10KSB

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

FORM 10-KSB

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

Commission File Number 0-12728

INTEGRAL VISION, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Part I

ITEM 1.  Description of Business

Overview

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

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

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

ITEM 2.  Description of Properties

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

ITEM 3.  Legal Proceedings

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

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

Market Information

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

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

Holders

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

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

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

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

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

Overview

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

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

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

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

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

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administrative expenses, and depreciation. Accordingly, expenses related to product development agreements are recorded as cost of revenues from product development agreements.

Inventories

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

Impairment of Long-lived Assets

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

Share-Based Compensation

We account for our share based compensation plans according to the provisions of SFAS 123-R. Accordingly, compensation costs attributable to stock options or similar equity instruments granted are measured at the fair value at the grant date, and expensed over the expected vesting period.

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

Contingencies and Litigation

We make an assessment of the probability of an adverse judgment resulting from current and threatened litigation. The Company accrues the cost of an adverse judgment if, in Management’s estimation, an adverse settlement is probable and Management can reasonably estimate the ultimate cost of such litigation. The Company has made no such accruals at December 31, 2007.

ITEM 7.  Financial Statements and Supplementary Data

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

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

None.

11

ITEM 8A. Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adaquate internal control over financial reporting for the small business issuer, as such term is defined in Exchange Act Rule 13a-15(f). We have designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

Management has evaluated the effectiveness of our disclosure controls and procedures and our internal fincancial controls using “SarboxPro”, a commercially available software package designed to implement the Committee of Sponsoring Organizations of the Treadway Commission framework in compliance with SEC Release No. 34-55929. We have presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on our evaluation. We have also disclosed in this report any change in our internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Management’s Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer have each reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer have each concluded that the Company’s current disclosure controls and procedures are effective to ensure that information required to be disclosed in its periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported, in each case, within the time period specified by the SEC’s rules and regulations. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s fourth quarter of the fiscal year that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

ITEM 8B.  Other Information

None

12

Part III

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

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

ITEM 10.  Executive Compensation

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

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

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

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

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

ITEM 13.  Exhibits

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

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

ITEM 14.  Principal Accountant Fees and Services

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

14

SIGNATURES

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

INTEGRAL VISION, INC.

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

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

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

15

Report of Independent Registered Public Accounting Firm

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

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

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

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

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

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

16

Balance Sheet
Integral Vision, Inc.

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

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

17

Statements of Operations
Integral Vision, Inc.

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

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

18

Statements of Stockholders’ Deficit
Integral Vision, Inc.

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

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

19

Statements of Cash Flows
Integral Vision, Inc.

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

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

20

Notes to Financial Statements
Integral Vision, Inc.

Note A – Nature of Business

Integral Vision, Inc. develops, manufactures, and markets flat panel display inspection systems to ensure product quality in the display manufacturing process. We primarily inspect Microdisplays and small flat panel displays, though the technology used is scalable to allow inspection of full screen displays and components. Our customers and potential customers are primarily large companies with significant investment in the manufacture of displays. Nearly all of our sales originate in the United States, Asia, or Europe. Our products are generally sold as capital goods. Depending on the application, display inspection systems have an indefinite life and are more likely to require replacement due to possible technological obsolescence than from physical wear.

During the period ended March 31, 2006, we began activity associated with a product development agreement where we are compensated for a portion of our development costs for a certain best efforts product development. We may not be able to find future opportunities similar to this, but remain open to such development agreements where they facilitate our strategic goals.

Major Customers

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

Note B - Summary of Significant Accounting Policies

Use of Estimates

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

Cash Equivalents

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

Accounts Receivable

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

Inventories

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

21

	2007
	(in thousands)
Raw materials	$	265
Work in process		—
Finished goods		—
	$	265

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

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

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

Capitalized Computer Software Development Costs

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

No software development costs were capitalized during 2007. Amortization of the costs capitalized prior to 2003 amounted to $0 and $38,000 in 2007 and 2006, respectively. These costs were primarily made up of payroll, fringe benefits, and other direct expenses such as facilities allocation. The software amortized over the period is tour microdisplay inspection software toolbox including vision processing algorithms and our patented sequence development and execution software. These software components are used in the products we sell.

Patents

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

Impairment of Long-lived Assets

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

Deferred Revenue

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

Fair Value of Financial Instruments

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

22

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

Revenue Recognition

We recognize revenue in accordance with SOP 97-2, Software Revenue Recognition, Staff Accounting Bulletin No. 101 (“SAB 101”), and Staff Accounting Bulletin No. 104 (“SAB 104”) Revenue Recognition in Financial Statements. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.

We account for certain product sales of our flat panel display inspection systems as multiple-element arrangements. If specific customer acceptance requirements are met, we recognize revenue for a portion of the total contract price due and billable upon shipment, with the remainder recognized when it becomes due (generally upon acceptance). We recognize all other product sales with customer acceptance provisions upon final customer acceptance. We recognize revenue from the sale of spare parts upon shipment. Revenue from service contracts is recognized over the term of the contract. Revenue is reported net of sales commissions of $67,000 and $24,000 in 2007 and 2006, respectively.

Revenue is also derived through business agreements for product development. We conduct specified product development projects related to one of our principal technology specializations for an agreed-upon fee. Typically the agreements require “best efforts” with no specified performance criteria. Revenue from product development agreements, where there are no specific performance terms, are recognized in amounts equal to the amounts expended on the programs. Generally, the agreed-upon fees contemplate reimbursing us, after our agreed-upon cost share if any, for costs considered to be associated with project activities. These include expenses for direct product development and research, operating expenses, general and administrative expenses, and depreciation. Accordingly, expenses related to product development agreements are recorded as cost of revenues from product development agreements.

Allocations of General and Administrative Costs and Engineering Costs

We allocate a portion of general and administrative expense and a portion of engineering and product development expense to cost of sales from product development agreements based on a percentage of direct labor costs. These allocations are limited to the amount of revenues, after direct expenses, under the applicable agreements.

The following is a summary of the allocations made for the year ended December 31:

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

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

23

Concentrations of Credit and Other Risk

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

Advertising

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

Shipping and Handling Costs

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

Income Taxes

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

Common Stock Options

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

Foreign Currency Transactions

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

Reclassifications

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

Contingencies and Litigation

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

24

Recently Issued Accounting Standards

On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no effect on our financial position, results of operations or cash flows as a result of adopting FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. SFAS No. 157 is effective January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. We are currently evaluating the effect, if any, of this statement on our financial condition and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157 and SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We will adopt SFAS No. 159 on January 1, 2008 and do not anticipate adoption to materially impact our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations” (“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business Combinations,” and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. SFAS No. 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect to adopt this statement on January 1, 2009. SFAS No. 141(R)’s impact on accounting for business combinations is dependent upon acquisitions at that time.

In December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements,” which amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. The statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This statement applies

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

Note C - Long-Term Debt and Other Financing Arrangements

The Board of Directors at various meetings during 2007 authorized increases in the allowable outstanding balance of Class 2 Notes to the present total of $3,622,000. From November 2006 through December 31, 2007, we have issued $2,964,000 of Class 2 Notes to fund operations leaving a balance of $658,000 of Class 2 Notes available to be issued in future periods.

Class 2 notes have been issued primarily to related parties. The issued Notes have a maturity date of April 30, 2008. See Note O – Going Concern in the Notes to Condensed Financial Statements for activity associated with the maturity date of the Notes. See Note P – Subsequent Events in the Notes to Condensed Financial Statements for recent activity associated with the issuance of Class 2 Notes.

The terms of the 5^th Amended Note and Warrant Purchase agreement have been amended and or modified at various dates during 2007 and 2008 to affect the following:

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

The Class 2 Notes are working capital notes and are secured by accounts receivable, inventory, and intellectual property. The purchasers of Class 2 Notes receive 10% interest and the option to earn either warrants for the purchase of our common stock or additional interest at the annual rate of 2% for the period such Notes were outstanding. Class 2 Warrants entitle the holder to purchase one share of common stock for each $1 in value of the Class 2 Note multiplied by a fraction, the numerator of which is the number of days such Class 2 Note is outstanding and the denominator of which is 365. The Board of Directors has approved a $1.60 strike price for the warrants. The antidilution terms of the warrants earned provide for the conversion price on the warrants to be reduced to the price of new securities sold, but not lower than $0.25, resulting in significant reduction of the amount of funds that will be realized by the Company in the event of an exercise of the warrants at current market prices. As of December 31, 2007, the note holders had earned 1,795,327 warrants of which 1,459,782 had not been issued. See Note P – Subsequent Events in the Notes to Condensed Financial Statements for recent activity associated with the issuance of Class 2 Notes.

As of December 31, 2007, we had $378,000 in outstanding Class 3 Notes payable that are convertible into our common stock at $1.00 per share. The Notes are due April 30, 2008, and interest is paid semi-annually at 8%. The Class 3 Notes are secured by our intellectual property. The antidilution terms of the Class 3 Notes provide for their conversion price to be reduced to the price of new securities sold, but not lower than $0.25, which could result in an increase in the number of shares that would be realized by the noteholders in the event of a conversion of the notes if new capital is raised using equity at current market prices. See Note P – Subsequent Events in the Notes to Condensed Financial Statements for recent activity associated with the Class 3 Notes.

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

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

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

Note D - Related Party Transactions

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

Note E - Income Taxes

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

As of December 31, 2007, the Company has cumulative net operating loss carryforwards approximating $48.0 million (expiring: $6.9 million in 2010, $3.9 million in 2011, $3.8 million in 2012, $2.3 million in 2018, $6.6 million in 2020, $1.9 million in 2021, $5.7 million in 2022, $5.5 million in 2023, $2.7 million in 2024, $2.7 million in 2025, $2.9 million in 2026 and $3.0 million in 2027) for federal income tax purposes available to reduce taxable income of future periods and unused investment, alternative minimum tax, and research and development tax credits approximating $331,000. Additionally, the Company’s inactive subsidiary in the United Kingdom has cumulative net operating loss carryforwards approximating $3.8 million that do not expire. For financial reporting purposes, the net operating losses and credits have been offset against net deferred tax liabilities based upon their expected amortization during the loss carryforward period. The remaining valuation allowance is necessary due to the uncertainty of future income estimates. The valuation allowance increased $989,000 in 2007 and $957,000 in 2006.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31 are as follows:

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

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

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

There were no income tax payments made in 2007 or 2006.

On January 1, 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”). There was no impact on our financial statements upon adoption. Because of our historical significant net operating losses, we have not been subject to income taxes since 1995. There were no unrecognized tax benefits during the periods presented.

We classify all interest and penalties as income tax expense. We did not have any accrued interest and penalties related to uncertain tax positions as of December 31, 2007.

We file income tax returns in the United States federal jurisdiction and various state jurisdictions. The tax years 2003 through 2006 remain open to examination by taxing jurisdictions to which we are subject. As of December 31, 2007, we did not have any tax examinations in process.

Note F – Loss per Share

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

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

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

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

Note G - Employee Savings Plan

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

Note H – Lease Commitments and Contingencies

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

Note I – Share-Based Compensation

We currently have two active stock option plans, the 1999 and the 2004 stock option plans (the “Plans”) which provide for options that may be granted to eligible employees, officers and directors of Integral Vision. We reserved 1,500,000 shares for future issuance under the Plans. As of December 31, 2007, there remained 99,000 shares which can be issued under the Plans.

The purpose of the Plans generally is to retain and attract persons of appropriate education, experience and ability to serve as our employees, to encourage a sense of proprietorship of such persons, and to stimulate an active interest in our development and financial success.

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

We granted 475,000 options to employees during 2007. 210,000 options were granted to employees during 2006. See Note P Subsequent Events for activity associated with stock options since January 1, 2008.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model with the assumptions noted in the following table. The fair value of all awards is amortized on a straight line basis over the requisite service periods. The expected life of all awards granted represents the period of time that they are expected to be outstanding. The expected life is determined using historical and other information available at the time of grant. Expected volatilities are based on historical volatility of our common stock, and other factors. The

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Note J – Contingencies and Litigation

Product Warranties

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

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

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

Note K – Operations by Geographic Area

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

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

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

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

Note L – Royalty Payments Received

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

Note M – Capitalized Software Costs

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

32

organic light emitting diodes (OLED and PolyOLED), electroluminescent (EL), high temperature polysilicon (HTPS), low temperature polysilicon (LTPS), liquid crystal display (LCD), and microelectromechanical systems (MEMS).

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

Note N – Market for the Company’s Common Stock

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

Note O – Going Concern Matters

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

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

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

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

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

33

Note P – Subsequent Events

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

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

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

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

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

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

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

34

Corporate Officers

Charles J. Drake, 67, is CEO and Chairman of the Board of Integral Vision, Inc. Mr. Drake founded the Company (originally known as Medar) in 1969 and has served as Chief Executive Officer since 1978.

Mark R. Doede, 50, is President, Chief Operating Officer, and Chief Financial Officer of Integral Vision Inc. Mr. Doede has served as an officer since 1989.

Jeffrey J. Becker, 46, is Senior Vice President of Integral Vision, Inc.

Andrew Blowers, 40, is Chief Technical Officer of Integral Vision, Inc.

Paul Zink, 42, is Vice President of Applications of Integral Vision, Inc.

Board of Directors

Charles J. Drake
Chairman of the Board of Directors, Integral Vision,
Inc.
Chief Executive Officer, Integral Vision, Inc.

Max A. Coon
Vice Chairman and Secretary of the Board of
Directors, Integral Vision, Inc.
President and Chairman of the Board, Maxco, Inc.

Vincent Shunsky
Director, Integral Vision, Inc.
Treasurer, Integral Vision, Inc.
Partner, Gannon Group, P.C.

William B. Wallace
Director, Integral Vision, Inc.
Senior Managing Director, Equity Partners, Ltd.

Corporate Directory

Corporate Headquarters
49113 Wixom Tech Drive
Wixom, MI 48393
+1 (248) 668-9230
+1 (248) 668-9384 fax

Independent Auditors
Rehmann Robson
Troy, MI

General Counsel
J.M. Warren Law Offices, P.C.
Lansing, MI

Stock Trading
Over the Counter Bulletin Board (OTCBB)
Symbol: INVI

Stock Registrar and Transfer Agent
Registrar and Transfer Company
Cranford, NJ
+1 (908) 497-2300

Form 10-KSB
Interested stockholders may obtain, without charge, a copy of the Company’s Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission, upon written request to:

Investor Relations

Integral Vision, Inc.

49113 Wixom Tech Drive

Wixom, MI 48393

Investor/Analyst Information
Stockholder and analyst inquiries concerning the Company should be addressed to:

Investor Relations
Integral Vision, Inc.
49113 Wixom Tech Drive
Wixom, MI 48393

Guerrant Associates
Laura Guerrant
+1 (808) 882-1467

E-Mail Investor Relations
cdrake@iv-usa.com
lguerrant@guerrantir.com

On the World Wide Web
www.iv-usa.com

35

Exhibits to Form 10-KSB

Integral Vision, Inc.

Year Ended December 31, 2007

Commission File Number 0-12728

36

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

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EX-4.6

EXHIBIT 4(6)

CONSENT TO MODIFICATIONS

          This Consent to Modifications, dated January 18, 2008 is given and agreed to by the “Purchasers” under the Fourth Amended Note and Warrant Purchase Agreement by and among the Purchasers, Integral Vision, Inc., a Michigan corporation (the “Company”), and J.M. Warren Law Offices P.C., as Agent.

Factual Statements

A.	The undersigned is a Purchaser, the Company, or the Agent under the Fourth Amended Note and Warrant Purchase Agreement as previously modified November 10, 2006, August 13, 2007, and October 10, 2007 (the “Purchase Agreement”), dated effective as of the date of execution by such Purchaser, for the purchase of the Notes and Warrants of the Company.
B.	The Company is currently indebted to Purchasers of Class 2 Notes under the Purchase Agreement in the total principal amount of $2,964,000 (all of which are currently due February 15, 2008) and of Class 3 Notes under the Purchase Agreement in the total amount of $378,000 (all of which are due April 1, 2008). Under the current $3,500,000 limit of aggregate Notes issuable pursuant to the Purchase Agreement (as modified October 10, 2007), the Company can only issue $158,000 of new Notes. At the present time there are no Class 1 Notes outstanding under the Purchase Agreement.
C.	The Company desires to raise additional funds under the Purchase Agreement. Prospective investors have requested terms for their potential investments that require certain portions of the Purchase Agreement be modified. The parties to this Purchase Agreement wish to modify certain portions of the Purchase Agreement to accommodate said prospective investors, which shall be accomplished by attaching said changes to the Purchase Agreement in the form of an addendum to the Purchase Agreement.

Agreement

1.       Modifications. The undersigned agree to the modifications to the Purchase Agreement as follows:
	Section 1(b): The aggregate amount of Notes allowable under the Purchase Agreement (as previously modified) shall be increased from the current limit of $3,500,000 to $3,700,000.

2.       Voluntary and Informed Execution. THE PARTIES ACKNOWLEDGE THAT THEY HAVE HAD AN OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL WITH RESPECT TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY, AND THAT THE MODIFICATIONS SET FORTH HEREIN WERE

January, 2008 Consent to Modifications

          KNOWINGLY AND VOLUNTARILY MADE.

3.       Effective Date. This agreement shall be effective on the date that the Majority Noteholders (as defined in the Purchase Agreement), the Company’s Board of Directors, and Agent have accepted the terms and conditions herein and have signed this agreement.

Integral Vision, Inc.	J.M. Warren Law Offices, P.C.
By:	By:
Charles J. Drake, Chairman	J. Michael Warren
To be signed in counterparts.
Note Holder

January, 2008 Consent to Modifications

EX-4.7

EXHIBIT 4(7)

COLLATERAL ASSIGNMENT OF
PROPRIETARY RIGHTS AND SECURITY AGREEMENT

          THIS COLLATERAL ASSIGNMENT OF PROPRIETARY RIGHTS AND SECURITY AGREEMENT (“the Agreement”), dated as of March 29, 2001 as amended March 5, 2008, is made by Integral Vision, Inc., a Michigan corporation (the “Company”), in favor of J. M. Warren Law Offices, P.C., (the “Agent”) as agent for the present and future holders of the notes issued under the Note and Warrant Purchase Agreement and subsequent amendments and restatements thereto (“Noteholders”), dated effective as of the Closing Date as to each Noteholder (the “Purchase Agreement”), among the Company, the Agent and the Noteholders.

Recitals:

A.	The Company, the Agent and the Noteholders are parties to the Purchase Agreement.
B.	It is a condition to the closing of the transactions contemplated by the Purchase Agreement that the Company executes and delivers this Agreement.

          NOW, THEREFORE, in consideration of the premises and to induce the Noteholders to make extensions of credit to the Company under the Purchase Agreement, and for the other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company agrees with the Agent and the Noteholders as follows:

          1. Defined Terms. In addition to those terms defined elsewhere in the Agreement, terms defined in the Purchase Agreement shall have their defined meanings when used herein (unless otherwise defined herein) and the following terms shall have the following meanings, unless the context otherwise requires:

                    “Collateral” means all of the wholly owned Trademarks, Copyrights, Patents and Intellectual Property Rights, whether now existing or hereafter created or acquired by the Company (including, without limitation, such of the foregoing as are listed on Schedule A attached hereto and made a part hereof).

                    “Copyrights” means all wholly owned United States copyrights, registered or unregistered, in and to all copyrightable work now owned or hereafter acquired by the Company, including all registrations and applications therefore and all licenses thereof and (a) any renewals or extensions of the registrations therefore that may be secured under the laws now or hereafter in effect in the United States, (b) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including, without limitation, payments under all licenses entered into in connection therewith and damages and payments for past, present or future infringements thereof, (c) the right to sue and recover for past, present and future infringements thereof, and (d) all rights corresponding thereto throughout the world.

                    “Company’s Obligations” means all loans, debts, principal, interest (including any

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

                    “Intellectual Property Rights” means all wholly owned intellectual property rights other than Trademarks, Copyrights and Patents, now owned or hereafter acquired by the Company, including, without limitation, trade secrets, know-how and confidential business information, computer software, data and documentation (including electronic media) and licenses thereof, and (a) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including, without limitation, payments under all licenses entered into in connection therewith and damages and payments for past or future infringements thereof, (b) the right to sue and recover for past, present and future infringements thereof, and (c) all rights corresponding thereto throughout the world.

                    “Patents” means all wholly owned United States patents and patent applications, now owned or hereafter acquired by the Company, including, without limitation, the inventions and improvements described and claimed therein, all licenses thereof and (a) the reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (b) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including, without limitation, payments under all licenses entered into in connection therewith and damages and payments for past, present or future infringements thereof, (c) the right to sue and recover for past, present and future infringements thereof, and (d) all rights corresponding thereto throughout the world.

                    “Trademarks” means all wholly owned trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, trademark registrations and applications for registration owned by the Company and all licenses thereof, together with the goodwill of the business connected with the use of, and symbolized by, the foregoing, and (a) the registration renewals thereof, (b) all income, royalties, damages, and payments now and hereafter due or payable under and with respect thereto including, without limitation, payments under all licenses entered into in connection therewith and damages and payments for past, present or future infringements thereof, (c) the right to sue and recover for past, present and future infringements thereof, and (d) all rights corresponding thereto throughout the world.

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          2. Collateral Assignment of Security Interest in Trademarks, Copyrights and Patents and Intellectual Property Rights. To secure the prompt and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of all the Company’s Obligations, the Company hereby grants to the Agent for the benefit of the Noteholders and their assignees a continuing security interest in the Collateral, and, subject to Section 7 hereof, shall assign, transfer and convey to the Noteholders all right, title and interest, in the United States and throughout the world, in, to and under the Collateral.

          3. Continuing Liability. The Company hereby expressly agrees that, anything herein to the contrary notwithstanding, it shall remain liable under each license, interest and obligation assigned to the Noteholders hereunder to observe and perform all the conditions and obligations to be observed and performed by the Company thereunder, all in accordance with and pursuant to the terms and provisions thereof. The Agent and the Noteholders shall have no obligations or liability under any such license, interest or obligation by reason of or arising out of this Agreement or the assignment thereof to the Noteholders or the receipt by the Noteholders of any payment relating to any such license, interest or obligation pursuant hereto, nor shall the Agent or Noteholders be required or obligated in any manner to perform or fulfill any of the obligations of the Company thereunder or pursuant thereto, or to make any payment, or to make any inquiry as to the nature or sufficiency of any payment received by any of them or the sufficiency of any performance by any party under any such license, interest or obligation, or to present or file any claim, or to take any action to collect or enforce any performance of the payment of any amounts which may have been assigned to the Company or to which the Company may be entitled at any time or times.

          4. Representations and Warranties. The Company hereby represents and warrants to the Agent and the Noteholders:

          (a) All of the Company’s Copyrights, Patents and Trademarks (whether or not registered), which are material to its business, are listed on Schedule A hereto, as updated from time to time.

          (b) Except for Permitted Liens, the Company owns free and clear of all Liens all right, title and interest in, or has full right and authority to use, all Collateral necessary or desirable for the conduct of its business as currently conducted or as currently proposed to be conducted.

          5. Updated Information and Filings. The Company agrees that it will deliver to the Agent and the Noteholders an updated Schedule A to this Agreement on at least a quarterly basis, and more often if requested by the Noteholders. The Company also agrees that it will take such actions as requested by the Agent or the Noteholders to allow the Agent for the benefit of the Noteholders to record and perfect its Lien on the Company’s Copyrights, Patents, Trademarks and Intellectual Property Rights, including, without limitation, filing and registering its rights with appropriate governmental entities.

          6. Restrictions on Future Agreements. The Company agrees that until all of the Company’s Obligations have been paid in full and the Purchase Agreement has been terminated, it will not, without the Noteholders’ evidencing more than 65% of the notes held by Noteholders then outstanding prior written consent, enter into any agreement, including, without limitation, any license agreement, which is inconsistent with the Company’s Obligations under this Agreement or which is prohibited by the Purchase Agreement.

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          7. Effect of Collateral Assignment and Remedies. (a) If an Event of Default has occurred and is continuing, the Agent and the Noteholders may exercise, in addition to all other rights and remedies granted to them in this Agreement, the Purchase Agreement and any other Loan Document, all rights and remedies of a secured party under the Uniform Commercial Code or any other applicable law. Without limiting the generality of the foregoing, the Company expressly agrees that in such event the Agent may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, or may forthwith sell, lease, assign or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more public or private sale or sales, at any exchange, broker’s board or at its offices or elsewhere at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk, and the Agent shall apply the net proceeds (after expenses) of any such sale, lease, assignment or other disposition against the Company’s Obligations in such order as the Agent in its sole discretion shall determine and the Company shall remain liable for any deficiency thereon; provided, however, that, in applying the net proceeds of any such sale or disposition, the Agent shall allocate the proceeds thereof pro rata among the Noteholders on the basis of the principal amount of each Note then outstanding. The Agent and the Noteholders shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity or redemption in the Company, which right or equity is hereby expressly waived and released. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Agent and the Noteholders arising out of the repossession, retention or sale of the Collateral. The Company agrees that the Agent need not give more than ten days’ notice of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matter.

          (b) During the continuance of an Event of Default, the Company hereby authorizes the Agent to make, constitute and appoint any officer or agent of the Agent as the Agent may select, in the Agent’s sole discretion, as the Company’s true and lawful attorney-in-fact, with power; (i) to endorse the Company’s name on all applications, documents, papers and instruments necessary or desirable for the Agent in the use of Collateral; (ii) to notify any licensee of the Company that such licensee should make future payments under the license directly to the Agent; (iii) to take any other actions with respect to the Collateral as the Agent and the Noteholders deem to be in their best interest; and (iv) to assign, pledge, convey or otherwise transfer title in or dispose of the Collateral to any Person. The Company hereby approves and ratifies all that such attorney shall lawfully do or cause to be done by virtue of this Agreement. This power of attorney shall be irrevocable until all of the Company’s Obligations have been paid in full and all of the financing arrangements between the Company and the Agent and the Noteholders have been terminated. The Company agrees that, in addition to all other rights and remedies granted to the Agent and the Noteholders in this Agreement, the Purchase Agreement and any other Loan Document, the Agent and the Noteholders shall be entitled to specific performance and injunctive and other equitable relief, and the Company further agrees to waive any requirement for the securing or posting of any bond or other security in connection with the obtaining of any such specific performance and injunctive or other equitable relief.

          8. Release of Collateral. The Agent and the Noteholders hereby agrees that if the Company proposes to sell any of the Collateral other than in the ordinary course of business, the Agent and the Noteholders will release their interests in such Collateral and will sign any documents and take any further action necessary to effectuate such release upon payment of 90% of the net proceeds received by the Company from the sale of such Collateral, up to the full amount of the Company’s Obligations to the Noteholders. It is agreed that the Company may

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place source code for software in escrow at the request of the Noteholders of its products without violating this Agreement.

          9. Indemnification. The Company shall indemnify and hold harmless the Agent and the Noteholders from and against any and all losses, claims, damages, liabilities and expenses (including, without limitation, reasonable attorneys’ fees and expenses) sustained, suffered or incurred by the Agent and the Noteholders arising out of, with respect to, or resulting from any commercially reasonable exercise by the Agent and the Noteholders of their rights under this Agreement, including without limitation, after a default by the Company, the exercise by the Agent and the Noteholders of their rights to sell, lease, assign, give option or options to purchase, or sell and otherwise dispose of the Collateral. In any suit, proceeding or action brought by the Agent and the Noteholders to enforce their rights in the Collateral, the Company will save, indemnify and hold the Agent and Noteholders harmless from and against all expenses, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of any third party, arising out of a breach by the Company of any obligation or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such third party or its successors from the Company; provided that the Company shall have no obligation under this Section 9 to indemnify any Person under this Agreement for liabilities arising from the gross negligence or willful misconduct of such Person or arising from the breach by any such Person of its obligations under applicable law ( including the obligation to act in a commercially reasonable manner in the disposition of certain Collateral).

          10. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest.

          11. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

          12. Section Headings, etc. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. All references to Sections, Schedules and Exhibits are to Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified.

          13. No Waiver: Cumulative Remedies. The Agent and the Noteholders shall not by any act (except a written instrument pursuant to Section 14 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of the terms an conditions hereof. A waiver by the Agent or the Noteholders of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent and the Noteholders would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of the Agent and the Noteholders any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other-right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by the Purchase Agreement, any other Loan Document or applicable law.

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          14. Waivers and Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Agreement may be waived, altered, modified or amended except by a written instrument, duly executed by the Company, the Agent and the Noteholders evidencing more than 65% of the notes held by Noteholders then outstanding, provided, however, that no such amendment or waiver shall amend any term in this Agreement (or any provision hereof or thereof waived) that does not treat all notes held by Noteholders then outstanding at the time of such amendment or waiver pursuant to this Agreement without partiality. This Agreement and all obligations of the Company hereunder shall be binding upon the successors and assigns of the Company, and shall, together with the rights and remedies of the Agent and the Noteholders hereunder, inure to the benefit of the Agent and the Noteholders and their successors and assigns, provided that the Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Agent. THIS AGREEMENT SHALL BE GOVERNED BY, AND BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAWS OF CONFLICT) OF THE STATE OF MICHIGAN.

          15. Notices. Etc. Any demand, notice or communication to be made or given hereunder shall be in writing and shall be given in accordance with the Purchase Agreement.

          16. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart.

          17. Waiver of Jury Trial. THE PARTIES HERETO ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL RIGHT, BUT THAT THIS RIGHT MAY BE WAIVED. THE AGENT, THE NOTEHOLDERS AND THE COMPANY EACH HEREBY KNOWINGLY, VOLUNTARILY AND WITHOUT COERCION, WAIVES ALL RIGHTS TO A TRIAL BY JURY OF ALL DISPUTES ARISING OUT OF OR IN RELATION TO THIS AGREEMENT OR ANY OTHER AGREEMENTS BETWEEN THE PARTIES. NO PARTY SHALL BE DEEMED TO HAVE RELINQUISHED THE BENEFIT OF THIS WAIVER OF JURY TRIAL UNLESS SUCH RELINQUISHMENT IS IN A WRITTEN INSTRUMENT SIGNED BY THE PARTY TO WHICH SUCH RELINQUISHMENT WILL BE CHARGED.

          The parties hereto have caused this Agreement to be executed and delivered as of the date first set forth above.

INTEGRAL VISION, INC.	J. M. Warren Law Offices, P.C.,
	As Agent for the Noteholders
By:	By:
Name: Charles J. Drake	Name: J. Michael Warren
Title: Chairman of the Board	Title: President

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EX-4.8

EXHIBIT 4(8)

Security Agreement

          This Security Agreement (“Security Agreement”) originally made May 1, 2002 between Integral Vision, Inc., 38700 Grand River Avenue, Farmington Hills, MI 48335 (“Debtor”) and The Klonoff Company, Inc., a California corporation of 11811 SE 255^th Street, Kent, WA 98031, as the Representative of the Class 2 Purchasers under the Second Amended Note and Warrant Purchase Agreement between the Debtor and the Purchasers thereunder (“Secured Party”) is hereby amended and restated March __, 2008. The Debtor and The Klonoff Company, Inc. hereby acknowledge that references to the Second Amended Note and Warrant Purchase Agreement or Purchase Agreement in this Security Agreement shall mean all subsequent amended and modified versions of the Second Amended Note and Warrant Purchase Agreement, including without limitation the Fifth Amended and Restated Note and Warrant Purchase Agreement which should be effective shortly after or currently with this amended Security Agreement being duly executed by the Debtor and The Klonoff Company, Inc. Both the Debtor and The Klonoff Company, Inc. have new addresses which are shown in Section 14.d below.

          Whereas, the Debtor wishes to grant security interests in favor of the Secured Party as provided in this Security Agreement;

          For valuable consideration acknowledged as received by the parties, they agree as follows:

1. Definitions.

a. Article 9 of the UCC. Terms used in the definition of Collateral below, and as those terms and any other terms are used in this Security Agreement, whether capitalized or not, shall have the respective meanings given such terms in Article 9 of the Uniform Commercial Code (“UCC”) (or absent definition in Article 9 of the UCC, as defined in any other article of the UCC) as enacted in the State of Michigan as of the date of this Security Agreement, and as amended thereafter.

b. Collateral. The term, “Collateral”, shall mean: all of the following assets, and rights of Debtor, wherever located, whether now owned or hereafter acquired or arising: Accounts; Letter of Credit; Letter-of-credit Rights; Inventory, including Work in Progress; Supporting obligations; and all Cash Proceeds and products of the foregoing.

c. Obligations. This Security Agreement secures all the following (all of which are referred to as “Obligations”):

          i. Debtor’s obligations to the Secured Party under (i) the promissory Note granted under the Note and Warrant Purchase Agreements (“Promissory Note”) and (ii) this Security Agreement;

          ii. all of Debtor’s other present and future amounts owed to Secured Party, including without limitation, obligations as a guarantor or surety, and all interest on any Obligations;

          iii. the repayment of (a) any amounts that Secured Party may advance or spend for the maintenance or preservation of the Collateral and (b) any other expenses that Secured Party may make under the provisions of the Security Agreement or the for the benefit of Debtor;

          iv. all costs incurred by Secured Party to obtain, preserve, and enforce this Security Agreement, collect the Obligations, and maintain and preserve the Collateral, and including, without limitation, taxes, assessments, insurance premiums, repairs, attorneys fees and legal costs and expenses, rent, storage costs, and expenses of sale;

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          v. all amounts owed under any modifications, renewals or extensions of any of the foregoing obligations;

          vi. any of the foregoing that arises after the filing of a petition by or against Debtor under the Bankruptcy Code, even if the obligations do not accrue because of the automatic stay under Bankruptcy Code §362 or otherwise.

2. Grant of Security Interest. Debtor grants a security interest in the Collateral to Secured Party to secure the payment or performance of the Obligations.

3. Perfection of Security Interests.

a. Filing of financing statement. Debtor irrevocably authorizes Secured Party at any time to file in any jurisdiction any financing statements, and amendments thereto, (the “Financing Statement”) that indicate (i) the Collateral covered by this Agreement, regardless of whether any particular asset in the Collateral falls within the scope of Article 9 of the UCC of the place of filing It is agreed that a new Financing Statement will be filed in the State of Michigan as soon as possible after this amended Security Agreement is duly executed by the Debtor and The Klonoff Company, Inc.

b. Letter-of-credit rights. If the Debtor is at any time a beneficiary under a letter of credit now or hereafter issued in favor of Debtor, the Debtor shall promptly notify the Secured Party thereof and, at the request and option of the Secured Party, the Debtor shall, in an agreement in form and substance satisfactory to Secured Party in the form attached as Exhibit 3.b. (“Credit Agreement”), arrange for the issuer and any confirmer of such letter of credit to consent to an assignment to the Secured Party of the proceeds of any drawing under the letter of credit, with the Secured Party agreeing that the proceeds of any drawing under the letter of credit are to be applied as provided in any Credit Agreement.

c. Other Actions as to any and all Collateral. The Debtor shall take any other action reasonably requested by Secured Party to insure the attachment, perfection and first priority of, and the ability of the Secured Party to enforce, the Secured Party’s security interest in any and all of the Collateral, including without limitation, (a) executing, delivering and, where appropriate, filing financing statements and any amendments, to the extent the Debtor’s signature is required, (b) causing the Secured Party’s name to be noted as a secured party on any certificate of title for a titled Collateral if such notation is a condition of attachment, perfection or priority of, or ability of the Secured Party to enforce the Secured Party’s security interest in such Collateral, (c) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition of attachment, perfection or priority of, or ability of the Secured Party to enforce the Secured Party’s security interest in such Collateral, (d) obtaining governmental and other third party consents and approvals, including without limitation, any consent of any licensor, lessor or other person obligation on the Collateral, (e) obtaining waivers from mortgagees and landlords in form and substance satisfactory to Secured Party and (f) taking all actions required by any earlier versions of the UCC or by other law, as applicable in any relevant UCC jurisdiction, or by other law as applicable to any foreign jurisdiction.

4. Relation to Intellectual Property Assignment. Along with this Security Agreement, the Debtor has previously executed and delivered to the Secured Party the Collateral Assignment of Proprietary Rights and Security Agreement dated March 29, 2001 (“Collateral Assignment”). It is also expected that said Collateral Assignment will be amended concurrently with this Security Agreement being amended (and that such amended Collateral Assignment will be delivered to the Secured Party as soon as possible after it is duly executed). Such Collateral Assignment, including amendments thereto, shall be governed by the terms of such Collateral Assignment and not by the terms of this Agreement.

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5. Post-Closing Covenants and Rights Concerning the Collateral.

a. Inspection. The parties to this Security Agreement may inspect any Collateral in the other party’s possession, at any time upon reasonable notice.

b. Personal Property. The Collateral shall remain personal property at all times.

c. Secured Party’s Collection Rights. Secured Party shall have the right at any time to enforce Debtor’s rights against Debtor’s account debtors and obligors.

6. Obligations Concerning Maintenance of Collateral.

a. Risk of Loss. Debtor has the risk of loss of the Collateral.

b. Insurance.

          i. Insurance Policies. Debtor shall maintain insurance with respect to its properties, business, and the Collateral, with financially sound and reputable insurers, against such casualties and contingencies as are in accordance with general practices of businesses engaged in similar activities of Debtor in similar geographic areas, and shall be in such amounts, contain such terms, in such forms and for such periods as may be reasonably satisfactory to Secured Party. Without limiting the forgoing, Debtor shall (i) maintain casualty or physical hazard insurance on “all risk” basis for all its physical property, (ii) maintain workers compensation or similar insurance required by law, and (iii) maintain liability insurance against claims of bodily injury, death, property damage, business interruption insurance, and product liability insurance. The Debtor shall furnish the Secured Party with such certificates of insurance and policies evidencing compliance with these provisions upon Secured Party’s request.

c. Secured Party’s Obligations and Duties. Secured Party has no duty to collect any income accruing on the Collateral or preserve any rights relating to the Collateral. Notwithstanding anything to the contrary herein, the Debtor shall remain liable under each contract or agreement comprised in the Collateral to be observed or performed by the Debtor thereunder. The Secured Party shall not have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by Secured Party of any payment relating to any of the Collateral. The Secured Party shall not be obligated in any manner to perform any of the obligations of the Debtor under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Secured Party in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to Secured Party or to which Secured Party may be entitled at time. The Secured Party’s sole duty with respect to the custody, safe-keeping and physical preservation of the Collateral in its possession, under §9-207 of the UCC or otherwise, shall be to deal with such Collateral in the same manner as the Secured Party deals with similar property for its own account.

7. Debtor’s Representations and Warranties. Debtor warrants and represents that:

a. Title to and transfer of Collateral. It has rights in or the power to transfer the Collateral, and its title to the Collateral is free of all adverse claims, liens, security interests and restrictions on transfer or pledge except as created by this Security Agreement.

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b. Debtor Information. Debtor is a Michigan corporation. Its Michigan corporate identification number is 105-593. Its Federal Identification Number is 38-2191935. Debtor maintains its principal office at the address set forth above.

8. Debtor’s Covenants. Until the Obligations are paid in full, Debtor agrees that it will:

a. preserve its organizational existence as it currently is, and not, in one transaction or a series of related transactions, merge into or consolidate with any other entity, or sell all or substantially all of its assets;

b. not change the state of its organization;

c. not change its organization name without providing Secured Party with thirty (30) days’ prior written notice; and

d. not cause or permit any lien, security interest or encumbrance to be placed on any Collateral, except in favor of Secured Party.

e. Unless Debtor has obtained the specific prior written authorization of Secured Party, Secured Party does not authorize, and Debtor agrees:

          i. not to sell, lease, license, assign, transfer or dispose of any of the Collateral or permit any such by operation of law, except for sales of Inventory in the ordinary course of business.

          ii. not to grant any other security interest in any of the Collateral.

f. Debtor will furnish Secured Party with the information regarding the Collateral that Secured Party shall from time to time request, including without limitation, the names and addresses of Debtor’s account debtors and obligors and the amount owned by each.

g. Debtor will pay, before they become delinquent, all taxes and assessments upon the Collateral or for its use or operation, and pay and perform when due, all indebtedness and obligations under all leases, land contracts, or other agreements under which Debtor has possession of any real property upon which any of the Collateral shall at any time be located, or under any mortgages or other interests at any time covering any such real property.

9. Secured Party’s Right to Perform. If Debtor fails to perform any obligation of Debtor under this Agreement, Secured Party may without giving notice to or obtaining Debtor’s consent, perform that obligation on behalf of Debtor. This may include without limitation, obtaining required insurance coverage for, or taxes or assessments or other liens relative to, the Collateral. Debtor shall reimburse Secured Party on demand of any such expenses incurred by Secured Party, and shall pay interest on such incurred sums at the rate of 10 per cent per annum from the date of the expense of Secured Party until paid in full by Debtor. In no event is Secured Party required to perform any of Debtor’s obligations, and in the event Secured Party does so, it shall not be a waiver of Secured Party’s right to declare an Event of Default or seek any other remedy under the law.

10. Events of Default. The occurrence of any of the following shall, at the option of Secured Party, be an Event of Default (“Event of Default”) should any such occurrence not be fully cured within ten days after written notice from Secured Party:

a. Any default by Debtor, or failure to comply with any of the provisions of, or the incorrectness of any representation or warranty contained in, (i) the Purchase Agreement, (ii) all Related Agreements made part of the

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Purchase Agreement (iii) the Promissory Note (iv) this Security Agreement, and (v) or any of the other Obligations;

b. Any sale, lease, assignment, license, transfer or disposition of any of the Collateral, except as expressly permitted by this Security Agreement;

c. Any attachment, execution or levy on any of the Collateral;

d. If any guaranty that now or later secures payment or performance of all or part of the Obligations is terminated or limited for any reason, without the written consent of Secured Party;

e. If Debtor dissolves, becomes insolvent, or makes an assignment for the benefits of creditor;

f. Debtor voluntarily or involuntarily becomes subject to any proceeding under (a) the Bankruptcy Code (b) any insolvency or receivership proceedings or (b) any similar remedy under federal, state, or local law;

g. Debtor shall fail to comply with, or become subject to any administrative of judicial proceeding under any federal, state or local (a) hazardous waste or environmental law, (b) asset forfeiture or similar law which can result in the forfeiture of property, or (c) other law, where noncompliance may have any significant effect on the Collateral; or

h. Secured Party shall receive at any time any information indicating that Secured Party’s security interest in the Collateral is not prior to all other security interests as required by this Agreement.

11. Default Costs. Should an Event of Default occur, Debtor shall pay to Secured Party all costs reasonably incurred by the Secured Party for the purpose of enforcing its rights hereunder, including without limitation;

a. costs of foreclosure;

b. costs of obtaining money damages; and

c. a reasonable fee for the services of all attorneys and all other professionals employed by Secured Party for any purpose related to this Security Agreement or the Obligations, including without limitation, consultation, drafting documents, sending notices or instituting, prosecuting or defending any claims, litigation or arbitration.

12. Remedies Upon Default.

a. General. Upon any Event of Default, Secured Party may pursue any remedy available at law or in equity (including those available under the provisions of the UCC and this Agreement) to collect, enforce or satisfy and Obligations then owing, whether by acceleration or otherwise, including without limitation, the right to pursue any of the following remedies separately, successively, cumulatively, simultaneously, or from time to time:

          i. Accelerate all Obligations, and deem all Obligations immediately due and payable without notice or demand;

          ii. Take any action to collect payments, income and revenues from the Collateral. Secured Party may at any time in Secured Party’s discretion transfer any Collateral into Secured Party’s name or that of a nominee, and receive the payments, income, and revenues and hold them or apply them to the Obligations as Secured party may determine. Secured Party may take any action to collect from Debtor’s account debtors and obligors, including without limitation, if necessary, on behalf of and in the name of Debtor, notify Debtor’s account debtors

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and obligors to make all payments directly to Secured Party, receive, open and dispose of mail addressed to Debtor, change any address of Debtor to which mail and payments are to be sent, and endorse notes, checks, drafts, money orders, documents of title, instruments and any other items pertaining to payment, shipment or storage of any Collateral. Secured Party shall have the right, but not the obligation, to take all actions the Secured Party considers necessary or desirable to collect upon the Collateral, including without limitation, prosecuting actions against, or settling or compromising disputes and claims with, Debtor’s account debtors and obligors.

          iii. File suit and obtain judgment and, in conjunction with any action, Secured Party may seek any ancillary remedies provided by law, including levy of attachment and garnishment;

          iv. Take possession of any Collateral if not already in its possession without demand and without legal process. Upon Secured Party’s demand, Debtor will assemble and deliver the Collateral, or make the Collateral available to Secured Party, as Secured Party’s in its sole discretion directs. Debtor grants to Secured Party the right, for this purpose, to enter into or on any premises where Collateral may be located;

          v. Without taking possession, sell, lease or otherwise dispose of the Collateral at public or private sale in accordance with the UCC;

          vi. Secured Party may apply any proceeds of collection or disposition of Collateral first to any expenses incurred by Secured Party in protecting and enforcing Secured Party’s rights hereunder

13. Foreclosure Procedures.

a. No Waiver. No delay or omission by Secured Party to exercise any right or remedy accruing upon any Event of Default shall: (a) impair any right or remedy, (b) waive any default or operate as an acquiescence to the Event of Default, or (c) affect any subsequent default of the same or of a different nature.

b. Notices. Secured Party shall give Debtor such notice of any private or public sale as may be required by the UCC.

c. No Obligation to Pursue Others. Secured Party has no obligation to attempt to satisfy the Obligations by collecting them from any other person liable for them and Secured Party may release, modify or waive any collateral provide by any other person to secure any of the Obligations, all without affecting Secured Party’s rights against Debtor. Debtor waives any right it may have to require Secured Party to pursue any third person for any of the Obligations.

d. Compliance With Other Laws. Secured Party may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.

e. Warranties. Secured Party may sell the Collateral without giving any warranties as to the Collateral. Secured Party may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.

f. Sales on Credit. If Secured Party sells any of the Collateral upon credit, Debtor will be credited only with payments actually made by the purchaser and received by Secured Party. In the event the purchaser fails to pay for the Collateral, Secured Party may resell the Collateral and Debtor shall be credited with the proceeds of the sale.

g. Purchases by Secured Party. In the event Secured Party purchases any of the Collateral being sold, Secured Party may pay for the Collateral by crediting some or all of the Obligations of the Debtor.

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h. No Marshaling. Secured Party has no obligation to marshal any assets in favor or Debtor, or against or in payment of any of the Obligations, or any other obligation owed by Debtor or any other person.

14. Miscellaneous

a. Assignment.

          i. Binds Assignees. Secured Party may assign its rights and interests under this Security Agreement. If an assignment is made by Secured Party, Debtor shall render performance under this Security Agreement to the assignee. This Security Agreement shall bind and shall inure to the benefit of the heirs, legatees, executors, administrators, successors and assigns of Secured Party and all person who become bound as a debtor to this Security Agreement.

          ii. No Assignments by Debtor. Secured Party does not consent to any assignment by Debtor except as expressly provided in this Security Agreement.

b. Power of Attorney. Debtor appoints Secured Party as Debtor’s irrevocable attorney-in-fact for the purposes of executing documents necessary to perfect, amend, or continue the security interests granted in this Agreement, or to enforce the terms of this Agreement, including without limitation, all actions to collect from Debtor’s account debtors and obligors.

c. Severability. Should any provision of this Security Agreement be found to be void, invalid or unenforceable by a court or panel of arbitrators of competent jurisdiction, that finding shall only affect the provisions found to be void, invalid or unenforceable and shall not affect the remaining provisions of this Security Agreement.

d. Notices. Any notices required by this Security Agreement shall be deemed to be delivered when a record has been (a) deposited in any United Sates postal box if postage is prepaid, and the notice property addressed to the intended recipient, (b) received by telecopy, (c) received through the Internet, and (d) when personally delivered, to the following or at such other addresses as may from time to time be provided:

If to Secured Party:	The Klonoff Company, Inc.
	Attn: P. Robert Klonoff
	1631 North 201st Street
	Shoreline, WA 98133
If to Debtor:	Integral Vision, Inc.
	49113 Wixom Tech Drive
	Wixom, MI 48393

e. Headings. Section headings used in this Security Agreement are for convenience only. They are not a part of this Security Agreement and shall not be used in construing it.

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f. Governing Law. This Security Agreement is being executed and delivered and is intended to be performed in the State of Michigan and shall be construed and enforced in accordance with the laws of the Sate of Michigan.

g. Rule of Construction. No reference to “proceeds” in this Agreement authorizes any sale, transfer, or other disposition of the Collateral by the Debtor; “Includes” or “including” are not limiting; “Or” is no exclusive; and “All” includes “any” and “any” includes “all”.

h. Integration and Modifications. This Security Agreement is the entire agreement of the Debtor and Secured Party concerning its subject matter. Any modification to this Security Agreement must be made in writing and signed by the parties.

          The parties have signed this Security Agreement as of the date first above written.

DEBTOR:	SECURED PARTY
Integral Vision, Inc.	The Klonoff Company, Inc.
	As Representative for the Class 2
	Purchasers

By:		By:
	Charles J. Drake		P. Robert Klonoff
	Its: Chairman and CEO		Its: President

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Exhibit 3.b.

Letter of Credit Control Agreement

Assignment of Right to Proceeds of a Letter of Credit

________________, ___________

1. Assignment. Integral Vision, Inc. (“Beneficiary”) assigns to
_______________________________(“Secured Party”) its rights to proceeds under Letter of Credit, No. ________________________issued by________________________ and
dated_____________________________, pursuant to the Security Agreement between the Beneficiary and the Secured Party executed on ___________________.

2. Warranty. The Beneficiary warrants that:

          a. The full sum of $_______________remains due on the letter of credit;

          b. No partial payments have been made;

          c. The credit is in full force;

          d. No one other than the Beneficiary has any interest or lien upon the credit; and

          e. There have been no amendments or modifications to the credit.

3. The Beneficiary agrees to furnish the Secured Party with all drafts and other documents necessary to enable the Beneficiary to obtain the proceed of the letter of credit.

Integral Vision, Inc.

Charles J. Drake, Chairman and CEO

Or Mark R. Doede, President

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Notice of Assignment

_________________, _______

To:

The right to proceeds under______________________________, Letter of Credit
No._______________(________________, correspondent) dated_____________________in favor of Integral Vision, Inc. have been assigned to the undersigned who is in possession of the letter of credit. The assignment of the right to proceeds has been duly signed by Integral Vision, Inc., the beneficiary under your letter of credit.

You may honor complying drafts when negotiated to us by the beneficiary and other demands for payment only when accompanied by the letter of credit or by our written release.

________________________________________

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EX-4.9

EXHIBIT 4(9)

CONSENT TO AMEND and REPLACE AGREEMENTS

          This Consent to Amend and Replace Agreements, dated March 12, 2008, is given by a Purchaser under the Fourth Amended Note and Warrant Purchase Agreement (the “Current Agreement”) as by and among the Purchasers, Integral Vision, Inc., a Michigan corporation, (the “Company”) and J. M. Warren Law Offices, P.C., as Agent.

Factual Statements

A.	The undersigned is a party to the Current Agreement as modified November 10, 2006, August 13, 2007, October 10, 2007, and January18, 2008 (said January 18th modification only increased the limit of authorized notes outstanding from the October 10th modification of $3.5 Million to $3.7 million) dated effective as of the date of execution by such Purchasers, for the purchase of the Notes and Warrants of the Company.
B.	The parties wish to adopt a Fifth Amended and Restated Note and Warrant Purchase Agreement (“Fifth Amended Agreement”) which amends and completely replaces the Current Agreement, including modifications thereto. The parties also wish to amend to the Collateral Assignment of Proprietary Rights and Security Agreement dated as of March 29, 2001 (“Collateral Assignment”).
C.	The parties agree that this amendment will not be effective until it is agreed to in writing by the Company, the Agent, and 95% of all of the Purchasers currently holding Notes outstanding under the Current Agreement. The parties acknowledge that they have received a copy of the Fifth Amended Agreement together with a copy of the Collateral Assignment as amended March 5, 2008 and a copy of the separate Security Agreement as amended March 6, 2008 (said Security Agreement only applies to Class 2 Note Purchasers– providing such Class 2 Note Purchasers additional collateral.) [With Purchaser, Purchasers, Notes, Class 2 Note, Class 3 Notes and Warrants being defined in the Current Agreement.]
Agreement
1.	Acceptance of Amended and Restated Agreement and Collateral Assignment. The undersigned agrees to accept the Fifth Amended Agreement and the Collateral Assignment as amended March 5, 2008.
2.	Voluntary and Informed Execution. THE PARTIES ACKNOWLEDGE THAT THEY HAVE HAD AN OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL WITH RESPECT TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY WERE KNOWINGLY AND VOLUNTARILY MADE.

This Consent to Amend and Replace Agreements is signed effective March 12, 2008.

By

Its

EX-4.10

EXHIBIT 4(10)

FIFTH AMENDED AND RESTATED
NOTE AND WARRANT PURCHASE AGREEMENT

          This Fifth Amended and Restated Note and Warrant Purchase Agreement (“Fifth Amended Agreement”) amends and completely replaces the prior version of this Fifth Amended Agreement. It remains effective as of the dates originally signed as to each Purchaser (under previous versions of this Fifth Amended Agreement).

          This Fifth Amended Agreement, dated effective as of the date noted by their signature as to each Purchaser, by and among Integral Vision, Inc., a Michigan corporation (the “Company”), those purchasers listed on Exhibit A (each individually a “Purchaser “ and collectively, the “Purchasers”, which term shall include Class 2 Purchasers and Class 3 Purchasers, as defined below, successors and assigns and any permitted transferees of the Notes or the Warrants) and J. M. Warren Law Offices, P.C., as Agent.

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

SECTION 1. SALE AND PURCHASE OF NOTES AND WARRANTS

(a)

The Company agrees to sell to the Purchasers and, subject to the terms and conditions hereof and in reliance upon the representations and warranties of the Company contained herein or made pursuant hereto, the Purchasers agree to purchase from the Company on the Closing Date specified in Section 2 hereof, (i) a Note or Notes in the aggregate principal amount set forth opposite such Purchaser’s name on Exhibit A hereto and (ii) upon the purchase of a Class 2 Note or Class 3 Note, a Warrant or Warrants for the number of shares of the Company’s Common Stock set forth opposite such Purchaser’s name on Exhibit A. The number of Class 2 Warrants purchased by a Class 2 Purchaser will be determined based on the amount of its Class 2 Note and the length of time such Note is outstanding, as more fully explained in Section 1(d), below. In addition, Class 2 Purchasers may elect to take interest of 12% per annum on their Class 2 Note instead of acquiring a Class 2 Warrant or Warrants. The aggregate purchase price to be paid to the Company by the Purchasers for such Notes and such Warrants is 100% of the principal amount of the Notes to be purchased by the Purchasers, which amount will be allocated in accordance with Section 2(d) hereof.

(b)

As used herein, “Note” or “Notes” means either “Class 2 Notes” or “Class 3 Notes” in a total aggregate amount outstanding at any time not to exceed $6,000,000 (excluding accrued or unpaid interest due thereon), however such $6,000,000 shall be decreased by the principal amount of any Class 3 Notes converted into the Company’s common stock subsequent to August 8, 2007.

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(i) Class 1 Notes were issued by the Company pursuant to previous note and warrant purchase agreements (between March 2001 and September 2003). All such Class 1 Notes have been retired and no Class 1 Notes have been outstanding since April 2005. The Company will not issue Class 1 Notes under this Fifth Amended Agreement.

(ii) “Class 2 Notes” means the aggregate in principal amount of the Company’s 10% secured working capital notes due at the time the Accounts Receivable or the Letter of Credit proceeds on the orders specified in such Class 2 Note is received by the Company. Each Class 2 Note will be substantially in the form of the Class 2 Note set forth as Exhibit B hereto. Interest on the Class 2 Notes shall accrue from the Closing Date at the rate of 10% (12% if elected and no Class 2 Warrant is received). Class 2 Notes will be issued to fund working capital needs to enable the Company to manufacture and ship specified orders and will be paid as the accounts receivable or the Letter of Credit proceeds on those specified orders are received. Payments will be applied first to accrued interest and then to principal. In the event the Class 2 Notes are not paid by the Company out of receivables or Letter of Credit Proceeds and the Company defaults on its obligations on the Class 2 Notes, the Class 2 Notes will have rights to payments under the Collateral Assignment (as defined below) and the right to payments under the WC Security Agreement and UCC financing statements (as defined below). At the time their Class 2 Note is issued or at any time their notes are outstanding, Class 2 Note holders will have the option to elect to cease accruing Class 2 Warrants, as defined below, and to instead begin receiving interest on their Class 2 Note at the rate of 12%.

(iii) “Class 3 Notes” means the aggregate in principal amount of the Company’s 8% secured convertible notes. Each Note will be substantially in the forms of the Notes set forth as Exhibit E and F hereto. Interest on the Class 3 Notes shall accrue from the Closing Date and shall be payable semi-annually on the first day of July and January of each year (the “Semi-Annual Payment Dates”), in the manner specified in the form of Class 3 Notes attached hereto as Exhibit E and F. Principal on the Class 3 Notes shall be paid at maturity, unless sooner called by the Company or converted into common stock of the Company at the option of the Holder. The conversion rate for Class 3 Notes shall be set at the time of their issuance by the Company’s board of directors. As of March 1, 2008, the Company has $378,000 principal amount on Class 3 Notes outstanding which were issued using the form of note on Exhibit E (“Old Class 3 Notes”). Class 3 Notes issued using the form of note on Exhibit F will be referred to herein as “New Class 3 Notes.” After the date hereof, the Company will only issue New Class 3 Notes. Old Class 3 Notes, New

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Class 3 Notes and Class 2 Notes will be on par with each other in their rights to receive payment under the Collateral Assignment, as defined below.

(c)	If all or a portion of (i) the principal amount of the Notes, (ii) the interest payable thereon or (iii) any fee or other amount payable hereunder or under any other Loan Document shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the Default Rate from the date of such nonpayment until paid in full (both before and after judgment).
(d)	As used herein, “Warrants” means “Class 2 Warrants.” “Class 2 Warrants” means the aggregate of Class 2 Common Stock purchase warrants evidenced by certificates substantially in the forms of Exhibit C and D hereto, together with Class 2 Warrants issued in exchange therefore or replacement thereof. Such Class 2 Warrants in the aggregate initially entitle the holders thereof to purchase one share of Common Stock of the Company, no par value, for each $1 in value of the Class 2 Notes issued to such Class 2 Purchaser 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 purchase price per share which shall be as agreed by the parties as of the date of the issuance of the corresponding Class 2 Note or such other price as the Board of Directors shall determine is appropriate based on the circumstances at the time, as set forth on Exhibit A hereto as to each Class 2 Purchaser and updated with each new purchase, such number and such price being subject to adjustment as provided in the forms of Warrants attached hereto as Exhibit C and D. Class 2 Note holders may elect to receive accrued Class 2 warrants at the time said Class 2 Note holders amend their notes. In addition to electing to receive accrued Class 2 warrants at the time Class 2 Note holders amend their notes, Class 2 Note holders may also elect to receive accrued Class 2 warrants once each calendar quarter. After November 1, 2006, the Company has and will only issue Class 2 Warrants in the form of Exhibit D
(e)	Anti-Dilution Provision for Old Class 3 Notes and Class 2 Warrants Issued Pursuant to Class 2 Notes Issued between January 1, 2004 and October 31, 2006.
	In the event the Company issues, after February 29, 2004, any common stock, or any Preferred Stock, Warrant or Note convertible into common stock, which has a share price, or an exercise or conversion rate, lower than the exercise price for Class 2 Warrants issued pursuant to Class 2 Notes issued after January 1, 2004, or the conversion rate for Old Class 3 Notes, then the exercise price for such Class 2 Warrants issued pursuant to Class 2 Notes issued after January 1, 2004 and Old Class 3 Notes shall be reduced to such lower rate, but in no event will the exercise price/conversion rate be reduced to less than $0.25 per share (subject to adjustment for stock splits, stock dividends and similar events after February 29, 2004). This

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	provision will not be triggered by shares issued for existing stock options under the Company’s stock option plans (as of February 29, 2004) or for the exercise of existing warrants (as of February 29, 2004).
(f)	Amendment of Class 2 Warrants. It is agreed that Section 2.2 of the Class 2 Warrants (issued in the forms as shown in Exhibits C and D) including issued and outstanding warrants, shall be amended by adding the following to said warrants:

(i)	In Section 2.2(a) After the phrase “but in no event will the exercise price be reduced to less than $0.25 per share” in said section shall be added the phrase as follows: “(subject to adjustment for stock splits, stock dividends and similar events after the Issue Date).”
(ii)	In Section 2.2(d) the phrase “without dilution” shall be deleted.
(iii)	The following shall be added as section 2.2(e):
	Exclusions from the Adjustment for Current Exercise Price. No adjustment of the current exercise price under Section 2.2 hereof shall be made as a result of or in connection with:
	(i)	the issuance of Shares upon exercise of the Warrants or Class 3 Notes;
	(ii)	the issuance of Warrants or Notes pursuant to this Agreement; or
	(iii)	the exercise of options to purchase shares of the Company’s Common Stock pursuant to options granted to certain employees or agents of the Company pursuant to the Company’s stock option plans.

(g)

Amendment of Class 2 Warrants. It is further agreed that Section 3 of the Class 2 Warrants (issued in the form as shown in Exhibit D) including issued and outstanding warrants shall be amended by replacing said section in its entirety with as follows:

Section 3. Company’s Consolidation or Merger. If the Company shall at any time consolidate with or merge into another entity (where the Company is not the continuing corporation after such merger or consolidation), the holder of a Warrant shall thereafter (including, without limitation, the holder of a Warrant that is blocked from exercising said warrant pursuant to Section 1.1.(c) hereof [“Blocked Holder”]) be entitled to receive, upon the exercise thereof (including, without limitation, after allowing sufficient time for the Blocked Holder to unblock and exercise said blocked Warrant) in whole or in part, the securities or other property to which (and upon the same terms and with the same rights as) a holder of the number of Shares then deliverable upon the exercise thereof would have been entitled upon such consolidation or merger (subject to adjustments under Section 2.2 hereof), and the Company shall take such steps in connection with such consolidation or merger as may be necessary to assure such holder that the provisions of the Warrants and the Purchase Agreement shall thereafter be applicable in relation to any securities or property thereafter deliverable upon the exercise of this Warrant, including,

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but not limited to, obtaining a written acknowledgment from the continuing entity of its obligation to supply such securities or property upon such exercise and to be so bound by the Warrant and the Purchase Agreement. A sale, transfer or lease (in one, or a series of related, transactions) of all or substantially all of the assets of the Company to another person shall be deemed a consolidation or merger for the foregoing purposes. The provision in this section shall apply regardless of whether or not there would have been sufficient number of shares of Common Stock authorized and available upon the exercise of this Warrant as of the date of such consolidation or merger (due to a temporary waiver granted the Company by the holder of this Warrant).

SECTION 2. THE CLOSING

          (a) Subject to the terms and conditions hereof, the closing (the “Closing”) of the purchase and sale of the Notes and Warrants will take place at the offices of J.M. Warren Law Offices, P.C. at such time and date as shall be mutually agreed to by the Company and the Purchasers. Such times and dates are herein referred to as the “Closing Dates” and individually as a “Closing Date.”

          (b) Subject to the terms and conditions hereof, on each Closing Date (i) the Company will deliver to each Purchaser a Note or Notes, substantially in the form of Exhibit B for Class 2 Notes and Exhibit F for New Class 3 Notes, payable to such Purchaser (or its nominee as notified to the Company), and dated the Closing Date, in the aggregate principal amount set forth opposite such Purchaser’s name on Exhibit A, and (ii) upon such Purchaser’s receipt thereof, such Purchaser will deliver to the Company by wire transfer an amount equal to the purchase price for such Notes (as specified in Section 1(a) hereof) payable to the order of the Company in immediately available funds (the Company is also allowed to exchange outstanding Notes for another class of Notes).

          (c) As an alternative to Section 2(b), upon receipt of a Purchaser’s signed copy of this Agreement, the Company will sign the Agreement, the Note and the Warrants, as applicable, and will instruct the Agent to communicate to the Purchaser that such documents have been signed and the Agent has obtained a perfected interest in the Collateral. Thereafter, upon the Company’s receipt by wire transfer of the purchase price for the Note and Warrants, the Company will deliver the signed Agreement, Note and Warrants, as applicable, to the Purchaser.

          (d) The Purchasers acknowledge that the Notes and the Warrants constitute an “investment unit” within the meaning of Section 1273(c)(2) of the Code and that the Company will allocate the “issue price” (within the meaning of Section 1273(b) of the Code) of such investment unit, for all Income Tax purposes, between the Notes and Warrants as required by applicable tax law. Each Purchaser agrees to abide by Treasury Regulation § 1. 1273-2(h)(2) with respect to such allocation of the issue price. For all Notes and Warrants issued under this Agreement after December 31, 2001, the Company and its tax advisors have determined that the limited marketability of the Company’s Common Stock does not provide a reasonable basis for the Company and its advisors to determine a value for the Warrants issued or the conversion

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rights. Therefore, all warrants issued by the Company pursuant to this Agreement, shall have only a minimal or negligible value ascribed to them. It is understood, however, that in the event market conditions change such that the warrants again have value, the Company and its tax advisors will determine an appropriate value for warrants issued thereafter with no need to amend this Agreement.

SECTION 3. DEFINITIONS

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

          “Accountants” means Rehmann Robson or another independent certified public accounting firm selected by the Company and reasonably satisfactory to the Majority Noteholders.

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

          “Agent” means J.M. Warren Law Offices, P.C. or any successor agent appointed pursuant to Section 21.7 hereof

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

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

          “Board” or “Board of Directors” means, with respect to any Person which is a

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

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

          “Business Day” means any day other than a Saturday, Sunday or other day on the New York Stock Exchange is required to close.

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

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

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

          “Class 2 Note” has the meaning set forth in Section 1(b)(ii) hereof.

          “Class 3 Note” has the meaning set forth in Section 1(b)(iii) hereof.

          “Class 2 Purchaser” means a purchaser of Class 2 Notes and Class 2 Warrants, if elected.

          “Class 3 Purchaser” means a purchaser of Class 3 Notes.

          “Class 2 Warrants” has the meaning set forth in Section 1(d) hereof.

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

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

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

          “Collateral” when used in the form of Class 2 Note attached hereto as Exhibit B is hereby defined to mean both IP Collateral and WP Collateral (both terms defined below).

          “Collateral Assignment” means the Collateral Assignment of Proprietary Rights and Security Agreement dated March 29, 2001 by the Company and the Agent as amended March    , 2008.

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

          “Common Stock” means that class of stock or other equivalent evidences of ownership of the Company, the holders of which are entitled to vote generally to elect the Board of Directors.

          “Common Stock Equivalents” means any securities of the Company or any Subsidiary which would entitle the holder thereof to acquire at any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

          “Company” means Integral Vision, Inc., a Michigan corporation, its successors and permitted assigns.

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

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

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

(i)	the earnings during such period of any Person to which the assets of the Company or any Subsidiary shall have been sold, transferred or disposed of, or into which the Company or such Subsidiary shall have merged, prior to the date of such transaction;
	(a)	any extraordinary gain or loss during such period arising from the sale, exchange or other disposition of capital assets (such term to include all fixed assets, whether tangible or intangible, and all inventory sold in conjunction with the disposition of fixed assets);
	(b)	any gain or loss during such period arising from the write-up or write-down of any asset; and
	(c)	any earnings or gains during such period resulting from the receipt of any proceeds of any life insurance policy.

           “Consolidated Assets” means, at any time, the total assets of the Company and its Subsidiaries determined in accordance with GAAP.

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

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

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

           “Environment” means all air, surface water, groundwater, or land, including land surface

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or subsurface, including all fish, wildlife, biota and all other natural resources.

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

           “Environmental Law” means any and all current and future, federal, state, local, provincial and foreign, civil and criminal laws, statutes, ordinances, orders, codes, rules, regulations, Environmental Permits, policies, guidance documents, judgments, decrees, injunctions, or agreements with any Governmental or Regulatory Authority, relating to the protection of health and the Environment, worker health and safety, and/or governing the handling, use, generation, treatment, storage, transportation, disposal, manufacture, distribution, formulation, packaging, labeling, or Release of Hazardous Materials, whether now existing or subsequently amended or enacted, including but not limited to: the Clean Air Act, 42 U.S.C. § 7401 et seq.; the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), 42 U.S.C. § 9601 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq; the Hazardous Material Transportation Act 49 U.S.C. § 1801 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act 7 U.S.C. § 136 et seq.; the Resource Conservation and Recovery Act of 1976 (“RCRA”), 42 U.S.C. § 6901 et seq.; the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq.; the Occupational Safety & Health Act of 1970, 29 U.S.C. § 651 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. § 2701 et seq.; and the state analogies thereto, all as amended or superseded from time to time; and any common law doctrine, including but not limited to, negligence, nuisance, trespass, personal injury, or property damage related to or arising out of the presence, Release, or exposure to a Hazardous Material.

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

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

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

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

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

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

           “Governmental Regulations” means any and all laws, statutes, ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders, awards and standards, or any similar requirement, of the government of the United States or any foreign government or any state, province, municipality or other political subdivision thereof or therein or any court, agency, instrumentality, regulatory authority or commission of any of the foregoing.

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

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

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

           “Indebtedness” means all liabilities, obligations and reserves, contingent or otherwise, which in accordance with GAAP, would be reflected as a liability on a balance sheet or would be required to be disclosed in a financial statement, including, without duplication: (i) all Indebtedness for Borrowed Money, (ii) all obligations secured by any Lien upon Property owned by the Company, irrespective of whether such obligation or liability is assumed; (iii) any

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obligation of the Company guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to the Company, but exclusive of obligations arising as the result of the endorsement by the Company of checks or other negotiable instruments in the ordinary course of the Company’s business for purposes of depositing such items) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person; and (iv) liabilities in respect of unfunded vested benefits under any Single Employer Plan or in respect of withdrawal liabilities incurred under ERISA by the Company or any ERISA Affiliate to any Multiemployer Plan.

           “Indebtedness for Borrowed Money” means without duplication, all Indebtedness (i) in respect of money borrowed, (ii) evidenced by a note, debenture or other like written obligation to pay money (including, without limitation, all of the Company’s Obligations and the Permitted Senior Indebtedness, and all reimbursement or other obligations of the Company in respect of letters of credit (except for commercial letters of credit up to $500,000), letter of credit guaranties, bankers acceptances, interest rate swaps, controlled disbursement accounts, or other financial products (except hedging transactions); (iii) in respect of Capitalized Leases or for the deferred purchase price of Property (other than trade payables arising in the ordinary course of business that are not represented by promissory notes or by other written evidence other than invoices); or (iv) in respect of obligations under conditional sales or other title retention agreements, and all guaranties of any or all of the foregoing.

           “Indemnified Persons” has the meaning set forth in Section 18.1 hereof.

           “Investment” means, with respect to any Person:

(i)	the amount paid or committed to be paid, or the value of property (excluding stock of the Company) or services contributed or committed to be contributed, by the Company for or in connection with the acquisition by the Company of any stock, bonds, notes, debentures, partnership or other ownership interests or other securities of such Person; and
(ii)	the amount of any advance, loan or extension of credit to, or guaranty or other similar obligation with respect to any Indebtedness of such Person by the Company and (without duplication) any amount committed to be advanced, loaned, or extended to, or the payment of which is committed to be assured by a guaranty or similar obligation for the benefit of, such Person by the Company.

           “Issue Date” means the date on which Notes or Warrants are issued pursuant to the Fifth Amended Agreement (or under previous versions of this Agreement).

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

          “IP Security Interest” means the Liens granted to the Agent for the benefit of the

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Noteholders pursuant to this Agreement and the Loan Documents.

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

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

           “Loan Documents” mean, collectively, the

(i)	Agreement;
(ii)	Notes;
(iii)	Warrants;
(iv)	Collateral Assignment;
(v)	WC Security Agreement;
(vi)	UCC financing statements; and
(vii)	such other instruments and documents as Noteholders may require to evidence and perfect the IP Security Interests, WC Security Interests and the Notes,

          and individually any one of them.

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

           “Losses” have the meaning set forth in Section 18.1 hereof.

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

           “Market Price” per share of the Company’s Common Stock means the average of the daily closing prices for the period specified. The closing price for each day shall be the last reported sale price or, in case no such sale takes place on such day, the average of the closing bid

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and asked prices, in either case on the principal national United States securities exchange on which the Company’s Common Stock is listed or admitted to trading, or if the Company’s Common Stock is not listed or admitted to trading on any such national securities exchange, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers Inc., Automated Quotation System Level I, the Over-the-Counter Bulletin Board or comparable system. If the closing price cannot be so determined, the Market Price shall be determined:

(a) by the written agreement of the Company and the holders of the affected Class 3 Notes or Warrants representing a majority of the Shares then obtainable from the conversion of such Class 3 Notes or the exercise of such outstanding Warrants (the “Majority Holders”); or

(b) in the event that no such agreement is reached within fifteen (15) days after the event giving rise to the need to determine the Market Price, by a nationally recognized U.S. investment banking firm, selected by the Company (“Company Appraiser”) not more than 5 Business Days after the end of such 15 day period. Any appraiser appointed pursuant to this paragraph shall be instructed to make its determination as promptly as possible and in any event within 30 days of appointment. If no such selection is made within such period, then the Majority Holders shall as promptly as possible select such a firm whose determination shall be final and binding. If such selection is timely made by the Company, and the Majority Holders do not object to the Market Price as determined by the Company Appraiser within 10 days of receipt of notice thereof by all holders of Warrants, then the Market Price as determined by the Company Appraiser shall be the Market Price. If the Majority Holders do so object to the Company Appraiser’s determination of Market Price, then the Majority Holders can select a nationally recognized U.S. investment banking firm (“Alternate Appraiser”) to review the Company Appraiser’s report and other relevant information. Within 10 days after receipt by the Alternate Appraiser of such report and such other information as is reasonably requested by the Alternate Appraiser, the Company Appraiser and Alternate Appraiser shall communicate and/or meet to resolve any questions or differences with respect to the Market Price. If such appraisers agree on a Market Price, such Market Price shall be the Market Price. If no agreement is reached then the Company Appraiser and Alternate Appraiser shall select a third nationally recognized firm (“Third Appraiser”). If the Company Appraiser and the Alternate Appraiser cannot agree on a Third Appraiser within 20 days of the end of such 10 day period, either may apply to the American Arbitration Association to appoint the Third Appraiser. The Third Appraiser shall, within 30 days of its hire, issue a report with its determination of Market Price which shall be conclusive and binding. All expenses of the Company Appraiser shall be borne by the Company. All expenses of the Alternate Appraiser shall be borne by the holders of the Warrants. All expenses of the Third Appraiser shall be borne equally by the Company and the holders of the Warrants.

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

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

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

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

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

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

           “Noteholder” or “Noteholders” shall mean the holder of an outstanding Note or Notes or holders of outstanding Notes.

           “Note and Warrant Purchase Agreement” as used in the Exhibits attached hereto, in the Collateral Assignment, and in the Agreement of Appointment of Representative appointing The Klonoff Company, Inc. as Representative of the Class 2 Purchasers is defined to mean this Agreement.

           “Outstanding” or “outstanding” means, when used with reference to the Notes or Warrants as of a particular time, all Notes or Warrants, as the case may be, theretofore duly issued except (i) Notes or Warrants theretofore reported as lost, stolen, mutilated or destroyed or surrendered for transfer, exchange or replacement, in respect of which new or replacement Notes or Warrants have been issued by the Company, (ii) Notes theretofore paid in full, (iii) Warrants theretofore fully exercised and (iv) Notes theretofore canceled by the Company, whether upon exercise of a Warrant in whole or in part or otherwise; except that for

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the purpose of determining whether holders of the requisite principal amount of Notes or Warrants have made or concurred in any declaration, waiver, consent, approval, notice, annulment of acceleration or other communication under this Agreement or under any Notes or Warrants, Notes or Warrants registered in the name of, as well as Notes or Warrants owned beneficially by, the Company, the Subsidiary or any of their Affiliates (other than one of the Purchasers) shall not be deemed to be outstanding.
	“PBGC” means the Pension Benefit Guaranty Corporation.
	“Permits” has the meaning set forth in Section 4.10 hereof
	“Permitted Liens” means any of the following Liens:
	(i)	the IP Security Interests and the WC Security Interests;
	(ii)	Liens for taxes not delinquent or for taxes being contested in good faith by appropriate proceedings and as to which adequate financial reserves have been established on its books and records;
	(iii)	Liens (other than any Lien imposed by ERISA) created and maintained in the ordinary course of business which are not material in the aggregate, and which would not constitute or result in a Material Adverse Effect, and which constitute (A) pledges or deposits under worker’s compensation laws, unemployment insurance laws or similar legislation, (B) good faith deposits in connection with bids, tenders, contracts or leases to which the Company or a Subsidiary is a party for a purpose other than borrowing money or obtaining credit, including rent security deposits, (C) Liens imposed by law, such as those of carriers, warehousemen and mechanics, if payment of the obligation secured thereby is not yet due or if such Liens are discharged within sixty (60) days of the date they are imposed, (D) Liens securing taxes, assessments or other governmental charges or levies not yet subject to penalties for nonpayment, and (E) pledges or deposits to secure public or statutory obligations of a Company or a Subsidiary, or surety, customs or appeal bonds to which the Company or a Subsidiary is a party;
	(iv)	Liens affecting real property which constitute minor survey exceptions or defects or irregularities in title, minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of such real property; provided, however, that all of the foregoing, in the aggregate, do not at any time materially detract from the value of said properties or materially impair their use in the operation of the businesses of the Company or any Subsidiary, as the case may be; and
	(v)	Purchase Money Liens securing purchase money Indebtedness; provided,

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

          “Permitted Senior Indebtedness” means the interests of the lessor under any Capitalized Leases permitted to exist hereunder.

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

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

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

          “Principal Market” means the principal securities exchange or market on which the Common Stock is listed or traded.

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

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

          “Purchase Agreement” when used in any of the Exhibits attached hereto and in the Collateral Assignment and WC Security Agreement shall have the same meaning as Agreement herein.

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

          “Purchaser(s)” has the meaning set forth in the second paragraph hereof.

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

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

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

          “Representative” means The Klonoff Company, Inc. or any successor Representative in its capacity as agent for the Class 2 Purchasers as Secured Party under the Security Agreement.

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

          “Restricted Investment” means any Investment other than (1) obligations of the United States government due within one year, (2) certificates of deposit and bankers acceptances due within one year of a United States domiciled commercial bank having capital funds of at least $100 million and whose long-term unsecured debt obligations have been given a rating of at least A by Standard & Poor’s or A2 by Moody’s, (3) commercial paper rated P-1 by Moody’s or A-1 by Standard & Poor’s and maturing not more than 270 days from the date of creation thereof, (4) debt of any state or political subdivision that is rated AA or better by Moody’s or Aa2 or better by Standard and Poor’s and maturing in less than one year, (5) investments in, and loans and advances to, Subsidiaries or entities that will, concurrently with such investment become Subsidiaries, (6) trade credit extended in the ordinary course of the Company’s business, (7) loans and advances made in the ordinary course of business to officers and employees of Company for relocation expenses, travel advances and similar expenses relating to their employment, (8) endorsements of instruments or items of payment for deposit to the Company’s bank accounts, and (9) additional Investments not to exceed $500,000 in the aggregate.

          “Restricted Payment” means (i) every direct or indirect dividend or other distribution paid, made or declared by the Company on or in respect of any class of its capital stock or in respect of any partnership or Joint Venture, in all cases whether now or hereafter outstanding, interests and any payment under or with respect to anti-dilution provisions of any capital stock of the Company, (ii) every payment in connection with the redemption, purchase, retirement or other acquisition, direct or indirect, by or on behalf of the Company of any shares of the Company’s capital stock, whether or not owned by the Company or any partnership or Joint Venture interests of the Company, or any warrants, rights or options to acquire such stock or partnership interests, (iii) every payment by or on behalf of the Company (whether as repayment or prepayment of principal or as interest or otherwise) on or with respect to any obligation to any Person, of any Affiliate of the Company or of any other holder of shares of the Company’s Common Stock, which obligation is assumed or guaranteed by the Company; provided, however, (a) that the restrictions of the foregoing clauses (i) and (ii) shall not apply to any dividend, distribution, or other payment to the extent payable in shares of the Common Stock of the Company or in options, warrants or other rights to purchase such Common Stock, (b) that none of the foregoing clauses shall apply to any payments from a Subsidiary to the Company, (c) that none of the foregoing clauses shall apply to any purchases by the Company from a Wholly-

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Owned Subsidiary of additional capital stock of such Subsidiary and (d) that none of the foregoing clauses shall apply to any payments, distributions or other transfers or actions on or with respect to the Notes or Warrants. For purposes of this definition, “capital stock” shall also include warrants (other than the Warrants) and other rights and options to acquire shares of capital stock.

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

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

          “Share” or “Shares” means shares of the Company’s Common Stock, or other securities, which can be obtained or have been obtained by an exercise in whole or in part of any Warrant or Class 3 Note or the exchange of a Warrant or Class 3 Note for shares of the Company’s Common Stock pursuant to the terms of the Warrants, including, without limitation, shares of the Company’s Common Stock received by the exercise of Class 1 Warrants in 2004 and 2005 under previous versions of this note and warrant purchase agreement. In the event that any Shares are sold either in a public offering pursuant to an effective registration statement under Section 6 of the Securities Act or pursuant to Rule 144 (but if sold under Rule 144, only if sold in “brokers’ transactions” within the meaning of Rule 144), then the transferees of such Shares shall not be entitled to any benefits under this Agreement with respect to such Shares and such Shares shall no longer be considered to be “Shares” for purposes of this Agreement.

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

          “Subordinated Debt” means debt of the Company issued in a capital raising transaction which meets each of the following requirements: (a) such debt is wholly unsecured; (b) such debt is contractually fully subordinated (including, without limitation, interest payments due thereon), as to payment and liquidation, to the payment in full of the Notes on terms, and pursuant to written agreements in form and substance, that restrict the subordinated creditor from pre-paying any amounts in respect of the principal of such debt (upon acceleration or otherwise) or commencing any judicial or other collection efforts or exercising any other remedies in respect of the principal of such debt prior to the date that is ninety-one (91) days following the payment in full of the Notes outstanding at the time of the issuance of said Subordinated Debt; and (c) such debt does not mature prior to the date that is ninety one (91) days following the latest maturity date (as defined in the Notes) of the Notes outstanding at the time of the issuance of said Subordinated Debt. Interest payments payable on Subordinated Debt cannot be required to be paid until after April 1, 2009.

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

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          “Trading Day” means any day on which the Common Stock is purchased and sold on the Principal Market.

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

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

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

          “WC Collateral” means all of the following assets and rights of the Company, wherever located, whether now owned or hereafter acquired or arising: Accounts; Letters of Credit; Letter-of-credit rights; Inventory, including Work in Progress; Supporting obligations; and all Cash Proceeds and products of the foregoing [said terms having the respective meanings given such terms in Article 9 of the Uniform Commercial Code (“UCC”) (or absent definition in Article 9 of the UCC, as defined in any other article of the UCC) as enacted in the State of Michigan as of the date of this Agreement, and as amended thereafter].

          “WC Security Agreement” means the Security Agreement dated May 1, 2002 between the Representative and the Company as amended March   , 2008.

          “WC Security Interest” means Liens granted to the Representative of the Purchasers pursuant to this Agreement and the Loan Documents.

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

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

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

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

(iii) all computations provided for herein, if any, shall be made in accordance with

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GAAP, unless another method of computation is herein specified;

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

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

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

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

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

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

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

          4.4. Subsidiaries. The Company has no active Subsidiaries.

          4.5. Financial Condition. The financial statements included in the documents delivered pursuant to Section 10.6, copies of which have been furnished to the Purchasers, fairly present, and the financial statements delivered pursuant to Section 7.4 will fairly present, the financial position of the Company and any Subsidiary as at the respective dates thereof, and the results of operations of the Company and any Subsidiary for the respective periods indicated, all on a Consolidated basis in accordance with GAAP (subject, in the case of interim statements, to normal, immaterial year-end audit adjustments). There is no material Contingent Liability of the Company or any Subsidiary that is not reflected in such Consolidated statements or in the notes thereto.

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

          4.7. Consents, Etc. Except for such consents, approvals, authorizations, declarations, registrations or filings delivered by the Company at or prior to the Closing pursuant to Section 10.4, if any, each of which is in full force and effect, no consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person, including any creditor, lessor or shareholder of the Company or any Subsidiary, is required on the part of the Company or any Subsidiary in connection with the execution, delivery and performance of this Agreement and the other Loan Documents or the transactions contemplated hereby or thereby or as a condition to the legality, validity or enforceability of this Agreement and the other Loan Documents.

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

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

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

          4.11. ERISA. To the best of the Company’s knowledge, the Company and its Plans are in

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

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

(a)	No written demand, claim, notice, suit, suit in equity, action, administrative action, investigation or inquiry whether brought by any governmental authority, private person or otherwise, arising under, relating to or in connection with any Environmental Laws is pending or, to the best of the Company’s knowledge, threatened against Company, the Subsidiary any Property or any past or present operation of the Company or any Subsidiary which could result in a Material Adverse Effect.
(b)	The Company does not have any knowledge that any other person has ever received any notice, claim or allegation of any violation, and the Company is not aware of any existing violation, of Environmental Laws at or about any Property, and the Company does not have any knowledge of any actions commenced or threatened by any party for or related to or arising out of non-compliance with Environmental Laws which apply to any Property, activities at any Property or Hazardous Materials at, from or affecting any Property.
(c)	None of the Property appears on the National Priority List (as defined under federal law) or any state listing which identifies sites for remedial clean-up or investigatory actions. To the best of the Company’s knowledge, none of the Property has been contaminated with substances which give rise to a clean-up obligation under any Environmental Law or common law.

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

          4.14. Disclosure. No report or other information furnished in writing by or on behalf of the Company to any Purchaser in connection with the negotiation or administration of this Agreement contains any material misstatement of fact or omits to state any material fact or any fact necessary to make the statements contained therein not misleading. Neither this Agreement, the other Loan Documents, nor any other document, certificate, or report or statement or other information furnished to any Purchaser by or on behalf of the Company in connection with the

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transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact in order to make the statements contained herein and therein not misleading. There is no fact known to the Company which materially and adversely affects, or which in the future may (so far as the Company can now foresee) materially and adversely affect, the business, properties, operations, condition, financial or otherwise, or prospects of the Company or any Subsidiary, which has not been set forth in this Agreement or in the other documents, certificates, statements, reports or other information furnished in writing to any Purchaser by or on behalf of the Company in connection with the transactions contemplated hereby.

          4.15. Stock Ownership. The authorized capital stock of the Company consists of (i) 50,000,000 shares of Common Stock, without par value, of which 29,566,409 shares are outstanding, and (ii) 400,000 shares of Preferred Stock (though 7,000 shares of preferred stock are retired), without par value, none of which are outstanding. Such outstanding shares of Common Stock are duly authorized, validly issued and outstanding and fully paid and nonassessable. Except for the Warrants, the warrants to purchase 3.5 million shares of the Company issued to investors who purchased 7 million shares of the Company in April 2005 [“PIPE Investors”] (said warrants include provisions requiring the Company to issue additional warrants to purchase shares of the Company to said warrant holders when the Company issues any equity securities below said warrants’ initial exercise price of $1.60 per share) the Class 3 Notes and options to purchase shares of Common Stock granted to employees, directors or agents of the Company pursuant to the Company’s stock option plans.

          4.16. No Defaults or Conflicts.

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

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

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provision referred to in the preceding clause (i) will have a Material Adverse Effect.

          4.17. Offering of Notes. Neither the Company nor any agent nor any other Person acting on their behalf, directly or indirectly, (i) offered any of the Notes, Warrants or any similar security of the Company (A) by any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) or (B) for sale to or solicited offer to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any Person other than the Purchasers and additional potential investors who, either alone or with their Purchaser Representatives(s) (as defined in Regulation D under the Securities Act) have such knowledge and experience in financial and business matters that they are capable of evaluation the merits and risks of the prospective investment and who are able to bear the economic risks of the investment or (ii) has done, or caused to be done (or has omitted to do or to cause to be done) any act which act (or which omission) would result in bringing the issuance or sale of the Notes, Warrants or Shares within the provisions of Section 5 of the Securities Act.

          4.18. Outstanding Securities. All securities (as defined in the Securities Act) of the Company have been offered, issued, sold and delivered in compliance with, or pursuant to exemptions from, all applicable federal and state laws, and the rules and regulations of federal and state regulatory bodies governing the offering, issuance, sale and delivery of securities. The Company’s common stock is currently traded on the the OTC Bulletin Board®.

                    4.19. Intellectual Property.

                    (a) The Company owns, free and clear of claims or rights of any other Person, except as provided under this Agreement, with full right to use, sell, license, sublicense, dispose of, and bring actions for infringement of, or, to the knowledge of the Company, has acquired licenses or other rights to use, all Intellectual Property necessary for the conduct of its business as presently conducted (other than with respect to software which is generally commercially available and not used or incorporated into the Company’s products and open source software which may be subject to one or more “general public” licenses). All works that are used or incorporated into the Company’s services, products or services or products actively under development and which is proprietary to the Company was developed by or for the Company by the current or former employees, consultants or independent contractors of the Company or purchased or licensed by the Company.

                    (b) The business of the Company as presently conducted and the production, marketing, licensing, use and servicing of any products or services of the Company do not, to the knowledge of the Company, infringe or conflict with any patent, trademark, copyright, or trade secret rights of any third parties or any other Intellectual Property of any third parties in any material respect. The Company has not received written notice from any third party asserting that any Intellectual Property owned or licensed by the Company, or which the Company otherwise has the right to use, is invalid or unenforceable by the Company and, to the Company’s knowledge, there is no valid basis for any such claim (whether or not pending or threatened).

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                    (c) No claim is pending or, to the Company’s knowledge, threatened against the Company nor has the Company received any written notice or other written claim from any Person asserting that the Company’s present or contemplated activities infringe or may infringe in any material respect any Intellectual Property of such Person.

                    (d) All licenses or other agreements under which the Company is granted Intellectual Property (excluding licenses to use software utilized in the Company’s internal operations and which is generally commercially available) are in full force and effect and, to the Company’s knowledge, there is no material default by any party thereto. The Company has no reason to believe that the licensors under such licenses and other agreements do not have and did not have all requisite power and authority to grant the rights to the Intellectual Property purported to be granted thereby.

                    (e) All licenses or other agreements under which the Company has granted rights to Intellectual Property to others (including all end-user agreements) are in full force and effect, there has been no material default by the Company or any Company Subsidiary thereunder and, to the Company’s knowledge, there is no material default of any provision thereof relating to Intellectual Property by any other party thereto.

                    (f) The Company has taken all steps required in accordance with commercially reasonable business practice to establish and preserve their ownership in its owned Intellectual Property and to keep confidential all material technical information developed by or belonging to the Company which has not been patented or copyrighted. To the Company’s knowledge, the Company is not making any unlawful use of any Intellectual Property of any other Person, including, without limitation, any former employer of any past or present employees of the Company. To the Company’s knowledge, neither the Company nor any of its employees has any agreements or arrangements with former employers of such employees relating to any Intellectual Property of such employers, which materially interfere or conflict with the performance of such employee’s duties for the Company or result in any former employers of such employees having any rights in, or claims on, the Company’s Intellectual Property. Each current employee of the Company has executed agreements regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company, as the case may be, each independent contractor or consultant of the Company has executed agreements regarding confidentiality and proprietary information, and the Company has not received written notice that any employee, consultant or independent contractor is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. Without limiting the foregoing: (i) the Company has taken reasonable security measures to guard against unauthorized disclosure or use of any of its Intellectual Property that is confidential or proprietary; and (ii) the Company has no reason to believe that any Person (including, without limitation, any former employee or consultant of the Company) has unauthorized possession of any of its Intellectual Property, or any part thereof, or that any Person has obtained unauthorized access to any of its Intellectual Property. The Company has complied in all material respects with its respective obligations pursuant to all agreements relating to Intellectual Property rights that are the subject of licenses granted by third parties, except for any non-

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compliance that has not had or would not reasonably be expected to have a Material.

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

SECTION 5. REPRESENTATIONS OF THE PURCHASERS

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

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

          5.2. Purchase for Investment. Such Purchaser is capable of evaluating the risk of its investment in the Notes and Warrants being purchased by it and is able to bear the economic risk of such investment. Such Purchaser is purchasing the Notes and Warrants to be purchased by it for its own account, and the Notes and Warrants are being purchased by it for investment and not with a present view to any distribution thereof.

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

SECTION 6. PREPAYMENTS

           6.1. Optional Prepayments of Class 2 Notes.

          Class 2 Notes must be paid at such times as the Company receives payment on the specified order(s) associated with such Notes, with payment being applied first to accrued interest and then to principal. In addition, the Company may make prepayment in full or part on the Class 2 Notes at any time.

          6.2. Optional Prepayments of Class 3 Notes.

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          (a) The Company may at its option (subject to the other provisions of this Section 6.2) prepay all or part of the principal amount of Class 3 Notes, at a price equal to the aggregate principal amount of the Notes to be prepaid plus accrued interest thereon to the date of prepayment.

          (b) The aggregate amount of each prepayment of the principal amount of affected Class 3 Notes pursuant to this Section 6.2 shall be allocated among all affected Class 3 Notes, in proportion, as nearly as practicable, to the respective unpaid principal amounts of such Class 3 Notes.

          (c) The right of the Company to prepay Class 3 Notes pursuant to this Section 6.2 shall be conditioned upon its giving notice of prepayment, signed by an officer, to the holders of Class 3 Notes not less than thirty (30) days and not more than sixty (60) days prior to the date upon which the prepayment is to be made specifying (i) the registered holder of each Class 3 Note to be prepaid, (ii) the aggregate principal amount being prepaid, (iii) the date of such prepayment (which must be a Business Day), (iv) the accrued and unpaid interest (to but not including the date upon which the prepayment is to be made) and (v) that the prepayment of Class 3 Notes is being made pursuant to this Section 6.2. Notice of prepayment having been so given, the aggregate principal amount of the Class 3 Notes so specified in such notice, and all accrued and unpaid interest thereon, shall become due and payable on the specified prepayment date, but the right to convert any or all of the Class 3 Notes to Common Stock shall continue to, but not including, the date of such prepayment.

          (d) The right of the Company to prepay Old Class 3 Notes pursuant to this Section 6.2 shall be further conditioned upon either of the following being met:

	(i)	fourteen months shall have elapsed from the Closing Date for each Class 3 Note affected, the Common Stock of the Company shall have been trading at an average Market Price of the greater of $1 per share or 125% of the conversion price for the Class 3 Notes being called for the four months prior to the specified prepayment date and the Common Stock receivable by the Class 3 Purchasers upon conversion of their Class 3 Notes having been eligible for public market sale, whether through registration or an exemption therefrom, for at least four months prior to the specified prepayment date; or
	(ii)	the common stock of the Company shall have been trading at an average Market Price of the greater of $1 per share or 200% of the conversion price for the Class 3 Notes being called for the four month prior to the specified prepayment date and the Common Stock receivable by the Class 3 Purchasers upon conversion of their Class 3 Notes having been eligible for public market sale, through registration, for at least four months prior to the specified prepayment date.
The provisions of this section 6.2(d) shall not be applicable if the prepayment by the Company is pursuant to the sale by the Company of substantially all of its assets.

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          (e) Notwithstanding any of the other provisions in this Agreement (including, without limitation, other provision in this Section 6.2), the Company shall have the right to prepay $100,000 of Old Class 3 Notes prior to April 1, 2008 without being required to prepay any New Class 3 Notes.

          (f) The right of the Company to prepay New Class 3 Notes pursuant to this Section 6.2 shall be further conditioned upon the satisfaction of the following conditions:

i.	Twelve (12) months have elapsed from the Issue Date,
ii.	The Market Price for the Common Stock shall have averaged at least $0.50 per share during any period of twenty (20) consecutive Trading Days prior to the date the Company gives notice to prepay said notes, and
iii.	During such twenty consecutive Trading Days (referred to in ii above), the resale of issuable shares underlying said notes shall have been covered by an effective registration statement or such issuable shares shall have been eligible for sale to the public pursuant to Rule 144 without limitation as to the number of shares to be sold. Notwithstanding other provisions in this Agreement that require the Company to treat all New Class 3 Notes without partiality, the Company may prepay notes under this provision [6.2.(f) iii] where the resale of issuable shares underlying said notes shall only have been eligible for sale to the public pursuant to Rule 144 without limitation as to the number of shares to be sold provided that the Company also offers to prepay a proportional share of the balance of New Class 3 Notes then outstanding.
The provisions of this section 6.2(f) shall not be applicable if the prepayment by the Company is pursuant to the sale by the Company of substantially all of its assets.

          (g) The right of the Company to prepay Class 3 Notes (other than notes specified in 6.2.(e) above) pursuant to the terms in 6.2 (d) and (f) shall be further conditioned that the Company has no Class 2 Notes outstanding at the prepayment date.

          (h) The right of the Company to prepay New Class 3 Notes outstanding that are “blocked” from being converted pursuant to Section 2 of said notes shall be subject to additional terms and conditions in this section as follows:

If such “blocked” holder of a New Class 3 Note is directly or indirectly, the beneficial owner of ten percent (10%) of shares of the Company (pursuant to Section 16 of the Securities Exchange Act) [“Blocked Insider”] and said Blocked Insider has sold any shares of the Company within the 6 month period prior to date of such planned prepayment date as specified in the notice of prepayment given pursuant to Section 6.2.(c) above, the Company must extend the prepayment date for such Blocked Insider to10 Business Days after six months have elapse from said Blocked Insider’s latest sale or disposition of shares of the Company prior to said Blocked Insider being given notice of such planned prepayment (this limitation shall not apply to sales of shares by the

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Blocked Insider after being given notice of such planned prepayment). Said Blocked Insider may waive the extra prepayment notice time and accept the prepayment. If the Blocked Insider has not waived the extra prepayment notice time, delaying prepayment to the Blocked Insider pursuant to this section shall not be considered a violation of requirements in this Agreement that the Company treat all Class 3 Note holders without partiality.

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

SECTION 7. AFFIRMATIVE COVENANTS

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

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

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

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requested by the Majority Noteholders. Upon request, the Company shall deliver to each Purchaser copies of all or any of such insurance policies or the related certificates of insurance.

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

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

(b) as soon as available and in any event within 45 days after the end of each fiscal quarter of the Company, the Consolidated balance sheet of the Company as of the end of each such quarter and Consolidated income statement of the Company for each such quarter and for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year;

(c) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, a copy of the annual audited Consolidated financial statements of the Company for such fiscal year;

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

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

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

          The requirement that information under Sections 7.3.(b), (c), (d), and (e) be furnished to each Purchaser shall be met by the Company filing such documents with the Commission. Additionally, the Company will also provide copies of such documents to any Purchaser upon

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written request of such Purchaser.

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

          7.4. Accounting; Access to Records, Books; Etc. Maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in accordance with GAAP and to comply with the requirements of this Agreement and, at any reasonable time and from time to time, (i) permit the Agent to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, such person and to discuss the affairs, finances and accounts of such person with their respective directors, officers, employees and independent auditors, and by this provision the Company does hereby authorize the same, and (ii) permit the Agent to conduct a comprehensive field audit of its books, records, properties and assets, if there is no Event of Default or Potential Default continuing, at the Purchasers’ expense, otherwise at the Company’s expense.

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

          7.6. Use of Proceeds. The Company will use the net proceeds realized from the sale of the Notes for working capital and other general corporate purposes and to repay up to $100,000 of Old Class 3 Notes. No portion of such proceeds will be used for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying, within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time, any “margin stock” as defined in said Regulation U, or any “margin stock” as defined in Regulation G of the Board of Governors of the Federal Reserve System, as amended from time to time, or for the purpose of purchasing, carrying or trading in securities within the meaning of Regulation T of the Board of Governors of the Federal Reserve System, as amended from time to time, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase any such margin stock or other securities.

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

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notice to the holders of all Notes and Warrants then outstanding.

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

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

          7.10. Communication with Accountants. The Company hereby authorizes the Agent or Representative (on behalf of the Purchasers) to communicate directly with the independent certified public Accountants for the Company and authorizes such Accountants to disclose to the Agent any and all financial statements and any other information of any kind that they may have with respect to the assets, Properties, liabilities, business, affairs, results of operations, condition (financial or otherwise) or prospects of the Company; provided, that the Company be informed of any such disclosures and participate in any conversations between such Accountants and the Agent (and the Company agrees that it will not fail to cooperate in arranging or unreasonably delay any such conversations); and further provided that the Agent or Representative shall not incur charges from such Accountants in exercise of such rights for more than ten (10) hours per calendar year without the Company’s prior written consent. The Company shall deliver a letter addressed to such Accountants instructing them to comply with the provisions of this Section 7.10.

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

          7.12. Taxes. All payments to a holder of Notes or to a partner of a holder (or to a partner of such a partner) (any of the foregoing referred to herein as a “recipient”) of principal of, and interest on, the Notes and all other amounts payable under this Agreement and any other Loan Document shall be made free and clear of, and without deduction for, any present or future

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income, stamp or other taxes, fees, duties, withholding or other charges of any nature whatsoever imposed by any taxing authority, other than taxes imposed on or measured by the net income of such recipient (such non-excluded items being herein called “Taxes”). In the event that any withholding or deduction from any payment to be made hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Company will:

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

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

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

          7.14. Amending Articles of Incorporation to increase authorized shares outstanding. The Company agrees to request that shareholders amend its Articles of Incorporation to increase its authorized shares outstanding to Seventy (70) million shares at the next regularly scheduled annual meeting of shareholders. If the Company does not obtain approval of the shareholders for this increase in authorized shares outstanding at said annual meeting, the Company shall call a meeting every fiscal quarter thereafter to seek approval of the shareholders until such approval is obtained.

SECTION 8. NEGATIVE COVENANTS

          The Company further covenants and agrees that it will not and will not permit any Subsidiary to:

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

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

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

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          8.4. Sale or Transfer of Assets. Sell, lease, assign, transfer or otherwise dispose of any IP Collateral except in the ordinary course of business or except upon payment to the Noteholders and holders of notes issued pursuant to Other Note Purchase Agreements (as defined in Section 23 below) of 90% of the net proceeds received by the Company from the sale of such IP Collateral, up to the full amount of the Company’s Obligations to the Noteholders and holders of notes issued pursuant to Other Note Purchase Agreements, except that Class 3 Note holders and holders of notes issued pursuant to Other Note Purchase Agreements would have the option instead to convert the portion of their Class 3 Notes or notes issued pursuant to Other Note Purchase Agreements which is proposed to be repaid into the common stock of the Company with the Company retaining that portion of the proposed payment. It is agreed that the Company may place source code for software in escrow at the request of purchasers of its products without violating this Agreement.

          8.5. Amendment of Charter. Amend, modify or waive any term or provision of its corporate charter, unless required by law, except as provided herein.

          8.6. Corporate Offices; Corporate Name; Corporate Records. Transfer its executive offices or change its corporate name or maintain records (including computer printouts and programs) with respect to the IP Collateral or WC Collateral at any locations other than those at which the same are presently kept or maintained, except upon giving notice to the Noteholders and the Agent

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

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

          8.9. Limitations of dilution rights on future securities issued. From March 1, 2008 until such time as Purchasers in the aggregate hold less than one million of the Shares and No Purchaser holds any of the Notes, enter into an agreement to effect any “Subsequent Financing” involving a “Dilutive Transaction” or an “MFN Transaction” (each as defined below). The term “Subsequent Financing” shall mean any capital raising financing by the Company or any Subsidiary using Common Stock or Common Stock Equivalents. The term “Dilutive Transaction” shall mean (A) a transaction in which the Company or any Subsidiary issues or sells any note or other security, including without limitation preferred shares, convertible into Common Stock (“Convertible Securities”) which calls for the conversion price at which such Convertible Securities may be converted into Common Stock to be reduced from the conversion price specified at the time of the issuance of such Convertible Securities below $0.25 per share

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(subject to adjustment for stock splits, stock dividends and similar events after February 25, 2008), or (B) a transaction in which the Company or any Subsidiary issues or sells any warrant or other security exercisable or exchangeable into Common Stock (“Other Exercisable Securities”) which calls for the Company to issue or commit to issue more shares of its Common Stock than was specified at the time of the issuance of said Other Exercisable Securities caused by the future issuance by the Company or any Subsidiary of Common Stock, Convertible Securities, or Other Exercisable Securities convertible, exchangeable, or exercisable into Common Stock below $0.25 per share (subject to adjustment for stock splits, stock dividends and similar events after March 1, 2008). The term “MFN Transaction” shall mean a transaction in which the Company or any Subsidiay issues or sells any securities in a capital raising transaction or series of related transactions which grants to an investor the right to receive additional shares based upon future transactions of the Company on terms more favorable than those granted to such investor in such offering. Any Purchaser shall be entitled to obtain injunctive relief against the Company to preclude any such issuance, which remedy shall be in addition to any right to collect damages. The limitations in this section shall not apply to the warrants issued to the PIPE Investors (as defined in Section 4.15 above), including, without limitation, additional warrants issued to said PIPE investors pursuant to the terms or waiver of terms in said PIPE Investors’ warrants.

          8.10. Limitations of future Common Stock issuances. Issue any security which commits it to issue or potentially to issue Common Stock in excess of the limit of authorized shares outstanding at the time of the issuance of any such security. This limitation shall only apply to authorized shares outstanding above Seventy (70) million shares.

          8.11. Limitations on equity securities which may be issued under employee compensation plans. Issue restricted stock bonuses, new stock options, or link other bonus plans to the change in the price of its Common Stock to its current employees, officers, or directors (current employees, officers, or directors being defined as any individuals that were engaged in such capacities at any time from January 1, 2007 to the date at which this Agreement is effective) in the aggregate amount exceeding Two Million Eight Hundred Twenty Eight Thousand (2,828,000) issued or issuable shares of its Common Stock until all Class 2 Notes are repaid (said 2,828,000 issued or issuable share limitation shall be reduced by any such share issuances that were not made pursuant to an existing employee stock option plan since January 1, 2008 and shall also be reduced by any of the options to purchase 128,000 shares of the Company’s Common Stock at $1.065 per share that have been granted to employees pursuant to the Company’s 1995 stock option plan that are outstanding at February 8, 2008 and that are not cancelled by May 5, 2008). (This limitation does not preclude the Company from seeking shareholder approval for employee compensation plans which allow the company to issue over 2,828,000 shares, options, or issuable shares of its Common Stock prior to repaying all of its Class 2 Notes.)

          8.12. Limitations of subordinated debt issuances. Except as otherwise provided in this Agreement and until there are no Notes outstanding, issue any debt securities in a capital raising transaction which do not meet the definition of Subordinated Debt herein.

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SECTION 9.

          Intentionally Omitted

SECTION 10. CONDITIONS TO PURCHASERS’OBLIGATIONS

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

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

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

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

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

          10.5. No Change in Law, etc. No legislation, order, rule, ruling or regulation shall have been proposed, enacted or made by or on behalf of any governmental body, department or

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

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

          10.7 Related Agreements. The Company shall have delivered to the Purchasers executed copies of the Collateral Assignment, and the WC Security Agreement.

          10.8 Security Interests. All filings of UCC financing statements and all other filings and actions necessary to perfect the IP Security Interests and the WC Security Interests as valid and perfected Liens in the Property covered thereby, subject only to Permitted Liens in effect on the date hereof, shall have been filed or taken and confirmation thereof shall have been received by the Agent. All filings of UCC financing statements and all other filings and actions necessary to perfect the security interests of the Class 2 Purchasers in the WC Collateral as valid and perfected Liens in the Property covered thereby, subject only to Permitted Liens in effect on the date hereof, shall have been filed or taken and confirmation thereof shall have been received by the Representative.

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

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

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

          10.12 Other Documents and Opinions. The Purchasers shall have received such other certificates, documents and opinions, in form and substance satisfactory to the Purchasers and

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their counsel, relating to matters incident to the transactions contemplated hereby as the Purchasers may reasonably request.

SECTION 11. AMENDMENT AND WAIVER

          11.1. Amendments and Waivers. This Agreement and any Loan Document may be amended (or any provision hereof or thereof waived) only with the written consent of (i) the Majority Noteholders, and (ii) the holder or holders of Warrants or Shares representing at least a majority of the sum of the Shares then outstanding and the Shares then obtainable upon the exercise of all Warrants and conversion of Class 3 Notes then outstanding, if any; provided, however, that no such amendment or waiver shall (i) change the fixed maturity of any Note, the rate or the time of payment of interest thereon, the principal amount thereof, the premium thereon, the currency in which the Notes are payable, the prepayment provisions of Section 6 hereof, the current exercise price of a Warrant, the current conversion price of a Class 3 Note, or the registration rights under Section 17 hereof, without the consent of the holder of each Note, Warrant or Share so affected or (ii) reduce the aforesaid percentage of Notes, or reduce the aforesaid percentage of Warrants or Shares, the holders of which are required to consent to any such amendment or waiver, without the consent of the holders of all the Notes, or, as the case may be, the holders of all Warrants and Shares, then outstanding or (iii) exchange the definition of “Majority Noteholders” without the consent of the holders of all the Notes then outstanding or (iv) increase the percentage of the amount of the Notes, the holders of which may declare the Notes to be due and payable under Section 14 hereof, without the consent of the holders of all the Notes then outstanding without the consent of the holder of each Note so affected, or (v) amend any term in this Agreement and any Loan Documents (or any provision hereof or thereof waived) that does not treat all Class 2 Notes, Class 3 Notes, Warrants, or Shares then outstanding or issuable at the time of such amendment or waiver pursuant to this Agreement or previous versions of this agreement without partiality, with respect to each such class of securities respectively [for example, all such Class 2 Note amendments or waivers must be without partiality for all Class 2 Notes then outstanding or all such Class 3 Note amendments or waivers must be without partiality for all Class 3 Notes then outstanding], without the consent of the holder of each Note, Warrant or Share so affected, or (vi) amend any term in this Agreement and any Loan Documents (or any provision hereof or thereof waived) that does not treat all Notes then outstanding without partiality with respect to any applicable provision in the Collateral Assignment and/or WC Security Agreement for Notes subject to such Collateral Assignment (including, without limitation notes issued pursuant to Section 23 below) or for Notes subject to the WC Security Agreement respectively without the consent of the Noteholder so affected. Notwithstanding the above, prior to April 30, 2008, the Company is allowed to amend or waive the terms in Old Class 3 Notes in the principal amount of $100,000 without offering or granting such terms or waivers to the balance of the Old Class 3 Note holders or offering such terms to New Class 3 Note holders.

          11.2. Notice of Proposed Amendments and Waivers. The Company agrees that all holders of Notes, Warrants or Shares shall be notified by the Company in advance of any proposed amendment or waiver of any Loan Document, but failure to give such notice shall not

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in any way affect the validity of any such amendment or waiver. In addition, promptly after obtaining the written consent of the holders herein provided, the Company shall transmit a copy of any amendment or waiver which has been adopted to all holders of Notes, Warrants or Shares then outstanding, but failure to transmit copies shall not in any way affect the validity of any such Amendment or waiver.

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

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

          12.1. Exchange of Notes. Subject to Section 16 hereof, at any time at the request of any holder of one or more of the Notes to the Company at its office provided under Section 7.7 hereof, the Company at its expense (except for any transfer tax or any other tax arising out of the exchange) will issue and deliver to or upon the order of the holder in exchange therefore new Notes, in such denomination or denominations as such holder may request (which must be in denominations of no less than $ 10,000 plus one Note in a lesser denomination, if required), in aggregate principal amount equal to the unpaid principal amount of the Note or Notes surrendered and substantially in the form thereof, dated as of the date to which interest has been paid on the Note or Notes surrendered (or, if no interest has yet been so paid thereon, then dated the date of the Note or Notes so surrendered) and payable to such Person or Persons or order as may be designated by such holder. Any such new Note shall bear any notation required by Section 11 hereof.

          12.2. Exchange of Warrants. Subject to Section 16 hereof, at any time at the request of any holder of one or more of the Warrants to the Company at its office provided under Section 7.7 hereof, the Company at its expense (except for any transfer tax or any other tax arising out of the exchange) will issue and deliver to or upon the order of the holder in exchange therefore a new Warrant certificate or certificates of like tenor, in such amount or amounts as such holder may request and calling in the aggregate on the face or faces thereof for the number of Shares which are called for on the face or faces of the Warrant certificate or certificates so surrendered, and in the name of such holder or as such holder may direct. Any such new Warrant certificate shall bear any notation required this Agreement, including Exhibits herein.

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

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interest on such Note or such portion thereof and interest shall cease to accrue upon that portion of the principal amount of such Note used for such exercise or which was prepaid, and the right to receive, and any right or obligation to make, any prepayment on such portion of the principal amount pursuant to Section 6 hereof shall terminate all upon the date of such exercise or prepayment and upon presentation and surrender of such Note to the Company.

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

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

SECTION 13. REGISTRATION; REPLACEMENT OF NOTES AND WARRANTS

          13.1. Registration of Transfers. The Company shall keep a register in which provisions shall be made for the registration of the Notes and Warrants and the registration of transfers of the Notes and Warrants. The register shall be kept at the office of the Company provided under Section 7.7 hereof. Upon surrender for registration of transfer of any Note or Warrant at the office of the Company, the Company shall execute and deliver, in the name of the designated transferee or transferees, one or more new Notes or Warrants, as the case may be, of a like aggregate principal amount of Notes or number of Shares. Each new Note issued upon transfer shall be in a principal amount of at least $10,000 and in integral multiples of $10,000 and dated the date or dates to which interest on the Notes or Warrants surrendered shall have been paid. Each new Warrant issued upon transfer shall be for at least 25% of the total Warrants held by such holder and dated the date of the original Warrant. All Notes or Warrants issued upon any registration of transfer of Notes or Warrants, as the case may be, shall be the valid obligations of the Company evidencing the same respective obligations, and entitled to the same security and benefits under this Agreement and the other Loan Documents, as the Notes or Warrants surrendered upon such registration of transfer. The Company shall make a notation on each new Note of the amount of all payments of principal previously made on the old Notes with respect to which such new Note is issued and the date to which interest accrued on such old Note has been paid.

          13.2. Replacement of Notes and Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note or Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement or bond reasonably satisfactory to the Company, or in the case of any such mutilation, upon

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surrender of such Note or Warrant (which surrendered Note or Warrant shall be canceled by the Company), the Company will, without further charge, issue a new Note or Warrant, as the case may be, of like tenor in lieu of such lost, stolen, destroyed or mutilated Note or Warrant as if the lost, stolen, destroyed or mutilated Note or Warrant were then surrendered for exchange.

SECTION 14. DEFAULTS

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

          (a) the Company defaults in the payment of (A) any part of the principal of any Note or any note issued under Other Note Purchase Agreements (as defined in Section 23 below), when the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise, or (B) the interest on any Note or any note issued under Other Note Purchase Agreements (as defined in Section 23 below), when the same shall become due and payable, and such default in the payment of interest shall have continued for ten (10) days or (C) the Company fails to pay any other amount due hereunder or under any Loan Document and such default shall have continued for ten (10) Business Days after notice thereof; from the Agent;

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

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

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

          (e) One or more judgments or orders for the payment of money in an aggregate amount of $250,000 or more shall be rendered against any of the Company, or any other judgment or order (whether or not for the payment of money) shall be rendered against or shall affect Company which causes or could cause a Material Adverse Effect or which does or could have an adverse effect on the legality, validity or enforceability of this Agreement or any other Loan Document and either (i) such judgment or order shall have remained unsatisfied and the Company shall not have taken action necessary to stay enforcement thereof by reason of pending appeal or otherwise, prior to the expiration of the applicable period of limitations for taking such action or, if such action shall have been taken, a final order denying such stay shall have been rendered, or (ii) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order; provided that no final judgment shall be included in the calculation under this

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subsection to the extent that the claim underlying such judgment is covered by insurance and defense of such claim has been tendered to and accepted by the insurer without reservation.

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

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

          (h) This Agreement or any of the other Loan Documents shall, at any time after their respective execution and delivery, and for any reason, cease to be in full force and effect or shall be declared null and void, or be revoked or terminated, or the validity or enforceability thereof or hereof shall be contested by the Company or any stockholder of the Company not a party to this Agreement, or the Company shall deny that it has any further liability or obligation thereunder or

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hereunder, as the case may be.

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

SECTION 15. REMEDIES

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

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

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

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

          (d) give notice of the disposition of the IP Collateral (if allowed by law) as follows:

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

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

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

          (e) the Agent or any Noteholder may bid and purchase at any public or private sale and can offset the Company’s obligations against the purchase price; and

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

          15.2. Payment of Expenses of Enforcement and Collection. In case of a default in the,

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

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

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

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

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account debtor, all to the extent that such waiver is permitted by law. The Company also consents that the Agent may enter upon any premises owned by or leased to the Company (limited by the rights of the owner of such premises if said owner is not the Company) without obligation to pay rent or other compensation or for use and occupancy, through self help, without judicial process and without having first given notice to the Company or obtained an order of any court. These waivers and all other waivers provided for in this Agreement, the other Loan Documents and any other agreements or instruments executed in connection herewith have been negotiated by the parties and the Company acknowledges that it has been represented by counsel of its own choice and has consulted such counsel with respect to its rights hereunder.

SECTION 16. RESTRICTIONS ON TRANSFER

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

SECTION 17. REGISTRATION RIGHTS

          17.1. Piggyback Rights. Pursuant to Piggyback Rights in previous versions of this note and warrant purchase agreement, the Company filed a registration statement under the Securities Act for all Shares issued by the Company prior to April 30, 2005 and Shares issuable by the Company pursuant to securities held by Purchasers prior to April 30, 2005 (collectively here-in-after referred to as “Registered Shares”). The Company shall use its best efforts to keep such registration statement continuously effective under the Securities Act until the date when all Registered Shares covered by such registration statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Shareholders.

          If permitted by law and if the Company shall at any time propose to file a registration statement under the Securities Act for any sales of shares of the Company’s Common Stock (or any warrants, units, convertibles, rights or other securities related or linked to any shares of the Company’s Common Stock) on behalf of the Company or otherwise (that are not the Registered Shares pursuant to the above paragraph), the Company shall give written notice of such registration no later than 60 days before its filing with the Commission to all holders of Warrants, Class 3 Notes, or Shares; provided that registrations relating solely to securities to be issued by the Company in connection with any employee stock option or employee stock purchase or savings plan on Form S-8 (or successor forms) under the Securities Act shall not be

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subject to this Section 17.1. If holders of Warrants, Class 3 Notes or Shares so request within thirty (30) days of receipt of such notice, the Company shall include in any such registration the Shares held or to be held after exercise of Warrants or Class 3 Notes by such holders and requested to be included in such registration (“Subsequent Registered Shares”).

          If the Securities and Exchange Commission requires that the number of Subsequent Registered Shares of Common Stock included in a registration statement be reduced, such reduction shall be effected on a pro rata basis taking into account the number of shares of Common Stock included in such registration statement by each selling shareholder in relation to the aggregate number of shares of Common Stock included in such registration statement by all selling shareholders (including, without limitation, for such purpose shares that have been included in such registration statement pursuant to registration rights granted to the PIPE Investors); provided, however, that selling shareholders who are Affiliates of the Company shall have priority over all other selling shareholders in determining which shares are to be removed from such registration statement. For example, holders of shares or issuable shares that are eligible to be included in such registration statement that are eligible to sell shares or issuable shares pursuant to an exemption under securities laws (“Exempt Shares”) shall have such Exempt Shares removed from such registration statement so that Affiliates of the Company shall have more of their shares or issuable shares eligible to be sold pursuant to such registration statement. If there is any conflict with the provision in this paragraph with other provisions in Sections 17.2 through 17.9, the provisions in this paragraph shall take precedence and govern.

          17.2. Expenses. Subject to the limitations contained in this Section 17.2 and except as otherwise specifically provided in this Section 17, the entire costs and expenses of any registration and qualification pursuant to Section 17.1 hereof shall be borne by the Company. Such costs and expenses shall include, without limitation, the fees and expenses of counsel for the Company and of its Accountants, all other costs, fees and expenses of the Company incident to the preparation, printing and filing under the Securities Act of the registration statement and all amendments and supplements thereto, the reasonable fees and expenses of one counsel to the holders of Warrants, Class 3 Notes or Shares relating to such registration and qualification, the cost of furnishing copies of each preliminary prospectus, each final prospectus and each amendment or supplement thereto to underwriters (if any), dealers and other purchasers of the Shares and the costs and expenses (including fees and disbursements of counsel) incurred in connection with the qualification of the Shares under the securities laws of various jurisdictions. The Company shall not, however, pay underwriting fees or commissions to the extent related to the sale of Shares sold in any registration and qualification, and such fees or commissions shall be paid by the selling holders of Shares.

          17.3. Procedures.

          (a) In the case of each registration or qualification pursuant to Section 17.1, the Company will keep all holders of Warrants, Class 3 Notes, or Shares advised in writing as to the initiation of proceedings for such registration and qualification and as to the completion thereof, and will advise any such holder, upon request, of the progress of such proceedings.

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          (b) At the Company’s expense, the Company shall use its best efforts to keep each registration statement or statements registering such Subsequent Registered Shares continuously effective under the Securities Act until the date when all Subsequent Registered Shares covered by such registration statement or statements have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Share holders.

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

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

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

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

          (g) In connection with any underwritten registration of Shares under this Section 17, the Company will, if requested by the underwriters for any Shares included in such registration, enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions

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as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, provisions relating to indemnification and contribution. The holders on whose behalf Shares are to be distributed by such underwriters shall be parties to any such underwriting agreement, and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Warrants, Class 3 Notes, or Shares and the conditions precedent to the obligations of such underwriters under such underwriting agreement shall be conditions precedent to the obligations of such holders of Warrants, Class 3 Notes, or Shares. The Company shall cooperate with such holders of Warrants, Class 3 Notes, or Shares in order to limit any representations or warranties to, or agreements with, the Company or such underwriters to be made by such holders only to those representations, warranties or agreements regarding such holder, such holder’s Shares and such holder’s intended method of distribution and any other representation required by law. Such underwriting agreement shall comply with Section 17.4 hereof.

          (h) Upon request by any holder of Warrants, Class 3 Notes, or Shares who has requested that their shares be included in a registration, the Company will give such holder and their underwriters, if any, and their respective counsel and Accountants, (i) such information regarding the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, as such holder may specify, and (ii) opportunities to discuss the business of the Company with its officers, its counsel and the independent public Accountants who have certified its financial statements, as shall be necessary, in the opinion of such holders or such underwriters or their respective counsel, in order to conduct a reasonable and diligent investigation within the meaning of the Securities Act. Without limiting the foregoing, each registration statement, prospectus, amendment, supplement or any other document filed with respect to a registration under this Section 17 shall be subject to review and reasonable approval by the holders registering Shares in such registration and by their counsel.

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

          17.4. Provision of Documents. The Company will, at the expense of the Company, furnish to each holder of Warrants, Class 3 Notes, or Shares with respect to which registration has been effected, such number of registration statements, prospectuses, offering circulars and other documents incident to any registration or qualification referred to in Section 17.1 as such holder from time to time may reasonably request.

          17.5. Indemnification. The Company will indemnify and hold harmless, to the extent permitted by law, each holder of Warrants, Class 3 Notes, or Shares and any underwriter (as defined in the Securities Act) for such holder and each person, if any, who controls the holder or underwriter within the meaning of the Securities Act or the Exchange Act and each of their respective directors, officers, general partners and members against any losses, claims, damages or liabilities, joint or several, and expenses (including reasonable attorneys’ fees and expenses

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

          17.6. Periodic Payments. The indemnification provided for in Section 17.5 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred, upon the presentation by the indemnified party to the indemnifying party of a statement showing the amount of expense, loss, damage or liability for which payment is then requested.

          17.7. Indemnification Procedure. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding involving a claim referred to in Section 17.5, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 17.5 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its

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election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal fees and expenses subsequently incurred by the latter in connection with the defense thereof, unless in such indemnified party’s reasonable judgment an actual or potential conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim. The indemnifying party will not, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such indemnified party or any Person who controls such indemnified party is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability arising out of such claim, action, suit or proceeding. Notwithstanding anything to the contrary set forth herein, and without limiting any of the rights set forth above, in any event any party will have the right to retain, at its own expense, counsel with respect to the defense of a claim.

          17.8. Contribution. If the indemnification provided for in Section 17.5 is unavailable (for any reason other than a determination of its inapplicability by a court of competent jurisdiction) to hold harmless an indemnified party under such Section, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to in Section 17.5 in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand, and the indemnified party on the other, in connection with statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations, including without limitation the relative benefits received by each party from the offering of the securities covered by such registration statement, the parties’ relative knowledge and access to information concerning the matter with respect to which the claim was asserted and the opportunity to correct and prevent any statement or omission. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statements or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 17.8 were to be determined by pro rata or per capita allocation (even if the underwriters, if any, were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the first and second sentences of this Section 17.8. The Company and each holder of Warrants, Class 3 Notes, or Shares agrees with each other and any underwriters of the Shares, if requested by such underwriters, that (i) the underwriters’ portion of such contribution shall not exceed the underwriting discount and (ii) that the amount of such contribution shall not exceed an amount equal to the net proceeds actually received by such indemnifying party from the sale of securities in the offering to which the losses, liabilities, claims, damages or expenses of the indemnified parties relate. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

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

          (a) From and after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any of its Common Stock providing for the granting to such holder of demand registration rights unless such agreement includes provisions to the effect that (i) the Company will give the holders of Warrants, Class 3 Notes, and Shares notice at least thirty (30) days prior to the filing of a registration statement pursuant to the exercise of such rights and (ii) notwithstanding Section 17.1 hereof, if a holder of Warrants, Class 3 Notes, or Shares requests inclusion of Shares (whether such Shares are held directly or through the right to obtain such Shares upon the conversion of Warrants or Class 3 Notes held by such holder) and requests priority for such Shares in such registration statement within thirty (30) days after receipt of such notice, then such holder’s Shares requested to be so included will be given priority over the securities sought to be registered by the holders of such demand registration rights if marketing factors require a limitation on the number of securities to be included in such registration statement If a holder of Warrants, Class 3 Notes or Shares requests inclusion of its Shares (whether such Shares are held directly or through the right to obtain such Shares upon conversion of Warrants or Class 3 Notes held by such holder), but does not request such priority for such Shares in such registration, then such Shares shall be included in such registration statement in the manner described in Section 17.1 hereof.

          (b) From and after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any of its Common Stock providing for the granting to such holder of incidental or “piggyback” registration rights unless such agreement includes provisions to the effect that, in the case of a registered underwritten public offering of the Company’s Common Stock to which Section 17.1 hereof applies, such agreement gives the following priority to holders of Warrants, Class 3 Notes, or Shares if marketing factors require a limitation on the number of shares of Common Stock to be included in such offering the holders of Warrants, Class 3 Notes, or Shares and other holders of securities of the Company having piggyback registration rights shall have an equal right to include securities in such registration (beyond the amount to be included on behalf of the Company) in proportion to their relative holdings of shares of Common Stock of the Company (whether held directly or obtainable upon conversion or the exercise of warrants, convertible notes, or other rights).

          17.10. Registration Rights under previous versions of the Agreement. Any holders of Shares or Notes that were acquired under previous versions of this Agreement who do not accept this Agreement (“Prior Share or Note Holders”) shall retain the registration rights given such Prior Share or Note Holders under the previous version of this Agreement that such Prior Share or Note Holders received their Shares or Notes.

SECTION 18. INDEMNIFICATION; EXPENSES;

          18.1. Indemnification. Whether or not the transactions contemplated by this Agreement are consummated, the Company hereby agrees to indemnify and hold each Purchaser and each

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

          18.2. Indemnification Procedures. If any Indemnified Party is entitled to indemnification hereunder, such Indemnified Party shall give prompt notice to the Company of any claim or of the commencement of any proceeding with respect to which such Indemnified Party seeks indemnification pursuant hereto and of which such Indemnified Party knew or reasonably should have known; provided, however, that the failure so to notify the Company shall not relieve the Company from any obligation or liability except to the extent that the amount owed by the Company has been increased by such failure. The Company shall have the right, exercisable by giving written notice to an Indemnified Person within 20 Business Days after receipt of written notice from such Indemnified Person of such claim or proceeding, to assume, at its expense, the defense of any such claim or proceeding; provided, however, that an Indemnified Person shall have the right to employ separate counsel in any such claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless: (1) the Company agrees to pay such fees and expenses; or (2) the Company fails promptly to assume, or to diligently pursue, the defense of such claim or proceeding (in which case if such Indemnified Person notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense thereof, it being understood, however, that the Company shall not, in connection with any one such claim or proceeding or separate but substantially similar or related claims or proceedings in the same jurisdiction, arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for such Indemnified Person). Whether or not such defense is assumed by the Company, such Indemnified Person will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably

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withheld or delayed).

          18.3. Expenses. The Company will pay the estimated expenses incurred and anticipated to be incurred (with a limit of $30,000) by the Representative (of the Class 2 Purchasers) for due diligence out-of-pocket expenses and legal and consulting fees and expenses.

SECTION 19. DIRECT PAYMENTS

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

SECTION 20. SECURITY INTEREST

          20.1. Grant of Security Interest. The Company shall grant to the Agent for the benefit of the Purchasers and Noteholders a security interest in the IP Collateral pursuant to the Collateral Assignment.

          20.2 In addition, the Company shall grant to the Class 2 Purchasers a security interest in the WC Collateral pursuant to the WC Security Agreement.

SECTION 21. THE AGENT

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

          21.2. Fees of Agent. The Agent shall be entitled to reasonable fees for the performance

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of its duties pursuant to this Agreement, which fees shall be paid by the Company or as provided by Section 21.3 hereunder.

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

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

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

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

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

          21.8 Conflict of Interest. Noteholders hereby acknowledge that Warren Cameron Asciutto & Blackmer, P.C. operating under its new name, J.M. Warren Law Offices, P.C. (the “Initial Agent”) serves as general counsel to the Company and that certain duties of the Initial Agent could present a conflict between the interest of the Company and the interests of the Noteholders. The Initial Agent has agreed to serve as Agent as an accommodation. In the event

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of any dispute between the Company and the Noteholders, it is agreed that the Initial Agent will resign its position as Agent and that no objection will be raised regarding the Initial Agent’s representation of the Company. A Default pursuant to this Agreement shall not be deemed to be a dispute pursuant to this section unless the Company or the Majority Noteholders give notice to the Initial Agent that they deem said Default to be a dispute between the Company and the Noteholders. Notwithstanding the foregoing, the Initial Agent may elect to deem a Default as a dispute between the Company and the Noteholders in its sole discretion

          21.9. Successor Agent. The Agent may resign as Agent upon 10 days notice to the Noteholders. If the Agent resigns as Agent under this Agreement and the other Loan Documents, then the Majority Noteholders on whose behalf such Agent is acting shall appoint a successor agent for the Noteholders, whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term “Agent” shall mean such successor agent effective upon its appointment, and the former Agent’s rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any Loan Document or any holders of the Notes. After any retiring Agent’s resignation hereunder as Agent, the provisions of this Section 21 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. The Agent shall use its best efforts to notify the Company and any pre-designated Successor Agent of any such resignation; provided, however, neither the Agent nor the Purchasers shall be held liable in any respect for the failure to provide such notice; and further provided, however, that until the Company receives notice of the Agent’s resignation and of the appointment of a successor agent, the Company shall be entitled to rely upon the Agent as the Agent hereunder.

          The Majority Noteholders may also elect to remove the Agent by giving the Company, the Agent, and any pre-designated Successor Agent notice of such election which shall be effective upon 10 days notice to either the Company or the Agent. If there is no pre-designated Successor Agent, the notice from the Majority Noteholders to remove the Agent must designate a Successor Agent to be effective.

          The Majority Noteholders hereby designate The Klonoff Company, Inc., a California Corporation, to be the Successor Agent under this Agreement if, and when, the Initial Agent resigns or is removed. The Klonoff Company, Inc.’s contact information is as follows:

P. Robert Klonoff, President
The Klonoff Company, Inc.
1631 North 201^st Street
Shoreline, WA 98133

Phone: 206.533.1174          Fax: 206.533.1916

          The Majority Noteholders may also elect to remove Successor Agent by giving the Company and Successor Agent notice of such election which shall be effective upon 10 days

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notice to either the Company or the Successor Agent. Said notice from the Majority Noteholders to remove the Successor Agent must designate a new Successor Agent to be effective.

SECTION 22. NOTICES

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

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

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

          (c) if to the Company, at 49113 Wixom Tech Dr., Wixom MI 48393, Attention: Charles J. Drake, telephone: 248-668-9230, fax: 248-668-9384 or at such other address as may have been furnished in writing by the Company to the Agent, the Purchasers and the other holders of Notes or Warrants; or

          (d) if to the Agent, at 2150 Heritage Ave., Okemos, MI 48864, Attention: J. Michael Warren, telephone: 517-349-8600, fax: 517-349-3311 or at such other address as may have been furnished in writing by the Agent to the Company, the Purchasers and the other holders of Notes or Warrants.

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

SECTION 23. ADDITIONAL SECURED NOTES

          The Company intends and is explicitly authorized to issue additional notes convertible into the Common Shares of the Company which the Company intends will be granted a security interest in the IP Collateral pursuant to the Collateral Assignment to secure said notes issued under other note purchase agreements (“Other Note Purchase Agreements”). Any notes issued pursuant to Other Note Purchase Agreements can only be issued upon the payment to the Company of immediately available funds in U. S. Dollars. Any notes issued under Other Note Purchase Agreements will be secured without partiality with the Notes issued by the Company pursuant to this Fifth Amendment Agreement.

          The aggregate amounts of notes issued under Other Note Purchase Agreements and Notes

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issued under this Agreement shall not at any time exceed Six Million Dollars [$6,000,000] (excluding accrued or unpaid interest due thereon) however such $6,000,000 shall be decreased by the principal amount of any Class 3 Notes converted into the Company’s common stock subsequent to August 8, 2007 and shall also be decreased by the principal amount of any note issued under Other Note Purchase Agreements converted into the Company’s common stock.

          No notes issued under Other Note Purchase Agreements (including amendments to such notes) shall have a maturity date or require partial principal repayments prior to the latest maturity date of any Class 3 Note outstanding at the date of issuance of said notes under Other Note Purchase Agreements.

          If any notes are issued under Other Note Purchase Agreements pursuant to this section, then such noteholders shall be required to accept the Agent appointed by the Noteholders under the Agreement and be required to accept the terms relating governing said Agent’s obligations, duties, conflicts, etc. in substantially the same form as in Section 21 of this Agreement.

SECTION 24. MISCELLANEOUS

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

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

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

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

          24.5. Binding Effect and Assignment.

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

          (b) The Company may not assign any of its obligations, duties or rights under any of the Loan Documents, except pursuant to Section 8.3 hereof or with the Majority Noteholders’ consent, which shall not be unreasonably withheld.

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

          24.6. Severability. Any provision of this Agreement or of any Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereby waive any provision of law which may render any provision hereof prohibited or unenforceable in any respect.

          24.7. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Michigan (other than any conflict of laws rule which might result in the application of the laws of any other jurisdiction).

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

          24.9. WAIVER OF JURY TRIAL. THE COMPANY AND THE PURCHASERS HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY LOAN DOCUMENT, OR

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ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION. THE COMPANY AND THE PURCHASERS ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE PURCHASERS. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND THE PURCHASERS FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER

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ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT PAYMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO (OR ASSIGNMENTS OF) ANY LOAN DOCUMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL (WITHOUT A JURY) BY THE COURT.

          IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amended Agreement Agreement to be executed effective as to each Purchaser on the date indicated beside their signature on Exhibit A.

Integral Vision, Inc.

Charles J. Drake

Chairman of the Board

J.M. Warren Law Offices, P.C.

As Agent for the Purchasers

J. Michael Warren

President

(Signatures for the Purchasers appear on Exhibit A)

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EXHIBIT A
List of Purchasers

	Principal	Number	Conversion Price
Name and Address	Amount of Note	of Warrants	Per Share

-A-

EXHIBIT B

Form of Class 2 Note

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

INTEGRAL VISION, INC.
10% Secured Working Capital Class 2 Note
Due _____________

Dated ______________
Wixom, Michigan

No. __

          FOR VALUE RECEIVED, the undersigned INTEGRAL VISION, INC., a Michigan corporation (herein, together with any successor, referred to as the “Company”), hereby promises to pay to __________________________________, a ______________________ of ______________________________________, (the “Payee”) or registered assigns, the principal sum of__________________________ Dollars ($___________.00) at such time or times as the accounts receivable or the specified Letter of Credit proceeds on the following specified orders is received by the Company: __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ and shall pay in full the remaining principal amount then outstanding on the maturity date of _______________, plus interest (computed on the basis of the actual number of days elapsed over a 365-day year) on the unpaid balance of such principal sum from the date hereof at the interest rate of 10% per annum (12% per annum if the Holder has elected not to receive Class 2 Warrants) until the entire principal amount hereof shall have become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or declaration or otherwise, and at the Default Rate on any overdue installment of principal (including any overdue prepayment of principal) and on any overdue premium and (to the extent permitted by law) on any overdue installment of interest until paid. The Default Rate shall be equal to the per annum interest rate on this Note, plus four percent (4%).

          Capitalized terms not otherwise defined herein shall have the meaning ascribed thereto in the Note and Warrant Purchase Agreement dated effective as of _______________ (the “Purchase Agreement”), by and among the Company, the Agent, the Payee and the other Purchasers named therein.

          If any payment due hereunder becomes due and payable on a day which is not a Business

1

Day, the due date thereof shall be the next day which is a Business Day, and the interest payable on such next Business Day shall be the interest accruing through such actual date of payment.

          Payments of principal and interest shall be made in lawful money of the United States of America, and may be paid by check mailed, or shall be made by wire transfer, all as provided in the Purchase Agreement, to the address or account designated by the holder hereof for such purpose.

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

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

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

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

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

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

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

(Signed on the next page)

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

INTEGRAL VISION, INC.

By

Name: Charles J. Drake

Title: Chairman of the Board

3

EXHIBIT C

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

INTEGRAL VISION, INC.
Common Stock Purchase Warrant Certificate
Issued Pursuant to Class 2 Notes Dated After January 1, 2004
(and Dated prior to October 31, 2006)

Dated_______________________
Wixom, Michigan

No. _____________ ___________Shares

          FOR VALUE RECEIVED, the undersigned INTEGRAL VISION, INC., a Michigan corporation (herein referred to as the “Company”), hereby certifies and agrees that ____________________________________________________________________________________________________ ______________________________________________________________________________________________, or registered assigns, is entitled to purchase from the Company up to an aggregate of ________________________________ _________________________ duly authorized, validly issued, fully paid and nonassessable shares of the Company’s Common Stock, no par value, or any stock into which such Common Stock shall have been changed or any stock or other securities resulting from a reclassification thereof (all such shares, stock or other securities which may be purchased by this, and all other, Warrants are herein known as the “Shares”) at a purchase price per Share of the lower of (i) $_________ or (ii) the price determined according to Section 2.2(a) hereof (the “Purchase Price”) at any time and from time to time from the date hereof until 5:00 p.m. on the fourth anniversary of the date hereof. The foregoing agreement and rights are all subject to the terms, conditions and adjustments set forth below in this Warrant Certificate.

          This Warrant Certificate is one of the Common Stock Purchase Warrant Certificates (the “Warrants”, which term includes all Warrants issued in substitution therefor) originally issued in connection with the issue and sale by the Company of its 10% Secured Notes (the “Notes”). The Warrants and the Notes have been issued pursuant to the Fourth Amended Note and Warrant Purchase Agreement, as amended, dated effective as of the Closing Date for each Purchaser (the “Purchase Agreement”) among the Company and the Purchasers named therein. This Warrant is subject to the provisions, and is entitled to the benefits, of the Purchase Agreement, including,

1

without limitation, the registration rights provisions contained therein. Capitalized terms used without definition herein are as defined in the Purchase Agreement.

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

          Section 1. Exercise of Warrant.

          1.1. Manner of Exercise.

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

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

          1.2. Effective Date. Each exercise of this Warrant pursuant to Section 1.1 (a) shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant is surrendered to the Company as provided in Section 1.1 hereof (except that if such exercise is in connection with an underwritten public offering of Shares subject to this Warrant, then such exercise shall be deemed to have been effected upon such surrender of this Warrant), and such exercise shall be at the current exercise price in effect at such time. On each such day that an exercise of this Warrant is deemed effected, the Person or Persons in whose name or names any certificate or certificates for Shares are issuable upon such exercise (as provided in Section 1.3 hereof) shall be deemed to have become the holder or holders of record.

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

2

the name of and delivered to the holder hereof or such other person as such holder may direct:

          (a) a certificate or certificates for the number of Shares to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the Market Price per Share on the effective date of such exercise; and

          (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number (which may be fractional) of Shares (without giving effect to any adjustment therein) equal to the number of such Shares called for on the face of this Warrant minus the number of Shares obtained upon such exercise.

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

          1.5. Notes. The holder shall have the option, but not the obligation, upon any exercise of this Warrant, to apply to the payment required by Section 1.1 all or any part of the accrued and unpaid interest on, or principal of, any Notes at the time held by the holder. The Company will accept the amount of accrued and unpaid interest or principal, if such election is selected, in satisfaction of the exercise price for such Shares to be purchased. The holder shall have the right to apply all or any portion of such accrued and unpaid interest or principal to exercise all or any portion of this Warrant whether or not payment on the Notes is otherwise prohibited.

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

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

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writing that the transfer is so exempt, and in either case the transferor must provide an opinion from an attorney reasonably satisfactory to the Company that the requirement for the exemption have been met.

          Section 2. Current Exercise Price and Adjustments.

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

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

          (a) Anti-Dilution Adjustment. In the event the Company issues, after February 29, 2004, any common stock, or any Preferred Stock, Warrant or Note convertible into common stock, which has a share price, or any exercise or conversion rate, lower than the exercise price for this Warrant, then the exercise price for this Warrant shall be reduced to such lower rate, but in no event will the exercise price be reduced to less than $0.25 per share. This provision will not be triggered by shares issued for existing stock options under the Company’s stock option plans or for the exercise of existing Warrants.

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

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

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price shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section 2.2.

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

          Section 3. Company’s Consolidation or Merger. If the Company shall at any time consolidate with or merge into another entity (where the Company is not the continuing corporation after such merger or consolidation), the holder of a Warrant shall thereafter be entitled to receive, upon the exercise thereof in whole or in part, the securities or other property to which (and upon the same terms and with the same rights as) a holder of the number of Shares then deliverable upon the exercise thereof would have been entitled upon such consolidation or merger (subject to adjustments under Section 2.2 hereof), and the Company shall take such steps in connection with such consolidation or merger as may be necessary to assure such holder that the provisions of the Warrants and the Purchase Agreement shall thereafter be applicable in relation to any securities or property thereafter deliverable upon the exercise of this Warrant, including, but not limited to, obtaining a written acknowledgment from the continuing entity of its obligation to supply such securities or property upon such exercise and to be so bound by the Warrant and the Purchase Agreement. A sale, transfer or lease (in one, or a series of related, transactions) of all or substantially all of the assets of the Company to another person shall be deemed a consolidation or merger for the foregoing purposes.

          Section 4. Notice to Holders of Warrants.

          In case at any time:

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

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

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

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

          Section 5. Number of Shares. No adjustment of the current exercise price will increase the number of Shares which a holder will be entitled to purchase.

          Section 6. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be construed as conferring upon the holder hereof any rights as a stockholder of the Company (prior to exercise of all or a portion of this Warrant) or as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise.

          Section 7. Ownership; Transfer. The Company may treat the Person in whose name this Warrant is registered pursuant to the Purchase Agreement as the owner and holder of this Warrant for all purposes, and the Company shall not be affected by any notice to the contrary (except that the Company shall comply with the provisions of the Purchase Agreement regarding the issuance of a new Warrant or Warrants to transferees). This Warrant is transferable upon the conditions specified in the Purchase Agreement.

          Section 8. Covenants

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

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

          8.3. No Dilution or Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant. The Company will at all times in good faith assist in the carrying out of all such terms, and in the taking of all such action, as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other

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impairment. Without limiting the generality of the foregoing, the Company (a) will not permit the par value of any shares of Common Stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of the Company’s Common Stock, free from all taxes, Liens and charges with respect to the issue thereof, upon the exercise of this Warrant from time to time outstanding and (c) will not take any action which results in any adjustment of this current exercise price under this Warrant if the total number of shares of the Company’s Common Stock (or other securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock (or other securities) then authorized by the Company’s Certificate of Incorporation and available for the purpose of issue upon such exercise.

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

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

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

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

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

          Section 9. Headings. The headings and captions in this Warrant are for convenience of reference only and shall not define, limit or otherwise affect any of the terms or provisions

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hereof.

          Section 10. Governing Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of Michigan (other than any conflict of laws rule which might result in the application of the laws of any other jurisdiction).

          Section 11. Survival. The obligations of the Company under this Warrant shall survive its full exercise.

          Section 12. Definitions. Terms not otherwise defined herein are defined in the Purchase Agreement and are used herein with the same definition.

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

Integral Vision, Inc.
By:
Name: Charles J. Drake
	Title: Chairman of the Board

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EXHIBIT D

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

INTEGRAL VISION, INC.
Common Stock Purchase Warrant Certificate
Issued Pursuant to Class 2 Notes Dated After November 1, 2006

Dated_______________________
Wixom, Michigan

No. _____

__________ Shares

          FOR VALUE RECEIVED, the undersigned INTEGRAL VISION, INC., a Michigan corporation (herein referred to as the “Company”), hereby certifies and agrees that _________________________________________________________________________________________, or registered assigns, is entitled to purchase from the Company up to an aggregate of ___________________________________________________________ duly authorized, validly issued, fully paid and nonassessable shares of the Company’s Common Stock, no par value, or any stock into which such Common Stock shall have been changed or any stock or other securities resulting from a reclassification thereof (all such shares, stock or other securities which may be purchased by this, and all other, Warrants are herein known as the “Shares”) at a purchase price per Share of the lower of (i) $_________ or (ii) the price determined according to Section 2.2(a) hereof (the “Purchase Price”) at any time and from time to time from the date hereof until 5:00 p.m. on the fourth anniversary of the date hereof. The foregoing agreement and rights are all subject to the terms, conditions and adjustments set forth below in this Warrant Certificate.

          This Warrant Certificate is one of the Class 2 Common Stock Purchase Warrant Certificates (the “Warrants”, which term includes all Class 2 Warrants issued in substitution therefor) originally issued in connection with the issue and sale by the Company of its Class 2 10% Secured Notes (the “Notes”). The Warrants and the Notes have been issued pursuant to the Fourth Amended Note and Warrant Purchase Agreement, as amended, dated effective as of the Closing Date for each Purchaser (the “Purchase Agreement”) among the Company and the Purchasers named therein. This Warrant is

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subject to the provisions, and is entitled to the benefits, of the Purchase Agreement. Capitalized terms used without definition herein are as defined in the Purchase Agreement.

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

          Section 1. Exercise of Warrant.

          1.1. Manner of Exercise.

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

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

          (c) Restrictions. [The following provision shall be omitted at the request of any Purchaser made to the Company prior to issuance of the Warrant] The holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 1.1(a) or otherwise, to the extent that after giving effect to such issuance after exercise, the holder (together with the holder’s affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 9.90% of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Shares or Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of

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this Section 1.1(c), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act, it being acknowledged by holder that the Company is not representing to holder that such calculation is in compliance with Section 13(d) of the Exchange Act and holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 1.1(c) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of such holder, and the submission of a Notice of Exercise shall be deemed to be such holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by such holder) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. For purposes of this Section 1.1(c), in determining the number of outstanding shares of Common Stock, the holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the holder, the Company shall within two Trading Days confirm orally and in writing to the holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 1.1(c) may be waived by the holder, at the election of the holder, upon not less than 61 days’ prior notice to the Company, and the provisions of this Section 1.1(c) shall continue to apply until such 61^st day (or such later date, as determined by the holder, as may be specified in such notice of waiver).

          1.2. Effective Date. Each exercise of this Warrant pursuant to Section 1.1 (a) shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant is surrendered to the Company as provided in Section 1.1 hereof (except that if such exercise is in connection with an underwritten public offering of Shares subject to this Warrant, then such exercise shall be deemed to have been effected upon such surrender of this Warrant), and such exercise shall be at the current exercise price in effect at such time. On each such day that an exercise of this Warrant is deemed effected, the Person or Persons in whose name or names any certificate or certificates for Shares are issuable upon such exercise (as provided in Section 1.3 hereof) shall be deemed to have become the holder or holders of record.

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

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

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entitled, cash in an amount equal to the same fraction of the Market Price per Share on the effective date of such exercise; and

          (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number (which may be fractional) of Shares (without giving effect to any adjustment therein) equal to the number of such Shares called for on the face of this Warrant minus the number of Shares obtained upon such exercise.

          1.4. Acknowledgment of Obligation. The Company will, at the time of each exercise of this Warrant, upon the request of the holder hereof or of any Shares issued upon such exercise, acknowledge in writing its continuing obligation to afford to such holder all rights to which such holder shall continue to be entitled under this Warrant and the Purchase Agreement; provided, that if any such holder shall fail to make any such request, the failure shall not affect the continuing obligation of the Company to afford such rights to such holder.

          1.5. Notes. The holder shall have the option, but not the obligation, upon any exercise of this Warrant, to apply to the payment required by Section 1.1 all or any part of the accrued and unpaid interest on, or principal of, any Notes at the time held by the holder. The Company will accept the amount of accrued and unpaid interest or principal, if such election is selected, in satisfaction of the exercise price for such Shares to be purchased. The holder shall have the right to apply all or any portion of such accrued and unpaid interest or principal to exercise all or any portion of this Warrant whether or not payment on the Notes is otherwise prohibited.

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

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

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          Section 2. Current Exercise Price and Adjustments.

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

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

          (a) Anti-Dilution Adjustment. In the event the Company issues, after November 1, 2006, any common stock, or any Preferred Stock, Warrant or Note convertible into common stock, which has a share price, or any exercise or conversion rate, lower than the exercise price for this Warrant, then the exercise price for this Warrant shall be reduced to such lower rate, but in no event will the exercise price be reduced to less than $0.25 per share (subject to adjustment for stock splits, stock dividends and similar events after the Issue Date). This provision will not be triggered by shares or options issued to employees, officers, or directors of the Company under the Company’s stock option plans or shares issued under existing warrants or convertible notes.

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

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

5

as practicable to the provisions with respect to the Common Stock contained in this Section 2.2.

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

          (e) Exclusions from the Adjustment for Current Exercise Price. No adjustment of the current exercise price under Section 2.2 hereof shall be made as a result of or in connection with:

(i)	the issuance of Shares upon exercise of the Warrants or Class 3 Notes;
(ii)	the issuance of Warrants or Notes pursuant to this Agreement; or
(iii)	the exercise of options to purchase shares of the Company’s Common Stock pursuant to options granted to certain employees or agents of the Company pursuant to the Company’s stock option plans.

          Section 3. Company’s Consolidation or Merger. If the Company shall at any time consolidate with or merge into another entity (where the Company is not the continuing corporation after such merger or consolidation), the holder of a Warrant shall thereafter (including, without limitation, the holder of a Warrant that is blocked from exercising said warrant pursuant to Section 1.1.(c) hereof [“Blocked Holder”]) be entitled to receive, upon the exercise thereof (including, without limitation, after allowing sufficient time for the Blocked Holder to unblock and exercise said blocked Warrant) in whole or in part, the securities or other property to which (and upon the same terms and with the same rights as) a holder of the number of Shares then deliverable upon the exercise thereof would have been entitled upon such consolidation or merger (subject to adjustments under Section 2.2 hereof), and the Company shall take such steps in connection with such consolidation or merger as may be necessary to assure such holder that the provisions of the Warrants and the Purchase Agreement shall thereafter be applicable in relation to any securities or property thereafter deliverable upon the exercise of this Warrant, including, but not limited to, obtaining a written acknowledgment from the continuing entity of its obligation to supply such securities or property upon such exercise and to be so bound by the Warrant and the Purchase Agreement. A sale, transfer or lease (in one, or a series of related, transactions) of all or substantially all of the assets of the Company to another person shall be deemed a consolidation or merger for the foregoing purposes. The provision in this section shall apply regardless of whether or not there would have been sufficient number of shares of Common Stock authorized and available upon the exercise of this Warrant as of the date of such consolidation or merger (due to a temporary waiver granted the Company by the holder of this Warrant).

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          Section 4. Notice to Holders of Warrants.

          In case at any time:

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

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

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

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

          Section 5. Number of Shares. No adjustment of the current exercise price will increase the number of Shares which a holder will be entitled to purchase.

          Section 6. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be construed as conferring upon the holder hereof any rights as a stockholder of the Company (prior to exercise of all or a portion of this Warrant) or as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise.

          Section 7. Ownership; Transfer. The Company may treat the Person in whose name this Warrant is registered pursuant to the Purchase Agreement as the owner and holder of this Warrant for all purposes, and the Company shall not be affected by any notice to the contrary (except that the Company shall comply with the provisions of the Purchase Agreement regarding the issuance of a new Warrant or Warrants to transferees). This Warrant is transferable upon the conditions specified in the Purchase Agreement.

          Section 8. Covenants

          8.1. Information Requirements. The Company will provide to each holder of Warrants or Shares, promptly after the same are available, copies of each annual report, proxy or financial statement or other communication sent to the Company’s or a Subsidiary’s stockholders and copies of all annual, regular, periodic and special reports and registration statements which the Company may

7

file or be required to file with the Securities and Exchange Commission or with any securities exchange or the National Association of Securities Dealers, Inc.

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

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

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

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

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

          (b) The Company will, upon the request of the holder hereof or of any Shares, make whatever other filings with the Commission, or otherwise make generally available to the public such

8

financial and other information, as any such holder may deem reasonably necessary or desirable in order to enable such holder to be permitted to sell Shares pursuant to the provisions of Rule 144 under the Securities Act (or any successor statute, rule or regulation to Rule 144).

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

          Section 9. Headings. The headings and captions in this Warrant are for convenience of reference only and shall not define, limit or otherwise affect any of the terms or provisions

9

hereof.

          Section 10. Governing Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of Michigan (other than any conflict of laws rule which might result in the application of the laws of any other jurisdiction).

          Section 11. Survival. The obligations of the Company under this Warrant shall survive its full exercise.

          Section 12. Definitions. Terms not otherwise defined herein are defined in the Purchase Agreement and are used herein with the same definition.

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

Integral Vision, Inc.

By:

Name: Charles J. Drake

Title: Chairman of the Board

10

EXHIBIT E
Form of Class 3 Note

(defined in the Fifth Amended Agreement as Old Class 3 Notes)

No. __________________ $________________

INTEGRAL VISION, INC.
Farmington Hills, Michigan
Dated ____________
8 Percent Convertible Note
Due _____________

          Integral Vision, Inc., a Michigan corporation, (the “Corporation”), for value received, promises to pay to _________________ or registered assigns, the sum of $ _________________ on ______________, and to pay interest at the rate of 8 percent per annum with the initial interest payment due on April 1 and thereafter semiannually on the first day of July and January of each year, computed from ________________ (the “issue date”). Payment of principal and interest shall be made at the offices of the Corporation in Farmington Hills, Michigan, in lawful money of the United States of America, and shall be mailed to the registered owner or owners hereof at the address appearing on the books of the Corporation.

          This Note is one of a duly authorized issue of the Corporation’s Class 3 Notes dated as of the Closing Date for each Purchaser, all of like tenor and maturity, except variations necessary to express the number, principal amount and payee of each Note.

          1. Equal rank. All Class 3 Notes of this issue rank equally and ratably without priority over one another.

          2. Conversion. The holder or holders of this Note may at any time prior to the maturity hereof (except that, if the Corporation has called this Note for redemption, the right to convert shall terminate at the close of business on the second business day prior to the day fixed as the date for such redemption), convert the principal amount hereof into the corporation’s common stock at the conversion ratio of $_____ of Note principal for one share of common stock. To convert this Note, the holder or holders hereof must surrender the same at the office of the Corporation, together with a written instrument of transfer in a form satisfactory to the Corporation, properly completed and executed and with a written notice of conversion. No accrued interest will be payable on Notes surrendered for conversion, whether or not notice of redemption has been given by the Company.

          3. Adjustments to conversion. If the Corporation at any time pays to the holders of its common stock a dividend in common stock, the number of shares of common stock issuable

1

upon the conversion of this Note shall be proportionally increased, effective at the close of business on the record date for determination of the holders of the common stock entitled to the dividend.

          If the Corporation at any time subdivides or combines in a larger or smaller number of shares its outstanding shares of common stock, then the number of shares of common stock issuable upon the conversion of this Note shall be proportionally increased in the case of a subdivision and decreased in the case of a combination, effective in either case at the close of business on the date that the subdivision or combination becomes effective.

          If the Corporation is recapitalized, consolidated with or merged into any other corporation, or sells or conveys to any other corporation all or substantially all of its property as an entity, provision shall be made as part of the terms of the recapitalization, consolidation, merger, sale, or conveyance so that the holder or holders of this Note may receive, in lieu of the common stock otherwise issuable to them upon conversion hereof, at the same conversion ratio, the same kind and amount of securities or assets as may be distributable upon the recapitalization, consolidation, merger, sale, or conveyance with respect to the common stock.

          In the event the Corporation issues, after February 29, 2004, any common stock, or any Preferred Stock, Warrant or Note convertible into common stock, which has a share price, or an exercise or conversion rate, lower than the conversion rate for this Note, then the conversion rate for this Note shall be reduced to such lower rate, but in no event will the conversion rate be reduced to less than $0.25 per share. This provision will not be triggered by shares issued for existing employee stock options, for the exercise of existing Warrants.

          4. Fractional shares. In lieu of issuing any fraction of a share upon the conversion of this Note, the Corporation shall pay to the holder hereof for any fraction of a share otherwise issuable upon the conversion cash equal to the same fraction of the then current per share Market Price of the common stock.

          5. Forbearance from suit. No Note holder of this issue may institute any suit or proceeding for the enforcement of the payment of principal or interest unless the holders of more than 50 percent in amount of all outstanding Notes of this issue join in the suit or proceeding.

          6. Redemption.

          (a) The Company may at its option (subject to the other provisions of this Section 6) prepay all or part of the principal amount of this Class 3 Note, at a price equal to the principal amount of the Note to be prepaid plus accrued interest thereon to the date of prepayment.

          (b) The aggregate amount of each prepayment of the principal amount of affected Class 3 Notes shall be allocated among all affected Class 3 Notes, in proportion, as nearly as practicable, to the respective unpaid principal amounts of such Class 3 Notes.

2

          (c) The right of the Company to prepay Class 3 Notes pursuant to this Section 6 shall be conditioned upon its giving notice of prepayment, signed by an officer, to the holders of Class 3 Notes not less than thirty (30) days and not more than sixty (60) days prior to the date upon which the prepayment is to be made specifying (i) the registered holder of each Class 3 Note to be prepaid, (ii) the aggregate principal amount being prepaid, (iii) the date of such prepayment (which must be a Business Day), (iv) the accrued and unpaid interest (to but not including the date upon which the prepayment is to be made) and (v) that the prepayment of Class 3 Notes is being made pursuant to this Section 6. Notice of prepayment having been so given, the aggregate principal amount of the Class 3 Notes so specified in such notice, and all accrued and unpaid interest thereon, shall become due and payable on the specified prepayment date, but the right to convert any or all of the affected Class 3 Notes to Common Stock shall terminate at the close of business on the second business day prior to the date of such prepayment.

          (d) The right of the Company to prepay Class 3 Notes pursuant to this Section 6 shall be further conditioned upon either of the following being met:

(i)

fourteen months shall have elapsed from the Closing Date for each Class 3 Note affected, the Common Stock of the Company shall have been trading at an average Market Price of the greater of $1 per share or 125% of the conversion price for the Class 3 Notes being called for the four months prior to the specified prepayment date and the Common Stock receivable by the Class 3 Purchasers upon conversion of their Class 3 Notes having been eligible for public market sale, whether through registration or an exemption therefrom, for at least four months prior to the specified prepayment date; or

(ii)

the common stock of the Company shall have been trading at an average Market Price of the greater of $1 per share or 200% of the conversion price for the Class 3 Notes being called for the four month prior to the specified prepayment date and the Common Stock receivable by the Class 3 Purchasers upon conversion of their Class 3 Notes having been eligible for public market sale, through registration, for at least four months prior to the specified prepayment date.

          7. Subordination. The rights of the holder or holders of this Note to receive payment of any principal hereof or interest hereon is subject and subordinate to the prior payment of the principal of and interest on all existing or future obligations of the Corporation to any Class 1 Note issued prior to April 16, 2002 (the “Senior Indebtedness”). Upon any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, sale of all or substantially all of the assets, dissolution, liquidation, or any other marshalling of the assets and liabilities of the Corporation, or in the event this Note is declared due and payable upon the occurrence of a default as defined in this Note, then the Corporation shall not pay any amount with respect to principal and interest on this Note unless and until the principal of, and interest on, the Senior Indebtedness then outstanding is paid in full.

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          8. Registered owner. The Corporation may treat the person or persons whose name or names appear on this Note as the absolute owner or owners hereof for the purpose of receiving payment of, or on account of, the principal and interest due on this Note and for all other purposes.

          9. Release of shareholders, officers and directors. This Note is the obligation of the Corporation only, and no recourse shall be had for the payment of any principal or interest hereon against any shareholder, officer or director of the Corporation, either directly or through the Corporation, by virtue of any statute for the enforcement of any assessment or otherwise. The holder or holders of this Note, by the acceptance hereof, and as part of the consideration for this Note, release all claims and waive all liabilities against the foregoing persons in connection with this Note.

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

INTEGRAL VISION, INC.

By

Name: Charles J. Drake

Title: Chairman of the Board

5

EXHIBIT F

Form of Class 3 Note
(for notes issued after January 1, 2008)

No. _________________ $__________________

INTEGRAL VISION, INC.
Wixom, Michigan
Dated ___________
8 Percent Convertible Note
Due ____________

          Integral Vision, Inc., a Michigan corporation, (the “Corporation”), for value received, promises to pay to _________________ or registered assigns, the sum of $_________________ on ______________, and to pay interest at the rate of 8 percent per annum (365 day interest table) with the initial interest payment due on January 1, 2009 and thereafter semiannually on the first day of July and January of each year, computed from ________________ (the “issue date”). Payment of principal and interest shall be made at the offices of the Corporation in Wixom, Michigan, in lawful money of the United States of America, and shall be mailed to the registered owner or owners hereof at the address appearing on the books of the Corporation.

          This Note is one of a duly authorized issue of the Corporation’s Class 3 Notes dated as of the Closing Date for each Purchaser, all of like tenor and maturity, except variations necessary to express the number, principal amount and payee of each Note.

          1. Equal rank. All Class 3 Notes of this issuer rank equally and ratably without priority over one another.

          2. Conversion. The holder or holders of this Note may at any time prior to the maturity hereof (except that, if the Corporation has called this Note for redemption, the right to convert shall terminate at the close of business on the second business day prior to the day fixed as the date for such redemption), convert the principal amount hereof into the corporation’s common stock at the conversion ratio of $_____ of Note principal for one share of common stock. To convert this Note, the holder or holders hereof must surrender the same at the office of the Corporation, together with a written instrument of transfer in a form satisfactory to the Corporation, properly completed and executed and with a written notice of conversion. No accrued interest will be payable on Notes surrendered for conversion, whether or not notice of redemption has been given by the Company.

          [The following provision shall be omitted at the request of any Purchaser made to the

1

Company prior to issuance of the Class 3 Note] The holder shall not have the right to convert any portion of this Note, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after conversion, the holder (together with the holder’s affiliates), as set forth on the applicable Notice of Conversion, would beneficially own in excess of 4.90% of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance.

          [The following provision shall be omitted at the request of any Purchaser made to the Company prior to issuance of the Class 3 Note] The holder shall not have the right to convert any portion of this Note, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after conversion, the holder (together with the holder’s affiliates), as set forth on the applicable Notice of Conversion, would beneficially own in excess of 9.90% of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance. This paragraph shall only be applicable if the Purchaser of this Note elected to omit the paragraph immediately preceding this paragraph (the paragraph referring to the holder beneficially owning in excess of 4.90% of the shares of the Company).

          For purposes of the foregoing two paragraphs, the number of shares of Common Stock beneficially owned by the holder and its affiliates shall include the number of shares of Common Stock issuable upon the conversion of this Note with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Note beneficially owned by the holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Shares or Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act, it being acknowledged by holder that the Company is not representing to holder that such calculation is in compliance with Section 13(d) of the Exchange Act and holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2 applies, the determination of whether this Note is convertible (in relation to other securities owned by the holder) and of which a portion of this Note is convertible shall be in the sole discretion of such holder, and the submission of a Notice of Conversion shall be deemed to be such holder’s determination of whether this Note is convertible (in relation to other securities owned by such holder) and of which portion of this Note is convertible, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. For purposes of this Section 2, in determining the number of outstanding shares of Common Stock, the holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the holder, the Company shall within two Trading Days confirm orally and in writing to the holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company,

2

including this Note, by the holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 2 may be waived by the holder, at the election of the holder, upon not less than 61 days’ prior notice to the Company, and the provisions of this Section 2 shall continue to apply until such 61^st day (or such later date, as determined by the holder, as may be specified in such notice of waiver).

          3. Adjustments to conversion. The current conversion price shall be subject to adjustment, from time to time (but not below zero), as follows:

          (a) Adjustments for Stock Dividends, Recapitalization. etc. In the event the Company shall, after the Closing Date, issue any shares of Common Stock (i) by stock dividend or any other distribution upon the stock of the Company payable in Common Stock or in securities convertible into or exercisable for shares of Common Stock or (ii) in subdivision of its outstanding Common Stock, by reclassification or otherwise, the current conversion price then in effect shall be reduced proportionately; and, in like manner, in the event of any combination of shares of Common Stock, by reclassification or otherwise, the current exercise price then in effect shall be increased proportionately. An adjustment made pursuant to this Section 3(a) shall become effective retroactively immediately after the record date in the case of a dividend or other distribution and shall become effective immediately after the effective date in the case of a subdivision or combination.

          (b) Reorganization Adjustments. In case of any capital reorganization or reclassification of the capital stock of the Company (other than a change in par value or a stock split-up), the holder of this Note shall thereafter be entitled to purchase for the current exercise price the securities and property receivable upon such capital reorganization or reclassification by a holder of the number of shares of Common Stock which this Note entitled the holder hereof to purchase immediately prior to such capital reorganization or reclassification. In the event that at any time, as a result of an adjustment made pursuant to this Section 3(b), the holder of this Note shall become entitled to purchase any other securities or property other than Common Stock, thereafter the number of such other securities or property so purchasable upon exercise of this Note and the current conversion price shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section 3.

          (c) Other Adjustments. Without limiting any provisions of this Section 3 or any other provisions of this Note, in case any event shall occur as to which any of the provisions of this Section 3 are not strictly applicable but the failure to make any adjustment would not fairly protect the exercise rights represented by the Note in accordance with the intent and principles of this Section 3, the Company shall at its expense appoint a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who may be the regular auditors of the Company), and reasonably satisfactory to the majority holders of all Class 3 Notes then outstanding, which shall give their opinion upon the adjustment, if any, on a

3

basis consistent with the intent and principles established in this Section 3 necessary to preserve the economic and other rights represented by the Notes. Upon receipt of such opinion, the Company will promptly mail copies thereof to the holders of the Notes and shall make the adjustments described therein.

          4. Fractional shares. In lieu of issuing any fraction of a share upon the conversion of this Note, the Corporation shall pay to the holder hereof for any fraction of a share otherwise issuable upon the conversion cash equal to the same fraction of the then current per share Market Price of the common stock.

          5. Company’s Consolidation or Merger. If the Company shall at any time consolidate with or merge into another entity (where the Company is not the continuing corporation after such merger or consolidation), the holder of this Note shall thereafter (including, without limitation, the holder of a Note that is blocked from converting said Note pursuant to Section 2 hereof [“Blocked Noteholder”]) be entitled to receive, upon the conversion thereof (including, without limitation, after allowing sufficient time for the Blocked Noteholder to unblock and convert said blocked Note) in whole or in part, the securities or other property to which (and upon the same terms and with the same rights as) a holder of the number of Shares then deliverable upon the conversion thereof would have been entitled upon such consolidation or merger (subject to adjustments under Section 3 hereof), and the Company shall take such steps in connection with such consolidation or merger as may be necessary to assure such holder that the provisions of the Notes and the Purchase Agreement shall thereafter be applicable in relation to any securities or property thereafter deliverable upon the conversion of this Note, including, but not limited to, obtaining a written acknowledgment from the continuing entity of its obligation to supply such securities or property upon such conversion and to be so bound by the Note and the Purchase Agreement. A sale, transfer or lease (in one, or a series of related, transactions) of all or substantially all of the assets of the Company to another person shall be deemed a consolidation or merger for the foregoing purposes. The provision in this section shall apply regardless of whether or not there would have been sufficient number of shares of Common Stock authorized and available upon the conversion of this Note as of the date of such consolidation or merger (due to a temporary waiver granted the Company by the holder of this Note).

          6. Forbearance from suit. No Note holder of this issue may institute any suit or proceeding for the enforcement of the payment of principal or interest unless the holders of more than 50 percent in amount of all outstanding Notes of this issue join in the suit or proceeding.

          7. Redemption.

          (a) The Company may at its option (subject to the other provisions of this Section 7 prepay all or part of the principal amount of this Class 3 Note, at a price equal to the principal amount of the Note to be prepaid plus accrued interest thereon to the date of prepayment.

          (b) The aggregate amount of each prepayment of the principal amount of affected Class 3

4

Notes shall be allocated among all affected Class 3 Notes, in proportion, as nearly as practicable, to the respective unpaid principal amounts of such Class 3 Notes.

          (c) The right of the Company to prepay Class 3 Notes pursuant to this Section 7 shall be conditioned upon its giving notice of prepayment, signed by an officer, to the holders of Class 3 Notes not less than thirty (30) days and not more than sixty (60) days prior to the date upon which the prepayment is to be made specifying (i) the registered holder of each Class 3 Note to be prepaid, (ii) the aggregate principal amount being prepaid, (iii) the date of such prepayment (which must be a Business Day), (iv) the accrued and unpaid interest (to but not including the date upon which the prepayment is to be made) and (v) that the prepayment of Class 3 Notes is being made pursuant to this Section 7. Notice of prepayment having been so given, the aggregate principal amount of the Class 3 Notes so specified in such notice, and all accrued and unpaid interest thereon, shall become due and payable on the specified prepayment date, but the right to convert any or all of the Class 3 Notes to Common Stock shall continue to, but not including, the date of such prepayment.

          (d) The right of the Company to prepay New Class 3 Notes pursuant to this Section 7 shall be further conditioned upon the satisfaction of the following conditions:

i.	Twelve (12) months have elapsed from the Issue Date,
ii.	The Market Price for the Common Stock shall have averaged at least $0.50 per share during any period of twenty (20) consecutive Trading Days prior to the date the Company gives notice to prepay said notes, and
iii.	During such twenty consecutive Trading Days (referred to in ii above), the resale of all issuable shares underlying said notes shall have been covered by an effective registration statement or such issuable shares shall have been eligible for sale to the public pursuant to Rule 144 without limitation as to the number of shares to be sold. Notwithstanding other provisions in this Agreement that require the Company to treat all New Class 3 Notes without partiality, the Company may prepay notes under this provision [7.(d) iii] where the resale of issuable shares underlying said notes shall only have been eligible for sale to the public pursuant to Rule 144 without limitation as to the number of shares to be sold provided that the Company also offers to prepay a proportional share of the balance of New Class 3 Notes then outstanding
	The provisions of this section 7(d) shall not be applicable if the prepayment by the Company is pursuant to the sale by the Company of substantially all of its assets.

          (e)      The right of the Company to prepay Class 3 Notes (other than notes specified the Fifth Amended Agreement) pursuant to the terms in 7(d) shall be further conditioned that the Company has no Class 2 Notes outstanding at the prepayment date.

          (f)      The right of the Company to prepay Class 3 Notes outstanding that are “blocked” from being converted pursuant to Section 2 of said notes shall be subject to additional terms and

5

conditions in this section as follows:

If such “blocked” holder of a Class 3 Note is directly or indirectly, the beneficial owner of ten percent (10%) of shares of the Company (pursuant to Section 16 of the Securities Exchange Act) [“Blocked Insider”] and said Blocked Insider has sold any shares of the Company within the 6 month period prior to date of such planned prepayment date as specified in the notice of prepayment given pursuant to Section 7(c) above, the Company must extend the prepayment date for such Blocked Insider to10 Business Days after six months have elapse from said Blocked Insider’s latest sale or disposition of shares of the Company prior to said Blocked Insider being given notice of such planned prepayment (this limitation shall not apply to sales of shares by the Blocked Insider after being given notice of such planned prepayment). Said Blocked Insider may waive the extra prepayment notice time and accept the prepayment. If the Blocked Insider has not waived the extra prepayment notice time, delaying prepayment to the Blocked Insider pursuant to this section shall not be considered a violation of requirements in this Agreement that the Company treat all Class 3 Note holders without partiality.

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

          Each holder of a Class 3 Convertible Note by acceptance thereof agrees that it will not sell or otherwise dispose of any Notes or Shares unless such Notes or Shares have been registered under, or have been sold pursuant to an exemption from registration under, the Securities Act. As a condition to the Company’s obligation to issue a new Note to a transferee thereof which (x) is not a holder of a Note, the transferor must certify to the Company the facts on which the transferor is relying for such exemption or (y) is a holder of a Note, the transferor must represent to the Company in writing that the transfer is so exempt, and in either case the transferor must provide an opinion from an attorney reasonably satisfactory to the Company that the requirement for the exemption have been met.

          9. Notice to Holders of Notes.

In case at any time:

(i) the Company shall take any action which would require an adjustment in the

6

current exercise price pursuant to Section 3; or

(ii)

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

(iii)

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

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

              10. Registered owner. The Corporation may treat the person or persons whose name or names appear on this Note as the absolute owner or owners hereof for the purpose of receiving payment of, or on account of, the principal and interest due on this Note and for all other purposes.

              11. Covenants

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

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

              11.3. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note. The Company will at all times in good faith assist in the carrying out of all such terms, and in the taking of all such action, as may

7

be necessary or appropriate in order to protect the rights of the holder of this Note against impairment. Without limiting the generality of the foregoing, the Company (a) will not permit the par value of any shares of Common Stock receivable upon the exercise of this Note to exceed the amount payable therefore upon such conversion, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of the Company’s Common Stock, free from all taxes, Liens and charges with respect to the issue thereof, upon the exercise of this Note from time to time outstanding and (c) will not take any action which results in any adjustment of this current exercise price under this Note if the total number of shares of the Company’s Common Stock (or other securities) issuable after the action upon the exercise of all of the Convertible Notes and Warrants would exceed the total number of shares of Common Stock (or other securities) then authorized by the Company’s Certificate of Incorporation and available for the purpose of issue upon such exercise.

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

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

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

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

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

8

Company and its Subsidiaries which is required to be delivered by such holder to any transferee of such Warrants or Shares pursuant to such Rule 144A.

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

          13. Governing Law. This Note shall be governed by, and construed in accordance with, the laws of the State of Michigan (other than any conflict of laws rule which might result in the application of the laws of any other jurisdiction).

          14. Survival. The obligations of the Company under this Note shall survive its full conversion.

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

          16. Release of shareholders, officers and directors. This Note is the obligation of the Corporation only, and no recourse shall be had for the payment of any principal or interest hereon against any shareholder, officer or director of the Corporation, either directly or through the Corporation, by virtue of any statute for the enforcement of any assessment or otherwise. The holder or holders of this Note, by the acceptance hereof, and as part of the consideration for this Note, release all claims and waive all liabilities against the foregoing persons in connection with this Note.

9

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

INTEGRAL VISION, INC.

By

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

10

EXHIBIT G
Defaults or Potential Defaults of Other Agreements

NONE

1

EX-10.5

EXHIBIT 10(5)

INTEGRAL VISION, INC. 2008 EQUITY INCENTIVE PLAN

          Integral Vision, Inc. (“Company”) hereby establishes the Integral Vision, Inc. 2008 Equity Incentive Plan (“Plan”), effective _________, 2008.

ARTICLE I
APPROVAL AND PURPOSE

          Section 1.01. Approval of Plan. The Company’s Board of Directors approved this Plan on March 12, 2008, contingent on approval by the Company’s shareholders within 12 months following its adoption by the Board. The Company’s shareholder’s approved the Plan on _______, 2008.

          Section 1.02. Description of Plan. The Plan is designed to promote the interests of the Company and its shareholders by providing a means by which the Company can grant equity-based incentives to eligible employees of the Company or any Subsidiary as well as non-employee directors, consultants, or advisors who are in a position to contribute materially to the Company’s success (“Participants”). The Plan permits the Compensation Committee of the Company’s Board of Directors to grant Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock, and Shares, all as provided herein.

          Section 1.03. Purpose of Plan. The purpose of the Plan is to further the growth, development, and financial success of the Company by providing for stock-based incentives to Participants that align their interests more closely with those of the Company’s shareholders. The Company also believes that the Plan will assist it in its efforts to attract and retain quality employees, directors, consultants, and advisors.

ARTICLE II
DEFINITIONS AND RULES OF CONSTRUCTION

          Section 2.01. Definitions. When capitalized in this Plan, the following terms shall have the meanings specified below, unless the context otherwise requires:

          (a) “Advisor” means an individual who provides valuable services to the Company or a Subsidiary in a capacity other than as an Employee or Director.

          (b) “Agreement” means a written instrument between the Company and a Participant evidencing an Award and prescribing the terms, conditions, and restrictions applicable to the Award.

          (c) “Award” an Incentive Stock Option, a Non-Qualified Stock Option, Restricted Stock, or Shares granted pursuant to the Plan.

          (d) “Board of Directors” or “Board” means the Company’s Board of Directors, as constituted from time to time.

          (e) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

          (f) “Committee” means the committee described in Section 3.01; provided however, to the extent that the Board has not designated a Committee, “Committee” means the “Board.”

          (g) “Company” means Integral Vision, Inc.

          (h) “Director” means a director of the Company or a Subsidiary who is not also an Employee.

          (i) “Effective Date” means ________, 2008, the effective date of the Plan.

          (j) “Employee” means any individual employed by the Company or a Subsidiary, including an employee who is a member of the Board or the board of directors of a Subsidiary.

          (k) “Employer” means the Company and/or a Subsidiary.

          (l) “Exercise Price” means the price required to be paid to the Company upon the exercise of an Award.

          (m) “Fair Market Value” means, with respect to a Share on any date, as follows:

          (1) if the Shares are listed or admitted to trade and are readily tradable on a national securities exchange, the closing price of a Share on the principal national securities exchange on which the Shares are listed or admitted to trade on such date, or, if there is no trading of the Shares on such date, the closing price of a Share as quoted on the next preceding date on which there was trading in Shares;

          (2) if the Shares are not subject to paragraph (1) above, but are readily tradable on an established securities market, the closing price of a Share on such date on such market, or if there is no trading of the Shares on such date, the closing price of a Share on the next preceding date on which there was trading in Shares; and

          (3) if the Shares are not subject to paragraph (1) or (2) above, the fair market value of the Shares on such date, as determined by the Committee in a manner that satisfies the requirements of Code Section 409A and the guidance thereunder for exempt equity-based compensation.

          (n) “Grant Date” means the date on which the Committee or its designee approves the grant of an Award. Notwithstanding the preceding sentence, if the Committee grants an Option and expressly designates a future Grant Date, with the minimum per Share Exercise Price based on the Fair Market Value of a Share on that future date, such future date shall be the Grant Date.

          (o) “Incentive Stock Option” means an option for Shares granted pursuant to the Plan that satisfies the requirements of Code Section 422.

          (p) “Non-Qualified Stock Option” means an option for Shares granted pursuant to the Plan that is not an Incentive Stock Option.

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          (q) “Option” means an Incentive Stock Option or a Non-Qualified Stock Option.

          (r) “Participant” means a person to whom an Award has been granted under the Plan, provided, however, a Participant shall cease to be such at such time as all Awards granted to him under the Plan have been exercised and/or forfeited.

          (s) “Period of Restriction” means the period during which a Share of Restricted Stock is subject to restrictions and a substantial risk of forfeiture.

          (t) “Plan” means the Integral Vision, Inc. 2008 Equity Incentive Plan, as set out in this document, as amended from time to time.

          (u) “Restricted Stock” means Shares awarded pursuant to the Plan that, at the time of grant, are non-transferable and subject to a substantial risk of forfeiture.

          (v) “Prior Plan” means the Integral Vision, Inc. 2004 Stock Option Plan.

          (w) “Rule 16b-3” means Rule 16b-3 under the Securities Exchange Act of 1934, as amended.

          (x) “Separation from Service,” “Separates from Service,” or any variation of such term means, (i) in the case of an Employee, a complete termination of the employment relationship between the Employee and all Employers, (ii) in the case of a Director, termination of the Director’s service as a Director, and (iii), in the case of an Advisor, a complete termination of the contractual relationship between the Advisor and the Company and all Subsidiaries.

          (y) “Share” means a share of the Company’s common stock.

          (z) “Subsidiary” means any company that is a “subsidiary corporation” of the Company within the meaning of Code Section 424.

          Section 2.02. Rules of Construction. The following rules shall apply in construing the Plan and any Agreement:

          (a) Except as expressly provided below, the Plan, all Awards and Agreements, and all other related documents shall be governed by, and construed in accordance with, the laws of the State of Michigan without regard to conflict of law principles.

          (b) Words used in the masculine shall be construed to include the feminine gender, where appropriate, and words used in the singular or plural shall be construed as being in the plural or singular, where appropriate.

          (c) Provisions of the Plan applicable to Incentive Stock Options shall be construed to effect compliance with Code Section 422.

          (d) Captions and headings are for convenience only, and they shall not affect the construction of the Plan or any Agreement.

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          (e) Reference to any provision of the Code or other law shall be deemed to include a reference to the successor of such provision.

          (f) The Plan and the Awards are intended to comply with and shall be construed to effect compliance with, the exemptions under Rule 16b-3, in the case of Participants who are subject to Section 16 of the Securities Exchange Act of 1934; provided, however, the Company shall have no liability to any Participant for Section 16 consequences of an Award.

          (g) It is intended that Options shall qualify as performance-based compensation or otherwise be exempt from deductibility limitations under Code Section 162(m), and the Plan and the Agreements shall be construed accordingly.

          (h) It is intended that all Awards shall be exempt from the provisions of Code Section 409A, and the provisions of the Plan and all Agreements shall be construed in accordance with such intent.

          (i) If a court of competent jurisdiction holds any provision hereof invalid and unenforceable, the remaining provisions shall continue in effect, provided that the essential economic terms of the Plan and any Award can still be enforced.

ARTICLE III
ADMINISTRATION

          Section 3.01. Committee. Except as otherwise provided herein, the Plan shall be administered by the compensation committee of the Board. The Committee shall consist solely of two or more non-employee directors (within the meaning of Rule 16b-3) who are “outside directors” for purposes of Code Section 162(m) and the regulations thereunder. Any action of the Committee with respect to administration of the Plan shall be taken by a majority vote or written consent of its members.

          Section 3.02. Powers of Committee. Subject to the express provisions of the Plan and any express limitations on its authority, the Committee is authorized and empowered to administer the Plan and to (i) designate those persons who are Participants; (ii) grant Awards; (iii) determine the effective date of each Award, the number of Shares subject to the Award, and the other terms and conditions governing the Award, which terms and conditions need not be the same for each Award; (iv) interpret the Plan; (v) determine the Fair Market Value of the Shares; (vi) accelerate the time during which an Option may be exercised or the restrictions applicable to Shares of Restricted Stock shall lapse, notwithstanding any provision of the applicable Agreement; (vii) prescribe, amend, and rescind rules relating to the Plan; (viii) authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Award; (ix) determine the rights and obligations of Participants under the Plan; and (x) make all other determinations deemed necessary or advisable for the administration of the Plan. Notwithstanding the preceding provisions, the Committee is not authorized to take any action that would cause an Award to become subject to the provisions of Code Section 409A.

          Section 3.03. Binding Determinations. Subject only to compliance with the express provisions hereof, the Board and Committee may act in their sole discretion with respect to matters within their authority related to the Plan, and any action taken by, or inaction of, the

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Company, the Board, or the Committee consistent with the terms of the Plan and relating or pursuant to the Plan shall be conclusive and binding on all persons.

          Section 3.04. Reliance on Experts. In making any determination or in taking or not taking any action under the Plan, the Committee may obtain and rely upon the advice of experts, including employees of and professional advisors to the Company.

          Section 3.05. Delegation. The Committee may delegate ministerial non-discretionary functions to one or more Company officers or employees. Subject to applicable law, the Committee may delegate to the Company’s Chief Executive Officer all or part of its authority and duties with respect to the granting of Awards to individuals who are not (i) subject to the reporting and other provisions of Section 16 of the Securities Exchange Act of 1934 or (ii) covered employees within the meaning of Code Section 162(m)(3). Any delegation pursuant to this Section shall specify the duration of the delegation and limit the amount and types of Awards that may be granted pursuant thereto.

          Section 3.06. Limitations on Liability. No director, officer, or agent of the Company shall be liable for any action, omission, or decision under the Plan that is taken, made, or omitted in good faith.

ARTICLE IV
ELIGIBILITY

          The Committee shall, from time to time, designate those persons eligible to receive Awards under the Plan from among Employees, Directors, and Advisors. The Committee may grant more than one Award to any Participant. The Committee may grant Awards before shareholder approval of the Plan, provided, however, any such Award shall become null and void upon the shareholder’s failure to approve the Plan at or before the 2008 annual meeting of the Company’s shareholders.

ARTICLE V
SHARES SUBJECT TO AWARDS

          Section 5.01. Shares Available The only shares subject to Awards shall be the Company’s authorized, but unissued, or reacquired Shares. Upon the expiration or termination, in whole or in part, for any reason of an outstanding Award or any portion thereof that shall not have vested or shall not have been exercised in full, or upon the surrender of Shares as payment for an Award, any Shares subject to the Award that have not been acquired by the Participant or that are forfeited or surrendered by the Participant shall again become available for the granting of additional Awards.

          Section 5.02. Aggregate Share Limit. Subject to adjustment as provided in Section 5.05 and any limitations specified elsewhere in the Plan, the maximum number of Shares cumulatively available for issuance pursuant to Awards shall not exceed the sum of the following:

          (a) 4,828,000 Shares, plus

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          (b) any Shares covered by an Award under the Plan or option under the Prior Plan that are forfeited or remain unpurchased or undistributed upon termination or expiration of the Award or option under the Prior Plan, plus

          (c) any Shares exchanged by a Participant as full or partial payment to the Company of the Exercise Price of any Award under the Plan.

          Section 5.03. Limitation Applicable to Incentive Stock Options. The maximum number of Shares that may be delivered pursuant to Incentive Stock Options granted under the Plan is 4,828,000 Shares, subject to adjustment under Section 5.05. The only limitations on the number of Shares available for Awards other than Incentive Stock Options shall be those specified in Sections 5.02 and 5.04.

          Section 5.04. Annual Limitations on Awards to Any Participant. The maximum number of Shares subject to all Awards granted in any calendar year to a Participant shall be limited to 400,000, subject to adjustment under Section 5.05. Notwithstanding the preceding sentence, the Committee may grant an Award of up to 2,000,000 Shares to the Company’s Chief Executive Officer during the two year period beginning on the Effective Date.

          Section 5.05. Adjustments Upon Recapitalization or Reorganization. If the outstanding Shares are changed into, or exchanged for, a different number or kind of shares or securities of the Company through any capital reorganization or reclassification, or if the number of outstanding Shares is changed through a stock split or stock dividend, an appropriate adjustment shall be made by the Committee in the number, kind, and/or Exercise Price with respect to Shares as to which Awards may be granted under the Plan. A corresponding adjustment shall likewise be made in the number, kind, and/or Exercise Price for Shares with respect to which there are unexercised outstanding Awards. Any such adjustment in an outstanding Award, however, shall be made without change in the total price applicable to the unexercised portion of the Award but with a corresponding adjustment in the price for each Share covered by the Award. In making such adjustments, or in determining that no such adjustments are necessary, the Committee may rely upon the advice of counsel and accountants to the Company, and the good faith determination of the Committee shall be final, conclusive, and binding. No fractional Shares shall be issued or issuable under the Plan on account of any such adjustment. No adjustment shall be made pursuant to this Section, if it would cause an Award to become subject to Code Section 409A or would cause an Incentive Stock Option to fail to be such.

ARTICLE VI
OPTION GRANTS

          Section 6.01. Option Grants. The Committee may grant Non-Qualified Stock Options to any Employee, Director, or Advisor, and it may grant Incentive Stock Options to any Employee, in each case, as it deems appropriate. The Company may assume options granted by an organization acquired by the Company or may grant Options in replacement of, or in substitution for, any such options. Each Option shall consist of a right to purchase a specified number of Shares during a specified period and at a specified Exercise Price, all as determined by the Committee. In addition to the terms, conditions, vesting periods, and restrictions

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established by the Committee in the Agreement, each Incentive Stock Option must comply with the requirements of Code Section 422 and Section 6.03.

          Section 6.02. Terms and Conditions of Options; Agreements. Each Option shall be evidenced by an Agreement executed by the Company and the Participant, which shall contain such terms and be in such form as the Committee may from time to time approve, subject to the following limitations and conditions:

          (a) Grant and Notice of Option. The date of an Option grant shall, for all purposes, be the date on which the Committee or its designee makes the determination granting such Option, unless the Committee designates a specific future Grant Date at such time. Notice of the determination shall be given to each Participant to whom an Option is granted within a reasonable time after the Grant Date. The grant of an Option shall not obligate the Participant to exercise it.

          (b) Number of Shares. The Agreement shall state the number of Shares with respect to which each Option is granted and whether the Option is a Non-Qualified Stock Option or Incentive Stock Option.

          (c) Exercise Price. The Agreement shall state the per Share Exercise Price for the Shares subject to the Option. The per Share Exercise Price under an Option shall not be less than the Fair Market Value of a Share on the Grant Date. For Incentive Stock Options, the per Share Exercise Price shall satisfy the requirements of Section 6.03 and the provisions of the Code applicable to incentive stock options.

          (d) Exercise and Payment of Exercise Price. A Participant may exercise a vested Option by (i) giving written notice to the Company specifying the number of Shares to be purchased and accompanied by payment of the full Exercise Price therefor in cash, by check, or in such other form of lawful consideration as the Committee may approve, including without limitation and in the sole discretion of the Committee, the transfer by the Participant to the Company of outstanding Shares held by the Participant in a manner intended to comply with the provisions of Rule 16b-3, if applicable, and (ii) satisfying any other requirements set forth herein (including, without limitation, the tax withholding requirements of Article IX) or in the applicable Agreement. Any Shares delivered by the Participant in connection with the exercise of an Option must have been owned by the Participant for at least six months as of the date of delivery. Shares used to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise.

          (e) Restrictions on Grants. Notwithstanding any other provisions set forth herein or in an Agreement, no Option may be granted under the Plan after _______, 2018.

          (f) Limitations on Transfer. No Option may be assigned, transferred, or pledged, except by will or under the laws of descent and distribution. During the lifetime of a Participant, an Option may be exercised only by the Participant and may not be assigned, transferred, or pledged.

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          (g) Vesting of Options. Options shall vest based on longevity of service and/or other schedules established by the Committee, as set forth in each Agreement. The Committee may grant Options that are fully vested and exercisable at grant.

          (h) Issuance of Shares and Compliance with Securities Laws. The Company may postpone the issuance and delivery of certificates representing Shares until (i) the admission of such Shares to listing on any stock exchange on which Shares are then listed and (ii) the completion of such registration or other qualification of Shares under any state or federal law, rule, or regulation as the Company shall determine to be necessary or advisable, which registration or other qualification the Company shall use its best efforts to complete; provided, however, a person purchasing or otherwise receiving Shares pursuant to the Plan has no right to require the Company to register the Shares under federal or state securities laws at any time. Any person purchasing or otherwise receiving Shares pursuant to the Plan may be required to make such representations and furnish such information as may, in the opinion of counsel for the Company, be appropriate to permit the Company, in light of the existence or non-existence with respect to such Shares of an effective registration under the Securities Act of 1933, as amended, or any similar state statute, to issue the Shares in compliance with the provisions of those or any comparable acts.

          Section 6.03. Additional Limitations Applicable to Incentive Stock Options.

          (a) General. The limitations and conditions of this Section, in addition to the terms and conditions otherwise specified by the Plan and the Agreement, shall apply to all Incentive Stock Options.

          (b) Price. The per Share Exercise Price under an Incentive Stock Option shall be not less than the Fair Market Value of a Share on the Grant Date. In the case of an Incentive Stock Option granted to an Employee who is a 10% shareholder, the per Share Exercise Price shall be not less than one hundred ten percent (110%) of the Fair Market Value of a Share on the Grant Date.

          (c) Exercise Period. Unless terminated earlier pursuant to other terms and provisions of the Agreement or the Plan, the term of each Incentive Stock Option shall expire within the period prescribed in the Agreement relating thereto, which shall not be more than five years from the Grant Date, if the Participant is a 10% shareholder (as defined in Code Section 422(b)(6)), and not more than ten years from the Grant Date, if the Participant is not a 10% shareholder (as defined in Code Section 422(b)(6)). An Option shall not be treated as an Incentive Stock Option if it is exercisable by the Participant more than (i) three months after his termination of employment (ii), if the Participant is disabled (within the meaning of Code Section 22(e)(3)), 12 months after his termination of employment.

          (d) Maximum Exercise Rule. The aggregate Fair Market Value (determined as of the Grant Date) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year under this Plan and any other incentive stock option plan (within the meaning of Code Section 422) of the Company or any parent or subsidiary corporation of the Company shall not exceed $100,000.

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          (e) Other Restrictions. Incentive Stock Options may be granted only to employees of the Company (or a Subsidiary) that satisfy the other eligibility requirements of the Code. There shall be imposed in any Agreement relating to Incentive Stock Options such other terms and conditions as from time to time are required for the Option be an “incentive stock option” within the meaning of Code Section 422.

          Section 6.04. Termination of Options.

          (a) Each Option granted under the Plan shall set forth a termination date, which shall be not later than ten years from the Grant Date, subject to earlier termination as set forth in this Plan or the Agreement.

          (b) The Committee shall establish the effect of a Separation from Service on the rights and benefits under each Option and in so doing may make distinctions based upon, among other factors, the cause of Separation from Service. Following Separation from Service, an Option may be exercised only in accordance with the applicable Agreement and, unless otherwise expressly provided by the Committee, only with respect to that number of Shares for which the Option could have been exercised by the Participant on the date of Severance from Service.

          (c) The Committee may cancel any unexpired Options at any time, if the Participant is not in compliance with all applicable provisions of the Plan or with any Agreement, or if the Participant, whether or not he is currently employed by an Employer, engages in any of the following activities without the prior written consent of the Employer:

      (1) directly or indirectly renders services to or for an organization, or engages in a business, that is, in the judgment of the Committee, in competition with the Employer; or

      (2) discloses to anyone outside of the Employer, or uses for any purpose other than the Employer’s business, any confidential or proprietary information or material relating to the Employer, whether acquired by the Participant during or after employment with the Employer.

The Committee may, in its discretion and as a condition to the exercise of an Option, require a Participant to acknowledge in writing that he is in compliance with all applicable provisions of the Plan and of any Agreement and has not engaged in any activities referred to in clauses (1) and (2) above.

          (d) Subject to Section 6.06, (i) upon the dissolution, liquidation, or sale of all or substantially all of the business, properties, and assets of the Company, (ii) upon any reorganization, merger, consolidation, sale, or exchange of securities in which the Company does not survive, (iii) upon any sale, reorganization, merger, consolidation, or exchange of securities in which the Company does survive and any of the Company’s shareholders have the opportunity to receive cash, securities of another corporation, partnership, or limited liability company and/or other property in exchange for their capital stock of the Company, or (iv) upon any acquisition by any person or group (as defined in Section 13d of the Exchange Act) of beneficial ownership of more than 50% of the then outstanding Shares (each of the events described in clauses (i), (ii),

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(iii) or (iv) is referred to herein as an “Extraordinary Event”), the Plan and each outstanding Option shall terminate, subject to any provision that has been made by the Committee through a plan of reorganization or otherwise for the substitution, assumption, settlement, or other continuation of the Options. If Options are to terminate (with no substitution, assumption, settlement, or other continuation) in such circumstances, each Participant shall have the right, by giving notice at least ten days before the effective date of the Extraordinary Event (“Effective Date”), to exercise on or before the Effective Date, in whole or in part, any unexpired Option issued to the Participant, to the extent that the Option is vested and exercisable as of the Effective Date.

          Section 6.05. Rights as a Shareholder. Unless otherwise provided by the Board or the Committee, a Participant shall have rights as a shareholder with respect to Shares covered by an Option, including voting rights or rights to dividends, only upon the date of issuance of a certificate to him and, if payment is required, only after payment if full has been made for such Shares.

          Section 6.06. Acceleration of Options.

          (a) Notwithstanding the preceding provisions of this Article or any provision to the contrary contained in a particular Agreement, the Committee, in its sole discretion, may accelerate the vesting and exercisability of all or any portion of any Option then outstanding. The decision by the Committee to accelerate an Option or to decline to accelerate an Option shall be final. In the event of the acceleration of the exercisability of Option as the result of a decision by the Committee pursuant to this Section, each outstanding Option so accelerated shall be exercisable for a period from and after the date of such acceleration and upon such other terms and conditions as the Committee may determine in its sole discretion, provided that such terms and conditions (other than terms and conditions relating solely to the acceleration of exercisability and the related termination of an Option) may not materially adversely affect the rights of any Participant without the consent of that Participant. Any outstanding Option that has not been exercised by the holder at the end of such period shall terminate automatically at that time.

          (b) If the vesting of an Option has been accelerated in anticipation of an event, and the Committee or the Board later determines that the event will not occur, the Committee may rescind the effect of the acceleration as to any then outstanding and unexercised or otherwise unvested Options.

          Section 6.07. Substitute Options. If the Company at any time should succeed to the business of another entity through a merger, consolidation, corporate reorganization or exchange, or through the acquisition of stock or assets of such entity or its subsidiaries or otherwise, the Committee may grant Options under the Plan to option holders of such entity or its subsidiaries, in substitution for options to purchase shares in such entity held by them at the time of succession. The Committee, in its sole and absolute discretion, shall determine the extent to which such substitute Options shall be granted (if at all), the person or persons to receive such substitute Options (who need not be all option holders of such entity), the number of Options to be received by each such person, the exercise price of such Option, and the other terms and conditions of such substitute Options.

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ARTICLE VII
RESTRICTED STOCK

          Section 7.01. Grants of Restricted Stock. Subject to the terms and provisions of the Plan, including Article V, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to any Employee, Director, or Advisor in such amounts as the Committee, in its sole discretion, shall determine.

          Section 7.02. Restricted Stock Award Agreement. Each Award of Restricted Stock shall be evidenced by an Agreement, which shall specify the Period of Restriction, the number of Shares granted, and the terms and conditions of the Award.

          Section 7.03. Restrictions on Transferability. Except as provided in herein, Shares of Restricted Stock may not be assigned, transferred, or pledged, whether by operation of law and whether voluntarily or involuntarily, until the end of the applicable Period of Restriction.

          Section 7.04. Other Restrictions. The Committee, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate in accordance with this Article. Such restrictions may be based upon any one or more of the following criteria: (i) the achievement of specific performance targets, (ii) vesting based on period of service with the Company and any of its Subsidiaries, (iii) applicable federal or state securities laws, or (iv) any other basis determined by the Committee, in its sole discretion.

          Section 7.05. Legend on Certificates. The Committee, in its sole discretion, may require the placement of a legend on certificates representing Shares of Restricted Stock to give appropriate notice of such restrictions. For example, the Committee may determine that some or all certificates representing Shares of Restricted Stock shall bear the following legend:

THE SALE, PLEDGE, OR OTHER TRANSFER OF THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE, WHETHER VOLUNTARY, INVOLUNTARY, OR BY OPERATION OF LAW, IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER UNDER FEDERAL AND STATE SECURITIES LAWS AND UNDER THE INTREGRAL VISION, INC. 2008 EQUTY INCENTIVE PLAN, AS SET FORTH IN AN AWARD AGREEMENT EXECUTED THEREUNDER. A COPY OF SUCH PLAN AND SUCH AWARD AGREEMENT MAY BE OBTAINED FROM THE CORPORATE SECRETARY OF INTEGRAL VISION, INC.

          Section 7.06. Removal of Restrictions. Except as otherwise provided in this Article, as soon as practicable after the applicable Period of Restriction lapses, Shares of Restricted Stock covered by an Award shall be subject to release to the Participant in accordance with the terms of the Award. The Committee, in its sole discretion, may accelerate the time at which any restrictions shall lapse or remove any restrictions.

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          Section 7.07. Voting Rights. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the applicable Award Agreement provides otherwise.

          Section 7.08. Return of Restricted Stock to Company. On the date set forth in the applicable Agreement, the Restricted Stock for which restrictions have not lapsed by the last day of the Period of Restriction shall revert to the Company and thereafter shall be available for the grant of new Awards.

          Section 7.09. Termination of Service. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant Terminates Service during the Period of Restriction, Shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and thereafter shall be available for the grant of new Awards; provided, however, that the Committee shall have the sole discretion to waive, in whole or in part, any or all remaining restrictions with respect to any or all of such Participant’s Shares of Restricted Stock.

          Section 7.10. Issuance of Shares and Compliance with Securities Laws. The Company may postpone the issuance and delivery of certificates representing Shares until (i) the admission of such Shares to listing on any stock exchange on which Shares are then listed and (ii) the completion of such registration or other qualification of Shares under any state or federal law, rule, or regulation as the Company shall determine to be necessary or advisable, which registration or other qualification the Company shall use its best efforts to complete; provided, however, a person purchasing or otherwise receiving Shares pursuant to the Plan has no right to require the Company to register the Shares under federal or state securities laws at any time. Any person purchasing or otherwise receiving Shares pursuant to the Plan may be required to make such representations and furnish such information as may, in the opinion of counsel for the Company, be appropriate to permit the Company, in light of the existence or non-existence with respect to such Shares of an effective registration under the Securities Act of 1933, as amended, or any similar state statute, to issue the Shares in compliance with the provisions of those or any comparable acts.

ARTICLE VIII
SHARE GRANTS

          Subject to the provisions of the Plan, including Article V and this Section, the Committee may make an Award of Shares to any Employee, Director, or Advisor in such amount as the Committee, in its sole discretion, may determine. A grant pursuant to this Section may be evidenced by an Agreement or such other documents as the Committee, in its sole discretion, determines to be appropriate. Awards of shares pursuant to this Section shall be subject to the withholding requirements of Article IX.

ARTICLE IX
WITHHOLDING OF TAXES

          The Company (or a Subsidiary) may deduct and withhold from the wages, salary, bonus, and other income paid by the Company (or Subsidiary) to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the

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exercise in whole or in part of any Option, lapse of restrictions on Restricted Stock, grant of Shares, or sale of Shares issued to the Participant upon the exercise of an Option, as may be required from time to time under any federal or state tax laws and regulations. This withholding of tax shall be made from the Company’s (or Subsidiary’s) concurrent or next payment of wages, salary, bonus, or other income to the Participant or by payment to the Company by the Participant of the required withholding tax, as the Committee may determine; provided, however, that, in the sole discretion of the Committee, the Participant may pay such tax by reducing the number of Shares issued upon exercise of an Option, lapse of restrictions, or award of Shares (for which purpose such Shares shall be valued at Fair Market Value at such time). Notwithstanding the foregoing, the Company shall not be obligated to issue certificates representing the Shares to be acquired through the exercise of an Option or grant of an Award, if the Participant fails to provide the Company with adequate assurance that the Participant will pay such amounts to the Company as required herein. Participants shall notify the Company in writing of any amounts included as income in the Participants’ federal income tax returns in connection with an Award. Any Shares or cash withheld by the Company to satisfy a Participant’s withholding tax obligation in connection with an Award shall not exceed the number of Shares or amount of cash necessary to satisfy the minimum required levels of withholding under applicable law.

ARTICLE X
COMPLIANCE WITH LAWS

          Section 10.01. General. The Plan, the granting and vesting of Awards under the Plan, and the offer, issuance, and delivery of the Shares to Awards are subject to compliance with all applicable federal and state laws, rules, and regulations (including but not limited to state and federal securities laws and federal margin requirements) and to such approvals by any listing, regulatory, or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. A person acquiring any securities under the Plan shall, if requested by the Company, provide such assurances and representations to the Company as the Committee may deem necessary or desirable to assure compliance with all applicable legal and accounting requirements.

          Section 10.02. Compliance with Securities Laws. No Participant shall sell, pledge, or otherwise transfer Shares acquired pursuant to an Award or any interest in such Shares except in accordance with the express terms of the Plan and the applicable Agreement. Any attempted transfer in violation of this Section shall be void and of no effect. Without in any way limiting the provisions set forth above, no Participant shall make any disposition of all or any portion of Shares acquired or to be acquired pursuant to an Award, except in compliance with all applicable federal and state securities laws. Notwithstanding anything else herein to the contrary, the Company has no obligation to register the Shares or file any registration statement under either federal or state securities laws.

ARTICLE XI
TERMINATION OF PLAN

          The Plan shall terminate at the close of business on _______, 2018, provided, however, the Board may, in its sole discretion, terminate the Plan at any prior time. Subject to Sections

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6.04 and 6.06, no such termination shall in any way affect any Award then outstanding or the Committee’s authority hereunder with respect to such Award.

ARTICLE XII
AMENDMENT OF PLAN

          Subject to Article VI, the Committee may make such amendments to the Plan and/or an Agreement as it shall deem advisable; provided, however, except as permitted by Article VI, no amendment shall materially adversely affect any Award then outstanding without the written consent of the affected Participant. Adjustments contemplated by Section 5.05 shall not be deemed to be amendments for purposes of the foregoing. Shareholder approval for any amendment shall be required only to the extent required under applicable law, including Code Section 162(m) and Code Section 422 and other provisions of the Code applicable to incentive stock options, or to the extent deemed necessary or advisable by the Board.

ARTICLE XIII
INDEMNIFICATION

          In addition to such other rights of indemnification as they may have as members of the Board, the members of the Committee shall be indemnified by the Company to the fullest extent permitted by law against reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit, or proceeding, or in connection with any appeal thereof, to which they or any of them may be a party by reason of any act or failure to act under or in connection with the Plan or any Award, and against all amounts paid by them in satisfaction of a judgment in any such action, suit, or proceeding except in relation to matters as to which it shall be adjudged in such action, suit, or proceeding that such Committee member is not entitled to indemnification under applicable law; provided, however, within 60 days after institution of any such action, suit, or proceeding, such Committee member shall in writing offer the Company the opportunity, at the Company’s expense, to handle and defend the same, and such Committee member shall cooperate with and assist the Company in the defense of any such action, suit, or proceeding. The Company shall not be obligated to indemnify any Committee member with regard to the settlement of any action, suit, or proceeding to which the Company did not give its prior written consent.

ARTICLE XIV
NOT AN EMPLOYMENT OR CONSULTING AGREEMENT

          Nothing contained in the Plan or in any Agreement shall confer, intend to confer, or imply any right of employment or right to continued employment by, or rights to a continued relationship with, the Company (or any affiliate) in favor of any Participant or limit the ability of the Company (or any affiliate) to terminate, with or without cause, in its sole and absolute discretion, the employment or other relationship between the Company and the Participant, subject to the terms of any written agreement between the Company and the Participant. In addition, nothing contained in the Plan or in any Agreement shall preclude any lawful action by the Company or the Board. Status as an eligible person under the Plan shall not be construed as a commitment that any Award will be granted to the eligible person.

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ARTICLE XV
MISCELLANEOUS

          Section 15.01. Non-Exclusivity of Plan. Nothing in the Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant options or authorize any other compensation, with or without reference to the Shares, under any other plan or independent authority.

          Section 15.02. No Restriction on Corporate Powers. The existence of the Plan and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Company’s capital stock or the rights thereof, the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding.

          Section 15.03. No Fiduciary Duties. Neither the provisions of this Plan (or of any related documents), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant or other person.

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EX-14

EXHIBIT 14

INTEGRAL VISION, INC.
CODE OF ETHICS

Integral Vision, Inc. (the “Company”) has adopted this Code of Ethics (this “Code”). The CEO and all senior financial officers, including the CFO and principal accounting officer or controller, are expected to abide by this Code and the provisions set forth herein relating to ethical conduct, conflicts of interest and compliance with law, as well as all business conduct standards and policies relating to areas covered by this Code which may be adopted by the Board of Directors (the “Board”) from time to time.

The CEO, CFO and other senior financial officers have a special role both to adhere to the principles of integrity and also to ensure that a culture exists throughout the Company as a whole that ensures the fair and timely reporting of the Company’s financial results and conditions. Because of this special role, the CEO, CFO, and all senior financial officers each agrees that he/she will:

- Act with honesty and integrity, and avoid conflicts of interest in his or her personal and professional relationships that may conflict with the interests of the Company or make it difficult to perform his or her Company-related work objectively and effectively; provided, however, that certain actual or apparent conflicts of interest shall be permissible if the contract, transaction, relationship or interest is disclosed or made known to the Board or the shareholders of the Company prior to such event, which in good faith authorizes, approves, or ratifies the contract, transaction, relationship or interest in accordance with the bylaws of the Company.

- Provide information that is accurate, complete, objective, relevant, timely and understandable to ensure full, fair, accurate, timely, and understandable disclosure in the reports and documents that the Company files with, or submits to, government agencies and in other public communications. Seek to involve the audit committee of the Company and/or external auditors to resolve ambiguity in terms of determining applications of accounting principles and/or reviewing significant accounting estimates.

- Establish and maintain internal controls and procedures and disclose controls and procedures designed to assure that financial information is recorded, processed and transmitted to those responsible for preparing periodic reports and other public communications containing financial information so that they are complete, accurate and timely. Oversee the appropriate personnel to help ensure that the internal controls and procedures and disclosure controls and procedures are being followed. Consult with independent auditors and legal counsel from time to time regarding new regulatory pronouncements that may require additional controls and establish such additional controls as may be appropriate.

- Respect the confidentiality of information acquired in the course of his or her work. Disclosure of confidential information to those outside of the Company is not permitted, except when authorized by the Board or otherwise legally obligated to disclose as advised by legal counsel. Confidential information acquired in the course of his or her work will not be used for personal advantage.

- Comply with the rules and regulations of federal, state and local governments, and other appropriate private and public regulatory agencies.

- Be responsible for abiding by this Code. Promptly bring to the attention of the audit committee and company counsel any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business or of a violation of this Code.

The Board shall determine, or designate appropriate persons to determine appropriate actions to be taken in the event of violations of this Code by the CEO and the Company’s senior financial officers. Such actions shall be

reasonably designed to deter wrongdoing and to promote accountability for adherence to the Code, and may include written notices to the individual involved that the Board has determined that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits, and termination of the individual’s employment. In determining what action is appropriate in a particular case, the Board or its designee will take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual involved had been advised prior to the violation as to the proper course of action, and whether or not the individual in question had committed other violations in the past.

It is the Company’s intention that this Code be its written code of ethics under Section 406 of the Sarbanes-Oxley Act of 2002 complying with the standards set forth in Securities and Exchange Commission Regulation S-B Item 406.

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement 333-113519 on Form S-8 dated March 11, 2004, Registration Statement 33-61977 on Form S-8 dated August 21, 1995, Registration Statement 33-61979 on Form S-8 dated August 21, 1995, Registration Statement 33-12571 on Form S-8 dated March 11, 1987 and Registration Statement 33-593 on Form S-8 dated October 1, 1985, of our report dated March 31, 2008, with respect to the balance sheet as of December 31, 2007 and the statements of operations, stockholders’ deficit and cash flows for each of the two years ended December 31, 2007, of Integral Vision, Inc. included in the Annual Report (Form 10-KSB) for the year ended December 31, 2007.
	/S/ Rehmann Robson, P.C.
Troy, Michigan March 31, 2008

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Charles J. Drake, certify that:
1.      I have reviewed this annual report on Form 10-KSB 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 small business issuer as of, and for, the periods presented in this report;
4.      The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer 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 small business issuer, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the small business issuer’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;
	d)	Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and
5.      The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of small business issuer’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 small business issuer’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 small business issuer’s internal control over financial reporting.

Date:	March 31, 2008
		/S/ Charles J. Drake
		Charles J. Drake Chief Executive Officer

39

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Mark R. Doede, certify that:
2.      I have reviewed this annual report on Form 10-KSB of Integral Vision, Inc.;
6.      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;
7.      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 small business issuer as of, and for, the periods presented in this report;
8.      The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
	e)	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 small business issuer, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	f)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	g)	Evaluated the effectiveness of the small business issuer’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;
	h)	Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and
9.      The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of small business issuer’s board of directors (or persons performing the equivalent function):
	c)	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 small business issuer’s ability to record, process, summarize and report financial information; and
	d)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date:	March 31, 2008
		/S/ Mark R. Doede
		Mark R. Doede Chief Financial Officer

40

EX-32.1

EXHIBIT 32.1

CERTIFICATION

          Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §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 Annual Report on Form 10-KSB for the year ended December 31, 2007 (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:	March 31, 2008
		/S/ Charles J. Drake
		Charles J. Drake Chairman of the Board and Chief Executive Officer

41

EX-32.2

EXHIBIT 32.2

CERTIFICATION

          Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §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 Annual Report on Form 10-KSB for the year ended December 31, 2007 (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:	March 31, 2008
		/S/ Mark R. Doede
		Mark R. Doede President, Chief Operating Officer, and Chief Financial Officer

42