10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934. For the Quarterly period ended June 30, 2004.

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. For the transition period from                     to                    .

Commission File Number 0-12728

INTEGRAL VISION, INC.

(Exact name of registrant as specified in its charter)

Michigan (State or other jurisdiction of incorporation or organization)	38-2191935 (I.R.S. Employee Identification Number)
38700 Grand River Avenue, Farmington Hills, Michigan (Address of principal executive offices)	48335 (Zip Code)

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

Former name, former address and former fiscal year, if changed since last report:

Not Applicable

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

YES   x        NO     o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES    o      NO    x

The number of shares outstanding of the registrant’s Common Stock, no par value, stated value $.20 per share, as of July 31, 2004 was 14,832,638.

1

INTEGRAL VISION, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

	PAGE
Part I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets		3
Consolidated Statements of Operations		5
Consolidated Statement of Stockholders’ Deficit		7
Consolidated Statements of Cash Flows		8
Notes to Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures about Market Risk		20
Item 4. Disclosure Controls and Procedures		21
Part II — Other Information
Item 1. Legal Proceedings		22
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities		22
Item 3. Defaults Upon Senior Securities		22
Item 4. Submission of Matters to a Vote of Security Holders		22
Item 5. Other Information		22
Item 6. Exhibits and Reports on Form 8-K		23
Signatures		25
Certifications		26
2004 Employee Stock Option Plan
Certification of Chief Executive Officer pursuant to Rule 13a-15(e)
Certification of Chief Financial Officer pursuant to Rule 13a-15(e)
Certification of Chief Executive Officer pursuant to Section 1350
Certification of Chief Financial Officer pursuant to Section 1350

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

INTEGRAL VISION, INC. AND SUBSIDIARY

Consolidated Balance Sheets

	June 30,			December 31,
	2004			2003
	(Unaudited)
	(in thousands)
ASSETS
CURRENT ASSETS
Cash	$	705		$	42
Accounts receivable		30			14
Inventories – Note A		884			168
Other current assets		15			48
TOTAL CURRENT ASSETS		1,634			272
PROPERTY, PLANT AND EQUIPMENT
Leasehold Improvements		43			43
Production and engineering equipment		110			110
Furniture and fixtures		64			64
Vehicles		18			18
Computer equipment		171			160
		406			395
Less accumulated depreciation		(383	)		(368	)
		23			27
OTHER ASSETS
Capitalized computer software development costs, less accumulated amortization of $7,592,000 ($7,495,000 in 2003) – Note A		226			323
Patents, less accumulated amortization of $442,000 ($428,000 in 2003) – Note A		32			45
		258			368
	$	1,915		$	667
See notes to consolidated financial statements.

3

INTEGRAL VISION, INC. AND SUBSIDIARY
Consolidated Balance Sheets – Continued

	June 30,			December 31,
	2004			2003
	(Unaudited)
	(in thousands)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Notes payable – Notes C & F	$	295		$	1,171
Accounts payable		530			412
Accrued compensation and related costs – Note F		268			282
Accrued state income taxes – Note B		131			166
Accrued interest – Note C		169			403
Other accrued liabilities		33			64
Current maturities of long-term debt – Note C		—			666
TOTAL CURRENT LIABILITIES		1,426			3,164
LONG-TERM DEBT, less current maturities and O.I.D. – Note C		3,374			1,425
TOTAL LIABILITIES		4,800			4,589
STOCKHOLDERS’ DEFICIT
Common stock, without par value, stated value $.20 per share; 31,000,000 shares authorized; 14,832,638 shares issued and outstanding (9,429,901 in 2003)		2,967			1,886
Additional paid-in capital		33,022			31,694
Accumulated deficit		(38,874	)		(37,502	)
Total Stockholders’ Deficit		(2,885	)		(3,922	)
	$	1,915		$	667
See notes to consolidated financial statements.

4

INTEGRAL VISION, INC. AND SUBSIDIARY

Consolidated Statements of Operations

	Three Months Ended June 30,
	2004			2003
	(Unaudited)
	(In thousands, except per share data)
Net revenues	$	77		$	128
Costs of sales:
Direct costs of sales		86			43
Depreciation and amortization		61			66
Total costs of sales		147			109
Gross margin (Loss on sales)		(70	)		19
Other costs and expenses:
Marketing		62			60
General and administrative		287			221
Engineering and development		251			174
Total other costs and expenses		600			455
Operating loss		(670	)		(436	)
Other income		2			22
Interest expense – Note C		(108	)		(84	)
Net loss	$	(776	)	$	(498	)
Basic and diluted loss per share:
Net loss	$	(0.06	)	$	(0.05	)
Weighted average number of shares of common stock and common stock equivalents, where applicable		13,595			9,430
See notes to consolidated financial statements.

5

INTEGRAL VISION, INC. AND SUBSIDIARY
Consolidated Statements of Operations

	Six Months Ended June 30,
	2004			2003
	(Unaudited)
	(In thousands, except per share data)
Net revenues	$	170		$	540
Costs of sales:
Direct costs of sales		146			258
Depreciation and amortization		123			132
Total costs of sales		269			390
Gross margin (Loss on sales)		(99	)		150
Other costs and expenses:
Marketing		115			109
General and administrative		527			429
Engineering and development		440			356
Total other costs and expenses		1,082			894
Operating loss		(1,181	)		(744	)
Other income		33			48
Interest expense – Note C		(224	)		(154	)
Net loss	$	(1,372	)	$	(850	)
Basic and diluted loss per share:
Net loss	$	(0.11	)	$	(0.09	)
Weighted average number of shares of common stock and common stock equivalents, where applicable		11,984			9,430
See notes to consolidated financial statements.

6

INTEGRAL VISION, INC. AND SUBSIDIARY

Consolidated Statement of Stockholders’ Deficit

	Number of
	Common Shares				Additional Paid-In			Accumulated
	Outstanding		Common Stock		Capital			Deficit			Total
	(in thousands, except number of common shares outstanding)
Balance at January 1, 2004		9,429,901	$	1,886	$	31,694		$	(37,502	)	$	(3,922	)
Net loss for the period									(1,372	)		(1,372	)
Warrants exercised		4,000,737		800		82						882
Stock option exercised		179,000		36		(13	)					23
Restricted shares issued		1,223,000		245		1,259						1,504
Balance at June 30, 2004		14,832,638	$	2,967	$	33,022		$	(38,874	)	$	(2,885	)

See notes to consolidated financial statements.

7

INTEGRAL VISION, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
	2004			2003
	(Unaudited)
	(in thousands)
Operating Activities
Net loss	$	(1,372	)	$	(850	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		15			16
Amortization		158			157
Changes in operating assets and liabilities:
Accounts receivable		36			60
Inventories		(716	)		203
Prepaid and other		33			69
Accounts payable and other current liabilities		139			(296	)
Net Cash Used In Operating Activities		(1,707	)		(641	)
Investing Activities
Purchase of property and equipment		(11	)		(2	)
Other		(2	)		(1	)
Net Cash Used In Investing Activities		(13	)		(3	)
Financing Activities
Issuance of restricted common stock		1,504			—
Proceeds from sale of Class 2 Notes		575			405
Repayments on Class 2 Notes		(60	)		(259	)
Proceeds from sale of Class 3 Notes		478			—
Repayments on long term notes		(137	)		—
Proceeds from exercise of stock options		23			—
Proceeds from other short term notes		—			27
Repayments on short term notes		—			(75	)
Proceeds from sale of Class 1 Notes, net of discount		—			369
Proceeds from sale of warrants		—			121
Net Cash Provided By Financing Activities		2,383			588
Effect of Exchange Rate Changes on Cash		—			—
Increase (Decrease) in Cash		663			(56	)
Cash at Beginning of Period		42			81
Cash at End of Period	$	705		$	25
Supplemental cash flows disclosure:
Interest Paid	$	80		$	33
See notes to consolidated financial statements.

8

INTEGRAL VISION, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

June 30, 2004

(Unaudited)

Note A — Summary of Significant Accounting Policies

Nature of Business

Integral Vision, Inc. (or the “Company”) develops, manufactures and markets microprocessor-based process monitoring and control systems for use in industrial manufacturing environments. The principle application for the Company’s products is optical display inspection (“machine vision products”). The Company’s product offerings include LCI-Professional, SharpEye, ChromaSee, and Lifetime Tester. The Company’s products are generally sold as capital goods. Depending on the application, machine vision systems have an indefinite life. Machine vision applications are more likely to require replacement due to possible technological obsolescence rather than physical wear.

Principles of Consolidation

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and notes thereto included in Integral Vision’s Annual Report on Form 10-K for the year ended December 31, 2003.

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.

Reclassifications

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

9

Accounts Receivable

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

Inventories

Inventories are stated at the lower of standard cost, which approximates actual cost determined on a first-in, first-out basis, or market. At June 30, 2004 and December 31, 2003, inventories consisted of the following (net of allowance of $666,000 at June 30, 2004 and $671,000 at December 31, 2003):

	June 30,		December 31,
	2004		2003
	(Unaudited)
	(in thousands)
Raw materials	$	198	$	70
Work in process		613		48
Finished goods		73		50
	$	884	$	168

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

Impairment of Long-lived Assets

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

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.

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).

10

Patents

Patents are stated at cost less accumulated amortization and are amortized on a straight-line basis over the estimated useful lives of the assets (not to exceed 5 years).

Revenue Recognition

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

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

Concentrations of Credit and Other Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. A significant portion of the Company’s customers are located in Asia, primarily Japan, Taiwan, and Korea, and in Europe. Therefore, the Company’s sales to these countries may be adversely affected by the overall health of these economies, including the effects of currency exchange rate fluctuations and political risks. The Company generally does not require collateral for most of its trade accounts receivable. For sales to some of its customers in certain geographic regions, the Company requires letters of credit. Substantially all of the Company’s revenue is invoiced in U.S. dollars. For the six months ended June 30, 2004, sales to three of the Company’s customers represented $143,000 of the Company’s total revenue of $170,000 for the period. The Company believes its credit evaluation and monitoring mitigates its credit risk.

Advertising

Advertising costs are expensed as incurred. Advertising costs were approximately $2,000 for the six months ended June 30, 2004 and $5,000 for the comparable 2003 period.

Income Taxes

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

Fair Value Disclosure

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

Contingencies and Litigation

The Company makes an assessment of the probability of an adverse judgment resulting from current and threatened litigation. The Company accrues the cost of an adverse judgment if, in management’s estimation, an adverse settlement is probable and management can reasonably estimate the ultimate cost of such litigation. The Company has made no such accruals at June 30, 2004.

11

Stock Options and Warrants

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

In May 2004, the Company’s stockholders approved a new stock option plan to authorize shares on which qualified and nonqualified options may be granted for the purchase of up to 1,000,000 shares of common stock of the Company.

The Compensation Committee of the Board of Directors approves option grants. The option price is the market price on the date of the grant, vesting generally occurs after one year and the expiration occurs ten years from the date of the grant. In May 2004, stock options for the purchase of 124,000 common shares were granted with an exercise price of $1.71 per share, which was the market price at the close of trading on the grant date. In May 2003, stock options for the purchase of 180,000 common shares were granted with an exercise price equal to the market price at the close of trading on the grant dates. Options for the purchase of 115,000 shares of the Company’s common stock were granted with an exercise price of $.15 per share and options on 65,000 shares were granted with an exercise price of $.16 per share. At June 30, 2004, there were options outstanding to purchase 943,000 shares of common stock at prices ranging from $.10 to $9.25 per share.

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

	Six Months Ended			Six Months Ended
	June 30, 2004			June 30, 2003
Dividend yield		0.0	%		0.0	%
Expected stock price volatility		1.330			1.172
Risk free interest rate		2.0	%		2.0	%
Expected life of options (years)		7.00			7.00

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The following table presents net loss and basic and diluted loss per common share, had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards, consistent with the method prescribed by SFAS 123, as amended by SFAS 148:

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
				(in thousands, except per share data)
Net loss:
Net loss, as reported	$	(776	)	$	(498	)	$	(1,372	)	$	(850	)
Add: Stock-based compensation expense included in the determination of net loss as reported, net of related tax effects		—			—			—			—
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(49	)		(6	)		(55	)		(6	)
Pro forma net loss	$	(825	)	$	(504	)	$	(1,427	)	$	(856	)
Basic and diluted earnings per share:
Basic and diluted – as reported	$	(0.06	)	$	(0.05	)	$	(0.11	)	$	(0.09	)
Basic and diluted – pro forma	$	(0.06	)	$	(0.05	)	$	(0.12	)	$	(0.09	)

12

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock option plan has characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such Company options.

Under the terms of the Company’s Note and Warrant Purchase agreement, as amended, the Company could issue up to $5.5 million of senior debentures, which consists of Class 1, Class 2, and Class 3 Notes. Class 2 Notes are working capital notes, are secured by accounts receivable of the Company, and are subordinated to the Class 1 Notes issued prior to April 16, 2002. In September 2003, the holders of all of the then outstanding Class 2 Notes agreed to modify the maturity dates of those Notes to April 30, 2004. In December 2003, certain of the Class 2 Notes were amended to have maturity dates of May 31, 2004. The purchasers of the Class 2 Notes receive warrants for the purchase of the Company’s common stock when the Note is repaid. Class 2 Warrants entitle the holder to purchase one share of Common Stock for each $1 in value of the Class 2 Note multiplied by a fraction, the numerator of which is the number of days such Class 2 note is outstanding and the denominator of which is 365, at a specified price which shall be approximately 150% of the recent fair market value of the Common Stock as of the date of the issuance of the Class 2 Note. Based on their respective maturity dates, the number of common shares that could be purchased with Class 2 warrants is estimated to be 840,000. In August 2003, the holders of those Notes agreed to a modification to the Note and Warrant Purchase Agreement that created a new Class 3 Note which is convertible into Integral Vision, Inc. common stock at a conversion rate set by the Company’s board of directors at the date of issuance. Class 1 Notes issued have maturities of up to four years, an interest rate of 10%, and the purchasers of the Notes receive warrants for the purchase of the Company’s common stock. The value assigned to warrants is included in additional paid-in capital and the discount is amortized over the life of the note. Additionally, the directors will determine the conversion rate at the date of issuance, subject to change in the event additional shares are issued in the future. In March 2004, the holders of the Class 1 and Class 2 Notes agreed to an additional modification to the Note and Warrant Purchase Agreement that increased the maximum amount of the Notes outstanding to $5.5 million. The maturity date on substantially all of the then outstanding Class 2 Notes was extended to December 31, 2005. Principal and interest due on those Class 2 notes on December 31, 2005 is projected to be approximately $1.2 million. The terms of the Class 1 Notes were changed such that all accrued interest would be due on June 30, 2004. Additionally, the first principal payments on the Class 1 Notes would be due on June 30, 2004. However, the amended Note and Warrant Purchase Agreement provides that, as a result of the Company’s shareholders’ approval of management’s proposal to increase the Company’s authorized stock to 31,000,000 shares at the Company’s annual meeting of its shareholders that was held on May 6, 2004, the following has occurred:

• The accrued interest on outstanding Class 1 Notes as of December 31, 2003 in the amount of approximately $331,000 has been exchanged for new Class 3 Notes due July 3, 2006 with interest at 8% payable semi-annually beginning April 1, 2005 and convertible into shares of the Company’s common stock at $0.75 per share.

• The initial interest payment due on Class 1 Notes for interest accruing after December 31, 2003 is due April 1, 2005.

• Quarterly principal payments on Class 1 Notes have been eliminated, with all principal due at maturity.

• $330,000 of principal on Class 1 Notes issued prior to April 16, 2002 has been exchanged for Class 3 Notes due February 27, 2007 with interest at 8% payable semi-annually beginning April 1, 2005 and convertible into shares of the Company’s common stock at $0.75 per share.

• Class 2 Notes outstanding at February 29, 2004, plus interest then accrued, may be exchanged for Class 3 Notes due December 31, 2005 with interest at 8% payable semi-annually beginning April 1, 2005 and convertible into shares of the Company’s common stock at $0.75 per share.

On the modification date, the market price of the Company’s common stock was approximately $1.50 per share. The Board considered the $0.75 conversion price was justified given the concessions received in connection with the debt, the fact that the shares are restricted, and other factors.

13

During the six month period ended June 30, 2004, $575,000 of the Class 2 Notes and $478,000 of the Class 3 Notes were placed. Additionally, Warren, Cameron, Asciutto, & Blackmer, P.C. (the Company’s corporate counsel), agreed to convert $250,000 of its $354,000 note payable into a Class 3 Note. The remaining $104,000 was repaid in June 2004. Also during the period, certain holders of Class 1 Notes exercised their warrants to purchase 1,540,000 shares of the Company’s common stock at $0.25 per share, the proceeds of which were used to repay the face value of the respective Class 1 Notes. Mr. Drake exercised his warrants to purchase 1,890,000 shares of the Company’s common stock at $0.25 per share, the proceeds of which were used to repay the face value of the his Class 1 Notes. Maxco, Inc. exercised its warrants to purchase 240,000 shares of the Company’s common stock at $0.25 per share, the proceeds of which were used to repay the face value of its Class 1 Note. Max A. Coon (a director of the Company) exercised his warrants to purchase 270,000 and 60,737 shares of the Company’s common stock at $0.25 and $0.75 per share, respectively, the proceeds of which were used to repay the face value of the his Class 1 and Class 3 Notes. At June 30, 2004, a total of $1,140,000 of the Class 1 Notes, $1,237,000 of the Class 2 Notes, and $1,355,326 of the Class 3 Notes were outstanding.

In connection with the private placement of $7.0 million of debentures in 1997, which were retired in 1999, the Company issued warrants for the purchase of 1,400,000 Integral Vision common shares at $6.86 per share through June 30, 2005, all of which were outstanding at June 30, 2004. Pursuant to the 1997 Note and Warrant Purchase agreement, these warrants have been re-priced based on subsequent warrant issues. At June 30, 2004, the holders of these warrants had the right to purchase up to 3,662,449 shares of the Company’s common stock at $2.62 per share.

During the six months ended June 30, 2004 employee stock options to purchase 179,000 shares of the Company’s common stock at prices ranging from $0.10 to $0.24 per share were exercised, resulting in net proceeds of approximately $23,000.

A summary of the outstanding warrants and options at June 30, 2004 is as follows:

					Weighted
	Weighted Average		Number		Average		Number
	Exercise Price		Outstanding		Remaining Life		Exercisable
	(number of shares in thousands)
1997 Note and Warrant Purchase Agreement	$	2.62		3,662		1.00		3,662
2001 Note and Warrant Purchase Agreement (1)		0.28		4,651		2.49		4,651
Class 3 Notes		0.86		1,569		2.65		1,569
Qualified ISO Plan		9.25		7		0.15		7
1995 Employee Stock Option Plan		1.30		380		5.95		380
1999 Employee Stock Option Plan		0.24		432		7.68		432
2004 Employee Stock Option Plan		1.71		124		9.90		—
	$	1.08		10,825		1.73		10,701

(1) Excludes warrants exercisable under outstanding Class 2 Notes. The number of warrants available to holders of Class 2 Notes is dependent on the length of time the principal balance is outstanding and the agreed upon base exercise price. At June 30, 2004, $1.2 million of the Class 2 Notes was outstanding.

Comprehensive Income

The Company displays components of accumulated comprehensive income (loss), if any, in the Consolidated Statement of Stockholders’ Deficit.

Note B — Sale of Welding Controls Division

The Company incurred both Federal and State income tax liabilities as a result of the sale of the assets of its Welding Controls division in 1999. The Company paid approximately $90,000 for its 1999 alternative minimum tax liability, which resulted primarily from the gain on the sale of the Welding Controls Division. This amount was refunded to the Company in 2002. Additionally, the Company incurred a Michigan Single Business Tax (SBT) liability of approximately $120,000 for the 1999 tax year as a result of the transaction. At June 30, 2004, this liability was not yet paid in full and was included in accrued state income taxes in the consolidated balance sheet. Including interest and penalties, approximately $131,000 was outstanding at June 30, 2004 for this obligation, which is included in accrued state income taxes in the consolidated balance sheet. The Company is making monthly payments of approximately $6,300 to the taxing authority.

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The acquiring company also assumed a liability to Square D in the amount of $1.8 million in accordance with the purchase agreement. This liability resulted from the settlement of patent litigation in 1994. The settlement required payments of $300,000 per year for ten years. In the event the acquiring company fails to make the required payments, Integral Vision may be obligated for those amounts due. As of June 30, 2004, no notifications have been made that the Company is obligated for any payments not made and the final payment is due in October 2005.

Note C — Long-Term Debt and Other Financing Arrangements

At June 30, 2004, the Company had a long term note payable to Maxco, Inc. (a 15% owner of the Company) of approximately $106,000 with an interest rate of prime plus 0.5%. This note matures in July 2005.

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

	June 30,			December 31,
	2004			2003
	(in thousands)
Long Term Debt:
Face value Class 1 Notes	$	1,140		$	2,455
Less Original Issue Discount		(169	)		(364	)
Class 2 Notes		942			—
Class 3 Notes		1,355			—
Other Long Term Debt		106			—
Less Current Maturities		—			(666	)
Net Long Term Debt	$	3,374		$	1,425
Short Term Debt:
Class 2 Notes	$	295		$	722
Other Short Term Debt		—			449
Total Short Term Debt	$	295		$	1,171

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

Note D — Loss per Share

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
	(unaudited)
	(in thousands, except per share data)
Numerator for basic and diluted loss per share – loss available to common stockholders
Net loss	$	(776	)	$	(498	)	$	(1,372	)	$	(850	)
*there was no effect of dilutive securities see below
Denominator for basic and diluted loss per share – weighted average shares		13,595			9,430			11,984			9,430
*there was no effect of dilutive securities see below
BASIC AND DILUTED LOSS PER SHARE:	$	(0.06	)	$	(0.05	)	$	(0.11	)	$	(0.09	)

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

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Note E — Sale of Optical Disc Inspection Technology

On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global test equipment manufacturer DaTARIUS Technologies GmbH, purchased Integral Vision’s assets related to inspection systems for the optical disc industry, including the names “Automatic Inspection Systems” and “AID.” The sale included Integral Visions optical disc scanner products as well as its range of print and identification code products used to inspect the printing stage of disc manufacture. The consideration the Company received for the technology consisted of a non-refundable $100,000 advanced minimum royalty payment in addition to future royalties. The Company received approximately $54,000 in royalties in 2003 and expects to receive additional royalties in excess of $60,000 a year for the next two years. Additionally, the Company received $25,000 from the sale of equipment to DaTARIUS.

Note F — Related Party Transactions

During the period ended June 30, 2004, Mr. Charles Drake, the Company’s chairman, exercised warrants to purchase 1,890,000 shares of the Company’s common stock at $0.25 per share in exchange for retiring various Class 1 Notes in the amount of $472,500.

Mr. Arthur Harmala, the Company’s Vice President of Marketing, has voluntarily deferred approximately $4,000 of his wages as of June 30, 2004. This amount is included in accrued compensation and related costs in the consolidated balance sheet.

During the quarter ended March 31, 2004, Maxco, Inc., a 15% owner of the Company, exercised warrants to purchase 240,000 shares of the Company’s common stock at $0.25 per share in exchange for retiring a portion of a Class 1 Note in the amount of $60,000.

Maxco, Inc. advanced the Company approximately $139,000 in 2001 to permit the Company to meet its obligations. In March 2004, the parties reached an agreement on a new note that extended the maturity date to July 1, 2005. Additionally, Maxco provides consulting services to the Company. These services include assistance with financial statement preparation, compliance with governmental filing requirements, and assistance with certain financing arrangements. The Company has not recorded any charge for these services to date. For future services the Company may record charges, if and when, management, Maxco, and the Independent Directors determine the value of such services on an ongoing basis.

Warren, Cameron, Asciutto, & Blackmer, P.C. (the Company’s corporate counsel), agreed to convert $250,000 of its $354,000 note payable into a Class 3 Note. The remaining $104,000 was repaid in June 2004.

Note G — 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.

Note H — Going Concern Matters

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, the Company has incurred losses from operations in the current and prior year six month periods of $1.4 million and $850,000, respectively. Further, during the years ended December 31, 2003, 2002, and 2001, the Company incurred losses from continuing operations of $1.9 million, $2.2 million, $8.1 million, respectively. The continuing losses, in addition to working capital deficiencies, recurring reductions in product sales, and cash flow deficiencies, among other factors, indicate that the Company may be unable to continue as a going concern for a reasonable period of time.

The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional

16

financing as may be required, and ultimately to attain profitability. Additionally, at June 30, 2004, approximately half of the Company’s $320,000 in trade accounts payable was overdue. Subsequent to June 30, 2004, approximately $220,000 of the total balance was paid. The Company also has an estimated $351,000 in amounts owed to certain regulatory agencies. The Company is making monthly payments of approximately $6,300 to one of the regulatory agencies.

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

Note I — Off Balance Sheet Risk

A claim has been made against the Company citing unpaid royalties totaling $107,000. Management does not believe that the Company will ultimately be found to be liable to the claimant.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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

Overview

Integral Vision, Inc. (or the “Company”) develops, manufactures and markets microprocessor-based process monitoring and control systems for use in industrial manufacturing environments. The principle application for the Company’s products is optical display inspection (“machine vision products”). The Company’s product offerings include LCI-Professional, SharpEye, ChromaSee, and Lifetime Tester. The Company’s products are generally sold as capital goods. Depending on the application, machine vision systems have an indefinite life. Machine vision applications are more likely to require replacement due to possible technological obsolescence rather than physical wear.

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

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

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

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

Results of Operations

Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003

Net revenues decreased $51,000 (39.8%) to $77,000 in the second quarter of 2004 from $128,000 in the second quarter of 2003. The decrease in net revenue was primarily attributable to $43,000 of revenue from sales of the Company’s packaging applications in the second quarter of 2003; there were no such sales from that product line in the comparable 2004 period.

Costs of sales increased $38,000 (34.9%) to $147,000 (190.9% of sales) in the second quarter of 2004 compared to $109,000 (85.2% of sales) in the second quarter of 2003. This was primarily due to increased material purchases and other costs in anticipation of higher sales in the third quarter.

Marketing costs were comparable to the prior year.

General and administrative costs increased $66,000 (29.9%) to $287,000 in the second quarter of 2004 compared to $221,000 in the second quarter of 2003. This was primarily due to increased legal costs of $30,000 in the 2004 period. The remainder of the increase in the second quarter of 2004 compared to the second quarter of 2003 was mainly attributable to an increase in employee related costs.

Engineering and development expenditures increased $77,000 (44.3%) to $251,000 in the second quarter of 2004 compared to $174,000 in the second quarter of 2003. Approximately $65,000 of this increase was attributable to engineering work done in anticipation of increased sales in the third quarter. The remainder of the increase in the second quarter of 2004 compared to the second quarter of 2003 was mainly attributable to an increase in employee related costs.

Other income in the second quarter of 2003 includes $17,000 of royalty income received in connection with the 2002 sale by the Company of its optical disc inspection technology.

Interest expense increased $24,000 to $108,000 in the second quarter of 2004 compared to $84,000 in the second quarter of 2003. The increase is primarily attributable to the interest on Class 1 and Class 2 Notes that were placed subsequent to June 30, 2003 (see Note C to consolidated financial statements).

Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003

Net revenues decreased $370,000 (68.5%) to $170,000 in 2004 from $540,000 in 2003. The decrease in net revenue was primarily attributable to $471,000 of revenue from sales of the Company’s flat panel display inspection products in 2003; there were only $82,000 in sales from that product line in the comparable 2004 period. Conversely, 2004 included $33,000 of additional revenue from packaging applications over the prior year. The Company’s work in process inventory increased during the six months ended June 30, 2004 as work proceeded on orders from a customer. The Company plans on reducing this inventory through shipments during the third quarter and expects revenue from such shipments to exceed $750,000.

Costs of sales decreased $121,000 (31.0%) to $269,000 (158.2% of sales) in 2004 compared to $390,000 (72.2% of sales) in 2003. This was primarily due to a decrease of $166,000 in material costs as a result of the lower sales of flat panel display inspection products in 2004. Offsetting this decrease were $57,000 in additional costs related to packaging applications in 2004.

Marketing costs increased $6,000 (5.5%) to $115,000 in 2004 compared to $109,000 in 2003. This was attributable to an increase in employee related costs.

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General and administrative costs increased $98,000 (22.8%) to $527,000 in 2004 compared to $429,000 in 2003. This was primarily due to increased legal costs of $53,000 in 2004. The remainder of the increase in 2004 compared to 2003 was mainly attributable to an increase in employee related costs.

Engineering and development expenditures increased $84,000 (23.6%) to $440,000 in 2004 compared to $356,000 in 2003. Approximately $52,000 of this variance was attributable to engineering work done in anticipation of increased sales in the third quarter. The remainder of the increase in 2004 compared to 2003 was mainly attributable to an increase in employee related costs.

Other income in 2004 includes $29,000 of royalty income received in connection with the 2002 sale by the Company of its optical disc inspection technology. Other income in 2003 includes $18,000 for engineering fees and $21,000 of royalty income.

Interest expense increased $70,000 to $224,000 in 2004 compared to $154,000 in 2003. The increase is primarily attributable to the interest on Class 1 and Class 2 Notes that were placed subsequent to June 30, 2003 (see Note C to consolidated financial statements).

Liquidity and Capital Resources

Operating activities for the six months ended June 30, 2004 used cash of approximately $1.7 million primarily due to the Company’s loss from operations of $1.4 million. Decreases in accounts receivable and other assets and an increase in payables generated cash of $208,000 while increases in inventory used $716,000. The Company’s work in process inventory increased during the six months ended June 30, 2004 as work proceeded on orders from a customer. The Company plans on reducing this inventory through shipments during the third quarter and expects revenue from such shipments to exceed $750,000.

The Company investing activities included primarily the purchase of approximately $11,000 of equipment in 2004.

The Company’s financing activities included proceeds of $1.5 million from the issuance of restricted common stock. These shares cannot be transferred without registration or pursuant to an applicable exemption from registration (see Part II Item 2). The Company received $575,000 and $478,000 from the sale of Class 2 Notes and Class 3 Notes, respectively. The Company made principal payments of approximately $60,000 on its Class 2 Notes in the period. The Company made principal payments of approximately $137,000 on other long term notes in the period. Additionally, employee stock options were exercised during the period generating approximately $23,000.

The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitability. Additionally, at June 30, 2004, approximately half of the Company’s $320,000 in trade accounts payable was overdue. Subsequent to June 30, 2004, approximately $220,000 of the total balance was paid. The Company also has an estimated $351,000 in amounts owed to certain regulatory agencies. The Company is making monthly payments of approximately $6,300 to one of the regulatory agencies.

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

Management’s Discussion of Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The accounting policies discussed below are considered by management to be the most important to an understanding of our financial statements, because their application places the most significant demands on management’s judgment and estimates about the effect of matters that are inherently uncertain. Our assumptions and estimates were based on the facts and circumstances known at June 30, 2004, future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. These policies are also described in Note A of the Notes to Consolidated Financial Statements included in this Quarterly Form 10-Q.

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Revenue Recognition

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

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

Inventories

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

Impairment of Long-lived Assets

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

Contingencies and Litigation

The Company makes an assessment of the probability of an adverse judgment resulting from current and threatened litigation. The Company accrues the cost of an adverse judgment if, in management’s estimation, an adverse settlement is probable and management can reasonably estimate the ultimate cost of such litigation. The Company has made no such accruals at June 30, 2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

• US Dollars

• Pound Sterling

• Euros

• Yen

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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 June 30, 2004, the Company had no open positions and had no sales denominated in a foreign currency.

Item 4. Disclosure Controls and Procedures

Controls and Procedures

a)	Evaluation of disclosure controls and procedures
	Our chief executive officer and chief financial officer have each reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing date of this report. Based on that evaluation, our chief executive officer and chief financial officer have each concluded that our current disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported, in each case, within the time period specified by the SEC’s rules and regulations.
b)	Changes in internal controls
	There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weakness, and therefore no corrective actions were taken.

21

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

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

The notes and warrants referenced above were sold in private transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. There are fifteen purchasers, some of whom have purchased on more than one occasion. Of these, three of the purchasers are related entities or insiders of the Company. Eleven of the purchasers are either a client, or relative of the principal, of one State of California registered investment advisor. To the best of the Company’s knowledge, all of the purchasers are either “accredited investors” as that term is defined in Regulation D under the Securities Act of 1933 or, either alone or with their purchaser representative, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the investment.

During June 2004, the Company sold 1,223,000 shares of unregistered shares of its common stock at $1.23 per share in private transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The securities were sold to four investment firms, one of which purchased in excess of 800,000 shares.

These shares, and the shares to be issued pursuant to the notes and warrants discussed above, are restricted from being transferred without registration or pursuant to an exemption from registration. After one year, the shares could be sold in unsolicited broker transactions pursuant to Rule 144 under the Securities Act of 1933 (“Rule 144”), which includes restrictions on the number of shares that may be sold in any three month period. For those holders who are not affiliates of the Company, after the restricted shares have been held for at least two years, many of the restrictions of Rule 144, including the restriction on the number of shares which may be sold, will no longer apply.

Under the terms of the Note and Warrant Purchase Agreement and the agreements for the sale of the restricted shares, the Company is obligated to use its best efforts to register the restricted shares and the shares issuable upon exercise of the notes and warrants by September 30, 2004. Such registration would eliminate the restrictions on transfer. The Company anticipates filing a registration statement to fulfill this obligation.

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

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Item 6. Exhibits and Reports on Form 8-K

(a) 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 registrant’s 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 registrant’s Form 8-K dated July 15, 1997, SEC file 0-12728, and incorporated herein by reference).
4.4	Note and Warrant Purchase Agreement dated March 29, 2001 including Form of Integral Vision, Inc. 15% Senior Subordinated Secured Note and Integral Vision, Inc. Common Stock Purchase Warrant Certificate (filed as Exhibit 4.4 to registrant’s Form 10-K for the year ended December 31, 2000, SEC file 0-12728, and incorporated herein by reference).
4.5	Form of amended Note and Warrant Purchase Agreement including Form of Integral Vision, Inc. 10% Secured Note and Integral Vision, Inc. Common Stock Purchase Warrant Certificate (filed as Exhibit 4.5 to registrant’s Form 10-Q for the quarter ended June 30, 2001, SEC file 0-12728, and incorporated herein by reference).
4.6	Form of Second Amended Note and Warrant Purchase Agreement including Form of Integral Vision, Inc. Class 2 Note and Integral Vision, Inc. Class 2 Common Stock Purchase Warrant Certificate (filed as Exhibit 4.6 to registrant’s Form 10-Q for the quarter ended March 31, 2002, SEC file 0-12728, and incorporated herein by reference).
4.7	Consent to Modifications dated March 17, 2003 modifying the terms of the Second Amended Note and Warrant Purchase Agreement (filed as Exhibit 4.7 to registrant’s Form 10-K for the year ended December 31, 2002, SEC file 0-12728, and incorporated herein by reference).
4.8	Form of Fourth Amended Note and Warrant Purchase Agreement including Form of Integral Vision, Inc. Class 3 Note (filed as Exhibit 4.8 to registrant’s Form 10-K for the year ended December 31, 2003, SEC file 0-12728, and incorporated herein by reference).
10.1	Incentive Stock Option Plan of the Registrant as amended (filed as Exhibit 10.4 to the registrant’s Form S-1 Registration Statement effective July 2, 1985, SEC File 2-98085, and incorporated herein by reference).
10.2	Second Incentive Stock Option Plan (filed as Exhibit 10.2 to the registrant’s Form 10-K for the year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).
10.3	Non-qualified Stock Option Plan (filed as Exhibit 10.3 to the registrant’s Form 10-K for the year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).
10.4	Amendment to Integral Vision, Inc. Incentive Stock Option Plan dated May 10, 1993 (filed as Exhibit 10.3 to the registrant’s Form 10-K for the year ended December 31, 1993, SEC File 0-12728, and incorporated herein by reference).
10.5	Integral Vision, Inc. Employee Stock Option Plan (filed as Exhibit 10.5 to the registrant’s Form 10-Q for the quarter ended September 30, 1995, SEC file 0-12728, and incorporated herein by reference).

23

Exhibit
Number	Description of Document
10.6	Form of Confidentiality and Non-Compete Agreement Between the Registrant and its Employees (filed as Exhibit 10.4 to the registrant’s Form 10-K for the year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).
10.7	Integral Vision, Inc. 1999 Employee Stock Option Plan (filed as Exhibit 10.5 to the registrant’s Form 10-Q for the quarter ended June 30, 1999, and incorporated herein by reference).
10.8*	Patent License Agreement dated October 4, 1995 by and between Integral Vision, Inc. and Square D Company (filed as Exhibit 10.24 to the registrant’s Form 10-Q for the quarter ended September 30, 1995, SEC File 0-12728, and incorporated herein by reference).
10.9	Asset Sale Purchase Agreement between the registrant and n.v. DIMACO, s.a. (filed as exhibit 10.12 to the registrant’s Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference).
10.10	Asset Sale Purchase Agreement between the registrant and DaTARIUS Technologies, Inc. (filed as exhibit 10.13 to the registrant’s Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference).
10.11	Integral Vision, Inc. 2004 Employee Stock Option Plan.
16	Letter regarding change in certifying accountant (filed as exhibit 16 to the registrant’s Form 10-K for the year ended December 31, 2002, SEC file 0-12728, and incorporated herein by reference).
31.1	Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-15(e) or Rule 15d-15(e).
31.2	Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-15(e) or Rule 15d-15(e).
32.1	Certification by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
32.2	Certification by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.

*	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.
(b)	There were no reports on Form 8-K filed in the quarter ended June 30, 2004

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INTEGRAL VISION, INC.
Date: August 16, 2004	/S/ CHARLES J. DRAKE
	Charles J. Drake Chairman of the Board and Chief Executive Officer
Date: August 16, 2004	/S/ MARK R. DOEDE
	Mark R. Doede President, Chief Operating Officer, and Chief Financial Officer

25

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION
10.11	Integral Vision, Inc. 2004 Employee Stock Option Plan.
31.1	Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-15(e) or Rule 15d-15(e).
31.2	Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-15(e) or Rule 15d-15(e).
32.1	Certification of Chief Executive Officer of Periodic Report pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Executive Officer of Periodic Report pursuant to 18 U.S.C. Section 1350.

EX-10.11

                                                                   EXHIBIT 10.11

                              INTEGRAL VISION, INC.
                         2004 EMPLOYEE STOCK OPTION PLAN

            1. Purpose. This Employee Stock Option Plan (the "Plan") is intended
to further the growth and development of INTEGRAL VISION, INC. (the "Company")
by affording an opportunity to eligible officers and key employees of the
Company and its subsidiaries, as well as nonemployee directors, consultants or
advisors, who are in a position to contribute materially to the prosperity of
the Company, to purchase shares of its common stock. It is further intended that
options issued pursuant to the Plan may be either nonqualified stock options or
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.

            2. Stock Offering. The Board of Directors of the Company are
authorized to offer and sell stock pursuant to this Plan. The aggregate amount
of stock which may be sold and delivered under the Plan, against payment
therefor, shall not exceed one million (1,000,000) shares. In the event that any
outstanding option under the Plan expires or is terminated for any reason prior
to the end of the period during which options may be granted, the shares of
common stock allocable to the unexercised or canceled portion of such Plan may
again be subjected to an option under the Plan.

            3. Designation of Participants and Administration of Plan. The Board
of Directors, or not less than two (2) Board Members appointed from time to time
by the Board of Directors, shall act as a Committee to administer the Plan. The
employees eligible to participate in the Plan shall be the officers and any
other key employees of the Company and its subsidiaries as the Board of
Directors may designate. Directors who are not also employees of the Company,
consultants and advisors are not eligible to receive incentive stock options,
but may be granted nonqualified stock options.

            4. Unauthorized Employees. In no event shall an incentive stock
option be granted to any individual who,immediately before such option is
granted, owns (as defined in Section 422 and 425(d) of the Internal Revenue Code
of 1986, as amended) stock possessing more than ten percent (10%) of the total
combined voting power or value of all classes of stock of the Company or of its
parent or subsidiary corporation, unless the option price to such individual is
no less than 110% of the fair market value of the stock at the time the option
is granted and such option by its terms is not exercisable after the expiration
of five years from the date such option is granted.

            5. Effective Date of Plan. The Plan is effective on the date of
ratification by a vote of the holders of a majority of the common stock of the
Company after adoption by the Board of Directors. The Company shall not be
required to issue any stock hereunder, however, until the approvals required by
the proper public authorities have been obtained, if any, and the Board of
Directors shall have been advised by counsel for the Company that all other
applicable legal requirements have been complied with.

            6. Termination of Plan. The Plan shall remain in effect until and
shall terminate upon the expiration of ten (10) years from the date the Plan is
adopted. The Plan may be terminated at an earlier date by action of the Board of
Directors. Termination of the Plan shall not affect the rights of beneficiaries
under options granted to purchase common stock under the Plan prior to
termination or to complete payment for and to receive any pledged shares, and
all such options shall continue in force and operation after termination of the
Plan, except as they may be terminated in accordance with the terms of the Plan.
The Board of Directors of the Company may from time to time suspend or
discontinue the Plan with respect to any shares as to which options have not
been granted.

            7. Offering to Designated Beneficiaries. Beneficiaries designated by
the committee shall be granted options to purchase stock. Option periods shall
be fixed by the committee (subject to the provisions of paragraph 4), but shall
not exceed ten (10) years.

            8. Exercise of Options. Options may be exercised in whole or in part
from time to time, but in no event may any option be exercised after ten (10)
years from the date on which such option is granted (subject to the provisions
of paragraph 4).



            9. Option Price. The option price shall be not less than 100% of the
fair market value of the stock at the time the option is granted (subject to the
provisions of paragraph 4). The fair market value per share shall be the closing
price of the common stock on the Over The Counter Market on the day the option
is granted, as reported by the National Association of Security Dealers,
Automatic Quotation System (NASDAQ), or if no sale of the Company's common stock
shall have been made on that day, on the next preceding day on which there was a
sale of such stock. If the stock is listed upon an established stock exchange or
exchanges, fair market value shall be deemed to be the highest closing price of
the common stock on such stock exchange or exchanges on the day the option is
granted. Subject to the foregoing, the Committee in fixing the option price
shall have full authority and discretion and be fully protected in doing so.

            10. Non-Transferability. Beneficiaries' rights under the Plan are
wholly personal and no assignment or transfer of a beneficiary's rights and
interests in the Plan will be permitted or recognized other than at death. An
option is exercisable during the lifetime of the beneficiary to whom the option
was granted only by such beneficiary.

            11. Limit on Annual Eligibility. A participant in the Plan shall not
be granted or be entitled to exercise, in any calendar year, incentive stock
options on which the aggregate fair market value of the stock (determined at the
date the option is granted) exceeds the annual limit established by Section 422
of the Internal Revenue Code of 1986, as amended.

            12. Payment. Upon exercise of any option granted hereunder, payment
in full shall be made at the time of such exercise for all shares then being
purchased; except, however, that the committee may in its discretion permit the
issuance of stock upon such plan of partial payment as it deems reasonable.

            13. Offset. The Company shall be authorized to apply the payment of
any amount due to it under this Plan, to any compensation or other amount due
from the Company or subsidiary to the beneficiary.

            14. Termination of Employment. In the event that an optionee who has
been granted an incentive stock option shall cease to be employed by the
Company, his option shall terminate at the expiration of three (3) months from
such cessation. If any cessation of employment is due to permanent and total
disability the optionee shall have the right to exercise his option at any time
within twelve (12) months after leaving employment.

            15. Stock Dividends or Recapitalization; Merger or Acquisition.

            (a)   If any stock dividend is declared upon the common stock, or if
                  there is any recapitalization of the Company with respect to
                  its common stock, resulting in a split-up or combination or
                  exchange or shares, the number and kind of shares then subject
                  to options granted to beneficiaries under the Plan shall be
                  proportionately and appropriately adjusted, without any change
                  in the aggregate purchase prices to be paid therefore. In the
                  alternative, in the discretion of the committee, the option
                  price may be appropriately adjusted without change in the
                  number of shares subject to such options.

            (b)  Subject to any required action by the stockholders, if the
                 Company shall be the surviving corporation in any merger or
                 consolidation, any option granted hereunder shall pertain to
                 and apply to the securities to which a holder of the number of
                 shares of common stock subject to the option would have been
                 entitled. However, a dissolution or liquidation of the Company
                 or a merger or consolidation in which the Company is not the
                 surviving corporation, shall cause every unexercised option
                 outstanding hereunder to terminate unless the surviving
                 corporation specifically agrees that the options shall apply to
                 shares in such surviving corporation or its parent or
                 subsidiary and the difference between the option price and the
                 fair market value of the new option shares immediately
                 following the transaction does not exceed the difference
                 between the option price and the fair market value of the old
                 option shares immediately before the transaction..

            16. Fractional Shares. No fractional shares of stock shall be issued
upon the exercise of any option, and in case a participating beneficiary shall
become entitled to any interest in a fractional share, by reason of a stock
dividend or otherwise, the Company shall either (a) sell the same and credit the
proceeds of the sale to the beneficiary or (b) credit to the beneficiary a cash
sum equal to the market value of such fractional share interest on the date when
such stock dividend was paid for or such fractional share interest was otherwise
created.



            17. Administration and Amendment of Plan. The Option Committee of
the Board of Directors shall have the power to interpret the provisions of the
Plan, to make regulations, and to formulate administrative provisions for
carrying it out, and to make such changes in the Plan and in the regulations and
administrative provisions as, from time to time, the committee deems proper and
in the best interest of the Company; provided, it may not increase the number of
shares authorized for the Plan, nor reduce the option price below the minimum
price provided in the Plan. Without limiting the generality of the foregoing,
the committee shall have the power in its discretion to make such changes in the
Plan as to termination of the options granted to designated beneficiaries as the
committee may deem advisable because of changes in the law while the Plan is in
effect or for any other reason; provided, further, no change in an option
already granted to an beneficiary shall be made without the written consent of
the beneficiary concerned. No member of the committee or the Board of Directors
shall be liable for any action or determination made in good faith. All actions
of the committee shall be final.

            18. Other Provisions. The option agreements authorized under the
Plan shall contain such other provisions as the committee shall deem advisable.

            19. Application of Funds. The proceeds received by the Company from
the sale of common stock pursuant to options, except as otherwise provided
herein, will be used for general corporate purposes.

            20. Indemnification and Exculpation.

            (a)  Each person who is or shall have been a member of the Board of
                 Directors or the Option Committee shall be indemnified and held
                 harmless by the Company against and from any and all loss,
                 cost, liability, or expense that may be imposed upon or
                 reasonably incurred by him, in connection with or resulting
                 from any claim, action, suit, or proceeding to which he may be
                 or become a party or in which he may be or become involved by
                 reason of any action taken or failure to act under the Plan and
                 against and from any and all amount paid by him in settlement
                 thereof (with the Company's written approval) or paid by him in
                 satisfaction of a judgment in any such action, suit, or
                 proceeding, except a judgment in favor of the Company based
                 upon a finding of his lack of good faith; subject, however, to
                 the condition that upon the institution of any claim, action,
                 suit, or proceeding against him, he shall in writing give the
                 Company an opportunity, at its own expense, to handle and
                 defend the same before he undertakes to handle and defend it on
                 his own behalf. The foregoing right of indemnification shall
                 not be exclusive of any other right to which such person may be
                 entitled as a matter of law or otherwise, or any power that the
                 Company may have to indemnify him or hold him harmless.

            (b) Each member of the Board, the Option Committee and each officer
and employee of the Company shall be fully justified in relying or acting in
good faith upon any information furnished in connection with the administration
of the Plan by any appropriate person or persons other than himself. In no event
shall any person who is or shall have been a member of the Board, the Option
Committee, or an officer or employee of the Company be held liable for any
determination made or other action taken or any omission to act in reliance upon
any such information, or for any action (including the furnishing of
information) taken or any failure to act, if in good faith.

Plan adopted by the Board of Directors on May 6, 2004

Plan approved by the Shareholders on May 6, 2004

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, Charles J. Drake, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Integral Vision,
      Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
      and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and
            34-47986]

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of
      registrant's board of directors (or persons performing the equivalent
      function):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: August 16, 2004

                                        /S/ Charles J. Drake
                                        ----------------------------------------
                                        Charles J. Drake
                                        Chairman of the Board and
                                        Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Mark R. Doede, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Integral Vision,
      Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
      and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and
            34-47986]

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of
      registrant's board of directors (or persons performing the equivalent
      function):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: August 16, 2004

                                        /S/ Mark R. Doede
                                        ----------------------------------------
                                        Mark R. Doede
                                        President, Chief Operating Officer,
                                        and Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1

                                  CERTIFICATION

      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350, as adopted), the undersigned, Charles J. Drake, Chairman of the
Board and Chief Executive Officer of Integral Vision, Inc. (the "Company"),
hereby certifies that, to the best of his knowledge:

1. The Company's Quarterly Report on Form 10-Q for the period ended June 30,
2004 (the "Periodic Report"), to which this Certification is attached as Exhibit
32.1 fully complies with the requirements of Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition of the Company at the end of the
period covered by the Periodic Report and results of operations of the Company
for the period covered by the Periodic Report.

DATED: August 16, 2004

                                        /S/ Charles J. Drake
                                        ----------------------------------------
                                        Charles J. Drake
                                        Chairman of the Board and
                                        Chief Executive Officer

EX-32.2

                                                                    EXHIBIT 32.2

                                  CERTIFICATION

      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C.Section 1350, as adopted), the undersigned, Mark R. Doede, President,
Chief Operating Officer and Chief Financial Officer of Integral Vision, Inc.
(the "Company"), hereby certifies that, to the best of his knowledge:

1. The Company's Quarterly Report on Form 10-Q for the period ended June 30,
2004 (the "Periodic Report"), to which this Certification is attached as Exhibit
32.2 fully complies with the requirements of Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition of the Company at the end of the
period covered by the Periodic Report and results of operations of the Company
for the period covered by the Periodic Report.

DATED: August 16, 2004

                                        /S/ Mark R. Doede
                                        ----------------------------------------
                                        Mark R. Doede
                                        President, Chief Operating Officer,
                                        and Chief Financial Officer