**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

**FORM10-KSB**

**x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THESECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended October 31,2006**

**Commission File Number:  0-11518**

**PPTVISION, INC.**

(Name of Small Business Issuer in its Charter)

| **MINNESOTA**                                                    |   | **41-1413345**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**12988Valley View Road**

**EdenPrairie, MN  55344**

(Address ofprincipal executive offices, including zip code)

 

Registrant’stelephone number, including area code:  **(952)996-9500**

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**(1) Common Stock $.10 par value (2)Preferred Stock Purchase Rights**

Checkwhether the issuer is not required to file reports pursuant to Section 13 or15(d) of the Exchange Act o

Checkwhether the issuer (1) has filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.  YES    x    NO    o

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB.  x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). YES   o   NO   x

Stateissuer’s revenues for its most recent fiscal year: $5,693,000

Theaggregate market value of the voting stock held by nonaffiliates of the issuer(based on the closing sale price of its stock as reported by the OTC BulletinBoard) as of December 4, 2006 was $638,000.

**DOCUMENTSINCORPORATED BY REFERENCE**

The information called for by Part III of this Form10-KSB will be incorporated by reference from the definitive proxy statementfor the annual meeting of shareholders to be held on March 8, 2007.

 

----

**PART I**

This Annual Report on Form 10-KSB containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, includingstatements regarding PPT VISION, Inc.’s expectations, beliefs, intentions andstrategies regarding the future. Forward-looking statements include, withoutlimitation, statements regarding the extent and timing of future revenues andexpenses and customer demand. All forward-looking statements included in thisdocument are based on information available to the Company as of the datehereof, and the Company assumes no obligation to update any forward-lookingstatements.

The Company’s actual results are subject to risks anduncertainties and could differ materially from those discussed in theforward-looking statements. These statements are based upon the Company’sexpectations regarding a number of factors, including the Company’s ability toobtain additional working capital if necessary to support its operations,changes in worldwide general economic conditions, cyclicality of capitalspending by customers, the Company’s ability to keep pace with technologicaldevelopments and evolving industry standards, worldwide competition, and theCompany’s ability to protect its existing intellectual property from challengesfrom third parties. A detailed description of the factors that could causefuture results to materially differ from the Company’s recent results or thoseprojected in the forward-looking statements are contained in the section ofthis Form 10-KSB entitled “Important Factors Regarding Forward-LookingStatements.”

During the fourth quarter of fiscal 2004, weimplemented a revised operating strategy that called for a total focus of ourresources on our core 2D machine vision business. Accordingly, we initiated andcompleted the sale of our 3D business unit, and all the related patents,intellectual property, inventory and equipment. The results of our 3D businessare presented in our financial statements as “discontinued operations.” Ourcontinuing operations represent our 2D business only. All references tofinancial information and description of business in this Form 10-KSB refer toour continuing operations.

**Item 1. DESCRIPTION OF BUSINESS**

**CORPORATE PROFILE**

PPT VISION, Inc. (“theCompany”) designs, manufactures, and markets machine vision based intelligentcameras used for automated inspection, measurement, and guidance applicationsin the manufacturing marketplace.  TheCompany’s IMPACTTM intelligent camera product line enables manufacturers torealize significant economic paybacks by increasing the quality of manufacturedparts and improving the productivity of manufacturing processes. The Company’sIMPACT intelligent camera product line is sold through a global network ofdistribution and integration partners to end-user manufacturers, originalequipment manufacturers, and manufacturing machine builders, in a wide varietyof manufacturing markets including electronics, automotive, medical device, andpackaged goods industries.

PPT VISION was incorporated under the laws of theState of Minnesota in 1981.

**WHAT IS MACHINE VISION?**

A machine vision system consists of computer hardwareand software working together with cameras and lighting to capture images ofobjects for the purpose of making a quality control decision. When the image iscaptured and stored in memory it is algorithmically compared to a predefinedimage or quality standard in an effort to detect defects or anomalies. This machinevision technology can be applied in a number of different applications.However, PPT VISION works exclusively developing and applying machine visiontechnology for manufacturing applications. Using machine vision technology forpurposes of inspection and quality control enables manufacturing companies toprevent defective products from being shipped to customers and to improve theirmanufacturing processes and reduce costs. Commercial use of machine visiontechnology for manufacturing quality control began to emerge in the early1980s. However, machine vision systems at that time were complex in programmingand maintaining, difficult to install, limited in performance and notcost-effective. Through advances in microprocessor and software technologiesthese barriers have been dramatically reduced in recent years, enabling machinevision to 

2

----

emergeas a powerful process control technology that enables manufacturers to improvequality and increase productivity. 

The Company’s machine vision based smart camerasolutions are primarily targeted at providing manufacturers with 100%inspection in high speed, discrete part manufacturing applications. Thistypically replaces older off-line random sampling techniques or human visioninspection techniques as a means of monitoring quality. Thus, The Company’smachine vision based smart cameras are a key technology in enablingmanufacturers to achieve zero defect production.

**THE MACHINE VISION MARKET**

The global market for machine vision technology in themanufacturing marketplace is large and highly fragmented with over 200 machinevision suppliers around the world. Many are very small companies focusing onniche applications, products or technologies. A small handful of competitorssuch as Cognex or Orbotech have emerged as large, global competitors. Recentmarket studies by the Automated Imaging Association estimate that the totalglobal market for machine vision technologies in manufacturing applications isover $8.0 billion. However, this total global machine vision market includeshundreds of different market and technology niches ranging from very simplevision sensors priced at $1,000 to very high end application specific machinespriced at more than $1,000,000. Within the total machine vision market, PPTVISION’s machine vision product line only addresses what is commonly referredto as the general purpose smart camera product segment. A recent market studyby the Automated Imaging Association estimates that the total market for smartcameras in North America in 2005 was approximately $99 million. The Companybelieves that the North America market for smart cameras is approximately onethird the size of the global market resulting in a global market size for smartcameras of approximately $300 million. Demand for machine vision systems comesfrom end-user manufacturers who apply these systems as an integral part oftheir manufacturing process, OEMs, system integrators and machine builders.

 The growth in demand for machine visiontechnology like smart cameras is being driven by global competitive trends thathave led manufacturers worldwide to redesign manufacturing processes in orderto reduce cost and increase productivity and quality through greater use ofautomation technologies. In order to meet today’s manufacturing qualityrequirements, statistical sampling methods are often insufficient and 100%inspection is required. As a result, manufacturers are increasingly adoptingmachine vision technology solutions such as smart cameras.

**BUSINESS STRATEGY**

The Company’s business objective is to be a worldwideleader in the design, manufacture, and marketing of machine vision-based smartcameras for manufacturing applications. Through the successful integration ofthe Company’s core competencies, including machine vision hardware and softwaredevelopment and machine vision application engineering expertise, the Companybelieves it will be able to meet its objective and successfully implement itsstrategy.

The Company’s product development strategy is focusedon the continuous introduction of new models of its IMPACT brand of intelligentcameras along with new software tools and features within its IMPACT softwarepackage in direct response to customer feedback. This enables the Company tocontinually add new customers, better serve existing customers, and expand thesize of the Company’s market by expanding its ability to solve newapplications.

TheCompany markets its products through a global network of industrial automationdistribution and system integration selling partners. These selling partnersuse the Company’s IMPACT intelligent cameras together with its IMPACT softwareto create complete automated inspection solutions for end-user manufacturingcompanies, original equipment manufacturers, and manufacturing machine builders.The Company’s selling strategy is focused on supporting, training, and growingthe number of its selling partners.  Asthe size of the Company’s trained infrastructure of selling partners grows, itexpects its sales results to grow right with it. Thus, the Company is focusingheavily on building up and supporting its selling partner network worldwide.

3

----

**PRODUCTS**

The Company designs, manufactures, and markets machinevision-based smart or “intelligent” cameras for manufacturing applications suchas electronic and mechanical assembly verification, verification andrecognition of printed characters, packaging integrity, surface flaw detection,gauging and measurement tasks, and robotic guidance.

The Company’s products are all marketed under a singlebrand name called IMPACT. The IMPACT intelligent camera product family consistsof nineteen individual intelligent camera models with a price range ofapproximately $3,000 to $9,000 per unit. The nineteen intelligent camera modelsare broken into three product categories referred to as the C-series, theT-series and the A-series. There are nine models each in the C-series andT-series.  These two product categoriesare distinguished from each other on the basis of a number of differenttechnical performance features with the C-series being a higher performance andslightly more expensive product line than the T-series. The nine differentmodels within these two product categories are distinguished from each otherprimarily on the basis of resolution.  Inaddition, each of these two product categories includes three color intelligentcamera models.

The newest addition to the Company’s intelligentcamera product offerings is the A-series, which consists of one model calledthe IMPACT A10. As of the 2006 fiscal year end, the Company had not yet shippedany IMPACT A10 units.  However, theCompany expects to begin production shipments of the IMPACT A10 in the firsthalf of fiscal year 2007.  The IMPACT A10is a physically smaller and lower priced intelligent camera than those in theC-series and T-series. This intelligent camera product has been developed indirect response to requests from the Company’s emerging industrial automationdistribution channels.

The Company’s IMPACT software package is embedded ineach IMPACT intelligent camera model when shipped to a customer. The IMPACTsoftware was developed alongside the IMPACT hardware and is a powerful,easy-to-use machine vision software package. As hardware prices have continuedto come down as a result of very powerful, lower priced semiconductor devicesbeing widely available, competitive differentiation in the machine visionmarketplace is primarily achieved through software technology. As a result, theCompany invests significantly in on going enhancements to its IMPACT softwarepackage in direct response to user feedback. The IMPACT software packageincludes a library of over ninety advanced machine vision software tools usedto solve wide range of applications. This capability is wrapped in aneasy-to-use graphical user interface designed with elements for both noviceusers solving simple applications as well as power users solving advancedapplications.

**MARKETS AND CUSTOMERS**

The Company sells its products to a broad range ofindustries, including manufacturers of electronic and semiconductor components,pharmaceuticals, medical devices, automotive components, consumer products andplastics. As of October 31, 2006, the Company had sold more than 18,000 machinevision cameras to over 1,000 customers since inception.

In both fiscal 2006 and 2005one customer accounted for over 10% of net revenues. This customer, Simac Masic BV PDC, accounted for 11.9%and 12.3% respectively. The loss of, or significant curtailment of purchasesby, any of the Company’s principal customers could have a material adverseeffect on the Company’s results of operations. See Risk Factors – “We aredependent upon a limited number of principal customers.”

**SALES, MARKETING AND CUSTOMER SUPPORT**

The Company sells its products to end-users, system integrators,distributors, machine builders and OEMs. The Company markets its productsthrough supporting its industrial automation distribution partners, appearancesat industry trade shows, advertising in industry trade journals, articlespublished in industry and technical journals, its own website and throughdirect-selling certain key accounts. In addition, the Company’s strong customerrelationships serve as valuable references.

4

----

The Company focuses on delivering a high level ofvalue-added applications engineering support to its industrial automationdistribution partners and end-user customers through its own in-houseapplications engineering resources. The Company also provides extensivetraining opportunities for its industrial automation distributors andcustomers, either at the Company’s facilities or on-site at customers’facilities.

The following table sets forth the percentage of theCompany’s net revenues (including sales delivered through internationaldistributors) by geographic location during the past two years:

| YEAR ENDED OCTOBER 31, | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| United States                         |       | 39       | %          | 46       | %          |
|                                  |       |     |       |     |       |
| Europe &  Canada                  |       | 24       | %          | 27       | %          |
|                                  |       |     |       |     |       |
| Asia-Pacific                          |       | 36       | %          | 24       | %          |
|                                  |       |     |       |     |       |
| South America                         |       | 1        | %          | 3        | %          |
|                                  |       |     |       |     |       |
|                                  |       | 100      | %          | 100      | %          |

 

Substantially all of the Company’s export sales arenegotiated, invoiced and paid in United States dollars. However, the Companywill from time to time enter into export sales negotiated, invoiced and paid inforeign currencies.

**BACKLOG**

The Company does not believe backlog is a keyindicator of future revenues in the end-user machine vision market. PPT VISIONproducts are typically shipped within 30 days after receipt of an order. TheCompany believes that maintaining as short a time as practical for delivery isa competitive advantage in the end-user machine vision market. Customers in theend-user machine vision market do not normally place orders for large multiplesof units with scheduled deliveries over many months. Rather, end-user machinevision addresses a specific application or problem at a specific manufacturingsite.

**RESEARCH AND PRODUCT DEVELOPMENT**

PPT VISION’s products are distinguished by the Company’sproprietary technology and its significant commitment to research and productdevelopment efforts. The Company’s research and product development efforts arefocused on its core technical competencies. The Company believes that theability to integrate these core competencies is a key strength of the Companyand is essential to achieving long term success in the machine vision market.The Company’s core competencies can be described as follows:

Image Acquisition. This refers to the means andmethods by which an image is captured, stored, and then made available forsubsequent processing and display. Image acquisition combines the disciplinesof photo-optics and electrical engineering.

Imaging Processing. This refers to the means andmethods by which an image is analyzed or enhanced to produce some desiredinformation, measurements or results. Image processing combines the disciplinesof software engineering, mathematics, algorithm development and electricalengineering to implement efficient solutions to computationally complexproblems. Typical image processing tasks include real-time inspection,guidance, gauging and recognition.

Application Development Software. This refers to themeans and methods whereby a machine vision system is configured and controlled.The development and support of application development software requiresexpertise in the disciplines of object-oriented programming, graphicalprogramming environments, man-machine interfaces, device drivers and generalsoftware engineering.

5

----

Application Expertise. This refers to the capabilityand experience of individuals in the Company, who are a critical component ofsuccessfully deploying this highly specialized technology. Applicationexpertise encompasses the means and methods whereby a machine vision system isinterfaced to and combined with other factory automation equipment for purposesof creating a complete solution for the customer. This may include thedevelopment of application specific solutions for certain vertical marketapplications along with mechanical fixturing for mounting camera and lightingcomponents, networking and programmable controllers for process control, andreject mechanisms for ejection of defective parts.

Various configurations of the Company’s productsinclude proprietary design work performed by the Company’s employees in each ofthese areas.

PPT VISION believes that continued and timelydevelopment of new products and enhancements to existing productcharacteristics are essential to maintaining its competitive position. TheCompany has committed and expects to continue to commit substantial resourcesto its research and development effort, which plays a significant role inmaintaining and advancing its position as a leading provider of machine visionsolutions for manufacturing applications. The Company’s current research anddevelopment efforts are directed to increasing performance in imageacquisition, image processing and application development software, which couldproduce systems with greater speed and accuracy while also providing customerswith more expanded software tools. Key software capabilities under developmentare targeted at expanding the number of software algorithms and tools andexpanding the ease-of use of the Company’s Inspection Builder software willenable support for different hardware and user interfaces, as well asincreasing the development speed of application specific software tools. TheCompany also intends to expand the number of its intelligent camera productofferings to include a wider variety of price points and performanceconfigurations to better enable it to address a wider variety of application nicheswith the machine vision market.

Research and development expenditures were $1.4million, and $1.3 million in the fiscal years ended October 31, 2006, and 2005,respectively. We expect these costs to remain relatively flat in fiscal 2007.

**MANUFACTURING**

The Company assembles, configures and tests itsproducts at its suburban Minneapolis facility. The Company’s printed circuitboards are custom built by several manufacturers. Although most of thecomponents used in the Company’s machine vision systems are availableoff-the-shelf, some components are available from only a single supplier orfrom a limited number of suppliers. The Company typically purchases inventoryand builds products in response to quarterly sales forecasts, enabling it toship products within 30 days after receipt of an order.

Much of the Company’s product manufacturing,consisting primarily of circuit board manufacturing and assembly and machinedparts production, is contracted with outside vendors. Company personnel inspectincoming parts and perform final assembly and testing of finished products. TheCompany believes that its outsourcing strategy enables it to focus itsresources on the key core competency areas from which it derives itscompetitive advantages.

**COMPETITION**

The machine vision industry is highly fragmented.Currently, no competitor holds a significant aggregate market share percentage,although some dominate individual niches within the overall machine visionindustry. The Company believes that over the next several years, the industrywill experience a continuing trend toward consolidation. However, given theapplication-specific nature of the industry, the Company also believes that themachine vision industry will continue to have a relatively large number ofcompetitors focusing on specific niches.

The Company believes the major competitive factors inthe industry are performance, quality, support and price. Although the Companybelieves that its products are unique, competitors offer technologies andsystems that are capable of certain of the functions performed by the Company’sproducts. The Company faces competition from a number of companies in themachine vision market, some of which have greater manufacturing and marketingcapabilities and greater financial, technological and personnel resources.

6

----

Although the Company believes that its currentproducts offer several advantages in terms of speed and ease-of-use, andalthough the Company has attempted to protect the proprietary nature of theseproducts, it is possible that any of the Company’s products could be duplicatedby other companies in the same general market. There can be no assurances thatthe Company would be able to compete with similar products produced by acompetitor.

**PATENTS AND PROPRIETARY RIGHTS**

The Company relies on a combination of patent,copyright, trademark and trade secret laws to establish its proprietary rightsin its products. The Company owns several issued and pending United States andinternational patents for various inventions used in machine-vision, automatedinspection and illumination systems. The Company believes that the patents itowns may have been useful in protecting the Company’s proprietary products andmay be useful in protecting potential future products. The Company also believesits ability to efficiently develop and sell high performance, cost-effectivevision systems on a timely basis, whether patented or not, is crucial to theCompany’s future success. The Company requires each of its employees to enterinto standard agreements pursuant to which the employee agrees to keepconfidential all proprietary information of the Company and to assign to theCompany all rights in any proprietary information or technology made orcontributed by the employee during his or her employment or made thereafter asa result of any inventions conceived or work done during such employment.Despite these precautions, it may be possible for a third party to copy orotherwise obtain and use the Company’s products or technology withoutauthorization or to develop similar technology independently. In addition,effective patent, copyright, trademark and trade secret protection may beunavailable or limited in certain foreign countries.

The Company has obtained United States federalregistration for a number of its trademarks including its “PPT”, “PPT VISION”, “IMPACT”,and “Inspection Builder” trademarks. The Company has filed for federalregistration of additional trademarks and intends to continue to do so in thefuture. Although no assurance can be given as to the strength or scope of theCompany’s trademarks, the Company believes that its trademarks have been andwill be useful in developing and protecting market recognition for itsproducts.

**EMPLOYEES**

As of December 15, 2006, the Company had 38 full-timeemployees, including 9 employees in research and development, 14 in sales,marketing and application engineering, 10 in manufacturing and 5 in finance andadministration. Although the Company has been successful in attracting andretaining qualified technical personnel to date, there can be no assurance thatthis success will continue. None of the Company’s employees are covered bycollective bargaining agreements or are members of a union. The Company hasnever experienced a work stoppage and believes that its relations with itsemployees are excellent.

**IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS**

Various forward-looking statements have been made inthis Annual Report on Form 10-KSB. Forward-looking statements may also be madein the Company’s other reports filed under the Securities Exchange Act of 1934,in its press releases and in other documents. In addition, from time to timethe Company, through its management, may make oral forward-looking statements.

Forward-looking statements are subject to risks anduncertainties, including those identified below, that could cause actualresults to differ materially from such statements. The words “anticipate,” “believe,”“expect,” “intend,” “optimistic,” “will” or similar expressions are intended toidentify forward-looking statements. Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateon which they are made. The Company undertakes no obligation to update publiclyor revise any forward-looking statements.

7

----

Important factors that could cause actual results todiffer materially from the Company’s forward-looking statements, as well asaffect the Company’s ability to achieve its financial and other goals, include,but are not limited to, the following:

**RISK FACTORS**

**Wehave incurred losses in each of the last three years, have received a goingconcern opinion and may require additional capital.** TheCompany has incurred net losses and negative cash flows from operatingactivities in each of the past three years and has an accumulated deficit of$35.1 million at October 31, 2006. In 2006, our net loss was $1.3 million.  In 2005, our net loss was $2.4 million. In2004, our net loss was $1.9 million. In addition, the Company expects to incur lossesand negative cash flows for at least the next several fiscal quarters. TheCompany believes that the amount of the losses will be smaller than in recentfiscal years. In connection with the audit of our financial statements for theyear ended October 31, 2006, our independent registered public accountants haveissued an opinion on our financial statements that included a going concernparagraph that states that we have losses and negative cash flows fromoperating activities in recent years and require additional working capital tosupport our future operations which raises substantial doubt about our abilityto continue as a going concern.

During fiscal year 2004, we sold our 3D business for$1.0 million. All of this cash had been received by the end of the firstquarter of fiscal 2005. The sale of this business unit reduced our ongoingoperating expenses. As of October 31, 2006, we had a cash balance ofapproximately $753,000, working capital of $1.6 million and no long-term debt.The Company believes it has sufficient cash and other sources of financingavailable to it to fund its operations, working capital and capital resourceneeds through the second quarter of fiscal 2007. There can be no assurance,however, that additional capital will be available on acceptable terms or atall, and the failure to obtain additional capital as needed may have an adverseeffect on the Company’s ability to continue to take advantage of futureopportunities or respond to competitive pressures or unanticipated requirements,which could adversely affect its business, financial position, results ofoperations and cash flows.

**We have encountered significantlyincreased competition from lower-priced competitive products.**Several of our competitors haveintroduced lower-priced 2D vision inspection systems that present a significantchallenge to us. Although we have introduced our new lower-priced, IMPACThigh-performance 2D inspection system, which currently accounts forsubstantially all of our sales, we cannot guarantee that this system willsuccessfully compete in this market if competitors introduce lower pricedproducts.

**Our market is characterized byrapidly changing technology and new product development.**Our future success depends upon ourability to keep pace with the evolving market for machine vision inspectionsystems. We need to continue enhancing our current products, developing andintroducing new products, responding to changes in customer requirements andachieving market acceptance. Our failure to anticipate or respond adequately totechnological developments and customer requirements, or any significant delaysin product development or introduction, could have a material adverse effect onour business, results of operations, financial condition and liquidity. Even ifwe do enhance our current products, develop new products, and remain responsiveto our customers, we cannot ensure that we will achieve market acceptance.

**We are dependent upon a limitednumber of principal customers.** In both fiscal 2006 and2005 one customer accounted for over 10% of net revenues. This customer, Simac Masic BV PDC, accounted for 11.9%and 12.3% respectively of net revenues. We do not have in effect long-termagreements with any significant customers under which they agree to continuepurchasing significant quantities of our products. The loss of, or significantdecrease in purchases by, any of our principal customers and subsequent failureto replace those customers could have a material adverse effect on our resultsof operations.

**Our revenues are dependent in part oncapital spending in the electronics and semiconductor industries.**The electronics and semiconductorindustries combined have historically accounted for over 50% of all machinevision industry sales. Capital spending on new manufacturing capacity by theseindustries has historically been very cyclical. There can be no assurance whencapital spending in these industries will begin a cyclical upturn and how longthis upturn may last.

8

----

**We rely heavily on our proprietary technology,much of which is protected as trade secrets.**We rely heavily on our image acquisition and imageprocessing hardware designs, along with proprietary software technology. Wehave been issued patents, or obtained licenses to patents, in the past on certaintechnology. We currently rely most heavily on protecting our proprietaryinformation as trade secrets. We cannot ensure that the steps we take will beadequate to prevent misappropriation of our technology by third parties. Wealso cannot be certain that the steps taken will be adequate under the laws ofsome foreign countries, which may not protect our proprietary rights to thesame extent as do laws of the United States. In addition, the possibilityexists that others may “reverse engineer” our products in order to determinetheir method of operation and then introduce competing products. Further, manyhigh technology markets, including segments of the machine vision industry, arecharacterized by the existence of a large number of patents and frequentlitigation for financial gain based on patents with broad, and oftenquestionable, applications. As the number of our products increases, themarkets in which our products are sold expand and the functionality of thoseproducts grows and overlaps with products offered by competitors. We have beensued for patent infringement in the past and may be subject to patentinfringement claims in the future. In addition to being expensive and timeconsuming for us, protracted litigation to defend or to prosecute intellectualproperty could result in some customers deferring or limiting their purchase ofour product until resolution of the litigation. Although we do not believe thatany of our products or proprietary rights infringe upon the valid rights of thirdparties, we cannot guarantee that infringement claims will not be assertedagainst us in the future or that any such claims will not require us to enterinto royalty arrangements or result in costly litigation.

**Our revenue fluctuates from year toyear.**We haveexperienced annual and quarterly fluctuations in operating results andanticipate that these fluctuations will continue. These fluctuations have beencaused by various factors, including the order flow of our principal customers,the timing and acceptance of new product introductions and enhancements and thetiming of product shipments. Future operating results may fluctuate as a resultof these and other factors, including our ability to continue to developinnovative products, the announcement or introduction of new products by ourcompetitors, our product and customer mix, and the level of competition andoverall trends in the economy.

**We are dependent on a limited numberof outside contractors and suppliers for a substantial portion of our componentsand assembly needs.**Wecurrently contract with third party assembly houses for a substantial portionof our components and assembly needs. Although we inspect these componentsprior to final assembly, reliance on outside contractors reduces our control overquality and delivery schedules. The failure by one or more of thesesubcontractors to deliver quality components in a timely manner could have amaterial adverse effect on our results of operations. In addition, a number ofthe components integral to the functioning of our products are available fromonly a single supplier or from a limited number of suppliers. Any interruptionin or termination of supply of these components, material changes in thepurchase terms, or reductions in their quality or reliability, could have amaterial adverse effect on our business or results of operations.

**A significant portion of our revenuearises from international markets.**In the years ended October 31, 2006, and 2005, salesof our products to customers outside of the United States accounted forapproximately 61%, and 54%, respectively, of our net revenues. We anticipatethat international revenue will continue to account for a significant portionof our net revenues. Our operating results are subject to the risks inherent ininternational sales, including various regulatory requirements, political andeconomic changes and disruptions, transportation delays and difficulties instaffing and managing foreign sales operations and distributor relationships.In addition, fluctuations in exchange rates may render our products less pricecompetitive relative to local product offerings. There can be no assurance thatthese factors will not have a material adverse effect on our futureinternational sales and, consequently, on our operating results.

**The costs to remain competitive mayadversely affect our financial performance.**We compete with other vendors of machine visionsystems, some of which have greater financial and other resources than we do.We cannot be sure that we will be able to compete successfully in the future.In addition, to remain competitive we may be required to incur significantcosts to increase our engineering research, development, marketing and customerservice efforts. Competitive pressures may result in price erosion or otherfactors that adversely affect our financial performance.

9

----

**We are dependent on key personnel.**Our success depends in large part uponthe continued services of many of our highly-skilled personnel involved inmanagement, research and product development and sales. We must also be able toattract and retain additional highly-qualified employees. The loss of servicesof these key personnel could have a material adverse effect on us. We do nothave key-person life insurance on any of our employees.

**We may be unable to utilize our taxnet operating loss carryforwards if we fail to generate sufficient taxableincome.**Theutilization of net operating loss carryforward is dependent upon our ability togenerate sufficient taxable income during the carryforward period. In fiscal2005, there was no tax provision due to the net loss for the period. At October31, 2006, we had available federal and state net operating loss and tax creditcarryforwards for income tax purposes of approximately $31.1 million, $9.6million and $1.2 million respectively. These carryforwards expire in the yearsending October 31, 2007 through October 31, 2026.

**EXECUTIVE OFFICERS AND OTHER KEY MEMBERS OF MANAGEMENT**

Theexecutive officers of the Company are as follows:

| NAME                  | ** ** | **AGE** | ** ** | **POSITION**                                     |
|-----------------------|------------|---------|------------|--------------------------------------------------|
| Joseph C. Christenson |       | 48      |       | President, Director, and Chief Financial Officer |
| David L. Friske       |       | 62      |       | Vice President, Manufacturing                    |

 

**Joseph C. Christenson**has been President of the Company sinceJanuary, 1989, a director since December, 1987 and Chief Financial Officersince June, 2005. Prior to being elected President of the Company, Mr.Christenson served in a series of positions of increasing responsibility sincejoining the Company in 1985. Mr. Christenson has a Masters in BusinessAdministration from the University of Michigan and a Bachelor of Arts degreefrom St. Olaf College.

**David L. Friske**has been Vice President of Manufacturingof the Company since March, 1999. From February, 1984, Mr. Friske served asDirector of Manufacturing and Purchasing. Prior to joining the Company, Mr.Friske was employed by Medtronic, Inc.

Mr. Christenson and Mr. Friske serve as full timeemployees of the Company.

**Item 2. DESCRIPTION OF PROPERTY**

In thesecond quarter of fiscal 2005, the Company executed an amended lease agreementwith respect to its headquarters facility in Eden Prairie, Minnesota. Under the amended lease terms signed onApril 29, 2005, the Company received a reduction in its base rental rates andits facility shrank from approximately 64,000 square feet to approximately35,000 square feet resulting in a savings of approximately $120,000 perquarter. In exchange for these amended lease terms, the Company paid $140,000for certain leasehold improvements associated with the reconfigured space andalso paid approximately $300,000 in accrued deferred rent. The Company alsoagreed to pay a $240,000 lease termination fee, which was accrued and was paidfor in equal monthly installments over a 12 month period which started on May1, 2005, and extended the current lease term by two years through May, 2011.The Company also terminated its leased space for its regional sales and supportoffice in Michigan effective December 31, 2005. There were no costs associated with the Michigan office leasetermination.

**Item 3. LEGAL PROCEEDINGS**

None.

**Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

10

----

**PART II**

**Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

**PRICE RANGE OF COMMON STOCK**

Effective January 23, 2006 the Company’s Common Stockbegan trading on the OTC Bulletin Board under the ticker symbol “PPTV.OB.”Prior to January 23, 2006, the Company’s Common Stock traded on the NasdaqCapital Market under the symbol “PPTV.” The following table sets forth the highand low closing sale prices of the Company’s Common Stock as reported by Nasdaqfor the period from November 1, 2005 to January 22, 2006 and OTC Bulletin Boardthereafter. The high and low bid prices per share of the Company’s Common Stockafter January 22, 2006 established between broker-dealers do not include retailmark-ups and mark-downs or any commissions to the dealer and therefore do notreflect prices of actual transactions.

|                                         | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
| **FISCAL  YEAR ENDED OCTOBER 31, 2006** |       |     |       |    |       |
| First Quarter                           |       | $        | 1.85       |    | $          | 0.50 |   |
| Second Quarter                          |       | 0.80     |       | 0.47    |       |
| Third Quarter                           |       | 0.61     |       | 0.40    |       |
| Fourth Quarter                          |       | 0.55     |       | 0.30    |       |
|                                    |       |     |       |    |       |
| **FISCAL  YEAR ENDED OCTOBER 31, 2005** |       |     |       |    |       |
| First Quarter                           |       | $        | 4.40       |    | $          | 2.44 |   |
| Second Quarter                          |       | 3.40     |       | 1.73    |       |
| Third Quarter                           |       | 2.52     |       | 1.21    |       |
| Fourth Quarter                          |       | 1.89     |       | 1.05    |       |

 

**HOLDERS**

On December 3, 2006, there were approximately 600holders of record of the Company’s Common Stock. This figure does not reflectthe almost 1,100 beneficial stockholders whose shares are held in nomineenames.

**DIVIDEND POLICY**

The Company has never declared or paid any cashdividends on its Common Stock. The Company currently intends to retain anyearnings for use in its operations and expansion of its business and thereforedoes not anticipate paying any cash dividends in the foreseeable future.

**ISSUER PURCHASES**

       The Company did not repurchase anyequity securities during the years ended October 31, 2006 and 2005.

**INFORMATIONREGARDING EQUITY COMPENSATION PLANS**

The following table sets forth information regardingour equity compensation plans in effect as of October 31, 2006. Each of ourequity compensation plans is an “employee benefit plan” as defined by Rule 405of Regulation C of the Securities Act of 1933.

11

----

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**
| **Plan category**                                  | ** ** | **Number of shares   of common stock   to be issued upon   exercise of   outstanding   options, warrants   and rights** | ** ** | **Weighted-average   exercise price of   outstanding   options, warrants  and rights** | ** ** | **Number of shares of   common stock   remaining available   for future issuance   under equity   compensation plans** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by stockholders:    |       |                                                                                                                                                                                                    |       |                                                                                                                      |       |                                                                                                                                                                                         |       |
| Stock Option Plans                                      |       | 406,453                                                                                                                                                                                                 |       | $                                                                                                                         | 3.04       |                                                                                                                                                                                         | 432,216    |   |
| Employee Stock Purchase Plan                            |       | 12,928                                                                                                                                                                                                  |       | —                                                                                                                    |       | 77,974                                                                                                                                                                                       |       |
| Equity  compensation plans not approved by stockholders |       | —                                                                                                                                                                                                  |       | —                                                                                                                    |       | —                                                                                                                                                                                       |       |
|                                                    |       |                                                                                                                                                                                                    |       |                                                                                                                      |       |                                                                                                                                                                                         |       |
| Total                                                   |       | 419,381                                                                                                                                                                                                 |       | $                                                                                                                         | 3.04       |                                                                                                                                                                                         | 510,190    |   |

 

The Company hasfour equity compensation plans, all of which have been approved by itsshareholders: 1988 Stock Option Plan, 1997 Stock Option Plan, 2000 Stock OptionPlan and 2005 Employee Stock Purchase Plan.

**Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION**

During the fourth quarter of fiscal 2004, the Companyimplemented a revised operating strategy which called for a total focus of ourresources on our core 2D machine vision business. Accordingly, in the fourthquarter of fiscal 2004 we initiated and completed the sale of our 3D businessunit, and all related patents, intellectual property, inventory and equipment.The results of our 3D business are presented as discontinued operations in ourfinancial statements.  Our continuingoperations represent our 2D business only. All references to financialinformation in this Management’s Discussion and Analysis or Plan of Operationsrefer to our continuing operations.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

Management’s discussion and analysis of its financialcondition and results of operations are based on the Company’s accompanyingfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the financial statements and the reported revenues and expensesduring the reporting period. Management bases its estimates on historicalexperience and various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities. Actual resultscould differ from these estimates.

Management believes the Company’s critical accountingpolicies and areas that require more significant judgments and estimates usedin the preparation of its financial statements to be:

·     revenuerecognition;

·     estimatingvaluation allowances, specifically the allowance for doubtful accounts andexcess and obsolete inventory; and

·     valuationand useful lives of long-lived and intangible assets.

12

----

The Company typically recognizes revenue on productsales upon shipment to the end user customers if contractual obligations havebeen substantially met and title and risk of loss have passed to the customer,which is generally the case for sales of machine vision systems, spare partsand accessories. The Company also recognizes revenue on products sold todistributors upon shipment because contracts with distributors do not includepost-shipment obligations or any right of return provisions and pricing is fixedat the time of sale. Revenue related to application engineering, productdevelopment and customer training services is recognized when the services areperformed.

Management estimates the allowance for doubtfulaccounts by analyzing accounts receivable balances by age and consideringspecific factors about each individual customer’s financial condition. When theCompany deems it probable that all or a portion of a customer’s account isuncollectible, a corresponding amount is added to the allowance for doubtfulaccounts.

The Company’s inventory primarily consists of partsand other materials that are used in the manufacture of vision systems. TheCompany generally only builds systems based on customer orders and as a resultmaintains only a minor amount of finished goods inventory. Managementestablishes valuation reserves for estimated excess and obsolete materialsinventory based on the difference between the cost of the inventory and itsestimated market value. Market value is estimated based on a variety ofassumptions about future product demand and market conditions. In view of therapid pace of technological change in the machine vision industry, the Companygenerally considers inventory that has had no usage for one year to beobsolete. In addition, changes in the Company’s product offerings or those oftheir competitors may also result in excess or obsolete inventory. Accordingly,these factors will also be considered in the determination of the market valueof inventory.

Actual results could differ from these estimates underdifferent assumptions. If the financial condition of one or more of ourcustomers were to deteriorate, or if actual product demand or market conditionsare less favorable than anticipated by management, additional reserves may berequired.

The Company’s long-lived assets include properties andequipment and intangible assets such as patents. These assets are evaluated forpossible impairment whenever changes in facts or circumstances indicate thatthe carrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to the undiscounted future net cash flows expected to be generatedby the assets. If these assets are considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount of theassets exceeds the fair value of the assets.

**RESULTS OF OPERATIONS**

**Comparison of Year Ended October 31, 2006 to Year EndedOctober 31, 2005**

**NetRevenues**slightly increased to $5.7million in fiscal 2006 from $5.6 million in fiscal 2005. Unit sales of theCompany’s machine vision systems increased to 1,074 in fiscal 2006 from 810 infiscal 2005. As we continued to phase out our legacy product lines in fiscal2006, our new IMPACT product line continued to increase in sales. This trend reflects an overall trend inthe machine vision industry for more powerful yet lower priced machine visionsystems. We expect this trend to continue in fiscal 2007.

The Company sold 1,063 IMPACT units in fiscal 2006 ascompared with almost 760 IMPACT units in fiscal 2005, showing a 40% increase inunit sales. The growth in our IMPACT sales indicates strong acceptance of theseproducts in the market and we expect that sales of our IMPACT units willcontinue to grow and replace the sales of our other machine vision systems.

**Gross Profit**increased 11.6% to $3.0 million in fiscal2006 from $2.7 million in fiscal 2005. Gross profit as a percentage of netrevenues for fiscal 2006 increased to 53% compared to 47.9% in fiscal 2005. Theincrease in gross profit dollars and as a percentage of net revenues reflectsthe increase in IMPACT sales which has a larger gross margin than our legacyproduct lines. We expect gross profit and gross profit as a percentage of netrevenues to continue to increase as our revenues increase.

13

----

**Sales and Marketing Expenses**decreased 6.3% to $2.2 million in fiscal2006, compared to $2.4 million in fiscal 2005. As a percentage of net revenues,fiscal 2006 selling and marketing expenses decreased to 38.8%, compared with41.8% in fiscal 2005. These decreases are the result of the Company’scontinuing efforts to control costs. We expect the amount of sales andmarketing expenses to remain relatively flat or increase slightly as revenuesincrease for fiscal year 2007.

**General and Administrative Expenses**decreased 6.2% to $959,000 in fiscal 2006,compared to $1.0 million in fiscal 2005. This decrease is, again, primarily theresult the Company’s continuing efforts to control costs. As a percentage ofnet revenues, general and administrative expenses decreased to 16.8% for fiscal2006, compared to 18.1% for fiscal 2005. We expect the amount of general andadministrative expenses to remain relatively flat for fiscal year 2007.

**Research and Development Expenses**increased 2.2% to $1.4 million in fiscal2006, from $1.3 million in fiscal 2005. The increase in research anddevelopment spending resulted from the outsourcing of our hardware engineeringin relation to the development of a new, lower cost IMPACT vision system.Research and development expenses as a percentage of net revenues for fiscal2006 increased slightly to 24.1%, compared to 23.8% for fiscal 2005. Thepercentage increase reflects the increase in research and development expenses.We expect research and development expenses to remain relatively flat forfiscal year 2007.

**Interest and Other Income** increased 163.3% to $237,000 in fiscal2006, from $90,000 in fiscal 2005.  Theincrease resulted primary from royalty payments of $110,000.

**Income Taxes:**There was no tax provision or benefit forfiscal 2006 or 2005 due to the net losses in the periods for which no benefitwas recognized.

**Lossfrom Discontinued Operations** was $55,000 in fiscal 2005 andthere was no net loss from discontinued operations for fiscal 2006.

**LIQUIDITY AND CAPITAL RESOURCES**

As of October 31, 2006, the Company had cash of$753,000 as compared with $778,000 as of the end of last fiscal year. Due toits continuing losses, the Company has been using its existing cash and cashequivalents to fund the shortfall in cash generated from its operatingactivities and also issued common stock from two private placements in fiscal2006.

Because we have working capital of $1.6 million and nolong-term debt, the Company believes that a variety of financing alternativesare available including external borrowing against accounts receivable andinventory, customer or vendor financing, the issuance of additional stock tothe public or to strategic partners, or customer-sponsored research anddevelopment projects. The Company believes it has sufficient cash and othersources of financing available to it to fund its operations, working capitaland capital resource needs through the second quarter of fiscal 2007. There canbe no assurance, however, that additional capital will be available onacceptable terms or at all, and the failure to obtain additional capital asneeded may have an adverse effect on the Company’s ability to continue to takeadvantage of future opportunities or respond to competitive pressures orunanticipated requirements, which could adversely affect its business,financial position, results of operations and cash flows.

The Company financed its operations during fiscal 2006through existing cash and cash equivalents and also issued common stock fromtwo private placements in fiscal 2006. Net cash used in operating activitiesduring fiscal 2006 was $771,000, a significant decrease from $1.8 million usedin operations in fiscal 2005 due, in large part, to our continued efforts incontrolling costs. Accounts receivable decreased $294,000 primarily due tostrong collection efforts. Inventories decreased slightly by $20,000 duringfiscal 2006. Accounts payable and accrued expenses increased by $35,000.

Net cash provided by investing activities was $51,000in fiscal 2006 due, in large part, to the Company selling its remaining 9,500shares of Electro-Sensors, Inc. common stock, resulting in gross proceeds of$94,000. During fiscal 2006, fixed asset additions 

14

----

totaled$43,000. During fiscal 2005, fixed asset additions totaled $293,000. We expectfixed asset additions in fiscal 2007 to be approximately the same as in fiscal2006.

Net cash provided by financing activities was $695,000for fiscal 2006 from two private placements of common stock in February andSeptember of 2006 and from the sale of stock to employees through our EmployeeStock Purchase Plan. The private placements were funded by the Company’scurrent largest shareholder, Mr. Peter R. Peterson. In the private placement onFebruary 17, 2006, the Company issued 800,000 shares of common stock at a priceof $0.50 per share. In the private placement on September 7, 2006, the Companyissued 725,000 shares of common stock at a price of $0.40 per share. Duringfiscal 2005, net cash provided by financing activities was $5,000.

The Company incurred a net loss of $1,287,000 forfiscal 2006, and has an accumulated deficit of $35.1 million as of October 31,2006. There can be no assurance that the Company will not incur additionallosses, will generate positive cash flow from its operations, or that theCompany will attain or thereafter sustain profitability in any future period.To the extent the Company continues to incur losses or grows in the future, itsoperating and investing activities may use cash and, consequently, may requirethe Company to obtain additional sources of financing in the future.

The Company does not have relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities that would havebeen established for the purpose of facilitating off-balance-sheet financialarrangements. Therefore, the Company is not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin these arrangements.

The following summarizes our contractual obligationsand shows the effect these contractual obligations are expected to have on ourliquidity and cash flows as of October 31, 2006 (amounts exclude requiredpayments for common area maintenance expenses):
| ** **       | ** ** | **Total** | ** ** | **1 Year or Less** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Over 5 years** | ** ** |
|------------------|------------|-----------|------------|-----------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|
| Operating Leases |       | $         | 1,398,000  |                              | $          | 293,000            |       | $                  | 601,000    |                       | $          | 504,000 |   | — |   |
|                  |            |           |            |                                   |            |                    |            |                    |            |                            |            |  |  |  |  |

**RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

In November, 2004, the FASB issued SFAS No. 151 “InventoryCosts,” (SFAS No. 151) which amends the guidance in ARB No. 43 (ARB 43),Chapter 4 “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that under somecircumstances, items such as idle facility expense, excessive spoilage, doublefreight, and re-handling costs may be so abnormal as to require treatment ascurrent period charges. SFAS No. 151 requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal.” In addition, SFAS No. 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS No. 151 shall be effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. Earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after the date SFAS No. 151 was issued. SFAS No. 151 shall be appliedprospectively. The adoption of SFAS No. 151 did not have a material effect onthe Company’s financial statements.

In December, 2004, FASB issued SFAS No. 123 (revised2004), “Share-Based Payment,” (SFAS No. 123R) that focuses primarily onaccounting for transactions in which an entity obtains employee services inshared-based payment transactions. This statement replaces SFAS No. 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock issued to Employees.” Beginning November 1, 2006, we will berequired to expense the fair value of employee stock options and similarawards. As a public company we are allowed to select from two alternativetransition methods, each having different reporting implications. Based onusing the modified prospective approach, the expense related to stock optionoutstanding and unvested at October 31, 2006 will be $14,000, $2,000 and $0 forthe years ending October 31, 2007, 2008 and 2009, respectively.  The impact of SFAS No. 123R for the employeestock purchase plan has not been determined at this time.

15

----

In December, 2003, FASB issued FASB Interpretation No.46R, “Consolidation of the Variable Interest Entities” (FIN 46R). Fin 46Rstates that companies that have exposure to the economic risks and potentialrewards from another entity’s assets and activities have a controllingfinancial interest in a variable interest entity and should consolidate theentity, despite the absence of clear control through a voting equity interest.The consolidation requirements apply to all special-purpose entities by the endof the first reporting period ending after December 15, 2003. FIN 46R shall beapplied to all variable interest entities by the end of the first reportingperiod ending after March 15, 2004, for enterprises that are not small businessissuers or December 15, 2004 for enterprises that are small business issuers.The adoption of FIN 46R did not have a material effect on the Company’sfinancial statements.

The FASB has published FASB Interpretation (FIN) No.48 (FIN No. 48), Accounting for Uncertainty in Income Taxes, to address thenoncomparability in reporting tax assets and liabilities resulting from a lackof specific guidance in FASB Statement of Financial Accounting Standards (SFAS)No. 109 (SFAS No. 109), Accounting for Income Taxes, on the uncertainty inincome taxes recognized in an enterprise’s financial statements. Specifically,FIN No. 48 prescribes (a) a consistent recognition threshold and (b) ameasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return, and providesrelated guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. FIN No. 48 willapply to fiscal years beginning after December 15, 2006, with earlier adoptionpermitted. The Company does not expect the adoption of FIN No. 48 to have amaterial effect on its financial statements.

In September, 2006, the Securities and ExchangeCommission (SEC) issued Staff Accounting Bulletin 108, “Considering the Effectson Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements,” (“SAB 108”). SAB 108 requires registrants to quantifyerrors using both the income statement method (i.e. iron curtain method) andthe rollover method and requires adjustment if either method indicates amaterial error. If a correction in the current year relating to prior yearerrors is material to the current year, then the prior year financialinformation needs to be corrected. A correction to the prior year results thatare not material to those years, would not require a “restatement process”where prior financials would be amended. SAB 108 is effective for fiscal yearsending after November 15, 2006. We do not anticipate that SAB 108 will have amaterial effect on our financial position, results of operations or cash flows.

**EFFECTS OF INFLATION**

The Company believes that the effect of inflation hasnot been material during each of the years ended October 31, 2006 and 2005.

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company believes it does not have material exposureto quantitative and qualitative market risks. The carrying amounts reflected inthe balance sheets of cash and cash equivalents, investments, trade receivablesand trade payables approximate fair value at October 31, 2006 due to the shortmaturities of these instruments.

**INTEREST RATE RISK**

The Company’s cash and cash equivalents representinvestments purchased with original maturities of three months or less. Giventhe short maturities and investment grade quality of the portfolio holdings atOctober 31, 2006, a 100 basis point rise in interest rates would not beexpected to have a material adverse impact on the fair value of the Company’scash and cash equivalents. As a result, the Company does not currently hedgethese interest rate exposures.

**FOREIGN CURRENCY EXCHANGE RATE RISK**

Historically, the Company’s international sales, whichare primarily in Europe, Canada, South America, Japan and Southeast Asia, havebeen transacted in U.S. Dollars. The Company did have one customer where saleswere denominated in Japanese Yen. The Company does not engage in 

16

----

foreign currency speculation. During the years endedOctober 31, 2006 and 2005, the Company had no foreign exchange contractsoutstanding.

**Item 7. FINANCIAL STATEMENTS**

The financial statements are listed in Item 13 of thisForm 10-KSB.

**Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

None.

**Item 8A. CONTROLS AND PROCEDURES**

**(a) Evaluation of Disclosure Controls and Procedures.**

The Company’s President,Chief Executive Officer and Chief Financial Officer Joseph C. Christenson, hasreviewed the Company’s disclosure controls and procedures as of theend of the period covered by this report and concluded that the Company’sdisclosure controls and procedures are effective.

** (b) Changes inInternal Control Over Financial Reporting.**

 There have been no changes in internal controlover financial reporting that occurred during the fiscal quarter covered bythis report that have materially affected, or are reasonably likely tomaterially affect, the registrant’s internal control over financial reporting.

**Item 8B.OTHER INFORMATION**

None.

**PART III**

**Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROLPERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT**

Information required under this item with respect todirectors is contained in the section “Election of Directors” in the Company’sProxy Statement for the Annual Meeting of Shareholders (the “2007 ProxyStatement”), a definitive copy of which will be filed within 120 days ofOctober 31, 2006 and is incorporated herein by reference. Informationconcerning executive officers is set forth in the Section entitled “ExecutiveOfficers of the Company” in the 2007 Proxy Statement and is incorporated hereinby reference.

Information concerning compliance with Section 16(a)is contained in the section entitled “Compliance with Section 16(a) of theSecurities Exchange Act of 1934,” and is incorporated herein by reference.Information concerning the Company’s Code of Ethics is included in the Sectionentitled “Governance Matters – Code of Ethics,” and is incorporated herein byreference.

**Item 10. EXECUTIVE COMPENSATION**

Information required under this item is contained inthe section entitled “Executive Compensation and Other Information,” in theCompany’s 2007 Proxy Statement and is incorporated herein by reference.

17

----

**Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

Information required under this item with respect toshare ownership is contained in the section entitled “Security Ownership ofPrincipal Shareholders and Management” in the Company’s 2007 Proxy Statementand is incorporated herein by reference.

Information required under this Item with respect tostock ownership under equity compensation plans is contained in the sectionentitled “Equity Compensation Plan Information” in Item 5 of this form 10-KSB.

**Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

The Company closed on a $400,000 private placement ofcommon stock on February 17, 2006. The placement was made to the Company’scurrent largest shareholder, Mr. Peter R. Peterson. In the February privateplacement, the Company issued 800,000 shares of common stock at a price of$0.50 per share.

In addition, the Company closed on a $290,000 privateplacement of common stock on September 7, 2006. The private placement wasfunded by Mr. Peter R. Peterson. In the September, 2006 private placement, theCompany issued 725,000 shares of common stock at a price of $0.40 per share.

These two private placements were conducted by theCompany to strengthen its balance sheet and provide for future working capitalrequirements.

**Item 13. EXHIBITS**

**(a) Documents filed as Part of thisReport**

(1) FINANCIAL STATEMENTS. The following financialstatements of the Company are hereby included in this Form 10-KSB.
| Report of Independent Registered Public Accounting  Firm of Virchow, Krause & Company, LLP |   |
|------------------------------------------------------------------------------------------------|--------|
| Statements of Operations for the Years ended October  31, 2006 and 2005                        |   |
| Balance Sheets as of October 31, 2006 and 2005                                                 |   |
| Statements of Cash Flows for the Years ended October  31, 2006 and 2005                        |   |
| Statements of Shareholders’ Equity for the Years ended  October 31, 2006 and 2005         |   |
| Notes  to Financial Statements                                                                 |   |

 

18

----

(2) LISTING OF EXHIBITS
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                          |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Restated Articles of Incorporation of PPT Vision,  Inc. (incorporated by reference to Exhibit 3.1 of Form    10-QSB  for the quarter ended April 30, 2005)                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 3.2         |       | By-Laws of PPT Vision (incorporated by reference to  Exhibit 3.2 of Form 10-QSB for the quarter ended April 30, 2005)                                                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1         |       | Preferred Stock Purchase Rights Agreement, as  amended (incorporated by reference to Exhibit 1 to June 17, 1999 Registration  Statement on Form 8-A, as amended by Exhibit 1 to October 19, 1999 Amendment  No. 1 to Registration Statement on Form 8-A/A and as amended by amendment No.  1 to March 11, 2002 Amendment No. 2 to Registration Statement on Form 8-A/A.) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1*       |       | Employment Agreement with Joseph C. Christenson  dated as of May 7, 1984 (incorporated by reference from Exhibit 10.4 to May  15, 1996 Form S-2)                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2*       |       | PPT VISION, Inc. 1988 Stock Option Plan, as amended  (incorporated by reference to Exhibit 10.6 of 1997 Form 10-K)                                                                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3*       |       | PPT VISION, Inc. 1997 Stock Option Plan  (incorporated by reference to Exhibit 10.7 of 1997 Form 10-K)                                                                                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4*       |       | PPT VISION, Inc. 2000 Stock Option Plan  (incorporated by reference to Exhibit 4.1 to the Company’s Registration  Statement on Form S-8 (File No. 333-116481))                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5        |       | Lease Agreement dated July 17, 1998 for facilities  at Prairie Crossroads Corporate Center, Eden Prairie, Minnesota (incorporated  by reference to Exhibit 10.7 of 1999 Form 10-K)                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5.1      |       | First Amendment of Lease dated October 16, 1999 for  Facilities at the Prairie Crossroads Corporate Center, Eden Prairie,  Minnesota (incorporated by reference to Exhibit 10.8 of 1999 Form 10-K)                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5.2      |       | Second Amendment dated April 29, 2005 of Lease dated  October 16, 1999 for Facilities at the Prairie Crossroads Corporate Center,  Eden Prairie, Minnesota (incorporated by reference to Exhibit 10.1 of Form  10-QSB for the quarter ended April 30, 2005)                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6*       |       | Employment Agreement with David Friske dated as of  March 5, 1984, incorporated by reference to Exhibit 10.6 of 2005 Form 10-KSB                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7        |       | PPT VISION, Inc. 2005 Employee Stock Purchase Plan  (incorporated by reference to Exhibit 4.1 to the Company’s Registration  Statement on Form S-8 (File No. 333-125780))                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 21          |       | The Company has no subsidiaries                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1        |       | Consent of Virchow, Krause & Company, LLP                                                                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1        |       | Certification of CEO/CFO Pursuant to Section 302 of  the Sarbanes-Oxley Act and Rules 13a-14 and 15d-14 of the Exchange Act.                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1        |       | Certification of CEO/CFO Pursuant to Section 906 of  the Sarbanes-Oxley Act and 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                     |

----

*Indicates compensatoryplan

19

----

## **Item14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

Informationrequired under this item is contained in the section entitled “IndependentAuditors” is in the Company’s 2007 Proxy Statement and is incorporated hereinby reference.

**SIGNATURES**

Pursuant to the requirements of Section 13 of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|                          | **PPT VISION, INC.** |
|--------------------------|----------------------|
|                     |                 |   |
| Date : January  26, 2007 | **By:**              | **/s/ Joseph C. Christenson** | ** ** |
|                     |                 | Joseph C. Christenson, President |
|                     |                 | (Principal Executive Officer and Chief Financial  Officer) |
|                          |                      |  |  |  |

**Signatures and Power of Attorney**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed by the following persons onbehalf of the Registrant, in the capacities, and on the dates, indicated. Eachperson whose signature appears below constitutes and appoints Joseph C.Christenson as his true and lawful attorney-in-fact and agent, acting alone,with full power of substitution and resubstitution, for him and in his name,place, and stead, in any and all capacities, to sign any or all amendments tothis Annual Report on Form 10-KSB and to file the same, with the exhibits thereto,and other documents in connection therewith, with the Securities and ExchangeCommission.
| Date: January 26, 2007  | ** ** | **/s/  Joseph C. Christenson**                             |
|-------------------------|------------|------------------------------------------------------------|
|                    |       | Joseph C.  Christenson                                     |
|                    |       | President,  Director                                       |
|                    |       | (Principal  Executive Officer and Chief Financial Officer) |
|                    |       |                                                       |
| Date: January  26, 2007 | ** ** | **/s/  Robert W. Heller, Director**                        |
|                    |       | Robert W.  Heller, Director                                |
|                    |       |                                                       |
| Date: January  26, 2007 | ** ** | **/s/  Peter R. Peterson, Director**                       |
|                    |       | Peter R.  Peterson, Director                               |

20

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders,Audit Committee and Board of Directors

PPT VISION, Inc.

Eden Prairie, Minnesota

We have audited the accompanying balance sheets of PPTVISION, Inc. as of October 31, 2006 and 2005, and the related statements ofoperations, shareholders’ equity and cash flows for the years then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

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

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of PPTVISION, Inc. as of October 31, 2006 and 2005 and the results of its operationsand its cash flows for the years then ended, in conformity with U.S. generallyaccepted accounting principles.

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern. Asdiscussed in Note 2 to the financial statements, the Company has incurredrecurring losses and negative cash flows from operating activities in recentyears and requires additional working capital to support future operations,which raises substantial doubt about its ability to continue as a goingconcern. Management’s plans in regards to these matters are also discussed inNote 2. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.
|  |   | /s/ Virchow,  Krause & Company, LLP |
|--|--------|-----------------------------------------|

 

Minneapolis, Minnesota

November 29, 2006

21

----

**STATEMENTS OF OPERATIONS**
| **YEAR ENDED OCTOBER 31,** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Net revenues                              |       | $          | 5,693,000  |       | $          | 5,648,000 |   |
| Cost of sales                             |       | 2,675,000  |       | 2,943,000  |       |
| Gross profit                              |       | 3,018,000  |       | 2,705,000  |       |
| Expenses:                                 |       |       |       |       |       |
| Sales and  marketing                      |       | 2,211,000  |       | 2,360,000  |       |
| Research and  development                 |       | 1,372,000  |       | 1,343,000  |       |
| General and  administrative               |       | 959,000    |       | 1,022,000  |       |
| Restructuring  Charges                    |       | —     |       | 390,000    |       |
| Total expenses                            |       | 4,542,000  |       | 5,115,000  |       |
| Interest and other  income, net           |       | 237,000    |       | 90,000     |       |
| Loss from continuing  operations          |       | (1,287,000 | )          | (2,320,000 | )          |
| Loss from discontinued  operations        |       | —     |       | (55,000    | )          |
| Net loss                                  |       | $          | (1,287,000 | )          | $          | (2,375,000 | ) |
| Basic and diluted loss  per share:        |       |       |       |       |       |
| Loss from  continuing operations          |       | $          | (0.35      | )          | $          | (0.77 | ) |
| Loss from  discontinued operations        |       | $          | —     |       | $          | (0.02 | ) |
| Net loss                                  |       | $          | (0.35      | )          | $          | (0.79 | ) |
| Weighted average shares  outstanding:     |       |       |       |       |       |
| Basic and diluted                         |       | 3,675,120  |       | 2,997,329  |       |

 

Theaccompanying notes are an integral part of the financial statements.

22

----

**BALANCE SHEETS**
| **OCTOBER 31,**                                                                                                            | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                                                                          |       |        |       |        |       |
| Current assets                                                                                                                  |       |        |       |        |       |
| Cash and cash  equivalents                                                                                                      |       | $           | 753,000    |        | $          | 778,000 |   |
| Accounts  receivable, net                                                                                                       |       | 903,000     |       | 1,197,000   |       |
| Inventories                                                                                                                     |       | 470,000     |       | 490,000     |       |
| Other current  assets                                                                                                           |       | 135,000     |       | 160,000     |       |
| Total current  assets                                                                                                           |       | 2,261,000   |       | 2,625,000   |       |
| Property and  equipment, net                                                                                                    |       | 308,000     |       | 438,000     |       |
| Intangible  assets, net                                                                                                         |       | 22,000      |       | 68,000      |       |
| Other assets,  net                                                                                                              |       | —      |       | 22,000      |       |
| Total assets                                                                                                                    |       | $           | 2,591,000  |        | $          | 3,153,000 |   |
|                                                                                                                            |       |        |       |        |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                      |       |        |       |        |       |
| Current liabilities                                                                                                             |       |        |       |        |       |
| Accounts payable                                                                                                                |       | $           | 487,000    |        | $          | 367,000 |   |
| Accrued expenses                                                                                                                |       | 138,000     |       | 223,000     |       |
| Deferred revenue                                                                                                                |       | 2,000       |       | 9,000       |       |
| Total current  liabilities                                                                                                      |       | 627,000     |       | 599,000     |       |
|                                                                                                                            |       |        |       |        |       |
| Commitments and  contingencies                                                                                                  |       |        |       |        |       |
| Shareholders’ equity                                                                                                       |       |        |       |        |       |
| Preferred stock  $.10 par value; authorized 2,500,000 shares, none issued and outstanding                                       |       |        |       |        |       |
| Common stock  $.10 par value; authorized 5,000,000 shares; issued and outstanding 4,532,845  and 2,998,747 shares, respectively |       | 453,000     |       | 300,000     |       |
| Capital in  excess of par value                                                                                                 |       | 36,625,000  |       | 36,081,000  |       |
| Accumulated  deficit                                                                                                            |       | (35,114,000 | )          | (33,827,000 | )          |
| Total  shareholders’ equity                                                                                                |       | 1,964,000   |       | 2,554,000   |       |
| Total liabilities and  shareholders’ equity                                                                                |       | $           | 2,591,000  |        | $          | 3,153,000 |   |

 

Theaccompanying notes are an integral part of the financial statements

23

----

**STATEMENTS OF CASH FLOWS**
| **YEAR ENDED OCTOBER 31,**                                   | ** ** | **2006** | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Net loss                                                                    |       | $        | (1,287,000 | )          | $          | (2,375,000 | ) |
| Adjustment to  reconcile net loss to net cash used in operating activities: |       |     |       |       |       |
| Depreciation and amortization                                               |       | 218,000  |       | 222,000    |       |
| Adjustment to write down inventory to lower of cost  or market              |       | —   |       | 255,000    |       |
| Stock based compensation                                                    |       | 2,000    |       | 1,000      |       |
| Loss from discontinued operations                                           |       | —   |       | 55,000     |       |
| Loss on sale of discontinued operations                                     |       | —   |       | —     |       |
| Gain on sale of securities                                                  |       | (72,000  | )          | (41,000    | )          |
| Change in  operating assets and liabilities:                                |       |     |       |       |       |
| Accounts receivable                                                         |       | 294,000  |       | 715,000    |       |
| Inventories                                                                 |       | 20,000   |       | 232,000    |       |
| Other assets                                                                |       | 25,000   |       | 83,000     |       |
| Accounts payable                                                            |       | 120,000  |       | (577,000   | )          |
| Accrued expenses                                                            |       | (85,000  | )          | (290,000   | )          |
| Deferred revenue                                                            |       | (6,000   | )          | (45,000    | )          |
| Total adjustments                                                           |       | 516,000  |       | 610,000    |       |
| Net cash used in  operating activities                                      |       | (771,000 | )          | (1,765,000 | )          |
| Cash flows from  investing activities:                                      |       |     |       |       |       |
| Purchase of property and equipment                                          |       | (43,000  | )          | (293,000   | )          |
| Net investment in other long-term assets                                    |       | —   |       | (2,000     | )          |
| Proceeds from sale of securities                                            |       | 94,000   |       | 71,000     |       |
| Net cash provided  by (used in) investing activities                        |       | 51,000   |       | (224,000   | )          |
| Cash flows from  financing activities:                                      |       |     |       |       |       |
| Proceeds from issuance of common stock, net of  offering costs              |       | 695,000  |       | 5,000      |       |
| Net cash  provided by financing activities                                  |       | 695,000  |       | 5,000      |       |
| Net cash  provided by discontinued operations                               |       | —   |       | 145,000    |       |
| Net decrease in  cash and cash equivalents                                  |       | (25,000  | )          | (1,839,000 | )          |
| Cash and cash  equivalents at beginning of year                             |       | 778,000  |       | 2,617,000  |       |
| Cash and cash  equivalents at end of year                                   |       | $        | 753,000    |       | $          | 778,000 |   |

 

Theaccompanying notes are an integral part of the financial statements.

24

----

**STATEMENTS OF SHAREHOLDERS’ EQUITY**
| ** **                                                        | ** ** | **COMMON  SHARES** | ** ** | **STOCK  AMOUNT** | ** ** | **CAPITAL IN  EXCESS OF  PAR VALUE** | ** ** | **ACCUMULATED  (DEFICIT)** | ** ** | **TOTAL  SHAREHOLDERS’  EQUITY** | ** **  |
|-------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|-----------------------------------------------------|------------|----------------------------|------------|---------------------------------------|-------------|
| October, 31,  2004                                                |       | 2,995,591          |       | $                 | 300,000    |                                                | $          | 36,075,000                 |       | $                                     | (31,452,000 | ) | $ | 4,923,000 |   |
| Stock based  compensation                                         |       |               |       |              |       | 1,000                                               |       |                       |       |                                  |        |
| Stock issued  through the employee stock purchase plan            |       | 1,942              |       |              |       | 2,000                                               |       |                       |       | 2,000                                 |        |
| Stock options  exercised                                          |       | 1,000              |       |              |       | 3,000                                               |       |                       |       | 3,000                                 |        |
| Additional  shares due to rounding related to reverse stock split |       | 214                |       |              |       |                                                |       |                       |       |                                  |        |
| Net loss                                                          |       |               |       |              |       |                                                |       | (2,375,000                 | )          | (2,375,000                            | )           |
| October 31, 2005                                                  |       | 2,998,747          |       | 300,000           |       | 36,081,000                                          |       | (33,827,000                | )          | 2,554,000                             |        |
| Stock based  compensation                                         |       |               |       |              |       | 2,000                                               |       |                       |       | 2,000                                 |        |
| Stock issued  through the employee stock purchase plan            |       | 9,098              |       | 1,000             |       | 4,000                                               |       |                       |       | 5,000                                 |        |
| Private  placements                                               |       | 1,525,000          |       | 152,000           |       | 538,000                                             |       |                       |       | 690,000                               |        |
| Net loss                                                          |       |               |       |              |       |                                                |       | (1,287,000                 | )          | (1,287,000                            | )           |
| October 31, 2006                                                  |       | 4,532,845          |       | $                 | 453,000    |                                                | $          | 36,625,000                 |       | $                                     | (35,114,000 | ) | $ | 1,964,000 |   |

 

Theaccompanying notes are an integral part of the financial statements.

25

----

**NOTES TO FINANCIAL STATEMENTS**

**OCTOBER 31, 2006 and 2005**

**NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**NATURE OF OPERATIONS**

PPT VISION, Inc. (“the Company”) designs,manufactures, and markets machine vision based intelligent cameras used forautomated inspection, measurement, and guidance applications in themanufacturing marketplace.  The Company’sIMPACT intelligent camera product line enables manufacturers to realizesignificant economic paybacks by increasing the quality of manufactured partsand improving the productivity of manufacturing processes. The Company’s IMPACTintelligent camera product line is sold through a global network ofdistribution and integration partners to end-user manufacturers, originalequipment manufacturers (OEM’s), and manufacturing machine builders, in a widevariety of manufacturing markets including electronics, automotive, medicaldevice, and packaged goods industries.

 **DISCONTINUED OPERATIONS**

During the fourth quarter of fiscal 2004, the Companyimplemented a revised operating strategy which called for a total focus of ourresources on our core 2D machine vision business. Accordingly, in the fourthquarter of fiscal 2004 we initiated and completed the sale of our 3D businessunit, and all related patents, intellectual property, inventory and equipment.The results of our 3D business are presented as discontinued operations in ourfinancial statements. Our continuing operations represent our 2D business only.All of the financial information in the financial statements and notes to thefinancial statements have been revised to reflect only the results of ourcontinuing operations. See Note 15 in the Notes to Financial Statements.

**USE OF ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

**REVENUE RECOGNITION**

The Company typically recognizes revenue on productsales upon shipment to end-user customers if contractual obligations have beensubstantially met and title and risk of loss have passed to the customer, whichis generally the case for sales of machine vision systems, spare parts andaccessories.

The Company also recognizes revenue on products soldto distributors upon shipment because contracts with distributors do notinclude post shipment obligations or any right of return provisions and pricingis fixed at the time of sale. Revenue related to application engineering,product development and customer training services is recognized when theservices are performed. Service revenue is less than 10% of total revenues foreach of the years ended October 31, 2006 and 2005.

Royalties are recognized when earned as promulgated bySFAS No. 45, “*Accounting for Franchise Fee Revenue*.”  Royalties are required to be paid equal to apercentage of the net sales on a monthly basis.

**CASH AND CASH EQUIVALENTS**

For purposes of reporting cash flows, cash and cashequivalents include cash on hand and investments with original maturities ofthree months or less when purchased. The Company deposits its cash in highcredit quality financial institutions. The balances, at times, may exceedfederally insured limits.

26

----

**ACCOUNTS RECEIVABLE**

The Company reviews customers’ credit history beforeextending unsecured credit and establishes an allowance for doubtful accountsbased upon factors surrounding the credit risk of specific customers and otherinformation. Invoices are usually due net 30 days. Accounts receivable over 60days are considered past due. The Company does not accrue interest on past dueaccounts receivable. The Company writes off accounts receivable when they aredeemed uncollectible. Accounts receivable are shown net of an allowance fordoubtful accounts of $60,000 at both October 31, 2006 and 2005.

**INVENTORIES**

Inventories are stated at the lower of cost or market,with costs determined on a first-in, first-out (“FIFO”) basis.

**PROPERTY AND EQUIPMENT**

Property and equipment consist of furniture, fixturesand equipment and are stated at cost net of accumulated depreciation.Depreciation is computed for book purposes on a straight-line basis over theestimated useful life of the asset ranging from one to ten years and for taxpurposes over five and ten years using accelerated and straight-line methods.When assets are retired or disposed of, the cost and related accumulateddepreciation are removed from the accounts, and gains or losses are recognizedin the same period. Maintenance and repairs are expensed as incurred; significantimprovements are capitalized. Leasehold improvements are amortized using thestraight-line method over the shorter of the lease term, or the estimateduseful life of the assets.

**INTANGIBLE ASSETS**

Intangible assets include patents and trademarks andare amortized using the straight-line method over their respective estimateduseful lives of 5 to 10 years.

**IMPAIRMENT OF LONG-LIVED ASSETS**

The Company reviews its long-lived assets forimpairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of assets to be heldand used is measured by a comparison of the carrying amount of an asset toundiscounted future net cash flows expected to be generated by the assets. Ifthese assets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of the assets. The Company believes that there has not been anyimpairment of long-lived assets as of October 31, 2006.

**DEFERRED REVENUE**

Deferred revenue results from amounts collected fromcustomers in advance of shipment of systems or in advance of performingengineering services.

**RESEARCH AND DEVELOPMENT**

Expenditures for research and development are expensedas incurred.

**SHIPPINGAND HANDLING**

The Company includes shipping and handling revenue innet sales and shipping and handling costs in cost of sales.

**INCOME TAXES**

The Companyaccounts for income taxes using the asset and liability approach, which requiresthe recognition of deferred tax assets and liabilities for tax consequences oftemporary differences between the

27

----

financial statementincome tax reporting bases of assets and liabilities based on currently enactedrates and laws. These temporary differences include depreciation, allowance fordoubtful accounts, inventory valuation adjustments, accrued expenses and netoperating losses. Deferred taxes are reduced by a valuation allowance to theextent that realization of the related deferred tax asset is not assured.

**ADVERTISING EXPENSE**

Advertising expense isexpensed as incurred. Advertising expense was $103,000 and $38,000 for theyears ended October 31, 2006 and 2005, respectively.

**STOCK-BASED COMPENSATION**

The Company uses the intrinsic value method prescribedby Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations in accounting for employee stockoptions. Under the intrinsic value method, compensation expense is recordedonly to the extent that the market price of the common stock exceeds theexercise price of the stock option on the date of grant.

In December 2002,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure.” SFAS No. 148 is an amendment to SFAS No. 123providing alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation and alsoprovides required additional disclosures about the method of accounting forstock-based employee compensation.  TheCompany chose to not adopt the voluntary change to the fair value based methodof accounting for stock-based employee compensation, pursuant to SFAS No. 148.The Company has adopted the disclosure-only provisions of SFAS No. 148,Accounting for Stock-Based Compensation. Accordingly, no compensation cost hasbeen recognized with respect to stock options related to SFAS No. 148.

During fiscal2005, the Company granted 2,500 of seven-year options outstanding to purchaseshares of the Company’s common stock to a consultant with an exercise price of$1.43 per share. Pursuant to Emerging Issues Task Force 96-18 (EITF 96-18), “Accountingfor Equity Instruments that are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services,” the Company valued andrecorded expenses related to the options. The Company recorded an expense of$2,000  and $1,000 for the years endedOctober 31, 2006 and 2005, respectively, in accordance with EITF 96-18.

Had compensationcost for stock options been determined based on the fair value methodologyprescribed by SFAS 123, the Company’s net loss and net loss per share wouldhave been reduced to the pro forma amounts indicated below:
| FISCAL YEAR ENDED  OCTOBER 31, | ** ** | ** **   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
| Net loss                                      |       | Reported     |       | $        | (1,287,000 | )        | $          | (2,375,000 | ) |
|                                          |       | Pro  forma   |       | $        | (1,501,000 | )        | $          | (2,552,000 | ) |
| Basic and  diluted loss per share             |       | Reported     |       | $        | (0.35      | )        | $          | (0.79 | ) |
|                                          |       | Pro  forma   |       | $        | (0.41      | )        | $          | (0.85 | ) |
| Stock based  compensation                     |       | As  reported |       | $        | 2,000      |     | $          | 1,000 |   |
| Stock based  compensation                     |       | Pro forma    |       | $        | 214,000    |     | $          | 177,000 |   |

 

28

----

The pro forma amounts may not be representative of theeffects on reported net loss for future years. The per share, weighted-averagefair value of each option granted is calculated using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants in the following years:
| FISCAL YEAR ENDED OCTOBER 31, | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Risk free  interest rates                         |       | 4.6      | %          | 4.0      | %          |
| Expected lives                                    |       | 7 Years  |       | 7 Years  |       |
| Expected  volatility                              |       | 254      | %          | 221      | %          |
| Expected dividends                                |       | 0        | %          | 0        | %          |

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

The Company’s financial instruments consist of cashand cash equivalents, short-term trade receivables and payables for whichcurrent carrying amounts approximate fair market value.

**RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

In November, 2004, the FASB issued SFAS No. 151 “InventoryCosts,” (SFAS No. 151) which amends the guidance in ARB No. 43 (ARB 43),Chapter 4 “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that under somecircumstances, items such as idle facility expense, excessive spoilage, doublefreight, and re-handling costs may be so abnormal as to require treatment ascurrent period charges. SFAS No. 151 requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal.” In addition, SFAS No. 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS No. 151 shall be effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. Earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after the date SFAS No. 151 was issued. SFAS No. 151 shall be appliedprospectively. The adoption of SFAS No. 151 did not have a material effect onthe Company’s financial statements.

In December, 2004, FASB issued SFAS No. 123 (revised2004), “Share-Based Payment,” (SFAS No. 123R) that focuses primarily onaccounting for transactions in which an entity obtains employee services inshared-based payment transactions. This statement replaces SFAS No. 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock issued to Employees.” Beginning November 1, 2006, we will berequired to expense the fair value of employee stock options and similarawards. As a public company we are allowed to select from two alternativetransition methods, each having different reporting implications. Based onusing the modified prospective approach, the expense related to stock optionoutstanding and unvested at October 31, 2006 will be $14,000, $2,000 and $0 forthe years ending October 31, 2007, 2008 and 2009, respectively.  The impact of SFAS No. 123R for the employeestock purchase plan has not been determined at this time.

In December, 2003, FASB issued FASB Interpretation No.46R, “Consolidation of the Variable Interest Entities” (FIN 46R). Fin 46Rstates that companies that have exposure to the economic risks and potentialrewards from another entity’s assets and activities have a controllingfinancial interest in a variable interest entity and should consolidate theentity, despite the absence of clear control through a voting equity interest.The consolidation requirements apply to all special-purpose entities by the endof the first reporting period ending after December 15, 2003. FIN 46R shall beapplied to all variable interest entities by the end of the first reportingperiod ending after March 15, 2004, for enterprises that are not small businessissuers or December 15, 2004 for enterprises that are small business issuers.The adoption of FIN 46R did not have a material effect on the Company’sfinancial statements.

The FASB has published FASB Interpretation (FIN) No.48 (FIN No. 48), Accounting for Uncertainty in Income Taxes, to address thenoncomparability in reporting tax assets and liabilities resulting from a lackof specific guidance in FASB Statement of Financial Accounting Standards (SFAS)No. 109 (SFAS No. 109), Accounting for Income Taxes, on the uncertainty inincome taxes recognized in an enterprise’s financial statements. Specifically,FIN No. 48 prescribes (a) a consistent recognition threshold and (b) a

29

----

measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return, and provides relatedguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. FIN No. 48 will apply to fiscalyears beginning after December 15, 2006, with earlier adoption permitted. TheCompany does not expect the adoption of FIN No. 48 to have a material effect onits financial statements.

In September, 2006, the Securities and ExchangeCommission (SEC) issued Staff Accounting Bulletin 108, “Considering the Effectson Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements,” (“SAB 108”). SAB 108 requires registrants to quantifyerrors using both the income statement method (i.e. iron curtain method) andthe rollover method and requires adjustment if either method indicates amaterial error. If a correction in the current year relating to prior year errorsis material to the current year, then the prior year financial informationneeds to be corrected. A correction to the prior year results that are notmaterial to those years, would not require a “restatement process” where priorfinancials would be amended. SAB 108 is effective for fiscal years ending afterNovember 15, 2006. We do not anticipate that SAB 108 will have a materialeffect on our financial position, results of operations or cash flows

**NOTE 2: LIQUIDITY AND CAPITAL RESOURCES**

The Company has incurred net losses and negative cashflows from operating activities for the years ended October 31, 2006 and 2005and has an accumulated deficit of $35.1 million at October 31, 2006. As ofOctober 31, 2006, we had a cash balance of approximately $753,000.

Because we have working capital of $1.6 million and nolong-term debt, the Company believes that a variety of financing alternativesare available including external borrowing against accounts receivable andinventory, customer or vendor financing, the issuance of additional stock tothe public or to strategic partners, or customer-sponsored research anddevelopment projects. The Company believes it has sufficient cash and othersources of financing available to it to fund its operations, working capital andcapital resource needs through the second quarter of fiscal 2007. There can beno assurance, however, that additional capital will be available on acceptableterms or at all, and the failure to obtain additional capital as needed mayhave an adverse effect on the Company’s ability to continue to take advantageof future opportunities or respond to competitive pressures or unanticipatedrequirements, which could adversely affect its business, financial position,results of operations and cash flows.

**NOTE 3:  INVENTORIES**

As of October 31, inventories consist of thefollowing:
|                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Manufactured and  purchased parts |       | $        | 440,000    |     | $          | 454,000 |   |
| Work-in-process                   |       | 15,000   |       | 34,000   |       |
| Finished goods                    |       | 15,000   |       | 2,000    |       |
| Totals                            |       | $        | 470,000    |     | $          | 490,000 |   |

 

In view of the rapid pace of technological change inthe machine vision industry, the Company periodically reviews the carryingvalue of its inventories for excess or obsolete inventories. This analysis ofthe net realizable value of inventories include consideration of a variety offactors including existing inventory quantities, historical usage, expectedfuture demand, the effect of technological advances and the impact of newlyintroduced products.

30

----

**NOTE 4:  PROPERTY ANDEQUIPMENT**

At October 31, furniture, fixtures and equipmentconsisted of the following:
|                                | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|
| Equipment                      |       | $          | 1,020,000  |       | $          | 3,581,000 |   |
| Leasehold  improvements        |       | 140,000    |       | 140,000    |       |
| Furniture and  fixtures        |       | 273,000    |       | 503,000    |       |
|                           |       | 1,433,000  |       | 4,224,000  |       |
| Less accumulated  depreciation |       | (1,125,000 | )          | (3,786,000 | )          |
| Total fixed assets             |       | $          | 308,000    |       | $          | 438,000 |   |

 

Depreciation expense for continuing operations was$172,000 and $180,000 for the years ended October 31, 2006 and 2005,respectively. During fiscal 2006 and 2005, the Company wrote-off fullydepreciated properties that were no longer in use.

**NOTE 5:  INTANGIBLEASSETS**

Intangible assets at October 31, 2006 and October 31,2005, consisted of the following:
|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Patent and  trademark          |       | $        | 549,000    |     | $          | 610,000 |   |
| Less accumulated  amortization |       | (527,000 | )          | (542,000 | )          |
| Total intangible assets        |       | $        | 22,000     |     | $          | 68,000 |   |

 

Patentand trademark costs are amortized over five to ten years. Amortization expensewas approximately $46,000 and $42,000 in the years ended October 31, 2006 and2005, respectively. Amortization expense for fiscal 2007, 2008 and 2009 isexpected to be approximately $9,000, $9,000 and $4,000, respectively.

**NOTE 6:  OTHER ASSETS**

There were no other assets at October 31, 2006. Otherassets at October 31, 2005 were $22,000. Other assets in 2005 represented aninvestment in the common stock of Electro-Sensors, Inc. a related partyshareholder of the Company. The Company’s percentage ownership was less than 1%of Electro-Sensors, Inc. outstanding common stock. During the second quarter offiscal 2006, the Company sold 9,500 shares of Electro-Sensors, Inc. commonstock, resulting in gross proceeds of $94,000. At October 31, 2006 the Companyno longer held shares of Electro-Sensors, Inc. common stock.

**NOTE 7: ACCRUED EXPENSES**

Accrued expenses atOctober 31, include: 
|                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Employee stock  purchase plan payroll deductions |       | $        | 8,000      |     | $          | 11,000 |   |
| Accrued  compensation                            |       | 37,000   |       | 40,000   |       |
| Professional  services                           |       | 60,000   |       | 52,000   |       |
| Restructuring  costs                             |       | —   |       | 107,000  |       |
| Accrued rent                                     |       | 14,000   |       | —   |       |
| Taxes and other                                  |       | 19,000   |       | 13,000   |       |
| Totals                                           |       | $        | 138,000    |     | $          | 223,000 |   |

 

31

----

**RestructuringCosts:**

Thecomponents of the restructuring charges associated with the lease terminationfee and miscellaneous remaining expenses follow:
|                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| Restructuring  costs |       | $        | 107,000    |     | $          | 390,000 |   |
| Payments             |       | (107,000 | )          | (283,000 | )          |
| Ending balance       |       | $        | —     |     | $          | 107,000 |   |

 

**NOTE 8: OPERATING LEASES**

In thesecond quarter of Fiscal 2005, the Company executed an amended lease agreementwith respect to its headquarters facility in Eden Prairie, Minnesota. Underthe amended lease terms signed on April 29, 2005, the Company paid $140,000 forcertain leasehold improvements associated with the reconfigured space and alsopaid approximately $300,000 in accrued deferred rent. The Company also paid a$240,000 lease termination fee, which was accrued in the second quarter offiscal 2005, in equal monthly installments over a 12 month period which startedon May 1, 2005 and ended on April 1, 2006. It also extended the current leaseterm by two years through May, 2011. The Company also terminated its leasedspace for its regional sales and support office in Michigan effective December31, 2005. Rent expense for all leased property was $310,000 and $507,000 forthe years ended October 31, 2006 and 2005, respectively.

Minimum future rental payments due undernon-cancelable operating lease agreements are as follows (amounts excluderequired payments for common area maintenance expenses):
| 2007  |   | $       | 293,000   |   |
|-------|--------|---------|-----------|--------|
| 2008  |   | 293,000 |      |
| 2009  |   | 308,000 |      |
| 2010  |   | 321,000 |      |
| 2011  |   | 183,000 |      |
| Total |   | $       | 1,398,000 |   |

 

** NOTE 9: INCOME TAXES**

The provision for income taxes (continuing anddiscontinued operations) differs from the statutory U.S. federal tax rate of34% applied to net loss before income taxes for the years ended October 31, asfollows:
|                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected tax  benefit at statutory rate              |       | $        | (430,000   | )        | $          | (800,000 | ) |
| State income tax  benefit, net of federal tax effect |       | (33,000  | )          | (40,000  | )          |
| Tax credits and  other                               |       | (26,000  | )          | (3,000   | )          |
| Expiring loss  carryforwards                         |       | 17,000   |       | 250,000  |       |
| Other                                                |       | 16,000   |       | —   |       |
| Increase in  valuation allowance                     |       | 404,000  |       | 593,000  |       |
| Total income tax  expense (benefit)                  |       | $        | —     |     | $          | — |   |

 

Based on an increase in the valuation allowance foreach of the years ended October 31, 2006 and 2005, no benefit for income taxesis applicable for either continuing or discontinued operations.

32

----

Deferred tax assets are comprised of the following atOctober 31:
|                                                       | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Depreciation and  amortization                        |       | $           | (99,000    | )           | $          | 244,000 |   |
| Net operating  loss carryforwards                     |       | 10,945,000  |       | 10,016,000  |       |
| Income tax  credits                                   |       | 1,237,000   |       | 1,263,000   |       |
| Inventory  allowances                                 |       | 7,000       |       | 147,000     |       |
| Other                                                 |       | 185,000     |       | 201,000     |       |
| Total deferred  tax assets before valuation allowance |       | 12,275,000  |       | 11,871,000  |       |
| Less valuation  allowance                             |       | (12,275,000 | )          | (11,871,000 | )          |
| Net deferred tax asset                                |       | $           | —     |        | $          | — |   |

 

At October 31, 2006, the Company has available federalnet operating loss, state net operating loss and tax credit carryforwards forincome tax purposes of approximately $31.1 million, $9.6 million and $1.2million, respectively. These carryforwards expire in the years ending October31, 2007 through October 31, 2026. The amount of the federal net operating losscarryforwards that expire in the next five fiscal years are $152,000, $0,$16,000, $0 and $0, respectively. Approximately $41,000, $39,000, $43,000,$25,000 and $32,000 of the tax credit carryforwards expire in each of the nextfive fiscal years.

The utilization of the net operating loss and taxcredit carryforwards is dependent upon the Company’s ability to generatesufficient taxable income during the carryforward period. Because of theuncertainty of future realization, a valuation allowance equal to the deferredtax asset has been recorded.

**NOTE 10: SHAREHOLDERS’ EQUITY**

**STOCK OPTION PLANS**

Under the Company’s 2000 Stock Option Plan, 1988 StockOption Plan and 1997 Stock Option Plan the Company may issue options to purchaseup to 550,000 shares of common stock to employees and directors. Options aregranted at the fair market value on the date of grant. The granting of optionsand their vesting is within the discretion of the Company’s Board of Directors.

A summary of stock options issued and outstandingunder these plans is as follows:
|                              | ** ** | **NUMBER  OF SHARES** | ** ** | **WEIGHTED  AVG.  OPTION PRICE** | ** ** |
|------------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| Balance at  October 31, 2004 |       | 258,122                    |       | $                                     | 7.50       |   |
| Granted                      |       | 148,075                    |       | $                                     | 1.69       |   |
| Cancelled                    |       | (50,429                    | )          | $                                     | 8.68       |   |
| Exercised                    |       | (1,000                     | )          | $                                     | 2.60       |   |
| Balance at  October 31, 2005 |       | 354,768                    |       | $                                     | 4.92       |   |
| Granted                      |       | 123,000                    |       | $                                     | 0.55       |   |
| Cancelled                    |       | (71,315                    | )          | $                                     | 7.81       |   |
| Exercised                    |       | —                     |       | $                                     | —     |   |
| Balance at  October 31, 2006 |       | 406,453                    |       | $                                     | 3.04       |   |
|                         |       |                       |       |                                  |       |
| Exercisable  Options at:     |       |                       |       |                                  |       |
| October 31, 2005             |       | 176,750                    |       | $                                     | 7.77       |   |
| October 31, 2006             |       | 392,281                    |       | $                                     | 3.07       |   |

 

33

----

In fiscal year 2002, pursuant to an option exchangeprogram approved by the Company’s Board of Directors, the Company allowedemployees to cancel any or all of their current stock options which were issuedpursuant to the 1988 or 1997 plans and which had exercise prices of $20 pershare or greater in exchange for a grant of the same number of stock optionscancelled in six months and one day from the date of cancellation at exerciseprices equal to the fair value of the Company’s common stock on the date ofgrant. Under this program, 52,913 stock options were voluntarily cancelled at aweighted average option price of $27.52 and 52,913 stock options weresubsequently granted at an option price of $3.60. This option exchange resultedin variable accounting for 6,250 of the stock options granted under theprogram. Variable accounting will continue until all stock options subject tovariable accounting are exercised, cancelled or forfeited. In fiscal year endedOctober 31, 2006, 11,000 stock options remain under variable accountingtreatment. There was no expense related to this variable accounting treatmentin fiscal 2006 or fiscal 2005.

The estimated weighted average grant-date fair valueof stock options granted is as follows: 2006 – $0.55, and 2005 – $1.69.

The following table summarizes stock optionsoutstanding and exercisable at October 31, 2006.
|                                | ** ** | **OUTSTANDING** | ** ** | **EXERCISABLE**                                  | ** ** |
|--------------------------------|------------|-----------------|------------|--------------------------------------------------|------------|
| **Exercise  Price Range** | ** ** | **Options**     | ** ** | **Weighted  Avg.  Contractual  Life  Remaining** | ** ** | **Weighted  Avg.  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Avg.  Exercise Price** | ** ** |
| $ 0.50 - $ 0.61      |       | 123,000         |       | 6.78                                             |       | $ | 0.55 |   | 114,000 |   | $ | 0.55 |   |
| $ 1.11 - $ 1.11      |       | 15,000          |       | 5.85                                             |       | $ | 1.11 |   | 15,000 |   | $ | 1.11 |   |
| $ 1.70 - $ 2.48      |       | 108,950         |       | 5.53                                             |       | $ | 1.70 |   | 108,817 |   | $ | 1.70 |   |
| $ 2.60 - $ 3.60      |       | 94,700          |       | 3.09                                             |       | $ | 3.09 |   | 94,700 |   | $ | 3.09 |   |
| $ 4.36 - $ 6.44      |       | 32,052          |       | 3.16                                             |       | $ | 5.34 |   | 27,054 |   | $ | 5.38 |   |
| $ 7.52 - $ 8.88      |       | 5,875           |       | 1.64                                             |       | $ | 8.61 |   | 5,834 |   | $ | 8.62 |   |
| $ 11.60 - $ 14.25    |       | 14,626          |       | 0.55                                             |       | $ | 13.72 |   | 14,626 |   | $ | 13.72 |   |
| $ 20.00 - $ 22.38    |       | 12,250          |       | 0.66                                             |       | $ | 20.39 |   | 12,250 |   | $ | 20.39 |   |
|                           |       | 406,453         |       | 4.78                                             |       | $ | 3.04 |   | 392,281 |   | $ | 3.07 |   |

                                                                                                                                                                                                                                                                                                                                                

At October 31, 2006 and 2005 there were no warrantsoutstanding.

**EMPLOYEE STOCK PURCHASE PLAN**

In March, 2005, shareholders approved the adoption ofthe 2005 Employee Stock Purchase Plan (the “2005 Plan”) to replace the earlier2000 Employee Stock Purchase Plan which, by its terms, expired during 2005. The2005 Plan authorizes the issuance of up to 100,000 shares of common stock.Under the terms of the 2005 Plan, eligible employees may purchase common stockannually at 85% of the lesser of (1) the fair market value on the first day ofthe annual offering period or (2) the fair market value on the last day of eachoffering period.

**NOTE 11: EMPLOYEE SAVINGS PLAN**

The Company provides a supplementary retirementsavings plan that is structured in accordance with Section 401(k) of theInternal Revenue Code. Employees eligible for the Plan may contribute from oneto fifty percent of their monthly earnings on a pre-tax basis, subject to annualcontribution limitations. The Company made Safe Harbor matching contributionsfor fiscal year ended October 31, 2006 by matching 100% of each Planparticipant’s contributions for the first 3% and 50% for the next 2% ofparticipant’s contributions. The Company made matching contributions of onedollar for each dollar contributed by each Plan participant up to a maximum of$500 annually for fiscal year ended October 31, 2005.

The Company’s contributions under this program wereapproximately $88,000, and $20,000 for the years ended October 31, 2006, and2005, respectively. In fiscal 2006 and 2005, $11,000 and $9,000,

34

----

respectivelyof contributions were funded from accumulated forfeitures and $77,000 and$11,000, respectively was expensed by the Company.

**NOTE 12: SHAREHOLDER RIGHTS PLAN**

On June 2, 1999, the Company adopted a ShareholderRights Plan (the “Rights Plan”) designed to deter coercive or unfair takeovertactics and to prevent a person or a group from gaining control of the Companywithout offering a fair price to all shareholders. Under the terms of theRights Plan, a dividend distribution of one Preferred Stock Purchase Right (“Right”)for each outstanding share of the Company’s common stock was made to holders ofrecord on June 22, 1999. These Rights entitle the holder to purchase oneone-hundredth of a share of the Company’s Series A Junior ParticipatingPreferred Stock (“Preferred Stock”) at an exercise price of $28. The Rightsbecome exercisable (a) 10 days after a public announcement that a person orgroup has acquired shares representing 20% or more of the outstanding shares ofcommon stock, or (b) 10 business days following commencement of a tender orexchange offer for 20% or more of such outstanding shares of common stock. TheCompany can redeem the Rights for $0.001 per Right at any time prior to theirbecoming exercisable. The Rights expire on June 2, 2009, unless redeemedearlier by the Company. Under certain circumstances, if a person or groupacquires 20% or more of the Company’s common stock, the Rights permitshareholders other than the acquirer to purchase common stock having a marketvalue of twice the exercise price of the Rights. In addition, in the event ofcertain business combinations, the Rights permit shareholders to purchase the commonstock of an acquirer at a 50% discount. Rights held by the acquirer will becomenull and void in both cases.

In October, 1999, the Company’s Board of Directorsamended the terms of the Rights Plan to enable Mr. P.R. Peterson, a member ofthe Board of Directors of the Company, to purchase up to 30% of the commonstock of the Company without being deemed an “Acquiring Person” within themeaning of the Rights Agreement. In March, 2002, the Company amended the termsof the Rights Plan to exclude Mr. Peterson completely from the definition ofAcquiring Person, regardless of his share ownership.

**NOTE 13:  NET LOSS PERSHARE**

Basic net loss per share is computed using onlyweighted average common shares outstanding. Diluted earnings per share giveseffect to all dilutive potential common shares outstanding during the fiscalreporting periods. Because of our net loss, basic and diluted loss per share isthe same.

|                                                               | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Loss from  continuing operations                              |       | $         | (1,287,000 | )         | $          | (2,320,000 | ) |
| Loss from  discontinued operations                            |       | —    |       | (55,000   | )          |
| Net loss                                                      |       | $         | (1,287,000 | )         | $          | (2,375,000 | ) |
| Weighted average  shares outstanding – basic and diluted |       | 3,675,120 |       | 2,997,329 |       |
| Basic and  diluted loss per share:                            |       |      |       |      |       |
| Continuing operations                                         |       | $         | (0.35      | )         | $          | (0.77 | ) |
| Discontinued operations                                       |       | $         | —     |      | $          | (0.02 | ) |
| Net loss per share                                            |       | $         | (0.35      | )         | $          | (0.79 | ) |

 

For the years ended October 31, 2006, and 2005, theCompany had outstanding options to purchase 406,453, and 354,768 shares of theCompany’s common stock, respectively. As the Company had a net loss, theinclusion of the aforementioned shares would have been anti-dilutive.

35

----

**NOTE 14: CUSTOMER AND GEOGRAPHIC INFORMATION**

**SIGNIFICANT CUSTOMER INFORMATION**

During fiscal 2006 revenue from one customer accountedfor 11.9% of net revenues. During fiscal 2005 revenue from one customeraccounted for 12.3% of net revenues.

At October 31, 2006 one customer accounted for 11% oftotal accounts receivable. At October 31, 2005 two customers accounted for 19%and 12% of total accounts receivable.

**CUSTOMER GEOGRAPHIC DATA**

United States and export sales by geographic region asa percentage of net revenues at October 31 are as follows: 
|                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| United States        |       | 39       | %          | 46       | %          |
| Europe &  Canada |       | 24       | %          | 27       | %          |
| Asia-Pacific         |       | 36       | %          | 24       | %          |
| South America        |       | 1        | %          | 3        | %          |
|                 |       | 100      | %          | 100      | %          |

 

**NOTE 15: DISCONTINUED OPERATIONS**

In the fourthquarter of fiscal 2004, the Company implemented a strategy to focus all of itsresources on its core 2D machine vision business. In accordance with this plan,in the fourth quarter of fiscal 2004, the Company initiated and completed thesale of its 3D business unit, and all related patents, intellectual property,inventory and equipment. The terms of the sale included cash payments of $1.0million and the opportunity to receive royalties on sales of certain productsby the buyer for the next five years. Royalty income for fiscal year 2006 was$110,000 and was recorded in other income. There was no royalty income forfiscal year 2005. The financial results for all periods presented include the3D business as discontinued operations.

The following arecondensed statements of operations of the discontinued operations:

**Statements of Operations**
|                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Revenues                                |       | $        | —     |     | $          | 169,000 |   |
| Cost of revenues                        |       | —   |       | 56,000   |       |
| Gross profit                            |       | —   |       | 113,000  |       |
| Total operating  expenses               |       | —   |       | 168,000  |       |
| Net loss from operation  of 3D business |       | $        | —     |     | $          | (55,000 | ) |

 

36

----