Note G – Share-Based Compensation

We currently have two active stock option plans: the 2004 Employee Stock Option Plan (“2004 Plan”) and the 2008 Integral Vision, Inc. Equity Incentive Plan (“2008 Plan”) (collectively the “Plans”). The purpose of the Plans generally is to retain and attract persons of appropriate education, experience and ability to serve as our employees, to encourage a sense of proprietorship of such persons, and to stimulate an active interest in our development and financial success.

The 2004 Plan is designed to promote the interests of the Company and its shareholders by providing a means by which the Company can grant equity-based incentives to eligible employees of the Company or any Subsidiary as well as non-employee directors, consultants, or advisors who are in a position to contribute materially to the Company’s success. The Plan permits the Compensation Committee of the Company’s Board of Directors to grant Incentive Stock Options and Non-Qualified Stock Options. The maximum number of shares cumulatively available is 1,000,000 shares.

The 2008 Plan is designed to promote the interests of the Company and its shareholders by providing a means by which the Company can grant equity-based incentives to eligible employees of the Company or any Subsidiary as well as non-employee directors, consultants, or advisors who are in a position to contribute materially to the Company’s success. The Plan permits the Compensation Committee of the Company’s Board of Directors to grant Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock, and Shares. The maximum number of shares cumulatively available is 14,000,000 plus (i) any shares that are forfeited or remain unpurchased or undistributed upon termination or expiration of the awards from the Plan or options from the 2004 Plan and (ii) any shares exchanged as full or partial payment for the exercise price of any award under the 2008 Plan.

On March 24, 2009, on the recommendation of the Compensation Committee, the Board of Directors approved amending and restating the 2008 Integral Vision, Inc. Equity Compensation Plan to provide for an additional 2,500,000 shares for awards under the Plan of which an additional 1,500,000 may be awarded over the two year period beginning March 24, 2009 to the Company’s Chief Executive Officer. The shareholders approved the amendment and restatement at the annual shareholders meeting held May 20, 2009. As of December 31, 2009, 2,328,000 Stock Option shares and 1,300,000 Restricted Shares have been granted from the 2008 Equity Incentive Plan leaving a balance of 3,700,000 shares available for future grants.

Effective April 19, 2010, and pending shareholder approval, the Board increased the maximum number of cumulative shares available to 14,000,000 plus (i) any shares that are forfeited or remain unpurchased or undistributed upon termination or expiration of the awards from the 2008 Plan or options from the 2004 Plan and (ii) any shares exchanged as full or partial payment for the exercise price of any award under the 2008 Plan. As of June 30, 2011, and assuming shareholder ratification of the Board’s action, 6,572,000 shares remain which can be issued under the 2008 Plan.

The Plans are administered by the Compensation Committee of the Board of Directors (the “Committee”). The Committee determines which eligible employees will receive awards, the timing and manner of the grant of such option awards, the exercise price of the stock options (which may not be less than market value on the date of grant) and the number of shares. We may at any time amend or terminate the Plans, however no amendment that would impair the rights of any participant with respect to outstanding grants can be made without the participant’s prior consent.

On April 2, 2010, the Compensation Committee of the Board approved a plan to offer key employees the opportunity to surrender certain outstanding stock options in exchange for replacement options effective April 2, 2010. The replacement options vest immediately. The program received 100% participation. 3,301,000 options with an average exercise price of $0.24 per share of our common stock were surrendered and 3,301,000 options with an exercise price of $0.0679, the closing price of the stock on April 2, 2010, were issued as replacements.

On May 5, 2010, the Committee removed the vesting restriction on 800,000 shares of common stock granted to certain executives because an amendment to Section 8.11 of the Fifth Amended Note and Warrant Purchase Agreement made the restriction unnecessary.

On May 5, 2010, the Committee awarded (i) 2,375,000 Incentive Stock Options from the Amended 2008 Equity Compensation Plan to various key employees and (ii) a grant of 1,342,000 shares to the Chief Executive Officer, both contingent on shareholder approval of the proposed amendment to the 2008 Equity Compensation Plan.

The Committee did not grant any options or shares to empolyees during the three months or the six months ended June 30, 2011.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model with the weighted average assumptions noted in the following table. The fair value of all awards is amortized on a straight-line basis over the requisite service periods. The expected life of all awards granted represents the period of time that they are expected to be outstanding. The expected life is determined using historical and other information available at the time of grant. Expected volatilities are based on historical volatility of our common stock, and other factors. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. We use historical data to estimate pre-vesting option forfeitures.

	2011		2010
	(in thousands)
Expected Life (in years)		-		5.0
Expected volatility		-		92.3	%
Risk-free interest rate		-		2.4	%
Expected dividend yield		-		0	%
Expected forfeiture rate		-		0	%

A summary of option activity under all Plans for the six month periods ended June 30, 2011, and 2010 follows:

	2011				2010
	Shares		Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
	(number of shares in thousands)
Outstanding at January 1		6,260	$	0.06		3,785		$	0.23
Granted		0		0.00		5,676			0.06
Exercised		0		0.00		0			0.00
Expired		0		0.00		(3,301	)		0.24
Outstanding at December 31 ($.04 to $0.30 per share)		6,260	$	0.06		6,160		$	0.06
Exercisable ($.04 to $.30 per share)		6,160	$	0.06		6,096		$	0.06

A summary of the status of our nonvested shares as of June 30, 2011 and 2010, and changes during the six months ended June 30, 2011, and June 30, 2010, is presented below:

	2011					2010

	Shares			Weighted Average Grant- Date Fair Value		Shares			Weighted Average Grant- Date Fair Value
Nonvested at January 1		64,000		$	0.04		590,000		$	0.25
Granted		0			0.00		5,676,000			0.06
Exchanged		0			0.00		(590,000	)		0.25
Vested		(64,000	)		0.04		(5,612,000	)		0.06
Nonvested at June 30		0		$	0.04		64,000		$	0.04

The following table summarizes share-based compensation expense for the three-months and six-months periods ended June 30, 2011 and 2010 related to share-based awards under ASC Topic 718 “Stock Compensation” as recorded in the Statements of Operations in the following expense categories:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(in thousands)				(in thousands)
Marketing	$	-	$	20	$	-	$	22
Engineering and Development		-		37		-		40
General and Administrative		-		110		-		112
Total share-based compensation expense	$	-	$	167	$	-	$	174

As of June 30, 2011, we had no unrecognized expense related to un-vested share-options.

Additional information regarding the range of exercise prices and weighted average remaining life of options outstanding at June 30, 2011 and 2010 is as follows:

				2011						2010
Range of Exercise Prices		Number Outstanding		Weighted Average Remaining Life		Number Exercisable		Number Outstanding		Weighted Average Remaining Life		Number Exercisable
		(number of shares in thousands)						(number of shares in thousands)
	$0.04 to $0.07		5,776		9.0		5,676		5,676		9.8		5,612
	$0.10 to $0.24		484		3.4		484		484		4.1		484
Totals			6,260		8.6		6,160		6,160		9.4		6,096

A summary of the outstanding warrants, options, and shares available upon the conversion of Class 3 Notes at June 30, 2011 and 2010 is as follows:

			2011								2010
	Weighted Average Exercise Price		Number Outstanding		Weighted Average Remaining Life		Number Exercisable		Weighted Average Exercise Price		Number Outstanding		Weighted Average Remaining Life		Number Exercisable
	(number of shares in thousands)								(number of shares in thousands)
PIPE Warrants	$	0.001		7,000		2.21		7,000	$	0.001		7,000		3.21		7,000
Class 2 Note Warrants	$	0.161		17,244		2.63		17,244	$	0.174		8,316		3.05		8,316
Class 3 Convertible Notes	$	0.213		23,233		-		23,233	$	0.213		23,233		0.11		23,233
1995 Employee Stock Option Plan	$	0.170		184		0.46		184	$	0.170		184		1.46		184
1999 Employee Stock Option Plan	$	0.170		290		4.69		290	$	0.170		290		5.69		290
2004 Employee Stock Option Plan	$	0.067		1,000		8.77		1,000	$	0.067		1,000		9.77		1,000
2008 Equity Compensation Plan	$	0.052		4,786		8.71		4,686	$	0.052		4,686		9.81		4,622
	$	0.151		53,737		2.10		53,637	$	0.152		44,709		2.42		44,645