE LOAN DOCUMENTS MAY BE LITIGATED IN SUCH COURTS. THE PARTIES
ACCEPT GENERALLY AND UNCONDITIONALLY THE EXCLUSIVE JURISDICTION OF THE AFORESAID
COURTS AND WAIVE ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREE TO
BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LOAN
DOCUMENTS. THE PARTIES HEREBY AGREE THAT SERVICE UPON THEM BY MAIL AT THE
ADDRESSES PROVIDED IN SECTION 22 HEREOF SHALL CONSTITUTE SUFFICIENT NOTICE AND
SERVICE OF PROCESS IN ANY SUCH PROCEEDING. NOTHING HEREIN SHALL AFFECT THE RIGHT
TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

         23.9. WAIVER OF JURY TRIAL. THE COMPANY AND THE PURCHASERS HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY LOAN DOCUMENT, OR ANY DEALINGS BETWEEN THEM RELATING
TO THE SUBJECT MATTER OF THIS TRANSACTION. THE COMPANY AND THE PURCHASERS ALSO
WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS
WAIVER, BE REQUIRED OF THE PURCHASERS. THE SCOPE OF THIS WAIVER IS INTENDED TO
BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND
THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND THE PURCHASERS FURTHER WARRANT
AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND
THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY
NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT PAYMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO (OR ASSIGNMENTS
OF) ANY LOAN DOCUMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED
AS A WRITTEN CONSENT TO A TRIAL (WITHOUT A JURY) BY THE COURT.

         IN WITNESS WHEREOF, the parties hereto have caused this Note and
Warrant Purchase Agreement to be executed as of the date first above written.


   51

                                         Integral Vision, Inc.


                                         --------------------------
                                         Charles J. Drake
                                         Chairman of the Board


                                         Mid-State Industrial Services, Inc.


                                         ----------------------------
                                         Vincent Shunsky
                                         Treasurer

                                         Warren Cameron Faust & Asciutto, P.C.
                                         As Agent for the Purchasers


                                         ------------------------------
                                         J. Michael Warren
                                         President









   52

                                    EXHIBIT A
                               List of Purchasers



                                            Principal
Name and Address                            Amount Of Note             Number of Warrants
- ----------------                            --------------             ------------------
                                                                 
Mid-State Industrial Services, Inc.         $120,000                   240,000
1118 Centennial Way
Lansing, MI 48917
Attn: Vincent Shunsky
Tele: 517-321-3130
Fax: 517-321-1022





   53

                                    EXHIBIT B
                                  Form of Note


THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER ANY APPLICABLE REGULATION OF ANY STATE AND IS NOT TRANSFERABLE EXCEPT
UPON THE CONDITIONS SPECIFIED IN SECTION 16 OF THE PURCHASE AGREEMENT REFERRED
TO HEREIN.

RIGHTS OF THE HOLDER TO RECEIVE PAYMENT AND ITS LIENS SECURING SUCH PAYMENT ARE
SUBJECT AND SUBORDINATE TO THE PRIOR PAYMENT OF ALL OBLIGATIONS OF THE COMPANY
TO NATIONAL CITY BANK OF MICHIGAN/ILLINOIS AND TO THE LIENS OF NATIONAL CITY
BANK OF MICHIGAN/ILLINOIS.


                              INTEGRAL VISION, INC.
                      15% Senior Subordinated Secured Note
                               Due March 31, 2005

                              Dated March 29, 2001
                           Farmington Hills, Michigan

No. __

         FOR VALUE RECEIVED, the undersigned INTEGRAL VISION, INC., a Michigan
corporation (herein, together with any successor, referred to as the("Company"),
hereby promises to pay to Mid-State Industrial Services, Inc., a Michigan
corporation of 1118 Centennial Way, Lansing, MI 48917, (the "Payee") or
registered assigns, the principal sum of One Hundred Twenty Thousand Dollars
($120,00.00) in quarterly installments of principal of Ten Thousand Dollars
($10,000.00) beginning on June 30, 2002 and thereafter on the 30th day of
September, December, March and June of each year to and including March 30,
2005, and shall pay in full the remaining principal amount of all Notes then
outstanding on the maturity date of March 31, 2005, plus interest (computed on
the basis of the actual number of days elapsed over a 360-day year) on the
unpaid balance of such principal sum from the date hereof at the interest rate
of 15% per annum, payable quarterly on the 30th day of March, June, September
and December of each year, commencing June 30, 2001 (which first interest
payment shall be for the period from and including the date hereof through and
including June 30, 2001) until the entire principal amount hereof shall have
become due and payable, whether at maturity or at a date fixed for prepayment or
by acceleration or declaration or otherwise, and at the Default Rate on any
overdue installment of principal (including any overdue prepayment of principal)
and on any overdue premium and (to the extent permitted by law) on any overdue
installment of interest until paid. The Default Rate shall be equal to the per
annum interest rate on this Note, plus four percent (4%).

         Capitalized terms not otherwise defined herein shall have the meaning
ascribed thereto in

   54

the Note and Warrant Purchase Agreement dated effective as of March 29, 2001
(the "Purchase Agreement"), by and among the Company, the Agent, the Payee and
the other Purchasers named therein.

         If any payment due hereunder becomes due and payable on a day which is
not a Business Day, the due date thereof shall be the next day which is a
Business Day, and the interest payable on such next Business Day shall be the
interest accruing through such actual date of payment.

         Payments of principal and interest shall be made in lawful money of the
United States of America at the principal office of the Company at Farmington
Hills, Michigan, or at such other place as the Company shall have designated for
such purpose to the holder thereof in writing, and may be paid by check mailed,
or shall be made by wire transfer, all as provided in the Purchase Agreement, to
the address or account designated by the holder hereof for such purpose.

         This Note is one of a duly authorized issue of Notes issued to the
Purchasers pursuant to the Purchase Agreement. This Note is subject to the
provisions of and is entitled to the benefits of the Purchase Agreement. Each
holder of this Note, by accepting the same, agrees to and shall be bound by the
provisions of the Purchase Agreement.

         The obligations of the Company under this Note (and under the Purchase
Agreement) are secured by the Collateral. The existence of such Collateral does
not in any way reduce or restrict the rights and remedies available to a holder
of this Note whether such rights and remedies arise under this Note, the
Purchase Agreement or otherwise.

         This Note is transferable only upon the terms and conditions specified
in the Purchase Agreement.

         In case an Event of Default shall occur and be continuing, all amounts
then remaining unpaid on this Note shall become or may be declared due and
payable in the manner and with the effect provided in the Purchase Agreement.

         No reference herein to the Purchase Agreement and no provision hereof
or thereof shall alter or impair the obligations of the Company, which are
absolute and unconditional, to pay the principal hereof and interest hereon at
the respective times and places specified herein and in the Purchase Agreement.

         This Note is delivered in and shall be construed and enforced in
accordance with and governed by the laws of the State of Michigan (other than
any conflict of laws rules which might result in the application of laws of any
other jurisdiction).

         Subject to the provisions of the Purchase Agreement, the Company may
treat the person in whose name this Note is registered as the owner and holder
of this Note for the purpose of receiving payment of principal of, premium, if
any, and interest on this Note and for all other purposes whatsoever, and the
Company shall not be affected by any notice to the contrary (except that the
Company shall comply with the provisions of the Purchase Agreement regarding the


   55
issuance of a new Note or Notes to permitted transferees).

         INTEGRAL VISION, INC. has caused this Note to be dated and to be
executed and issued on its behalf by its officer thereto duly authorized.

                                              (Signed on the next page)



                                               INTEGRAL VISION, INC.



                                               By_____________________________
                                               Name: Charles J. Drake
                                               Title: Chairman of the Board


   56



                                    EXHIBIT C
                                 Form of Warrant

No. __

THIS WARRANT CERTIFICATE (AND THE COMMON STOCK OR OTHER SECURITIES ISSUABLE UPON
EXERCISE HEREOF) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
UNDER ANY APPLICABLE REGULATION OF ANY STATE AND ARE NOT TRANSFERABLE EXCEPT
UPON THE CONDITIONS SPECIFIED IN SECTION 16 OF THE PURCHASE AGREEMENT REFERRED
TO HEREIN.

                              INTEGRAL VISION, INC.
                    Common Stock Purchase Warrant Certificate

                              Dated March 29, 2001
                           Farmington Hills, Michigan

         FOR VALUE RECEIVED, the undersigned INTEGRAL VISION, INC., a Michigan
corporation (herein referred to as the "Company"), hereby certifies and agrees
that Mid-State Industrial Services, Inc., a Michigan corporation of 1118
Centennial Way, Lansing, MI 48917 or registered assigns, is entitled to purchase
from the Company up to an aggregate of Two Hundred Forty Thousand (240,000) duly
authorized, validly issued, fully paid and nonassessable shares of the Company's
Common Stock, no par value, or any stock into which such Common Stock shall have
been changed or any stock or other securities resulting from a reclassification
thereof (all such shares, stock or other securities which may be purchased by
this, and all other, Warrants are herein known as the "Shares") at a purchase
price per Share of $0.50 at any time and from time to time from the date hereof
until 5:00 p.m. on May 30, 2005. The foregoing agreement and rights are all
subject to the terms, conditions and adjustments (in both the number of Shares
and the purchase price per Share) set forth below in this Warrant Certificate.

         This Warrant Certificate is one of the Common Stock Purchase Warrant
Certificates (the "Warrants", which term includes all Warrants issued in
substitution therefor) originally issued in connection with the issue and sale
by the Company of its Senior Subordinated Secured Notes (the "Notes"). The
Warrants and the Notes have been issued pursuant to the Note and Warrant
Purchase Agreement dated effective as of March 29, 2001 (the "Purchase
Agreement") among the Company, and the Purchasers named therein. The Warrants
originally so issued evidence rights to purchase an aggregate of 240,000 shares
at an exercise price of $0.50 per share, subject to adjustment as provided
herein. This Warrant is subject to the provisions, and is entitled to the
benefits, of the Purchase Agreement, including, without limitation, the
registration rights provisions contained therein.


         The Company represents that all Shares to which the holders of the
Warrants shall be entitled upon the exercise thereof (i) are duly authorized by
the Articles of Incorporation of the Company in accordance with the laws of the
State of Michigan, (ii) have been duly authorized to be issued upon the exercise
of the Warrants from time to time in whole or in part, (iii) will be,
   57
when issued in accordance with the terms of the Warrants, duly authorized and
validly issued and fully paid and nonassessable and free and clear of all Liens
and rights of others whatsoever (other than Liens and rights of others claiming
by, through or under the holder hereof) and (iv) will not be at the time of such
exercise subject to any restrictions on transfer or sale except as provided by
applicable laws.

         Section 1. Exercise of Warrant.

         1. 1. Manner of Exercise.

         (a) This Warrant may be exercised by the holder hereof, in whole or in
part, during normal business hours on any Business Day by surrender of this
Warrant, together with the form of subscription attached as Annex A hereto (or a
reasonable facsimile thereof) duly executed by such holder in substantially such
form, to the Company at its office designated pursuant to the Purchase Agreement
(or, if such exercise is in connection with an underwritten public offering of
Shares subject to this Warrant, at the location at which the underwriting
agreement requires that such Shares be delivered).

         (b) Payment of the exercise price for Shares shall be made, at the
option of the holder (i) as provided in Section 1.5 hereof, or (ii) by check or
wire transfer payable to the order of the Company, in any case, in an amount
equal to (A) the number of Shares specified in such form of subscription,
multiplied by (B) the then current exercise price. Such holder shall thereupon
be entitled to receive the number of Shares specified in such form of
subscription (plus cash in lieu of any fractional share as provided in Section
1.3 hereof).

         1.2. Effective Date. Each exercise of this Warrant pursuant to Section
1. 1 (a) hereof shall be deemed to have been effected immediately prior to the
close of business on the Business Day on which this Warrant is surrendered to
the Company as provided in Section 1. 1 hereof (except that if such exercise is
in connection with an underwritten public offering of Shares subject to this
Warrant, then such exercise shall be deemed to have been effected upon such
surrender of this Warrant), and such exercise shall be at the current exercise
price in effect at such time. On each such day that an exercise of this Warrant
is deemed effected, the Person or Persons in whose name or names any certificate
or certificates for Shares are issuable upon such exercise (as provided in
Section 1.3 hereof) shall be deemed to have become the holder or holders of
record thereof.

         1.3. Share Certificates; Cash for Fractional Shares; and Reissuance of
Warrants. As promptly as practicable after the exercise of this Warrant, in
whole or in part, and in any event within five (5) Business Days thereafter
(unless such exercise shall be in connection with a public offering of Shares
subject to this Warrant, in which event concurrently with such exercise), the
Company at its expense (including the payment by it of any applicable issue,
stamp or other taxes) will cause to be issued in the name of and delivered to
the holder hereof or such other person as such holder may direct:

         (a) a certificate or certificates for the number of Shares to which
such holder shall be entitled upon such exercise plus, in lieu of any fractional
share to which such holder would

   58

otherwise be entitled, cash in an amount equal to the same fraction of the
Market Price per Share (determined in accordance with Section 2.2(f) hereof) on
the effective date of such exercise; and

         (b) in case such exercise is in part only, a new Warrant or Warrants of
like tenor, calling in, the aggregate on the face or faces thereof for the
number (which may be fractional) of Shares (without giving effect to any
adjustment therein) equal to the number of such Shares called for on the face of
this Warrant minus the number of Shares which could have been obtained upon such
exercise for the exercise price paid if the current exercise price had been
$0.50 per Share.

         1.4. Acknowledgment of Obligation. The Company will, at the time of or
at any thereafter each exercise of this Warrant, upon the request of the holder
hereof or of any Shares issued upon such exercise, acknowledge in writing its
continuing obligation to afford to such holder all rights (including, without
limitation, any rights to registration of any such Shares pursuant to the
Purchase Agreement) to which such holder shall continue to be entitled under
this Warrant and the Purchase Agreement; provided, that if any such holder shall
fail to make any such request, the failure shall not affect the continuing
obligation of the Company to afford such rights to such holder.

         1.5. Notes. The holder shall have the option, but not the obligation,
upon any exercise of this Warrant, to apply to the payment required by Section
1. 1 hereof all or any part of the accrued and unpaid interest on, or principal
of, any Notes at the time held by the holder. The Company will accept the amount
of accrued and unpaid interest or principal, if such election is selected,
specified in the form of subscription in satisfaction of the exercise price for
such Shares to be purchased. The holder shall have the right to apply all or any
portion of such accrued and unpaid interest or principal to exercise all or any
portion of this Warrant whether or not payment on the Notes is otherwise
prohibited.

         1.6. Restriction. The holder acknowledges that the Shares acquired upon
exercise of the Warrant will be "restricted securities" as that term is defined
under the regulations promulgated under the Securities Act, will not be saleable
in the absence of an effective registration statement under the Securities Act
or an exemption from registration, and accordingly may be required to be held
for an indefinite period of time. The holder agrees that Shares issued pursuant
hereto may contain the following legend on the face thereof: "This security has
not been registered pursuant to the Securities Act of 1933, as amended, and each
holder of this security by the acceptance hereof agrees that this security shall
not be transferred in violation of said Act." The Company agrees that such
legend shall be removed from any Shares which are no longer subject to such
restrictions.

         Each holder of a Warrant by acceptance thereof agrees that it will not
sell or otherwise dispose of any Warrants or Shares unless such Warrants or
Shares have been registered under, or have been sold pursuant to an exemption
from registration under, the Securities Act. As a condition to the Company's
obligation to issue a new Warrant to a transferee thereof which (x) is not a
holder of a Warrant, the transferor must certify to the Company the facts on
which the transferor is relying for such exemption or (y) is a holder of a
Warrant, the transferor must represent to the Company in writing that the
transfer is so exempt.
   59

         Section 2. Current Exercise Price and Adjustments.

         2.1 Current Exercise Price. The term "current exercise price" shall
mean initially $0.50 per Share, subject to adjustment from time to time as
hereinafter provided, in effect at any given time. In determining the current
exercise price, the result shall be expressed to the nearest $.01, but any such
lesser amount shall be carried forward and shall be considered at the time of
and together with the next subsequent adjustment which, together with any
adjustments being carried forward, shall amount to $.01 per Share or more.

         2.2. Adjustment of Current Exercise Price. The current exercise price
shall be subject to adjustment, from time to time (but not below zero), as
follows:

         (a) Adjustments for Stock Dividends, Recapitalization. etc. In the
event the Company shall, after the Closing Date, issue any shares of Common
Stock (i) by stock dividend or any other distribution upon the stock of the
Company payable in Common Stock or in securities convertible into or exercisable
or exchangeable for shares of Common Stock or (ii) in subdivision of its
outstanding Common Stock, by reclassification or otherwise, the current exercise
price then in effect shall be reduced proportionately; and, in like manner, in
the event of any combination of shares of Common Stock, by reclassification or
otherwise, the current exercise price then in effect shall be increased
proportionately. An adjustment made pursuant to this Section 2.2(a) shall become
effective retroactively immediately after the record date in the case of a
dividend or other distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination.

         (b) Adjustments for Issuance of Additional Stock. Subject to the
exception referred to in Section 2.2(e) hereof and except as otherwise provided
for in Section 2.2(a) hereof, in case the Company shall at any time or from time
to time after the Closing Date issue any additional shares of its Common Stock
("Additional Common Stock") either (i) for consideration per share less than the
then current Market Price per share of the Company's Common Stock (determined as
provided in Section 2.2(f) hereof) immediately prior to the issuance of such
Additional Common Stock, or (ii) for a consideration per share less than the
then current exercise price immediately prior to the issuance of such Additional
Common Stock, or (iii) without consideration, then (in the case of either clause
(i), (ii) or (iiii)), and thereafter successively upon each such issuance, the
current exercise price shall forthwith be reduced to a price determined by
multiplying such current exercise price by a fraction, of which

                  (A) the numerator shall be (i) the number of shares of the
                  Company's Common Stock outstanding immediately prior to such
                  issuance of shares of Additional Common Stock plus (ii) the
                  number of shares of the Company's Common Stock which the
                  aggregate amount of consideration, if any, received by the
                  Company for the total number of shares of Additional Common
                  Stock so issued would purchase at the greater of (x) the
                  Market Price per share of the Company's Common Stock in effect
                  immediately prior to such issuance of shares of Additional
                  Common Stock or (y) the exercise price per Share in effect
                  immediately prior to such



   60
                  issuance of shares of Additional Common Stock, and

                  (B) the denominator shall be the number of shares of the
                  Company's Common Stock outstanding immediately after such
                  issuance of shares of Additional Common Stock,

provided, however, that such adjustment shall be made only if the current
exercise price determined from the aforesaid fraction shall be less than the
current exercise price in effect immediately prior to the issuance of such
Additional Common Stock. The adjustment described in this Section 2.2(b) shall
be made whenever such Common Stock is issued, and shall become effective
retroactively immediately after the date on which the Company committed to make
such issuance.

         (c) Certain Rules in Applying the Adjustment for Additional Stock
Issuances. For purposes of any adjustment as provided in Section 2.2(b), the
following provisions shall also be applicable:

         (1) Cash Consideration. In case of the issuance of Additional Common
Stock for cash, the consideration received by the Company therefor shall be
deemed to be the net cash proceeds received by the Company for such Additional
Common Stock after deducting any commissions or other expenses paid or incurred
by the Company for any underwriting of, or otherwise in connection with the
issuance of, such Additional Common Stock.

         (2) Non-Cash Consideration. In case of the issuance (other than
application of obligations of the Company) of Additional Common Stock for a
consideration other than cash, or a consideration a part of which shall be other
than cash, the amount of the consideration other than cash so received or to be
received by the Company shall be deemed to be the value of such consideration at
the time of its receipt by the Company as determined in good faith by the Board
of Directors of the Company, provided, that where the non-cash consideration
consists of the cancellation, surrender or exchange of outstanding obligations
of the Company (or where such obligations are otherwise converted into shares of
the Company's Common Stock), the value of the non-cash consideration shall be
deemed to be the amount, including principal and any accrued interest, as of the
time of the Company's receipt, of the obligations canceled, surrendered,
satisfied, exchanged or converted. If the Company receives consideration, part
or all of which consists of publicly traded securities, the value of such
non-cash consideration shall be the aggregate market value of such securities
(based on the latest reported trades) as of the close of the day immediately
preceding the date of their receipt by the Company.

         (3) Options, Warrants, Convertibles, etc. In case of the issuance
(other than by way of a Distribution on Common Stock pursuant to Section 2.2(b)
hereof), whether by distribution or sale to holders of its Common Stock or to
others, by the Company of (i) any security that is convertible into the
Company's Common Stock or (ii) any rights, options or warrants to purchase the
Company's Common Stock (except for the Warrants), if inclusion thereof would
result in a current exercise price lower than if excluded, the Company shall be
deemed to have issued, for the consideration described below, the number of
shares of the Company's Common Stock into
   61
which such convertible security may be converted when first convertible, or the
number of shares of the Company's Common Stock deliverable upon the exercise of
such rights, options or warrants when first exercisable, as the case may be (and
such shares shall be deemed to be Additional Common Stock for purposes of
Section 2.2(b) hereof). The consideration deemed to be received by the Company
at the time of the issuance of such convertible securities or such rights,
options or warrants shall be the consideration so received determined as
provided in Sections 2.2(c)(1) and (2) hereof deducting any commissions or other
expenses paid or incurred by the Company for any underwriting of, or otherwise
in connection with, the issuance of such convertible securities or rights,
options or warrants, plus (x) any consideration or adjustment payment to be
received by the Company in connection with such conversion, or, as applicable,
(y) the aggregate price at which shares of the Company's Common Stock are to be
delivered upon the exercise of such rights, options or warrants when first
exercisable (or, if no price is specified and such shares are to be delivered at
an option price related to the Market Price of the subject Common Stock, an
aggregate option price bearing the same relation to the Market Price of the
subject Common Stock at the time such rights, options or warrants were granted).
In case any such securities, rights, options or warrants shall be issued in
connection with the issue or sale of other securities of the Company comprising
one integral transaction in which no specific consideration is allocated to such
securities, rights, options or warrants, such securities, rights, options or
warrants shall be deemed to have been issued without consideration. If,
subsequently, (1) such number of shares into which such convertible security is
convertible, or which are deliverable upon the exercise of such right, options
or warrants, is increased or (2) the conversion or exercise price of such
convertible security, rights, options or warrants is decreased, then the
calculations under the preceding two sentences (and any resulting adjustment to
the current exercise price under 2.2(b) hereof) with respect to such convertible
security, rights, options or warrants, as the case may be, shall be recalculated
as of the time of such issuance but giving effect to such changes (but any such
recalculation shall not result in the current exercise price being higher than
that which would be calculated without regard to such issuance). On the
expiration or termination of such rights, options or warrants, or rights to
convert, the current exercise price hereunder shall be readjusted (up or down as
the case may be) to such current exercise price as would have been obtained had
the adjustments made upon the issuance of such rights, options, warrants or
convertible securities been made upon the basis of the delivery of only the
number of shares of the Company's Common Stock actually delivered upon the
exercise of such rights, options or warrants or upon the conversion of any such
securities and at the actual exercise or conversion prices (but any such
recalculation shall not result in the current exercise price being higher than
that which would be calculated without regard to such issuance).

         (4) Number of Shares Outstanding. The number of shares of the Company's
Common Stock as at the time outstanding shall exclude all shares of the
Company's Common Stock then owned or held by or for the account of the Company
or any of its Subsidiaries but shall include the aggregate number of shares of
the Company's Common Stock at the time deliverable in respect of the convertible
securities, rights, options and warrants referred to in Section 2.2(c)(3 ));
provided, that to the extent that such rights, options, warrants or conversion
privileges are not exercised, such shares of Common Stock shall be deemed to be
outstanding only until the expiration dates of the rights, warrants, options or
conversion privileges or the prior cancellation thereof.
   62
         (d) Exclusions from the Adjustment for Additional Stock Issuances. No
adjustment of the current exercise price under Section 2.2(b) hereof shall be
made as a result of or in connection with the issuance of Shares upon exercise
of the Warrants or the exercise of options to purchase 982,600 shares of the
Company's Common Stock pursuant to options previously granted to certain
officers of the Company pursuant to the Company's stock option plans. To the
extent that the issuance (or deemed issuance) of the Company's Common Stock
shall not result in any adjustment of the current exercise price pursuant to the
provisions of this Section 2.2(d), then such Common Stock shall not be taken
into account for purposes of determining any fraction referred to in Section
2.2(b) hereof.

         (e) Accountants' Certification. Whenever the current exercise price is
adjusted as provided in this Section 2.2, the Company will promptly obtain a
certificate of a firm of independent public accountants of recognized national
standing selected by the Board of Directors of the Company (who may be the
regular auditors of the Company) setting forth the current exercise price as so
adjusted, the computation of such adjustment and a brief statement of facts
accounting for such adjustment, and will mail to the holders of the Warrants a
copy of such certificate from such firm of independent public accountants.

         (f) Determination of Market Price. The current "Market Price" per share
of the Company's Common Stock on any date shall be deemed to be the average of
the daily closing prices for the twenty (20) consecutive trading dates ending on
the trading day before such date. The closing price for each day shall be the
last reported sale price or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, in either case on the principal
national United States securities exchange on which the Company's Common Stock
is listed or admitted to trading, or if the Company's Common Stock is not listed
or admitted to trading on any such national securities exchange, the average of
the highest reported bid and lowest reported asked prices as furnished by the
National Association of Securities Dealers Inc., Automated Quotation System
Level I, or comparable system. If the closing price cannot be so determined, the
Market Price shall be determined:

                  (x) by the written agreement of the Company and the holders of
                  Warrants representing a majority of the Shares then obtainable
                  from the exercise of outstanding Warrants (the "Majority
                  Holders"); or

                  (y) in the event that no such agreement is reached within
                  fifteen (15) days after the event giving rise to the need to
                  determine the Market Price, by a nationally recognized U.S.
                  investment banking firm, selected by the Company ("Company
                  Appraiser") not more than 5 Business Days after the end of
                  such 15 day period. Any appraiser appointed pursuant to this
                  paragraph shall be instructed to make its determination as
                  promptly as possible and in any event within 30 days of
                  appointment. If no such selection is made within such period,
                  then the Majority Holders shall as promptly as possible select
                  such a firm whose determination shall be final and binding. If
                  such selection is timely made by the Company, and the Majority
                  Holders do not object to the Market Price as determined by the
                  Company Appraiser within 10 days of receipt of notice thereof
                  by all holders of Warrants, then the Market Price as
                  determined by the Company

   63
                  Appraiser shall be the Market Price. If the Majority Holders
                  do so object to the Company Appraiser's determination of
                  Market Price, then the Majority Holders can select a
                  nationally recognized U.S. investment banking firm ("Alternate
                  Appraiser") to review the Company Appraiser's report and other
                  relevant information. Within 10 days after receipt by the
                  Alternate Appraiser of such report and such other information
                  as is reasonably requested by the Alternate Appraiser, the
                  Company Appraiser and Alternate Appraiser shall communicate
                  and/or meet to resolve any questions or differences with
                  respect to the Market Price. If such appraisers agree on a
                  Market Price, such Market Price shall be the Market Price. If
                  no agreement is reached then the Company Appraiser and
                  Alternate Appraiser shall select a third nationally recognized
                  firm ("Third Appraiser"). If the Company Appraiser and the
                  Alternate Appraiser cannot agree on a Third Appraiser within
                  20 days of the end of such 10 day period, either may apply to
                  the American Arbitration Association to appoint the Third
                  Appraiser. The Third Appraiser shall, within 30 days of its
                  hire, issue a report with its determination of Market Price
                  which shall be conclusive and binding. All expenses of the
                  Company Appraiser shall be borne by the Company. All expenses
                  of the Alternate Appraiser shall be borne by the holders of
                  the Warrants. All expenses of the Third Appraiser shall be
                  borne equally by the Company and the holders of the Warrants.

                  Market Price shall be determined on the basis of the fair
                  market value of the Company as if it were sold as a going
                  concern on the date of valuation and without regard to the
                  lack of any trading market for, or the lack of liquidity in,
                  the Common Stock of the Company.

                  The Company shall cooperate, and shall provide all necessary
                  information and assistance, to permit any determination under
                  the preceding clause (x) or (y).

                  Each Appraiser shall be instructed to use its best efforts to
                  give the Company and all holders reasonable advance notice of
                  the Market Price and the contents of its report (by delivering
                  a draft report) before the report is delivered in final form.
                  Any communications or reports by an Appraiser to either the
                  Company or any of the holders regarding Market Price shall be
                  given simultaneously to both the Company and all of the
                  holders.

         (g) Antidilution Adjustments Under Other Securities. Without limiting
any other rights available hereunder to the holders of Warrants, if there is an
antidilution adjustment (x) under any security which is convertible into Common
Stock of the Company whether issued prior to or after the date hereof or (y)
under any rights, options or warrants to purchase Common Stock of the Company
whether issued prior to or after the date hereof (except for the Warrants and
except as stated in Section 2.2(d) hereof) which (in the case of the preceding
clause (x) or (y)) results in a reduction in the exercise or purchase price with
respect to such security or rights or results in an increase in the number of
shares obtainable under such security or rights, then an adjustment

   64
shall be made under this Section 2.2(g) to the current exercise price hereunder.
Any such adjustment under this Section 2.2(g) shall be whichever of the
following results in a lower current exercise price: (A) a reduction in the
current exercise price equal to the percentage reduction in such exercise or
purchase price with respect to such security or rights or (B) a reduction in the
current exercise price which will result in the same percentage increase in the
number of Shares available hereunder as the percentage increase in the number of
Shares available under such security or rights. Any such adjustment under this
Section 2.2(g) shall only be made if it would result in a lower current exercise
price than that which would be determined pursuant to any other antidilution
adjustment otherwise required hereunder as a result of the event or circumstance
which triggered the adjustment to the security or rights described in clause (x)
or (y) above (and if any such adjustment is so made under this Section 2.2(g),
then such other antidilution adjustment otherwise required hereunder shall not
be made as a result of such event or circumstance).

         (h) Reorganization Adjustments. In case of any capital reorganization
or reclassification of the capital stock of the Company (other than a change in
par value or a stock split-up), the holder of this Warrant shall thereafter be
entitled to purchase for the current exercise price the securities and property
receivable upon such capital reorganization or reclassification by a holder of
the number of shares of Common Stock which this Warrant entitled the holder
hereof to purchase immediately prior to such capital reorganization or
reclassification. In the event that at any time, as a result of an adjustment
made pursuant to this Section 2.2(h), the holder of this Warrant shall become
entitled to purchase any other securities or property other than Common Stock,
thereafter the number of such other securities or property so purchasable upon
exercise of this Warrant and the current exercise price shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in this
Section 2.2.

         (i) Other Adjustments. Without limiting any provisions of this Section
2.2 or any other provisions of this Warrant, in case any event shall occur as to
which any of the provisions of this Section 2.2 are not strictly applicable but
the failure to make any adjustment would not fairly protect the exercise rights
represented by the Warrants in accordance with the intent and principles of this
Section 2.2, the Company shall at its expense appoint a firm of independent
public accountants of recognized national standing selected by the Board of
Directors of the Company (who may be the regular auditors of the Company), and
reasonably satisfactory to the Majority Holders, which shall give their opinion
upon the adjustment, if any, on a basis consistent with the intent and
principles established in this Section 2.2, necessary to preserve, without
dilution, the economic and other rights represented by the Warrants. Upon
receipt of such opinion, the Company will promptly mail copies thereof to the
holders of the Warrants and shall make the adjustments described therein.

         (j) Meaning of "Issuance". References in this Warrant to "issuance" of
stock by the Company include issuances by the Company of previously unissued
shares and issuances, sales or other transfers by the Company of treasury stock.

         Section 3. Company's Consolidation or Merger. If the Company shall at
any time

   65
consolidate with or merge into another entity (where the Company is not the
continuing corporation after such merger or consolidation), the holder of a
Warrant shall thereafter be entitled to receive, upon the exercise thereof in
whole or in part, the securities or other property to which (and upon the same
terms and with the same rights as) a holder of the number of Shares then
deliverable upon the exercise thereof would have been entitled upon such
consolidation or merger (subject to adjustments under Section 2.2 hereof), and
the Company shall take such steps in connection with such consolidation or
merger as may be necessary to assure such holder that the provisions of the
Warrants and the Purchase Agreement shall thereafter be applicable in relation
to any securities or property thereafter deliverable upon the exercise of this
Warrant, including, but not limited to, obtaining a written acknowledgment from
the continuing entity of its obligation to supply such securities or property
upon such exercise and to be so bound by the Warrant and the Purchase Agreement.
A sale, transfer or lease (in one, or a series of related, transactions) of all
or substantially all of the assets of the Company to another person shall be
deemed a consolidation or merger for the foregoing purposes.

         Section 4. Notice to Holders of Warrants.

         In case at any time:

         (i) the Company shall take any action which would require an adjustment
in the current exercise price pursuant to Section 2.2(a), (b), (j), (h) or (i);
or

         (ii) there shall be any capital reorganization or reclassification of
the Company's Common Stock (other than a change in par value or from par value
to no par value or from no par value to par value of the Common Stock), or any
consolidation or merger to which the Company is a party and for which approval
of any stockholders of the Company is required, or any sale, transfer or lease
(in one, or a series of related, transactions) of all or substantially all of
the assets of the Company; or

         (iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;

then, in any one or more of said cases, the Company shall give written notice to
the holders of the Warrants, not less than twenty (20) days before any record
date or other date set for definitive action, of the date on which such action,
reorganization, reclassification, sale, transfer, lease, consolidation, merger,
dissolution, liquidation or winding-up, as the case may be, and the terms
thereof.

         Section 5. Number of Shares. Upon any adjustment of the current
exercise price, the holder of this Warrant shall thereafter (until another such
adjustment) be entitled to purchase at the current exercise price the number of
Shares, calculated to the nearest 1/100 of a Share, obtained by multiplying the
current exercise price in effect immediately prior to such adjustment by the
number of Shares purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the new current exercise price
resulting from such adjustment.
   66

         Section 6. Specific Performance. The Company stipulates that the
remedies at law of a holder of this Warrant in the event of any default or
threatened default by the Company in the performance of or compliance with any
of the terms of this Warrant are not and will not be adequate and that, to the
fullest extent permitted by law, such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.

         Section 7. No Rights or Liabilities as Stockholder. Nothing contained
in this Warrant shall be construed as conferring upon the holder hereof any
rights as a stockholder of the Company (prior to exercise of all or a portion of
this Warrant) or as imposing any liabilities on such holder to purchase any
securities or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors or stockholders of the Company or
otherwise.

         Section 8. Ownership; Transfer. The Company may treat the Person in
whose name this Warrant is registered pursuant to the Purchase Agreement as the
owner and holder of this Warrant for all purposes, and the Company shall not be
affected by any notice to the contrary (except that the Company shall comply
with the provisions of the Purchase Agreement regarding the issuance of a new
Warrant or Warrants to transferees). This Warrant is transferable upon the
conditions specified in the Purchase Agreement.

         Section 9. Covenants

         9.1. Information Requirements. The Company will provide to each holder
of Warrants or Shares, promptly after the same are available, copies of each
annual report, proxy or financial statement or other communication sent to the
Company's or a Subsidiary's stockholders and copies of all annual, regular,
periodic and special reports and registration statements which the Company may
file or be required to file with the Securities and Exchange Commission or with
any securities exchange or the National Association of Securities Dealers, Inc.

         9.2. Reservation of Shares. There have been reserved, and the Company
shall at all times keep reserved, out of its authorized Common Stock, a number
of shares of Common Stock sufficient to provide for the exercise of the rights
of purchase represented by the then outstanding Warrants.

         9.3. No Dilution or Impairment. The Company will not, by amendment of
its Certificate of Incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant. The Company will at all times in good faith
assist in the carrying out of all such terms, and in the taking of all such
action, as may be necessary or appropriate in order to protect the rights of the
holder of this Warrant against dilution or other impairment. Without limiting
the generality of the foregoing, the Company (a) will not permit the par value
of any shares of Common Stock receivable upon the exercise of this Warrant to
exceed the amount payable therefor upon such exercise, (b) will take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of the Company's Common
Stock, free from all taxes,
   67
Liens and charges with respect to the issue thereof, upon the exercise of this
Warrant from time to time outstanding and (c) will not take any action which
results in any adjustment of this current exercise price under this Warrant if
the total number of shares of the Company's Common Stock (or other securities)
issuable after the action upon the exercise of all of the Warrants would exceed
the total number of shares of Common Stock (or other securities) then authorized
by the Company's Certificate of Incorporation and available for the purpose of
issue upon such exercise.

         9.4. Listing of Shares. If the Company shall list any shares of its
Common Stock on any national securities exchange, it will take such action as
may be necessary, from time to time, to list the Shares, subject to issuance, on
such exchange.

         9.5. Securities Exchange Act Registration. At any time that the Company
either files and such filing becomes effective, or is required to file, a
registration statement with respect to Common Stock of the Company under Section
5 of the Securities Act or Section 12(b) or Section 12(g) of the Securities
Exchange Act, then thereafter:

         (a) The Company will maintain effective a registration statement
(containing such information and documents as the Commission shall specify and
otherwise complying with the Securities Exchange Act) with respect to the Common
Stock of the Company under Section 12(b) or Section 12(g), whichever is
applicable, of the Securities Exchange Act and will file on time such
information, documents and reports as the Commission may require or prescribe
for companies whose stock has been registered pursuant to such Section 12(b) or
Section 12(g), whichever is applicable.

         (b) The Company will, upon the request of the holder hereof or of any
Shares, make whatever other filings with the Commission, or otherwise make
generally available to the public such financial and other information, as any
such holder may deem reasonably necessary or desirable in order to enable such
holder to be permitted to sell Shares pursuant to the provisions of Rule 144
under the Securities Act (or any successor statute, rule or regulation to Rule
144).

         9.6. Delivery of Information for Rule 144A Transactions. If a holder of
Warrants or Shares proposes to transfer any such Warrants or Shares pursuant to
Rule 144A under the Securities Act (as in effect from time to time), the Company
agrees to provide (upon the request of such holder or the prospective
transferee) to such holder and (if requested) to the prospective transferee any
financial or other information concerning the Company and its Subsidiaries which
is required to be delivered by such holder to any transferee of such Warrants or
Shares pursuant to such Rule 144A.

         Section 10. Headings. The headings and captions in this Warrant are for
convenience of reference only and shall not define, limit or otherwise affect
any of the terms or provisions hereof.

         Section 11. Governing Law. This Warrant shall be governed by, and
construed in accordance with, the laws of the State of Michigan (other than any
conflict of laws rule which

   68

might result in the application of the laws of any other jurisdiction).

         Section 12. Survival. The obligations of the Company under this Warrant
shall survive its full exercise.

         Section 13. Definitions. Terms not otherwise defined herein are defined
in the Purchase Agreement and are used herein with the same definition.

         INTEGRAL VISION, INC. has caused this Warrant to be dated and to be
executed and issued on its behalf by its officer thereunto duly authorized.

                                                  Integral Vision, Inc.


                                                  By:_________________________
                                                  Name: Charles J. Drake
                                                  Title: Chairman of the Board

EX-21

   1
                                                                      EXHIBIT 21



Subsidiary of the Registrant

Integral Vision, Inc. and Subsidiary



Integral Vision LTD

Incorporated in the United Kingdom

EX-23.1

   1
                                                                    EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS




    We consent to the incorporation by reference in Registration Statement
    33-61977 on Form S-8 dated August 21, 1995, Registration Statement
    33-61979 on Form S-8 dated August 21, 1995, Registration Statement
    33-12571 on Form S-8 dated March 11, 1987 and Registration Statement
    33-593 on Form S-8 dated October 1, 1985, of our report dated February
    25, 1999, (except for Note D, as to which the date is March 31, 1999),
    with respect to the consolidated statements of operations,
    stockholders' equity and cash flows for the year ended December 31,
    1998 of Integral Vision, Inc. and subsidiary (formerly Medar, Inc. and
    subsidiaries) included in the Annual Report (Form 10-K) for the year
    ended December 31, 2000.



    /S/ Ernst & Young, LLP

    Detroit, Michigan
    March 28, 2001

EX-23.2

   1

                                                                    EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS




         We consent to the incorporation by reference in Registration Statement
         33-61977 on Form S-8 dated August 21, 1995, Registration Statement
         33-61979 on Form S-8 dated August 21, 1995, Registration Statement
         33-12571 on Form S-8 dated March 11, 1987 and Registration Statement
         33-593 on Form S-8 dated October 1, 1985, of our report dated March 16,
         2001 (except for Note M, as to which the date is March 29, 2001), with
         respect to the consolidated balance sheets as of December 31, 2000 and
         1999 and the consolidated statements of operations, stockholders'
         equity and cash flows for each of the two years in the period ended
         December 31, 2000, and the financial statement schedule for each of the
         respective periods, of Integral Vision, Inc. and subsidiary (formerly
         Medar, Inc. and subsidiaries) included in the Annual Report (Form 10-K)
         for the year ended December 31, 2000.



         /S/ Moore Stephens Doeren Mayhew


         Troy, Michigan
         March 29, 2001