INTEGRAL VISION INC

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 the three months and six months ended June 30, 2012, sales to Qualcomm represented 100% of our total net sales for each period, Approximately $95,000 was due from Qualcomm at June 30, 2012.

From November 2006 through August 16, 2012, we have used $10,417,980 of Class 2 and Class 3 Notes to fund operations. $4,953,632 are Class 3 Notes, all of which are in default as of August 16, 2012. $5,464,348 are Class 2 Notes, $1,603,542 of which are in default as of August 16, 2012. We have $445,729 of over 90 days in accounts payable as of June 30, 2012 ($585,282 as of August 31, 2012). We have been unable to sell additional notes under the Agreement since July 26, 2012. We have begun the process of seeking alternative sources of capital to fund our operating expenses and working capital needs. However, there can be no assurance that the Company will raise funding sufficient to continue operating as a going concern. Raising additional capital will likely require a restructuring of the existing debt and equity of the Company. The Company needs to finalize negotiations with the note holders to allow outside cash and find additional cash within the next 30 days or it will have no funds available for operations. The Company has retained an investment banking firm to assist with the debt restructuring and the raising of new capital and interim financing.

As of August 14, 2012, the Company was finalizing ongoing negotiations with Qualcomm who requested that the Company delay shipment of $667,500 of orders it previously made. The Company anticipates that it will be able to retain the down payment on these orders to cover the expense of work already performed, which will mitigate the financial impact of the delay. Final delivery dates for the delayed orders have not been specified. The lack of clarity regarding an ultimate delivery date, and uncertainty regarding new orders from this customer, have partly contributed to the Company’s difficulties in raising additional funding. While the Company still anticipates that additional material orders will be forthcoming from this customer, we do not know if or when such additional material orders will actually be made. We do, however, anticipate receiving smaller orders from such customer over the next several months.

Net cash used in operating activities was $793,000 for the six-month period ended June 30, 2012, compared to $790,000 for the first six months of 2011. Operating cash flow for both periods primarily reflected net losses of $1,076,000 for 2012 and $1,598,000 for 2011 adjusted for non-cash charges and changes in working capital. Working capital changes in the first six months of 2012 primarily reflected an increase in accounts receivable, both trade and employee, as a result of payments not received and loans made to employees, a decrease in inventory as a result of decreases in finished goods and our increased sales, and a decrease in other current assets as a result of timing of expense recognition. We realized an increase in accounts payable and other current liabilities as a result of insufficient cash to make payments. Accrued interest increased as a result of the issuance of additional debt and the default interest rate in effect on the defaulted Class 2 and Class 3 Notes. Customer deposits decreased as a result of sales orders shipped. Deferred revenue decreased as a result of shipped systems that had received final customer acceptance by the end of the period. Working capital changes in the first six months of 2011 primarily reflected an increase in accounts receivable, both trade and employee, as a result of payments not received and loans made to employees, an increase in inventory as a result of increases in finished goods, partially offset by a decrease in other current assets as a result of timing of expense recognition We realized an increase in accounts payable and other current liabilities as a result of insufficient cash to make payments. Accrued interest increased as result of the issuance of additional debt and and the default interest rate in effect on the defaulted Class 2 and Class 3 Notes. Customer deposits increased as a result of sales orders received. Deferred revenue increased as a result of shipped systems that had not received final acceptance by the end of the period.

As of August 14, 2012, the Company was near completion of negotiations with a significant customer that requested the Company delay shipment of certain material orders. The company anticipates that the negotiations will result in the company being able to retain down payments already made for the orders to cover the expense of work already done. Final delivery dates for the delayed orders have not been specified. While the Company still anticipates that additional material orders will be forthcoming from this customer, we do not know if or when such additional material orders will actually be made. We do, however, anticipate receiving smaller orders from such customer over the next several months.