This paper presents an overall image processing approach of defect inspection of patterned TFT-LCD panels for the real manufacturing process. A prototype of AOI(Automatic Optical Inspection) system which is composed of air floating stage and multi line scan cameras is developed. Adjacent pattern comparison algorithm is enhanced and used for pattern elimination to extract defects in the patterned image of TFT-LCD panels. New region merging algorithm which is based on border expansion is proposed to identify defects from the pattern eliminated defect image. Experimental results show that a developed AOI system has acceptable performance and the proposed algorithm reduces environmental effects and processing time effectively for applying to the real manufacturing process.