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**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

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**ý****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

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**For thefiscal year ended October 31, 2001**

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**OR**

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**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

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**For theTransition period from              to**

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**CommissionFile Number:  0-11518**

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**PPT VISION, INC.**

(Exact name ofregistrant as specified in its charter)

                

| **Minnesota**                                                     |   | **41-1413345**                        |
|-------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction   of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                              |   |                                  |
| **12988  Valley View Road  Eden Prairie, MN  55344**         |

(Address of principalexecutive offices and zip code)

 

Registrant’s telephonenumber, including area code:  **(952) 996-9500**

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

Securities registeredpursuant to Section 12(g) of the Act:

 (1) Common Stock $.10 par value

(2) Preferred StockPurchase Rights

 

                Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

**YES ****ý**                                                                                                  NO  o

 

                Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

                The approximateaggregate market value of the registrant’s common stock held by nonaffiliatesof the registrant (based on the closing sale price of such stock as reported bythe Nasdaq Stock Market) on January 18, 2002 was approximately $4,803,136.  The number of shares of common stock, $0.10par value per share, outstanding as of January 18, 2002 was 5,512,118.

 

                DocumentsIncorporated by Reference:  Portion ofthe Company’s Proxy Statement for its Annual Meeting of Shareholders to be heldMarch 19, 2002, is incorporated by reference into Part III of this Form 10-K

 

                This Annual Reporton Form 10-K contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934, including statements regarding the Company’s expectations,beliefs, intentions or strategies regarding the future. Forward-lookingstatements include, without limitation, statements regarding the extent andtiming of future revenues and expenses and customer demand. These statementsinclude, but are not limited to, changes in worldwide general economicconditions, cyclicality of capital spending by customers, PPT VISION’s abilityto keep pace with technological developments and evolving industry standards,worldwide competition, and PPT VISION’s ability to protect its existingintellectual property from challenges from third parties and other factors.

 

                Allforward-looking statements included in this document are based on informationavailable to the Company as of the date hereof, and the Company assumes noobligation to update any such forward-looking statements. It is important tonote that the Company’s actual results could differ materially from those insuch forward-looking statements. The forward-looking statements of the Companyare subject to risks and uncertainties. Some of the factors that could causefuture results to materially differ from the Company’s recent results or thoseprojected in the forward-looking statements are described in the “ImportantFactors Regarding Forward-Looking Statements” section of this Form 10-K.

 

### **Item 1. BUSINESS**

# ** **

# **CORPORATE PROFILE**

 

PPT VISION, Inc. designs, manufactures, markets, andintegrates 2D and 3D machine vision-based automated inspection systems formanufacturing applications.  Machinevision-based inspection systems enable manufacturers to realize significanteconomic paybacks by increasing the quality of manufactured parts and improvingthe productivity of manufacturing processes. The Company’s 2D machine vision product line is sold on a global basisto end-users, system integrators, and original equipment manufacturers (OEM’s)primarily in the electronic and semiconductor component, automotive, medicaldevice, and packaged goods industries. The Company’s *Speed*Scan 3DTMsensor, incorporating the Company’s patented high-speed Scanning MoiréInterferometryTM technology, is sold to original equipment manufacturersfor specific applications. The Company’s PPT861TM 3D scanningsystem, which uses the Company’s *Speed*Scan 3D sensor, is anapplication-specific inspection solution targeted at inspection of leaded andbumped components in the semiconductor back-end manufacturing process,inspection of surface-mount electronic connectors, and inspection of componentsused in hard disk drives.

 

# **WHAT IS MACHINE VISION?**

 

A machine vision system consists of computer softwareand hardware working together with cameras and lighting to capture images ofproducts as they are being manufactured. This prevents defective products from being shipped to consumers andhelps manufacturers improve their processes and reduce costs.  Commercial use of machine vision technologyfor manufacturing quality control began to emerge in the early 1980s. However,machine vision systems at that time were complex to program and maintain,difficult to install, limited in performance and not cost-effective. Throughadvances in microprocessor and software technologies, these barriers have beenremoved, enabling machine vision to emerge as a powerful process controltechnology that allows manufacturers to improve quality and increaseproductivity.

 

# **THE MACHINE VISION MARKET**

 

The machine vision market is large and highlyfragmented with over 200 machine vision suppliers around the world.  Many are very small companies focusing onniche applications or niche technologies. A small handful of competitors such as Cognex or Orbotech have emergedas large, global competitors. The Automated Imaging Association (“AIA”)estimates that the North American market for machine vision systems in 2000 wasapproximately $2.1 billion, with worldwide levels estimated at approximately$5.5 billion. The AIA expects this market to grow at approximately 12% per yearover the next 5 years.  Demand formachine vision systems comes from end-user manufacturers who apply thesesystems as an integral part of their manufacturing process, original equipmentmanufacturers (“OEMs”) who incorporate machine vision systems into theirproducts, systems integrators and machine builders.

 

A key factor in the expansion of the machine visionmarket has been growth in the demand for machine vision systems in thesemiconductor and electronics industries. The growth in demand for personalcomputers, cellular communications and other electronic devices, as well as theincrease in electronic components inside other products such as consumerappliances and automobiles, is stimulating demand for electronic andsemiconductor components.  For example,VLSI Research, Inc., an independent technology research firm, projects that thedemand for lead inspection equipment will grow from $185 million in 2000 to$400 million in 2004.  In an effort torapidly improve and increase manufacturing capability, while at the same timeintroducing innovative new designs and improving quality, manufacturers ofthese components are increasingly turning to machine vision as a vital part oftheir manufacturing process.

 

The growth of the end-user machine vision market isalso being driven by global competitive trends, which have led manufacturersworldwide to redesign manufacturing processes in order to reduce cost andincrease productivity and quality. In order to meet today’s manufacturingquality requirements, statistical sampling methods are often insufficient and100% inspection is required. To accomplish these objectives, manufacturers areincreasingly adopting machine vision solutions.

 

Manufacturers are demanding expanded capabilities frommachine vision systems, including faster processing capabilities and greaterease of use. Manufacturers are also demanding more comprehensive services frommachine vision providers, including application engineering, technical support andtraining. Furthermore, manufacturers are seeking the ability to monitor trends,to better comprehend the manufacturing process and to identify problems. Inaddition, manufacturers are being challenged to maintain high production levelsthat require rapid set up times, flexibility and seamless networking with thehost manufacturing control system to provide comprehensive diagnostic andprocess control feedback.

 

# **BUSINESS STRATEGY**

 

The Company’s objective is to be a worldwide leader inthe design, manufacture, marketing and integration of 2D and 3D machinevision-based automated inspection systems for manufacturing applications.Through the successful integration of the Company’s five core competencies,including image acquisition, image processing, application developmentsoftware, optics and illumination, and vision system integration, the Companybelieves it will be able to meet its objective and successfully implement itsstrategy.

 

**Keyelements of the Company’s strategy include:**

 

•                  ProvidingComplete Solutions: The Company focuses on providing complete machine visionsolutions to end-user manufacturers, OEM’s, system integrators and machinebuilders. PPT VISION is pursuing what it believes to be the most fullyvertically integrated business model in the industry, including designing,manufacturing, marketing and integrating complete machine vision solutions. TheCompany believes this provides it with a competitive advantage in deliveringcost-effective, complete vision solutions.

 

•                  ExtendingTechnology Leadership in Speed and Ease-of-Use:  The Company is continuing to aggressively invest in nextgeneration software and hardware architectures that will expand its lead inspeed, ease-of-use and the ability to deliver cost-effective complete solutionsto its customers.

 

•                  TargetingExpanding Markets Through Continued Development of Application-SpecificSoftware Tools and Hardware Products: The Company’s application-specificsoftware tools are a proven solution for a wide variety of inspectionapplications. In response to the worldwide expansion of the semiconductor andelectronics industries, the Company is developing additional software tools andhardware products for electronic component, electronics and semiconductorapplications.

 

•                  Providinga Superior Level of Value-Added Application Engineering Support:  The Company delivers a high level ofvalue-added application engineering support to its end-user customers throughits own in-house applications engineering resources and through its network ofvalue-added system integrators and international distributors.  Manufacturing end-users increasingly want toconcentrate their engineering expertise on the products they manufacture, noton engineering machine vision systems. They are seeking complete machine visionsolutions with associated application engineering support on an on-going basis.

 

•                  IncreasingInternational Market Presence: The Company is aggressively focusing onincreasing its market share in the worldwide machine vision market. The Companybelieves international markets represent a significant opportunity and intendsto capture a significant share of this market through investment and expansionin its international sales distribution and support infrastructure.  In fiscal 2001, 55% of the Company’s revenuescame from customers based outside of the United States.

 

# **PRODUCTS**

 

The Company designs, manufactures, markets andintegrates machine vision-based automated inspection systems for manufacturingapplications such as electronic and mechanical assembly verification,verification of printed characters, packaging integrity, surface flawdetection, and gauging and measurement tasks. A machine vision system is a combination of cameras, lighting, andcomputer hardware and software working together to capture and analyze imagesof moving parts to determine if the parts match a defined standard.  Machine vision-based inspection systemsenable manufacturers to realize significant economic paybacks by increasing thequality of manufactured parts and improving the productivity of manufacturingprocesses.  The Company’s vision systemsare sold throughout the Americas, Europe and Asia to a broad range of industrycategories, including automotive, electronic and semiconductor components,consumer goods, medical devices, pharmaceuticals and plastics.

 

The Company’s machine vision systems are primarilytargeted at providing manufacturers with 100% inspection in high speed,discrete part manufacturing applications. This typically replaces olderoff-line, random sampling techniques or human vision inspection techniques as ameans of monitoring quality. The Company’s machine vision systems enablemanufacturers to achieve zero defect production.

 

The Company’s family of machine vision systems, whichinclude its proprietary Vision Program ManagerTM (VPM) graphical programmingsoftware, provide significant performance advantages that meet manufacturers’critical requirements. These requirements include high speed, flexibility,ease-of-use, networkability and statistical feedback, all without sacrificingperformance. All PPT VISION systems are supported by the Company’s focus onproviding its customers with complete solutions, not just components, and amajor commitment to providing its customers with value-added application engineeringservices.

 

The Company has developed products that have specificadvantages in terms of speed and ease-of-use. Many of the Company’s machinevision systems are capable of operating at speeds over 10,000 parts per minuteperforming 100% inspection. This speed can be critical to successfullyemploying machine vision in many applications. PPT VISION also pioneered theuse of an icon-based visual programming system (i.e. VPM) operating in theMicrosoft® WindowsTM environment. Users are able to program the Company’ssystems by creating a flowchart of icons linked together rather than having towrite a computer program in a programming language such as “C” or using acomplex menu-based system. This results in lower cost and less time forimplementation.

 

**Passport DSLTM and Scout DSLTM (Digital Serial Link)**

 

The Company introduced its completely digital machinevision systems, the patented Passport DSL and Scout DSL, in fiscal 1998. Theseproducts offer an integrated network of cameras, lighting, image processors andhubs, which together form a complete machine vision system.

 

The Passport DSL and Scout DSL systems are completelydigital, which results in much greater accuracy and repeatability thantraditional analog systems. These DSL systems feature PPT’s Vision ProgramManager (VPM) software, a powerful, graphical programming interface thatrequires no programming expertise and operates in the Microsoft® WindowsTMenvironment.  The Passport DSL and ScoutDSL both incorporate a fully integrated Pentium-based PC, which can be easilyadded onto a factory network, allowing for a full range of control andmonitoring capabilities and an easy way to import or export process informationand images.  The DSL systems support anetwork of up to 16 asynchronously functioning cameras that capturenon-interlaced video images at rates up to 4,000 full frames per minute.  To complement the DSL product family, theCompany has also developed the DSL5000, DSL5600, DSL6000 and DSL7500 digitalcameras.

 

# **PassportTM 440,PassportTM 240, and ScoutTM Machine Vision Systems**

 

The Passport 440 is designed to operate with up tofour asynchronously functioning cameras for multiple inspection views andcomplex imaging tasks. The Passport 240 has all of the basic capabilities ofthe Passport 440 in a two-camera model. Both systems are housed in industriallyrugged enclosures and are capable of operating at speeds over 10,000inspections per minute. The Scout is a cost-effective machine vision systemdesigned for industrial applications that do not require rugged enclosures. Itis packaged in a non-industrial style enclosure and is capable of running twocameras with speed and power similar to that of the Passport 240.

 

***Speed*Scan 3DTM Sensor**

 

The *Speed*Scan 3D Sensor is based on PPT’spatented Scanning Moiré InterferometryTM (SMITM) 3D technology.  Using a tri-linear CCD sensor and advancedoptics, the *Speed*Scan3D Sensor is capable of real-time calculation of 3D topography in a singlepass.  SMI is a patented real-time,unique technology for high speed, high accuracy 3D scanning.  It is an area-scanning technology thatgathers height data at rates many times faster than conventional laser-basedsensors.  SMI is especially suitable forapplications in the semiconductor and electronics industries, such as ICcoplanarity (BGA, mBGA, QFP),connector coplanarity, solder paste volume and hard drive components.

 

# **PPT861TM InspectionSystem**

 

The PPT861 is an application-specific inspectionsolution utilizing the Company’s core 2D and 3D vision technology for threetarget markets:  inspection of leadedand bumped components in the semiconductor back-end manufacturing process,inspection of surface-mount electronic connectors, and inspection of componentsused in hard disk drives.

 

The PPT861 is a high-speed, semi-automated, highresolution, 3D scanning station. The PPT861 provides the flexibility to scan awide range of in-tray semiconductor packages including QFP, BGA, CSP and mBGA,as well as electronic connectors and hard drive components.  Using the Company’s patented SMI 3Dtechnology, the PPT861 delivers precise measurements at greatly enhancedthroughput rates as compared with traditional inspection techniques.  With the addition of the optional 2D module,the PPT861 provides a comprehensive solution for critical measurement andinspection requirements.  The PPT861 canbe configured to operate in either an in-line or stand-alone mode, providingcapabilities for both small lot production and high volume applications. Allscanning and motion parameters are programmable to allow the inspection of abroad range of component types with varying size and thickness. As of October31, 2001, the Company has sold 15 PPT861TM systems to 5 customers.

 

# **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, 2001, the Company had sold more than 4,200 machinevision systems to over 320 customers since inception.

 

In each of the past several years, the Company has hadone or more customers that have accounted for ten percent or more of theCompany’s net revenues. During fiscal 2001, Tokyo Weld, Co., Ltd. accounted for22% of net revenues, and revenue from Simac Masic B.V. accounted for 11% of netrevenues.  During fiscal 2000, revenuefrom Tokyo Weld, Co., Ltd. accounted for 17% of net revenues and revenue fromTyco International accounted for 12% of net revenues.  During fiscal 1999, revenue from Philip Morris Incorporatedaccounted for 27% and Simac Masic B.V. accounted for 13% of net revenues.  The loss of, or significant curtailment ofpurchases by, any of the Company’s principal customers could have a materialadverse effect on the Company’s results of operations.

 

# **SALES, MARKETING AND CUSTOMER SUPPORT**

 

The Company sells its products primarily on a directbasis in the United States to end-users, system integrators, machine buildersand OEMs. Outside the United States, the Company sells primarily through anetwork of distributors covering Europe, Asia and South America. The Companymarkets its products through appearances at industry trade shows, advertisingin industry trade journals, articles published in industry and technicaljournals, its own website and through direct-selling in specific verticalmarkets. In addition, the Company’s strong customer relationships serve asvaluable references.

 

The Company focuses on delivering a high level ofvalue-added applications engineering support to its end-user customers throughits own in-house applications engineering resources. The Company also providesextensive training opportunities for its customers, either at the Company’sfacilities or on-site at the customer’s facilities.

 

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

 
|               |   | **YEAR ENDED OCTOBER 31,** |   |
|--------------------|--------|----------------------------|--------|
|               |   | **2001**                   |   | **2000** |   | **1999** |   |
|               |   |                       |   |   |   |   |   |
| United States      |   | 45                         | %      | 52 | % | 74 | % |
| Europe and  Canada |   | 13                         | %      | 12 | % | 13 | % |
| Asia-Pacific       |   | 40                         | %      | 31 | % | 12 | % |
| South America      |   | 2                          | %      | 5 | % | 1 | % |

 

Substantially all of the Company’s export sales arenegotiated, invoiced and paid in United States dollars.  However, the Company will from time to timeenter into export sales negotiated, invoiced and paid in foreign 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 machine visionaddresses a specific application or problem at a specific manufacturing site.

 

# **RESEARCH AND PRODUCT DEVELOPMENT**

 

PPT VISION’s products are distinguished by theCompany’s proprietary technology and its significant commitment to research andproduct development efforts. The Company’s research and product developmentefforts are focused on its five core competencies: image acquisition, imagingprocessing, application development software, optics and illumination, andvision system integration. The Company believes that the integration of thesecore competencies is essential to achieving long term success in the machinevision market. The Company’s five core competencies can be described asfollows:

 

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 whereby 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 processingtasks 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 applicationdevelopment software requires expertise in the disciplines of object-orientedprogramming, graphical programming environments, man-machine interfaces, devicedrivers and general software engineering.

 

Optics and Illumination. This refers to the means andmethods by which a scene is illuminated and optically presented to an inputdevice such as a video camera. Special optics and illumination techniques areoften used to reveal features in an image which would otherwise go undetectedor to optimize an image for subsequent processing. Optics and illumination drawon skills from the disciplines of physics, mechanical engineering andelectrical engineering.

 

Vision System Integration. This refers to the meansand methods whereby a machine vision system is interfaced to and combined withother factory automation equipment for purposes of creating a complete solutionfor the customer. This may include the development of application specificsolutions for certain vertical market applications along with mechanicalfixturing for mounting camera and lighting components, networking andprogrammable controllers for process control, and reject mechanisms forejection of defective parts.

 

Various configurations of the Company’s productsinclude proprietary design work performed by the Company’s employees in each ofthese five 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 completemachine vision systems. The Company’s current research and development effortsare directed to increasing performance in image acquisition, image processingand application development software, which could produce systems with greaterspeed and accuracy while also providing customers with more expanded softwaretools. These efforts include the Company’s traditional two-dimensional (2D)machine vision systems as well as three- and one-dimensional (3D and 1D) sensorproducts. Key software products under development will enable support fordifferent hardware and user interfaces, as well as increasing the developmentspeed of application specific software tools. The Company also intends toexpand its offerings of application-specific software and hardware products forthe industries it identifies as being poised to exhibit significant growth indemand for machine vision solutions, which includes electronics andsemiconductors.

 

Research and development expenditures were $5.0million, $5.3 million, $4.5 million and $2.9 million in the fiscal years endedOctober 31, 2001, 2000, 1999, and 1998, respectively.

 

# **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 the components used in the Company’s machinevision systems are available off-the-shelf, some components are available fromonly a single supplier or from a limited number of suppliers. The Companytypically purchases inventory and builds products in response to quarterlysales forecasts, enabling it to ship products within 30 days after receipt ofan 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.

 

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 suchproducts, 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 alsobelieves its ability to efficiently develop and sell high performance,cost-effective vision systems on a timely basis, whether patented or not, iscrucial to the Company’s future success. The Company requires each of itsemployees to enter into standard agreements pursuant to which the employeeagrees to keep confidential all proprietary information of the Company and toassign to the Company all rights in any proprietary information or technologymade or contributed by the employee during his or her employment or madethereafter as a result of any inventions conceived or work done during suchemployment. Despite these precautions, it may be possible for a third party tocopy or otherwise 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.

 

A number of users of machine-vision technology havereceived notice of alleged patent infringement from, or have been sued by, theLemelson Medical, Education and Research Foundation Limited Partnership(“Lemelson Foundation”) alleging that their use of machine-vision technology intheir production processes infringes certain patents issued to Jerome H.Lemelson.  Certain of these users havenotified the Company that, in the event it is subsequently determined thattheir use of the Company’s products in their production processes infringes anyof Mr. Lemelson’s patents, they may seek indemnification from the Company fordamages or expenses resulting from this matter. The Company believes that ithas defenses to such indemnification claims. To date, the Company has receivedno actual claims for indemnification. The Company cannot predict the outcomes from the claims of allegedinfringement made by the Lemelson Foundation or the effect of such outcomes onthe operating results of the Company.

 

The Company has obtained United States federalregistration for its “PPT”, “PPT VISION”, “Passport”, “Scout”, “Passport DSL”and “Scout DSL” trademarks. The Company intends to file for federal registrationof additional trademarks in the future. Although no assurance can be given asto the strength or scope of the Company’s trademarks, the Company believes thatits trademarks have been and will be useful in developing and protecting marketrecognition for its products.

 

# **EMPLOYEES**

 

As of January 15, 2002, the Company had 89 full-timeemployees, including 39 employees in research and development, 27 in sales,marketing and application engineering, 17 in manufacturing and 6 in finance andadministration. To date, the Company has been successful in attracting andretaining qualified technical personnel, although there can be no assurancethat this 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-K. Forward-looking statements may also be made in the Company’s otherreports filed under the Securities Exchange Act of 1934, in its press releasesand in other documents. In addition, from time to time the Company, through itsmanagement, 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 to identifyforward-looking statements. Readers are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date on whichthey are made.  The Company undertakesno obligation to update publicly or revise any forward-looking statements.

 

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:

 

Technological Change and New Product Development. Themarket for the Company’s products is characterized by rapidly changingtechnology. The Company’s future success will continue to depend upon itsability to enhance its current products and to develop and introduce newproducts that keep pace with technological developments and evolving industrystandards, respond to changes in customer requirements and achieve marketacceptance. Any failure by the Company to anticipate or respond adequately totechnological developments and customer requirements, or any significant delaysin product development or introduction, could have a material adverse effect onthe Company’s business, results of operations, financial condition andliquidity. In addition, there can be no assurance the new products and servicesor product and service enhancements, if any, developed by the Company willachieve market acceptance.

 

Dependence Upon Principal Customers. In each of thepast several years, the Company has had one or more customers that haveaccounted for ten percent or more of the Company’s net revenues. During thefiscal year ended October 31, 2001, revenue from Tokyo Weld, Co., Ltd.accounted for 22% of net revenues and revenue from Simac Masic B.V. accountedfor 11% of net revenues.  The Companydoes not have in effect long-term agreements with these customers under whichthe customers have agreed to purchase significant quantities of the Company'sproducts.  The loss of, or significantcurtailment of purchases by, any of the Company’s principal customers andsubsequent failure to replace its customers could have a material adverseeffect on the Company’s results of operations.

 

Cyclicality of Capital Spending by Customers. Asignificant portion of the Company’s revenue is derived from sales to varioussegments of the electronic component industry, such as metal stamping,electronic connectors and passive components. The markets for these segments,and for the electronic component industry in general, can be cyclical,resulting in varying amounts of capital spending. Any significant downturn incapital spending in these markets, or in any other markets served by theCompany’s products, could have a material adverse effect on the Company’sbusiness and results of operations.

 

Proprietary Technology. The Company relies heavily onits image acquisition and image processing hardware designs, along withproprietary software technology. Although the Company has been issued patents,or obtained licenses to patents, in the past on certain technology and haspatents pending on new technologies, it currently relies most heavily onprotecting its proprietary information as trade secrets. There can be noassurance that the steps taken by the Company will be adequate to preventmisappropriation of its technology by third parties or will be adequate underthe laws of some foreign countries, which may not protect the Company’sproprietary rights to the same extent as do laws of the United States. Inaddition, the possibility exists that others may “reverse engineer” theCompany’s products in order to determine their method of operation and thenintroduce competing products. Further, many high technology markets, includingsegments of the machine vision industry, are characterized by the existence ofa large number of patents and frequent litigation for financial gain based onpatents with broad, and often questionable, application. As the number of theCompany’s products increases, the markets in which its products are soldexpands and the functionality of those products grows and overlaps withproducts offered by competitors. The Company has been sued for patentinfringement in the past and may be subject to patent infringement claims inthe future.  In addition to beingexpensive and time consuming for the Company and its management, protractedlitigation to defend or to prosecute intellectual property could result in somecustomers deferring or limiting their purchase of the Company’s product untilresolution of the litigation.  Althoughthe Company is not aware that any of its products or proprietary rightsinfringe upon the valid rights of third parties, there can be no assurance thatinfringement claims will not be asserted against the Company in the future orthat any such claims will not require the Company to enter into royaltyarrangements or result in costly litigation.

 

Revenue Fluctuations. The Company has experiencedannual fluctuations in operating results and anticipates that thesefluctuations will continue. These fluctuations have been caused by variousfactors, including the order flow of its principal customers, the timing andacceptance of new product introductions and enhancements and the timing ofproduct shipments and marketing. Future operating results may fluctuate as aresult of these and other factors, including the Company’s ability to continueto develop innovative products, the announcement or introduction of newproducts by the Company’s competitors, the Company’s product and customer mix,the level of competition and overall trends in the economy.

 

Dependence on Outside Contractors and Suppliers. TheCompany currently contracts with third party assembly houses for a substantialportion of its components and assembly needs. Although the Company endeavors toinspect and internally test most components prior to final assembly, relianceon outside contractors reduces its control over quality and delivery schedules.The failure by one or more of these subcontractors to deliver qualitycomponents in a timely manner could have a material adverse effect on theCompany’s results of operations. In addition, a number of the componentsintegral to the functioning of the Company’s products are available from only asingle supplier or from a limited number of suppliers. Any interruption in ortermination of supply of these components, or a material change in the purchaseterms, including pricing, or a reduction in their quality or reliability, couldhave a material adverse effect on the Company’s business or results ofoperations.

 

International Revenue. In the years ended October 31,2001, 2000 and 1999, sales of the Company’s products to customers outside ofthe United States accounted for approximately 55%, 48% and 26%, respectively,of the Company’s net revenues. The Company anticipates that internationalrevenue will continue to account for a significant portion of its net revenues.The Company’s 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 the Company’s productsless price competitive relative to local product offerings. There can be noassurance that these factors will not have a material adverse effect on theCompany’s future international sales and, consequently, on the Company’soperating results.

 

Competition. The Company competes with other vendorsof machine vision systems, some of which may have greater financial and otherresources than the Company. There can be no assurance that the Company will beable to compete successfully in the future or that the Company will not berequired to incur significant costs in connection with its engineeringresearch, development, marketing and customer service efforts to remaincompetitive. Competitive pressures may result in price erosion or other factorswhich will adversely affect the Company’s financial performance.

 

Dependence on Key Personnel. The Company’s successdepends in large part upon the continued services of many of its highly skilledpersonnel involved in management, research and product development and sales,and upon its ability to attract and retain additional highly qualifiedemployees. The loss of services of these key personnel could have a materialadverse effect on the Company. The Company does not have key-person lifeinsurance on any of its employees.

 

                Utilization of Net Operating Loss. The utilization ofthe net operating loss carryforward is dependent upon the Company’s ability togenerate sufficient taxable income during the carryforward period. In fiscal2001, there was no tax provision due to the net loss for the period. At October31, 2001, the Company has available net operating loss and tax creditcarryforwards for income tax purposes of approximately $17.8 million and $0.9 million,respectively.  These carryforwardsexpire in the years ending October 31, 2002 through October 31, 2021. A valuation allowance equal to the deferredtax asset has been recorded.

# ** **

# **EXECUTIVE OFFICERS OF THE COMPANY**

 

The executive officers of the Company are as follows:

 
| **Name**              |   | **Age** |   | **Position**                                                           |
|-----------------------|--------|---------|--------|------------------------------------------------------------------------|
|                  |   |    |   |                                                                   |
| Joseph C. Christenson |   | 43      |   | President, Director                                                    |
|                  |   |    |   |                                                                   |
| Arye Malek            |   | 45      |   | Vice President and General Manager, Microelectronics  Systems Division |
|                  |   |    |   |                                                                   |
| David L. Friske       |   | 57      |   | Vice President of Manufacturing                                        |

 

**Joseph C. Christenson** has been President ofthe Company since January 1989 and a director since December 1987. Prior tobeing elected President of the Company, Mr. Christenson served in a series ofpositions of increasing responsibility since joining the Company in 1985. Mr.Christenson has a Masters in Business Administration from the University ofMichigan and a Bachelor of Arts degree from St. Olaf College.

 

**Arye Malek** has been Vice President andGeneral Manager of the Microelectronics Systems Division since February2000.  Prior to that, he served as VicePresident of Marketing of the Company since May 1996. He joined the Company inMay 1990 as a Senior Account Manager and became Director of InternationalOperations in November 1992. Mr. Malek holds a Bachelor of Science Degree fromthe University of Minnesota.

 

**David L. Friske** has been Vice President ofManufacturing of the Company since March 1999. From February 1984, Mr. Friskeserved as Director of Manufacturing and Purchasing.  Prior to joining the Company, Mr. Friske was employed byMedtronic, Inc.

 

# **Item 2. PROPERTIES**

 

                The Companyentered into a ten-year lease in May 1999 for approximately 59,000 square feetof office and manufacturing space in Eden Prairie, Minnesota.  The lease commenced on June 1, 1999 at aninitial monthly rate of approximately $51,000. The Company has an obligation to occupy additional space with additionallease payment over the term of the lease. The Company also leases space for its regional sales and support officesin Massachusetts and Michigan.

 

# **Item 3.  LEGALPROCEEDINGS**

 

                None.

 

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

# ** **

                None.

 

**PART II**

 

**Item5.  MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

 

**PRICE RANGE OF COMMON STOCK**

 

The Company’s Common Stock trades on the Nasdaq Stock Market under thesymbol “PPTV”.  The following table setsforth the high and low closing sale prices of the Company’s Common Stock on theNasdaq Stock Market as reported by Nasdaq.

 
|                                    |   | **High** |   | **Low** |   |
|-----------------------------------------|--------|----------|--------|---------|--------|
| **Fiscal  Year Ended October 31, 2001** |   |     |   |    |   |
| First Quarter                           |   | $        | 4.39   |    | $      | 2.75 |   |
| Second Quarter                          |   | 4.63     |   | 2.38    |   |
| Third Quarter                           |   | 3.50     |   | 2.10    |   |
| Fourth Quarter                          |   | 2.33     |   | 1.35    |   |
|                                         |        |          |        |         |        |  |  |

 

 
|                                   |   | **High** |   | **Low** |   |
|----------------------------------------|--------|----------|--------|---------|--------|
| **Fiscal Year Ended October 31, 2000** |   |     |   |    |   |
| First Quarter                          |   | $        | 4.63   |    | $      | 2.94 |   |
| Second Quarter                         |   | 7.25     |   | 3.56    |   |
| Third Quarter                          |   | 5.63     |   | 4.25    |   |
| Fourth Quarter                         |   | 6.00     |   | 4.19    |   |
|                                        |        |          |        |         |        |  |  |

 

                On January 18,2002, there were approximately 575 holders of record of the Company’s commonstock. This figure does not reflect more than 2,000 beneficial stockholderswhose shares are held in nominee names.

 

**DividendPolicy**

 

                The Company hasnever declared or paid any dividends on its Common Stock. The Company currentlyintends to retain any earnings for use in its operations and expansion of itsbusiness and therefore does not anticipate paying any cash dividends in theforeseeable future.

 

 

**Item6.  SELECTED FINANCIAL DATA**

 
|                                 |   | **YEAR ENDED OCTOBER 31,** |       |
|--------------------------------------|--------|----------------------------|------------|
|                                 |   | **2001**                   |       | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
| INCOME STATEMENT  DATA:              |   |                       |       |   |   |   |   |   |   |   |   |
| Net  revenues                        |   | $                          | 13,326,000 |   | $ | 18,272,000 |   | $ | 11,325,000 |   | $ | 13,512,000 |   | $ | 12,055,000 |   |
| Loss from  operations                |   | (5,020,000                 | )          | (4,138,000 | ) | (6,821,000 | ) | (1,184,000 | ) | (82,000 | ) |
| Net  income (loss)                   |   | (4,843,000                 | )          | (3,598,000 | ) | (7,734,000 | ) | 103,000 |   | 660,000 |   |
|                                 |   |                       |       |   |   |   |   |   |   |   |   |
|                                 |   |                       |       |   |   |   |   |   |   |   |   |
| Basic  net income (loss) per share   |   | $                          | (0.88      | ) | $ | (0.67 | ) | $ | (1.43 | ) | $ | 0.02 |   | $ | 0.12 |   |
| Diluted  net income (loss) per share |   | $                          | (0.88      | ) | $ | (0.67 | ) | $ | (1.43 | ) | $ | 0.02 |   | $ | 0.12 |   |
|                                 |   |                       |       |   |   |   |   |   |   |   |   |
|                                 |   |                       |       |   |   |   |   |   |   |   |   |
| BALANCE SHEET  DATA:                 |   |                       |       |   |   |   |   |   |   |   |   |
| Working  capital                     |   | $                          | 7,044,000  |   | $ | 11,166,000 |   | $ | 13,444,000 |   | $ | 20,495,000 |   | $ | 22,887,000 |   |
| Total  assets                        |   | 13,356,000                 |       | 19,412,000 |   | 21,845,000 |   | 29,575,000 |   | 29,986,000 |   |
| Shareholders’  equity           |   | 12,098,000                 |       | 16,871,000 |   | 19,171,000 |   | 27,871,000 |   | 27,535,000 |   |

 

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**RESULTSOF OPERATIONS**

 

**Comparisonof Year Ended October 31, 2001 to Year Ended October 31, 2000**

 

                Net revenuesdecreased 27.1% to $13.3 million in fiscal 2001 from $18.3 million in fiscal2000.  Unit sales of the Company’smachine vision systems decreased to 688 in fiscal 2001 versus 853 in fiscal2000.  Net revenues decreased primarilydue to slower economic growth, both domestically and internationally, in theCompany’s core markets, including electronics and automotive.  Gross revenues in fiscal 2001 decreased38.5% in the United States and decreased 14.1% outside the United States.  Sales to customers outside the United Statesrepresented 55% of net revenues in fiscal 2001, compared to 48% in fiscal 2000.

 

                Gross profitdecreased 33.1% to $6.8 million in fiscal 2001 from $10.1 million in fiscal2000 primarily as a result of the decrease in net revenues.  Gross profit as a percentage of net revenuesfor fiscal 2001 decreased to 50.7% compared to 55.3% in fiscal 2000.  The decrease in gross profit margin infiscal 2001 was attributable to the decrease in net revenues, as overhead wasbeing allocated over a lower revenue base.

 

                Selling expensesdecreased 6.4% to $4.4 million in fiscal 2001, compared to $4.7 million infiscal 2000.  As a percentage of netrevenues, fiscal 2001 selling expenses increased to 33.1%, compared with 25.8%in fiscal 2000.  The percentage increaseis due to lower fiscal 2001 revenues.

 

                General andadministrative expenses decreased slightly to $2.2 million in fiscal 2001,compared to $2.5 million in fiscal 2000. As a percentage of net revenues, general and administrative expensesincreased to 16.4% for fiscal 2001, compared to 13.7% for fiscal 2000.  The decrease in general and administrativeexpenses reflects the cost cutting measures implemented by the Company infiscal 2001 to lower its cost structure. The increase in general and administrative expenses as a percentage ofrevenues reflects the lower fiscal 2001 revenues.

 

                Research anddevelopment expenses decreased 6.8% to $5.0 million in fiscal 2001, from $5.3million in fiscal 2000.  Research anddevelopment expenses as a percentage of net revenues for fiscal 2001 increasedto 37.2%, compared to 29.2% for fiscal 2000. The slight decrease in research and development spending reflects theCompany's  effort to control operatingcosts in a weak economic environment, while still supporting an aggressive newproduct development agenda focused both on its 2D and 3D technology.

 

                Non-recurringcharges for fiscal 2001 relate to costs and expenses incurred in connectionwith the Company's cost reduction efforts, which included the closing of anoffice and the termination of a number of employees.

 

                Interest incomedecreased to $72,000 in fiscal 2001, compared to $424,000 in fiscal 2000.  The decrease in interest income is due tothe decline in balances of cash, cash equivalents and investments.

 

                Income Tax Benefit(Expense): There was no tax provision for fiscal 2001 or 2000 due to the netloss in the period.

 

**Comparisonof Year Ended October 31, 2000 to Year Ended October 31, 1999**

 

                Net revenuesincreased 61% to $18.3 million in fiscal 2000, compared to net revenues of$11.3 million in fiscal 1999.  Unitsales of the Company’s machine vision systems increased to 853 in fiscal 2000versus 387 in fiscal 1999.  Net revenuesincreased primarily due to strong performance both domestically andinternationally in the Company’s core markets, including electronics andautomotive.  Gross revenues in fiscal2000 increased 15% in United States and increased 195% outside UnitedStates.  Sales to customers outsideUnited States represented 48% of net revenues in fiscal 2000, compared to 26%in fiscal 1999.

 

                Gross profitincreased 64% to $10.1 million in fiscal 2000, compared to $6.2 million infiscal 1999.  Gross profit as apercentage of net revenues for fiscal 2000 remained relatively consistent at55.3% as compared to 54.5% in fiscal 1999. The increase in gross profit in absolute dollars in fiscal 2000 isattributed to the increase in net revenues.

 

                Selling expensesincreased 6% to $4.7 million in fiscal 2000, compared to $4.5 million in fiscal1999.  As a percentage of net revenues,fiscal 2000 selling expenses decreased to 25.8%, compared with 39.3% in fiscal1999.  The increase in selling expensesin absolute dollars is primarily the result of higher net revenues in fiscal2000.

 

                General andadministrative expenses were relatively constant at $2.5 million in fiscal 2000and fiscal 1999.  As a percentage of netrevenues, general and administrative expenses decreased to 13.7% for fiscal2000, compared to 22.4% for fiscal 1999. Fiscal 1999 general and administrative expenses included $719,000 inlegal fees related to the lawsuit with National Instruments Corporation, whichwas settled in the third quarter of fiscal 2000.  Net of the $719,000 in legal fees, general and administrativeexpenses for fiscal 1999 were $1.8 million. Using the $1.8 million as a comparison to fiscal 2000, general andadministrative expenses increased $695,000 year over year.  This increase is primarily related to patentamortization of the SMI Patent which commenced in June 1999, at a rate of$25,000 per month, bonus payments, severance charges and a general increase inother general and administrative expenses.

 

                Research anddevelopment expenses increased 17.7% to $5.3 million in fiscal 2000, comparedto $4.5 million in fiscal 1999. Research and development expenses as a percentage of net revenues forfiscal 2000 decreased to 29.2%, compared to 39.9% for fiscal 1999.  The increase in expenditures is mainly dueto resource commitments required to support new and existing productdevelopment programs, including development of the Company's patented ScanningMoiré InterferometryTM (SMIä)3D technology and patented DSL digital vision technology.

 

                Non-recurringcharges for fiscal 2000 relate to costs and expenses incurred in connectionwith the Company’s defense and settlement of the patent infringement lawsuitbrought by National Instruments Corporation and the Company’s defense andsettlement of the breach of contract lawsuit brought by Integrated ElectronicTechnologies.   In fiscal 1999,non-recurring charges of $1,481,000 consisted of the following:

 

a.               Capitalized equipmentwrite-offs of $953,000.  This equipmentconsisted of ready-made items purchased directly by the Company and equipmentconstructed to the Company’s specifications by two third-party vendors.   The equipment was determined to have futurealternative uses at the time of capitalization.  The product line associated with this equipment was laterdiscontinued in fiscal 1999 and the Company then determined that the equipmentno longer had alternative future uses.

 

b.              Accrued charges of$360,000.  These charges related topayments made to a third party vendor in connection with  the termination of a supply agreement withthe vendor.   This termination relatedto the Company's discontinued PPT 8600 product line.  This amount was included in accrued liabilities at October 31,1999 and paid in January 2000.

 

c.               A capitalizedsoftware write-off of $168,000.  Thisamount was originally capitalized during fiscal 1997 and fiscal 1998 when theCompany determined that this software-related project achieved technologicalfeasibility in accordance with paragraph 4 of FAS 86.  The amount was written off at the end of fiscal 1999 because, asa result of the decision to discontinue the PPT 8600 product line,  the Company had no current or future plansto finalize the project and the Company was beginning to explore other similarthird party product alternatives.

 

                Interest incomedecreased to $424,000 in fiscal 2000, compared to $701,000 in fiscal 1999.  The decrease in interest income is due tothe decline in balances of cash, cash equivalents and investments.

 

                There was no taxprovision for fiscal 2000 due to the net loss in the period.  In fiscal 1999, income tax expense of$1,650,000 was recorded.  This incometax expense resulted from the recording of a valuation allowance againstpreviously recorded deferred tax assets due to the uncertainty of futurerealization.  A valuation allowanceequal to the deferred tax asset has been recorded.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

                Working capitaldecreased to $7.0 million at October 31, 2001 from $11.2 million at October 31,2000.  The Company financed itsoperations in fiscal 2001 through internally generated cash flow, existing cashand cash equivalents and sales of investments. Net cash used in operating activities in fiscal 2001 was $824,000.

 

                Net cash providedby investing activities for fiscal 2001 was $1.8 million, generated from thesales and maturities of investments which was partially offset by cash used forthe purchase of fixed assets and investment in other long-term assets.  The Company used $676,000 of cash for thepurchase of fixed assets, mainly consisting of computer, lab and manufacturingequipment.  The Company used $77,000 ofcash for investment in other long-term assets, mainly consisting of costrelated to patent filings.  Investmentsconsist of short-term investment grade securities.

 

                Net cash providedby financing activities for fiscal 2001 was $58,000, resulting from theissuance of shares under the employee stock purchase plan and upon the exerciseof common stock options.

 

                The Company doesnot maintain a finished goods inventory for expected orders.  The Company builds finished systems onlywhen a firm sales order is in place for the purchase of a system.  During the final month of the Company’s fiscal2000 fourth quarter, all completed systems were shipped to customers resultingin no finished goods on hand at the end of fiscal 2000.  The finished goods on hand at the end offiscal 2001 were consignment inventory.

 

                The Companyentered into a ten-year lease in May 1999 for approximately 59,000 square feetof office and manufacturing space in Eden Prairie, Minnesota.  The lease commenced on June 1, 1999 at aninitial monthly rate of approximately $51,000. The Company has an obligation to occupy additional space with additionallease payments over the term of the lease.

 

                Although theCompany had $2.8 million in cash and cash equivalents and positive workingcapital of $7.0 million at October 31, 2001, the Company believes that thecontinuing slowdown in its core markets will require it to raise additionaldebt or equity during the current fiscal year to strengthen its working capitalposition.  The Company is currentlyexploring alternatives for raising additional capital.

 

**Effectsof Inflation**

 

                The Companybelieves that the effect of inflation has not been material during each of theyears ended October 31, 2001, 2000 and 1999, respectively.

 

**Item 7A.Quantitative and Qualitative Disclosures About Market Risk**

 

                The Company believes it does nothave material exposure to quantitative and qualitative market risks.  The carrying amounts reflected in theconsolidated balance sheets of cash and cash equivalents, investments, tradereceivables and trade payables approximate fair value at October 31, 2001 due tothe short maturities of these instruments.

 

**InterestRate Risk**

 

                The Company maintains investmentportfolio holdings of various issuers, types and maturities, primarily U.S.government and agency securities and other short-term, interest-bearing investmentgrade securities.   The Company’s cashand investments include cash equivalents, which the Company considers to beinvestments purchased with original maturities of three months or less.Investments having original maturities in excess of three months are stated atamortized cost, which approximates fair value, and are classified asavailable-for-sale.  Given the shortmaturities and investment grade quality of the portfolio holdings at October31, 2001, as well as the Company’s policy of holding rate-sensitive instrumentsto maturity, a 100 basis point rise in interest rates would not be expected tohave a material adverse impact on the fair value of the Company’s investmentportfolio.  As a result, the Company doesnot currently hedge these interest rate exposures.

 

**ForeignCurrency Exchange Rate Risk**

 

                Historically, theCompany’s international sales, which are primarily in Europe, South America,Japan and Southeast Asia, have been transacted in U.S. Dollars.  However, during fiscal 2000 the Company enteredinto forward foreign exchange contracts in Japanese Yen to hedge currencyexposures associated with specific contracts denominated in Japanese Yen. Thesecontracts are used to reduce the Company’s risk associated with exchange ratemovements, as the gains or losses on these contracts are intended to offset theexchange rate losses or gains on the underlying contracts.  The Company does not engage in foreigncurrency speculation.  At October 31,2001, the Company had no foreign exchange contracts outstanding.

 

**Item8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

                See Part IV, Item14 of this Form 10-K.

 

**Item 9.****       CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

                None.

 

**PART III**

 

**Item10.  DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

                Informationrequired under this item with respect to directors is contained in the section“Election of Directors” in the Company’s Proxy Statement for the Annual Meetingof Shareholders to be held on March 19, 2002 (the “2002 Proxy Statement”), adefinitive copy of which will be filed within 120 days of October 31, 2001 andis incorporated herein by reference.

 

                Informationconcerning executive officers and other key members of management is set forthin the Section entitled “Executive Officers of the Company” in Part I, Item 1of this Form 10-K pursuant to Instruction 3 to paragraph (b) of Item 401 ofRegulation S-K.

 

**Item11.  EXECUTIVE COMPENSATION**

 

                Informationrequired under this item is contained in the section entitled “ExecutiveCompensation and Other Information,” in the Company’s 2002 Proxy Statement andis incorporated herein by reference.

 

**Item12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

                Informationrequired under this item is contained in the section entitled “SecurityOwnership of Principal Shareholders and Management” in the Company’s 2002 ProxyStatement and is incorporated herein by reference.

 

**Item13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

                None

 

**PART IV**

 

**Item14.  EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K**

 

                (a)           Documents filed as Part of thisReport

 

(1)                                  FINANCIALSTATEMENTS.  The following financialstatements of the Company are hereby included in this Form 10-K.

 
|                                                                                         |   |
|----------------------------------------------------------------------------------------------|--------|
| Report of Independent  Accountants                                                           |   |
| Income Statements for the three years  ended October 31, 2001, 2000 and 1999                 |   |
| Balance Sheets as of October 31, 2001  and 2000                                              |   |
| Statements of Cash Flows for  the Years ended October 31, 2001, 2000 and 1999                |   |
| Statements of  Shareholders’ Equity for the Years ended October 31, 2001, 2000 and 1999 |   |
| Notes to Financial  Statements                                                               |   |

 

(2)                                  FINANCIALSTATEMENT SCHEDULES FOR THE THREE YEARS ENDED OCTOBER 31, 2001.

 
| VIII.        Valuation  and Qualifying Accounts |   |
|------------------------------------------------------------------------------------|--------|

 

                All otherschedules are omitted because they are not applicable or the requiredinformation is shown in the Financial Statements or the notes thereto.

 

                (b)           Reports on Form 8-K

 

                                Therewere no Reports on Form 8-K filed during the fourth quarter of the year endedOctober 31, 2001.

 

 

                (c)           Listing of Exhibits

 
| Exhibit No. |   | Description                                                                                                                                                                                                                                               |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |   | Restated Articles of Incorporation of Registrant  (incorporated by reference to Exhibit 3.1 of 1996 Form 10-K                                                                                                                                             |
| 3.2         |   | By-Laws of Registrant (incorporated by reference to  Exhibit 3.2 of 1996 Form 10-K                                                                                                                                                                        |
| 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) |
| 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        |   | Employment Agreement with Arye Malek dated as of May  1, 1990 (incorporated by reference from Exhibit 10.7 to May 15, 1996 Form  S-2)                                                                                                                     |
| 10.3*       |   | PPT VISION, Inc. 1988 Stock Option Plan, as amended  (incorporated by reference to Exhibit 10.6 of 1997 Form 10-K)                                                                                                                                        |
| 10.4*       |   | PPT VISION, Inc. 1997 Stock Option Plan  (incorporated by reference to Exhibit 10.7 of 1997 Form 10-K)                                                                                                                                                    |
| 10.5*       |   | PPT VISION, Inc. 2000 Stock Option Plan  (incorporated by reference to Form S-8 dated June 15, 2000, File No.  333-39344)                                                                                                                                 |
| 10.6        |   | Lease Agreement dated July 17, 1998 for facilities  at the Prairie Crossroads Corporate Center, Eden Prairie, Minnesota  (incorporated by reference to Exhibit 10.7 of 1999 Form 10-K)                                                                    |
| 10.7        |   | 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)                                                        |
| 21          |   | The Company has no subsidiaries                                                                                                                                                                                                                           |
| 23          |   | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                                      |

 

----

*Indicates compensatory plan

 

**SIGNATURES**

 

                Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                           |   | PPT VISION, Inc.                  |
|--------------------------------|--------|-----------------------------------|
|                           |   |                              |   |
| Dated:   January 31, 2002 |   | By:                               |    /s/ Joseph C. Christenson |
|                           |   | Joseph C. Christenson             |
|                           |   | (Principal Executive Officer      |
|                           |   | and Principal Accounting Officer) |

**Signatures and Power of Attorney**

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed by the following persons on behalf of the Registrant, in thecapacities, and on the dates, indicated. Each person whose signature appears below constitutes and appointsJoseph C. Christenson as his true and lawful attorney-in-fact and agents, eachacting alone, with full power of substitution and resubstitution, for him andin his name, place, and stead, in any and all capacities, to sign any or allamendments to this Annual Report on Form 10-K and to file the same, with theexhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission.

 
| Dated:   January 31, 2002 |   |   |   |   |   | /s/ Joseph C. Christenson         |
|--------------------------------|--------|--------|--------|--------|--------|-----------------------------------|
|                           |   |   |   |   |   | Joseph C. Christenson,            |
|                           |   |   |   |   |   | (Principal Executive Officer      |
|                           |   |   |   |   |   | and Principal Accounting Officer) |
|                           |   |   |   |   |   |                              |   |
|                           |   |   |   |   |   |                              |   |
| Dated:   January 31, 2002 |   |   |   |   |   | /s/ Robert W. Heller, Director    |
|                           |   |   |   |   |   | Robert W. Heller, Director        |
|                           |   |   |   |   |   |                              |   |
|                           |   |   |   |   |   |                              |   |
| Dated:   January 31, 2002 |   |   |   |   |   | /s/ David C. Malmberg, Director   |
|                           |   |   |   |   |   | David C. Malmberg, Director       |
|                           |   |   |   |   |   |                              |   |
|                           |   |   |   |   |   |                              |   |
| Dated:   January 31, 2002 |   |   |   |   |   | /s/ Peter R. Peterson, Director   |
|                           |   |   |   |   |   | Peter R. Peterson, Director       |
|                           |   |   |   |   |   |                              |   |
|                           |   |   |   |   |   |                              |   |
| Dated:   January 31, 2002 |   |   |   |   |   | /s/ Benno G. Sand, Director       |
|                           |   |   |   |   |   | /s/ Benno G. Sand, Director       |

 

 

### **REPORT OF INDEPENDENTACCOUNTANTS**

 

To the Shareholders and Board of Directorsof PPT VISION, Inc.

 

In our opinion,the financial statements listed in the accompanying index present fairly, inall material respects, the financial position of PPT VISION, Inc. at October31, 2001 and 2000, and the results of its operations and its cash flows foreach of the three fiscal years in the period ended October 31, 2001 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in ouropinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related financial statements.  These financial statements and the financialstatement schedule are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these the financial statements andthe financial statement schedule based on our audits.  We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

 

#### PricewaterhouseCoopers LLP

Minneapolis, MN

December 14, 2001

PPT VISION, INC.

 

INCOME STATEMENTS

 

 
|                                  |   | **YEAR ENDED OCTOBER 31,** |       |
|---------------------------------------|--------|---------------------------------|------------|
|                                  |   | **2001**                        |       | **2000** |   | **1999** |   |
| Net revenues                          |   | $                               | 13,326,000 |   | $ | 18,272,000 |   | $ | 11,325,000 |   |
| Cost of sales                         |   | 6,566,000                       |       | 8,162,000 |   | 5,150,000 |   |
| Gross profit                          |   | 6,760,000                       |       | 10,110,000 |   | 6,175,000 |   |
|                                  |   |                            |       |   |   |   |   |
| Expenses:                             |   |                            |       |   |   |   |   |
| Selling                               |   | 4,408,000                       |       | 4,710,000 |   | 4,456,000 |   |
| General and  administrative           |   | 2,192,000                       |       | 2,511,000 |   | 2,535,000 |   |
| Research and  development             |   | 4,963,000                       |       | 5,327,000 |   | 4,524,000 |   |
| Non-recurring  charges                |   | 217,000                         |       | 1,700,000 |   | 1,481,000 |   |
| Total expenses                        |   | 11,780,000                      |       | 14,248,000 |   | 12,996,000 |   |
|                                  |   |                            |       |   |   |   |   |
| Loss from  operations                 |   | (5,020,000                      | )          | (4,138,000 | ) | (6,821,000 | ) |
| Interest income                       |   | 72,000                          |       | 424,000 |   | 715,000 |   |
| Other income,  net                    |   | 105,000                         |       | 116,000 |   | 22,000 |   |
|                                  |   |                            |       |   |   |   |   |
| Loss before  income taxes             |   | (4,843,000                      | )          | (3,598,000 | ) | (6,084,000 | ) |
| Income tax  benefit (expense)         |   | --                              |       | -- |   | (1,650,000 | ) |
| Net income  (loss)                    |   | $                               | (4,843,000 | ) | $ | (3,598,000 | ) | $ | (7,734,000 | ) |
|                                  |   |                            |       |   |   |   |   |
| Net income  (loss) per share:         |   |                            |       |   |   |   |   |
| Basic                                 |   | $                               | (0.88      | ) | $ | (0.67 | ) | $ | (1.43 | ) |
| Diluted                               |   | $                               | (0.88      | ) | $ | (0.67 | ) | $ | (1.43 | ) |
|                                  |   |                            |       |   |   |   |   |
| Weighted average  shares outstanding: |   |                            |       |   |   |   |   |
| Basic                                 |   | 5,492,000                       |       | 5,346,000 |   | 5,398,000 |   |
| Diluted                               |   | 5,492,000                       |       | 5,346,000 |   | 5,398,000 |   |

 

The accompanying notesare an integral part of the financial statements

 

PPT VISION, INC.

BALANCE SHEETS

 

 
|                                                                                                                                                                                        |   | **OCTOBER 31,** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|------------|
|                                                                                                                                                                                        |   | **2001**             |       | **2000** |   |
| ASSETS                                                                                                                                                                                      |   |                 |       |   |   |
| Current assets                                                                                                                                                                              |   |                 |       |   |   |
| Cash  and cash equivalents                                                                                                                                                                  |   | $                    | 2,805,000  |   | $ | 1,818,000 |   |
| Restricted  cash                                                                                                                                                                            |   | --                   |       | 400,000 |   |
| Investments                                                                                                                                                                                 |   | 502,000              |       | 3,072,000 |   |
| Accounts  receivable, net                                                                                                                                                                   |   | 2,175,000            |       | 5,202,000 |   |
| Inventories,  net                                                                                                                                                                           |   | 2,592,000            |       | 2,890,000 |   |
| Other  current assets                                                                                                                                                                       |   | 228,000              |       | 325,000 |   |
| Total  current assets                                                                                                                                                                       |   | 8,302,000            |       | 13,707,000 |   |
| Fixed  assets, net                                                                                                                                                                          |   | 2,116,000            |       | 2,464,000 |   |
| Intangible  assets, net                                                                                                                                                                     |   | 2,885,000            |       | 3,188,000 |   |
| Other  assets                                                                                                                                                                               |   | 53,000               |       | 53,000 |   |
|                                                                                                                                                                                        |   |                 |       |   |   |
| Total  assets                                                                                                                                                                               |   | $                    | 13,356,000 |   | $ | 19,412,000 |   |
|                                                                                                                                                                                        |   |                 |       |   |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                                                                  |   |                 |       |   |   |
| Current  liabilities                                                                                                                                                                        |   |                 |       |   |   |
| Accounts  payable                                                                                                                                                                           |   | $                    | 494,000    |   | $ | 1,553,000 |   |
| Accrued  expenses                                                                                                                                                                           |   | 478,000              |       | 705,000 |   |
| Deferred  revenue                                                                                                                                                                           |   | 286,000              |       | 283,000 |   |
| Total  current liabilities                                                                                                                                                                  |   | 1,258,000            |       | 2,541,000 |   |
|                                                                                                                                                                                        |   |                 |       |   |   |
| Commitments  and contingencies                                                                                                                                                              |   |                 |       |   |   |
|                                                                                                                                                                                        |   |                 |       |   |   |
| Shareholders’  equity                                                                                                                                                                  |   |                 |       |   |   |
| Preferred  stock $.10 par value; authorized 10,000,000 shares, none outstanding Common  stock $.10 par value; authorized 10,000,000 shares; issued and outstanding  5,512,118 and 5,479,782 |   | 551,000              |       | 548,000 |   |
| Capital  in excess of par value                                                                                                                                                             |   | 30,117,000           |       | 30,062,000 |   |
| Accumulated  (deficit)                                                                                                                                                                      |   | (18,582,000          | )          | (13,739,000 | ) |
| Accumulated  other comprehensive income                                                                                                                                                     |   | 12,000               |       | -- |   |
| Total  shareholders’ equity                                                                                                                                                            |   | 12,098,000           |       | 16,871,000 |   |
|                                                                                                                                                                                        |   |                 |       |   |   |
| Total  liabilities and shareholders’ equity                                                                                                                                            |   | $                    | 13,356,000 |   | $ | 19,412,000 |   |

 

The accompanying notes are an integral part of thefinancial statements

PPT VISION, INC.

STATEMENTS OF CASH FLOWS

 
|                                                                                                |   | **YEAR ENDED OCTOBER 31,** |       |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                                |   | **2001**                        |       | **2000** |   | **1999** |   |
| Net income  (loss)                                                                                  |   | $                               | (4,843,000 | ) | $ | (3,598,000 | ) | $ | (7,734,000 | ) |
| Adjustment to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                            |       |   |   |   |   |
| Depreciation and  amortization                                                                      |   | 1,404,000                       |       | 1,189,000 |   | 1,093,000 |   |
| Deferred rent                                                                                       |   | --                              |       | -- |   | (102,000 | ) |
| Deferred income  tax benefit                                                                        |   | --                              |       | -- |   | (586,000 | ) |
| Deferred income  tax valuation allowance                                                            |   | --                              |       | -- |   | 2,274,000 |   |
| Loss on disposal  of fixed assets and other assets                                                  |   | --                              |       | -- |   | 964,000 |   |
| Accrued interest  income                                                                            |   | 2,000                           |       | 59,000 |   | 27,000 |   |
| Realized gain  (loss) on sales of investments                                                       |   | 74,000                          |       | 1,000 |   | (14,000 | ) |
| Change in assets  and liabilities:                                                                  |   |                            |       |   |   |   |   |
| Accounts  receivable                                                                                |   | 3,027,000                       |       | (1,911,000 | ) | (484,000 | ) |
| Inventories                                                                                         |   | 298,000                         |       | (699,000 | ) | (184,000 | ) |
| Other assets                                                                                        |   | 97,000                          |       | (34,000 | ) | 49,000 |   |
| Restricted cash                                                                                     |   | 400,000                         |       | (400,000 | ) | -- |   |
| Accounts payable                                                                                    |   | (1,059,000                      | )          | 182,000 |   | 428,000 |   |
| Accrued expenses                                                                                    |   | (227,000                        | )          | (598,000 | ) | 944,000 |   |
| Deferred revenue                                                                                    |   | 3,000                           |       | 283,000 |   | -- |   |
|                                                                                                |   |                            |       |   |   |   |   |
| Total  adjustments                                                                                  |   | 4,019,000                       |       | (1,928,000 | ) | 4,409,000 |   |
|                                                                                                |   |                            |       |   |   |   |   |
| Net cash  provided by (used in)                                                                     |   |                            |       |   |   |   |   |
| Operating  activities                                                                               |   | (824,000                        | )          | (5,526,000 | ) | (3,325,000 | ) |
|                                                                                                |   |                            |       |   |   |   |   |
| Cash flows from  investing activities:                                                              |   |                            |       |   |   |   |   |
| Purchase of  fixed assets                                                                           |   | (676,000                        | )          | (1,060,000 | ) | (1,877,000 | ) |
| Purchase of  investments                                                                            |   | --                              |       | (2,643,000 | ) | (10,590,000 | ) |
| Sales and  maturities of investments                                                                |   | 2,506,000                       |       | 7,797,000 |   | 17,238,000 |   |
| Net investment  in other long term assets                                                           |   | (77,000                         | )          | (107,000 | ) | (416,000 | ) |
|                                                                                                |   |                            |       |   |   |   |   |
| Net cash  provided by (used in)                                                                     |   |                            |       |   |   |   |   |
| Investing  activities                                                                               |   | 1,753,000                       |       | 3,987,000 |   | 4,355,000 |   |
|                                                                                                |   |                            |       |   |   |   |   |
| Cash flows from  financing activities:                                                              |   |                            |       |   |   |   |   |
| Proceeds from  issuance of common stock                                                             |   | 58,000                          |       | 1,222,000 |   | 368,000 |   |
| Repurchases of  common stock                                                                        |   | --                              |       | -- |   | (1,249,000 | ) |
|                                                                                                |   |                            |       |   |   |   |   |
| Net cash  provided by (used in)                                                                     |   |                            |       |   |   |   |   |
| Financing  activities                                                                               |   | 58,000                          |       | 1,222,000 |   | (881,000 | ) |
|                                                                                                |   |                            |       |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                               |   | 987,000                         |       | (317,000 | ) | 149,000 |   |
| Cash and cash  equivalents at beginning of year                                                     |   | 1,818,000                       |       | 2,135,000 |   | 1,986,000 |   |
|                                                                                                |   |                            |       |   |   |   |   |
| Cash and cash  equivalents at end of year                                                           |   | $                               | 2,805,000  |   | $ | 1,818,000 |   | $ | 2,135,000 |   |
|                                                                                                |   |                            |       |   |   |   |   |
| Supplemental  disclosure of cash flow information:                                                  |   |                            |       |   |   |   |   |
| Cash paid during  the year for:                                                                     |   |                            |       |   |   |   |   |
| Income tax                                                                                          |   | $                               | --         |   | $ | -- |   | $ | -- |   |
| Interest                                                                                            |   | $                               | --         |   | $ | -- |   | $ | -- |   |

 

The accompanying notesare an integral part of the financial statements

PPT VISION, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

 

 
|                                                   |   | **COMMON STOCK** |   | **CAPITAL IN  EXCESS OF  PAR VALUE** |    | **ACCUMULATED   OTHER   COMPREHENSIVE   INCOME** |   | **ACCUMULATED   (DEFICIT)** |   | **TOTAL   SHAREHOLDERS’   EQUITY** |    |
|--------------------------------------------------------|--------|------------------|--------|--------------------------------------|---------|--------------------------------------------------|--------|-----------------------------|--------|-----------------------------------------|---------|
| **SHARES**                                             |   | **AMOUNT**       |
|                                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| October 31,  1998                                 |   | 5,440,583        |   | $                                    | 544,000 |                                             | $      | 29,725,000                  |   | $                                       | 9,000   |   | $ | (2,407,000 | ) | $ | 27,871,000 |   |
| Stock issued  through the exercise of stock options    |   | 90,093           |   | 10,000                               |    | 274,000                                          |   |                        |   |                                    |    | 284,000 |   |
| Stock issued  through the employee stock purchase plan |   | 21,099           |   | 2,000                                |    | 82,000                                           |   |                        |   |                                    |    | 84,000 |   |
| Stock  repurchased                                     |   | (295,500         | )      | (30,000                              | )       | (1,219,000                                       | )      |                        |   |                                    |    | (1,249,000 | ) |
| Comprehensive  loss:                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| Net loss                                               |   |             |   |                                 |    |                                             |   |                        |   | (7,734,000                              | )       | (7,734,000 | ) |
| Unrealized loss  on investments                        |   |             |   |                                 |    |                                             |   | (85,000                     | )      |                                    |    | (85,000 | ) |
| Total  Comprehensive Loss                              |   |             |   |                                 |    |                                             |   |                        |   |                                    |    | (7,819,000 | ) |
|                                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
|                                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| October 31,  1999                                 |   | 5,256,275        |   |                                 | 526,000 |                                             |   | 28,862,000                  |   |                                    | (76,000 | ) |   | (10,141,000 | ) |   | 19,171,000 |   |
| Stock issued  through the exercise of stock options    |   | 19,275           |   | 2,000                                |    | 69,000                                           |   |                        |   |                                    |    | 71,000 |   |
| Stock issued  through the employee stock purchase plan |   | 34,232           |   | 3,000                                |    | 128,000                                          |   |                        |   |                                    |    | 131,000 |   |
| Issuance of  common stock                              |   | 170,000          |   | 17,000                               |    | 1,003,000                                        |   |                        |   |                                    |    | 1,020,000 |   |
| Comprehensive  loss:                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| Net loss                                               |   |             |   |                                 |    |                                             |   |                        |   | (3,598,000                              | )       | (3,598,000 | ) |
| Unrealized gain  on investments                        |   |             |   |                                 |    |                                             |   | 76,000                      |   |                                    |    | 76,000 |   |
| Total  Comprehensive Loss                              |   |             |   |                                 |    |                                             |   |                        |   |                                    |    | (3,522,000 | ) |
|                                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
|                                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| October 31,  2000                                 |   | 5,479,782        |   |                                 | 548,000 |                                             |   | 30,062,000                  |   | --                                      |    |   | (13,739,000 | ) |   | 16,871,000 |   |
| Stock issued  through the exercise of stock options    |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| Stock issued  through the employee stock purchase plan |   | 32,336           |   | 3,000                                |    | 55,000                                           |   |                        |   |                                    |    | 58,000 |   |
| Stock  repurchased                                     |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| Comprehensive  loss:                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| Net loss                                               |   |             |   |                                 |    |                                             |   |                        |   | (4,843,000                              | )       | (4,843,000 | ) |
| Unrealized gain  on investments                        |   |             |   |                                 |    |                                             |   | 12,000                      |   |                                    |    | 12,000 |   |
| Total  Comprehensive Loss                              |   |             |   |                                 |    |                                             |   |                        |   |                                    |    | (4,831,000 | ) |
|                                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
|                                                   |   |             |   |                                 |    |                                             |   |                        |   |                                    |    |   |   |
| October 31,  2001                                 |   | 5,512,118        |   | $                                    | 551,000 |                                             | $      | 30,117,000                  |   | $                                       | 12,000  |   | $ | (18,582,000 | ) | $ | 12,098,000 |   |

 

 

The accompanying notes are an integral part of the financial statements

PPT VISION, INC.

NOTES TO FINANCIAL STATEMENTS

 

 

### **NOTE 1: ORGANIZATION AND OPERATIONS**

 

PPT VISION, Inc. designs, manufactures, markets, and integrates 2D and3D machine vision-based automated inspection systems for manufacturingapplications.  Machine vision-basedinspection systems enable manufacturers to realize significant economicpaybacks by increasing the quality of manufactured parts and improving theproductivity of manufacturing processes. The Company’s 2D machine vision product line is sold on a global basisto end-users, system integrators, and original equipment manufacturers (OEM’s)primarily in the electronic and semiconductor component, automotive, medicaldevice, and packaged goods industries. The Company’s *Speed*Scan 3DTMsensor, incorporating the Company’s patented high-speed Scanning MoiréInterferometryTM technology is sold to original equipmentmanufacturers for specific applications. The Company’s PPT861TM 3Dscanning system, which uses the Company’s *Speed*Scan 3D sensor, is anapplication-specific inspection solution targeted at inspection of leaded andbumped components in the semiconductor back-end manufacturing process,inspection of surface-mount electronic connectors, and inspection of componentsused in hard disk drives.

 

Although the Company had $2.8 million in cash and cash equivalents andpositive working capital of $7.0 million at October 31, 2001, the Companybelieves that the continuing slowdown in its core markets will require it toraise additional debt or equity during the current fiscal year to strengthenits working capital position.  TheCompany is currently exploring alternatives for raising additional capital.

 

### **NOTE 2:  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

CASH AND CASH EQUIVALENTS

 

For purposes of reportingcash flows, cash and cash equivalents include cash on hand and investments withoriginal maturities of three months or less.

 

RESTRICTED CASH

 

Restricted cash consisted of an investment in a certificate of depositused as collateral against certain outstanding forward foreign exchangecontracts at October 31, 2000.  Therewas no restricted cash at October 31, 2001.

 

INVESTMENT SECURITIES

 

Investment securities with original maturities greater than threemonths are stated at market values as provided by a third party serviceorganization, and are categorized as available-for-sale debt securities.  Changes in unrealized gains or losses oninvestment securities are recorded as other comprehensive income.

 

ACCOUNTS RECEIVABLE

 

Accounts receivable are shown net of allowance for doubtful accounts of$108,000 at October 31, 2001, and $100,000 at October 31, 2000.

 

INVENTORIES

 

Inventories are stated at the lower of cost or market, with costsdetermined on a first-in, first-out (“FIFO”) basis.  As of October 31, inventories consist of the following:

 
|                              |   | **2001** |      | **2000** |   |
|-----------------------------------|--------|----------|-----------|----------|--------|
| Manufactured  and purchased parts |   | $        | 2,126,000 |     | $      | 2,615,000 |   |
| Work-in-process                   |   | 436,000  |      | 275,000  |   |
| Finished  goods                   |   | 30,000   |      | --       |   |
|                              |   |     |      |     |   |
| Totals                            |   | $        | 2,592,000 |     | $      | 2,890,000 |   |
|                              |   |     |      |     |   |

 

The Company does not maintain a finished goods inventory for expectedorders.  The Company builds finishedsystems only when a firm sales order is in place for the purchase of a system.  During the final month of the Company’sfiscal 2000 fourth quarter, all completed systems were shipped to customersresulting in no finished goods on hand at the end of fiscal 2000.  The finished goods on hand at the end offiscal 2001 were consignment inventory.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

FORWARD FOREIGN EXCHANGECONTRACTS

 

Effective November 1, 2000, the Company adopted SFASNo. 133 - "Accounting for Derivative Instruments and HedgingActivities" which requires that all derivative financial instruments, suchas foreign exchange contracts, be recognized in the financial statements andmeasured at fair value regardless of the purpose or intent for holding them.Changes in the fair value of derivative financial instruments are recognizedperiodically in either income or shareholders' equity (as a component of othercomprehensive income).  There was notransition adjustment upon adoption by the Company of SFAS No. 133 as theCompany was already carrying the forward contracts at a value that approximatedfair value.

 

As part of the Company'srisk management programs, the Company formerly entered into forward exchangecontracts during fiscal 2000. The Company used forward exchange contracts tohedge against the currency risk associated with firmly committed Japanese yentransactions. In accordance with SFAS No. 133, the forward exchange contractswere recognized as cash flow hedges at fair value with the gain or loss on thecontracts being deferred in other comprehensive income. At October 31, 2000,the fair value of the contract was approximately $34,500.  The fair value was determined by taking thedifference in the spot rates at the time that the contracts were entered intoand at the balance sheet date times the notional amounts of the contracts. Theresults approximated what the fair values would have been if discounted futurecash flows would have been calculated using changes in the forward contractrates rather than using the spot rates. During fiscal 2001, the firmly committed Japanese yen transactions andthe forward exchange contracts were settled. No gains or losses were recognized in earnings for the fiscal year endedOctober 31, 2001 as the hedges were 100% effective.  At October 31, 2001, the Company had no foreign exchangecontracts outstanding.

 

The Company has not anddoes not hold or issue derivative financial instruments for trading purposes.

 

INTANGIBLE ASSETS

 

Intangible assets at October 31, 2001 and October 31, 2000, consistedof the following:

 
|                           |   | **2001** |      | **2000** |   |
|--------------------------------|--------|----------|-----------|----------|--------|
|                           |   |     |      |     |   |
| Patent  and trademark          |   | $        | 3,615,000 |     | $      | 3,538,000 |   |
| Less  accumulated amortization |   | (730,000 | )         | (350,000 | )      |
| Total  intangible assets       |   | $        | 2,885,000 |     | $      | 3,188,000 |   |

 

The patent and trademark balance of $3,615,000 as of October 31,2001 includes $3,041,000 which represents the cost to acquire United StatesPatent No. 5,646,733, (“Scanning Phase Measurement Method and System for anObject at a Vision Station”) which was purchased from a third party company infiscal year 1998.  Patent and trademarkcosts are amortized over five to ten years. The Company commenced amortizing Patent No. 5,646,733 in June 2000 inconjunction with the shipment of production product utilizing the underlyingtechnology.  The Company has recorded$447,000 of amortization expense related to Patent No. 5,656,733 as ofOctober 31, 2001.

 

OTHER ASSETS

 

Other assets at October 31, 2001 and October 31, 2000, represent aninvestment of $53,000 in a related party, which consisted of common stockownership of Electro-Sensors, Inc.  TheCompany has held the shares since 1997. The shares were acquired in exchange for certain patents held by theCompany.  The percentage ownership isless than 1% of Electro-Sensor, Inc. outstanding common stock.  There are no commitments or obligationsassociated with this investment.  Thereare also no intercompany transactions between Electro-Sensors, Inc. and theCompany.

 

FIXED ASSETS

 

Fixed assets consist of furniture, fixtures and equipment and arestated at cost net of accumulated depreciation. Depreciation is computed forbook purposes on a straight-line basis over the estimated useful life of theasset and for tax purposes over five and ten years using accelerated andstraight-line methods. At October 31, furniture, fixtures and equipmentconsisted of the following:

 
|                          |   | **2001**   |      | **2000**   |   |
|-------------------------------|--------|------------|-----------|------------|--------|
|                          |   |       |      |       |   |
| Equipment                     |   | $          | 6,694,000 |       | $      | 6,071,000 |   |
| Furniture and fixtures        |   | 972,000    |      | 918,000    |   |
|                          |   | 7,666,000  |      | 6,989,000  |   |
| Less accumulated depreciation |   | (5,550,000 | )         | (4,525,000 | )      |
| Total fixed assets            |   | $          | 2,116,000 |       | $      | 2,464,000 |   |

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company reviews its long-lived assets for impairment whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable.  Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to undiscounted future net cash flows expected to be generated bythe assets. If these assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets.

 

REVENUE RECOGNITION

 

In December 1999, the Securities and Exchange Commission (SEC) issuedStaff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition inFinancial Statements." SAB 101 summarizes certain of the SEC's views inapplying generally accepted accounting principles to revenue recognition infinancial statements. In October 2000, the SEC issued additional writtenguidance to further supplement SAB 101. The Company adopted SAB 101 in the fourth quarter of fiscal 2001. Theimplementation of SAB No. 101 did not change the Company's revenues or revenuerecognition policy.

 

The Company records sales revenue upon shipment to the customer as theterms are generally FOB shipping point and the Company has no significantremaining obligations.  The Company also recognizes revenueshipped to distributors upon shipment, as contracts with distributors do notinclude any right of return and pricing is fixed at the time of sale.  In certain cases, installation is performedby the Company and the related revenue is recognized as the installation iscompleted.

 

DEFERRED REVENUE

 

Deferred revenue results from amounts collected from customers inadvance of shipment of systems or in advance of performing services related tothe installation of the Company’s product. The Company recognizes revenue as systems are shipped or as services areperformed, as this is when significant risks and rewards of ownership havetransferred to the buyer.

 

RESEARCH AND DEVELOPMENT

 

Expenditures for research and development are expensed as incurred.

 

INCOME TAXES

 

The Company accounts for income taxes under the provisions of SFAS No.109, Accounting for Income Taxes.  Underthe asset and liability method prescribed in SFAS No. 109, deferred tax assetsand liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases.

 

EARNINGS PER SHARE

 

Basic earnings per share is computed using only weighted average commonshares outstanding. Diluted earnings per share gives effect to all dilutivepotential common shares outstanding during the fiscal reporting periods.

 
|                                                |   | **2001**  |       | **2000**  |   | **1999**   |   |
|-----------------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|
| Net  income (loss)                                  |   | $         | (4,843,000 | )         | $      | (3,598,000 | )      | $ | (7,734,000 | ) |
| Weighted  average shares outstanding – basic   |   | 5,492,000 |       | 5,346,000 |   | 5,398,000  |   |
| Dilutive  effect of stock options                   |   | --        |       | --        |   | --         |   |
| Weighted  average shares outstanding – diluted |   | 5,492,000 |       | 5,346,000 |   | 5,398,000  |   |
| Basic  earnings (loss) per share                    |   | $         | (0.88      | )         | $      | (0.67      | )      | $ | (1.43 | ) |
| Diluted  earnings (loss) per share                  |   | $         | (0.88      | )         | $      | (0.67      | )      | $ | (1.43 | ) |

 

At October 31, 2001, 2000 and 1999, options to purchase 740,000,788,000 and 647,000, respectively, and warrants to purchase 25,000 shares ofthe Company's common stock were not included in the calculation of dilutedearnings per share.  As the Company hada net loss, the inclusion of the aforementioned shares would have beenanti-dilutive.

 

## ESTIMATES BY MANAGEMENT

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

STOCK OPTIONS

 

The Company follows the disclosure only provisions of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” regarding disclosure of proforma information for stockcompensation.  As permitted by StatementNo. 123, the Company measures compensation cost using the methodsdescribed in Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees.”

 

RECLASSIFICATIONS

 

Certain amounts in the 1999 and 2000 financial statements have beenreclassified to conform with the 2001 presentation.

 

RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS

 

In July 2001, theFinancial Accounting Standards Board (“FASB”) issued Statements of FinancialAccounting Standards No. 141, “Business Combinations” (“SFASNo. 141”) and No. 142, “Goodwill and Other Intangible Assets” (“SFASNo. 142”). SFAS No. 141, which requires the purchase method ofaccounting be used for all business combinations completed after June 30,2001, clarifies the criteria for recognition of intangible assets separatelyfrom goodwill and requires unallocated negative goodwill to be written offimmediately as an extraordinary gain. SFAS No. 142, effective for fiscalyears beginning after December 15, 2001, requires that ratableamortization of goodwill be replaced with periodic tests of goodwill impairmentand that intangible assets, other than goodwill, which have determinable usefullives be amortized over their useful lives. Management believes that the adoption of SFAS No. 141 and SFASNo. 142 will have no impact on the Company’s financial position or resultsof operations.

 

In July 2001, the FASB also issued SFAS No. 143, “Accounting forAsset Retirement Obligations” (“SFAS No. 143”) which provides accountingrequirements for retirement obligations associated with tangible long-livedassets.  SFAS No. 143 is effectivefor fiscal years beginning after June 15, 2002.  Management believes the adoption of SFAS No. 143 will nothave a material impact on the Company’s financial position or results ofoperations.

 

In October 2001, the FASB issued SFAS No. 144, “Accountingfor Impairment of Long-Lived Assets” (“SFAS No. 144”).  SFAS No. 144, effective for financialstatements for fiscal years beginning after December 15, 2001, addressesissues relating to the implementation of SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”(“SFAS No. 121”), and develops a single accounting model for long-livedassets to be disposed of by sale, whether previously held and used or newlyacquired.  Management believes theadoption of SFAS No. 143 will not have a material impact on the Company’sfinancial position or results of operations.

 

Note 3:  NON-RECURRING CHARGES

 

During fiscal 2001 the Company had non-recurring expenses of $217,000incurred in connection with the Company's efforts to reduce operatingexpenses.  These charges representseverance payments and related costs associated with a reduction in theemployment force of 21 positions.

 

During fiscal 2000, the Company had non-recurring legal costs andexpenses of $1,700,000 incurred in connection with the Company’s defense andsettlement of the patent infringement lawsuit brought by National InstrumentsCorporation and the Company’s defense and settlement of the breach of contractlawsuit brought by Integrated Electronic Technologies.  Both lawsuits were settled during the thirdquarter of fiscal 2000.

 

In the fourth quarter of fiscal 1999, the Company recorded a one-timecharge of $1,481,000 for the write-down of assets associated with thediscontinuation of certain new product development initiatives.  As a result, $953,000 of equipment wasdetermined to no longer have alternative future uses.  In addition, a settlement for $360,000 was made with a vendor toterminate a purchase order for equipment that would have been used for thediscontinued product line.  This$360,000 was included in accrued liabilities at October 31, 1999, and was paidin fiscal 2000.  Also included in theone-time charge was a capitalized software write-off of $168,000.  This amount was written off during fiscal1999 because the Company had no current or future plans to finalize thesoftware project and the Company was beginning to explore other similar thirdparty product alternatives.

 

### **NOTE 4:  CUSTOMERINFORMATION**

 

SIGNIFICANT CUSTOMER INFORMATION

 

During 2001, revenue from one customer accounted for 22% of net revenuesand revenue from one other customer accounted for 11% of revenues.  During 2000, revenue from one customeraccounted for 17% of net revenues and revenue from one other customer accountedfor 12% of net revenues.  During 1999revenue from two customers accounted for 27% and 13% of net revenues,respectively.

 

At October 31, 2001, two customers accounted for 22% and 11% of totalaccounts receivable, respectively. At October 31, 2000, one customer accountedfor 13% of total accounts receivable.

 

CUSTOMER GEOGRAPHIC DATA

 

North American and export sales as a percentage of net revenues atOctober 31 are as follows:

 
|               |   | **2001** |   | **2000** |   | **1999** |   |
|--------------------|--------|----------|--------|----------|--------|----------|--------|
| United  States     |   | 45       | %      | 52       | %      | 74       | %      |
| Europe  and Canada |   | 13       | %      | 12       | %      | 13       | %      |
| Asia-Pacific       |   | 40       | %      | 31       | %      | 12       | %      |
| South  America     |   | 2        | %      | 5        | %      | 1        | %      |

 

### **NOTE 5:  ACCRUEDEXPENSES**

 

                Accrued expenses at October 31, include:

 
|                                             |   | **2001** |    | **2000** |   |
|--------------------------------------------------|--------|----------|---------|----------|--------|
| Vacation                                         |   | $        | 53,000  |     | $      | 20,000 |   |
| Employee  stock purchase plan payroll deductions |   | 69,000   |    | 83,000   |   |
| Accrued  compensation                            |   | 13,000   |    | 53,000   |   |
| Sales  and uses taxes payable                    |   | 96,000   |    | 101,000  |   |
| Severance  costs                                 |   | 52,000   |    | 159,000  |   |
| Other                                            |   | 195,000  |    | 289,000  |   |
| Total                                            |   | $        | 478,000 |     | $      | 705,000 |   |

 

### **NOTE 6:  COMMONSTOCK OPTIONS AND WARRANTS**

 

Under the Company’s 2000 Stock Option Plan, 1988 Stock Option Plan and1997 Stock Option Plan the Company may issue options to purchase up to1,600,000 shares of common stock to employees and directors.  Options are granted at the fair market valueon the date of grant.  The granting ofoptions and their vesting is within the discretion of the Company’s Board ofDirectors.

 

A summary of stock options issued and outstanding under these plans isas follows:

 
|                         |   | **Employee  Stock Options** |   |
|------------------------------|--------|-----------------------------|--------|
|                         |   | **Number**                  |   | **Weighted  Average  Option Price** |   |
| Balance  at October 31, 1998 |   | 523,950                     |   | $ | 6.15 |   |
| Granted                      |   | 269,850                     |   | $ | 4.11 |   |
| Exercised                    |   | (95,875                     | )      | $ | 3.24 |   |
| Forfeited                    |   | (26,500                     | )      | $ | 6.79 |   |
|                         |   |                        |   |   |   |
| Balance  at October 31, 1999 |   | 671,425                     |   | $ | 5.78 |   |
| Granted                      |   | 274,650                     |   | $ | 4.23 |   |
| Exercised                    |   | (19,275                     | )      | $ | 3.67 |   |
| Forfeited                    |   | (138,500                    | )      | $ | 5.89 |   |
|                         |   |                        |   |   |   |
| Balance  at October 31, 2000 |   | 788,300                     |   | $ | 5.25 |   |
| Granted                      |   | 144,900                     |   | $ | 2.38 |   |
| Exercised                    |   | ---                         |   | $ | --- |   |
| Forfeited                    |   | (193,432                    | )      | $ | 4.33 |   |
|                         |   |                        |   |   |   |
| Balance  at October 31, 2001 |   | 739,768                     |   | $ | 4.97 |   |

 
| As of October 31, 2001:        |   |         |
|-------------------------------------|--------|--------------|
| Price Range of  Outstanding Options |   |         |
| Options                             |   | $2.13-$12.00 |
| Expiration dates                    |   | 2001-2008    |
| Options  exercisable                |   | 479,803      |

 

The estimated weighted average grant-date fair value of stock optionsgranted is as follows:  2001 – $1.76,2000 – $2.56, and 1999 – $2.21.

 

The Company accounts for stock options and other equity instruments inaccordance with APB Opinion No. 25, “Accounting for Stock Issued toEmployees.”  Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation,” was issued in October 1995.  SFAS No. 123 establishes a fair value based method ofaccounting for employee stock based compensation plans and encourages companiesto adopt that method.  However, it alsoallows companies to continue to apply the intrinsic value based methodcurrently prescribed under APB Opinion No. 25, provided certain pro formadisclosures are made.  Had the Company’sstock option plans and its stock purchase plans compensation costs beendetermined based on the fair value at the option grant dates for awardsconsistent with the accounting provision of SFAS No. 123, the Company’snet income (loss) and earnings per share (loss) for fiscal years 2001, 2000 and1999 would have been adjusted to the pro forma amount indicated below:

 
| **Fiscal  Year Ended October 31,**      |   |        |   | **2001** |       | **2000** |   | **1999**   |   |
|----------------------------------------------|--------|-------------|--------|----------|------------|----------|--------|------------|--------|
| Net  income (loss)                           |   | As reported |   | $        | (4,843,000 | )        | $      | (3,598,000 | )      | $ | (7,734,000 | ) |
|                                         |   | Pro forma   |   | $        | (5,303,000 | )        | $      | (4,198,000 | )      | $ | (8,323,000 | ) |
| Basic  and diluted earnings (loss) per share |   | As reported |   | $        | (0.88      | )        | $      | (0.67      | )      | $ | (1.43 | ) |
|                                         |   | Pro forma   |   | $        | (0.97      | )        | $      | (0.79      | )      | $ | (1.54 | ) |

 

The following table summarizes stock options outstanding andexercisable at October 31, 2001.

 
| **Outstanding**           |   | **Exercisable** |   |
|---------------------------|--------|-----------------|--------|
| **Exercise  Price Range** |   | **Options**     |   | **Weighted Average Contractual Life  Remaining** |   | **Weighted Average Exercise Price** |   | **Options** |   | **Weighted Average Exercise Price** |   |
| $2.13 - $3.34             |   | 77,050          |   | 6.36 |   | $ | 2.55 |   | 7,550 |   | $ | 3.24 |   |
| $3.56 - $3.88             |   | 270,084         |   | 5.03 |   | $ | 3.73 |   | 180,265 |   | $ | 3.80 |   |
| $3.91 - $6.88             |   | 373,084         |   | 3.70 |   | $ | 6.17 |   | 272,438 |   | $ | 6.56 |   |
| $6.94 - $8.69             |   | 14,300          |   | 2.93 |   | $ | 7.35 |   | 14,300 |   | $ | 7.35 |   |
| $9.63 - $12.00            |   | 5,250           |   | 1.82 |   | $ | 11.66 |   | 5,250 |   | $ | 11.66 |   |
|                      |   | 739,768         |   | 4.43 |   | $ | 4.97 |   | 479,803 |   | $ | 5.55 |   |

 

The fair value of options granted under the Company’s fixed stockoption plans during fiscal 2001, 2000 and 1999 was estimated on the dates of grantusing the Black-Scholes options-pricing model. The assumptions for the fiscal periods ending October 31, were asfollows:

 
| **Fiscal  Year Ended October 31,** |   | **2001** |   | **2000** |   | **1999** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Risk  free interest rates               |   | 4.20     | %      | 5.13     | %      | 6.21     | %      |
| Expected  life                          |   | 6.0      |   | 6.0      |   | 6.0      |   |
| Expected  volatility                    |   | 85       | %      | 59       | %      | 47       | %      |
| Expected  dividends                     |   | 0        | %      | 0        | %      | 0        | %      |

 

Pro forma compensation cost related to shares purchased under theCompany’s Employee Stock Purchase Plan is measured based on the discount frommarket value.

 

In September of 1997, the Company issued a warrant to purchase 25,000shares of common stock with an exercise price of $12.00 and an expiration dateof September of 2004.

 

### **NOTE 7:  EMPLOYEESTOCK PURCHASE PLAN**

 

In March 2000, shareholders approved the adoption of the 2000 EmployeeStock Purchase Plan (the “2000 Plan”) to replace the 1995 Employee StockPurchase Plan (the “1995 Plan”) which by its terms expired during 2000. The2000 Plan provides for the purchase of up to 150,000 shares of common stockduring a five year annual offering period beginning June 1, 2000.  Under the terms of the 2000 Plan, eligibleemployees may purchase common stock annually at 85% of the lesser of(1) the fair market value on the first day of the annual offering periodor (2) the fair market value on the last day of each annual offeringperiod.  The 1995 Plan had similarprovisions.

 

The first phase of the 2000 Plan began on June 1, 2000 and employeeswere granted the right to purchase 53,354 shares at $3.88 per share.  The first phase of the 2000 Plan ended onMay 31, 2001 and employees purchased 32,336 shares at $1.81 pershare.  The second phase of the 2000Plan began on June 1, 2001 and employees were granted the right topurchase 53,354 shares at $3.88 per share.

 

### **NOTE 8:  SHAREHOLDERRIGHTS PLAN**

 

On June 2, 1999, the Company adopted a Shareholder Rights Plan(the “Rights Plan”) designed to deter coercive or unfair takeover tactics andto prevent a person or a group from gaining control of the Company withoutoffering a fair price to all shareholders. Under the terms of the Rights Plan, a dividend distribution of onePreferred Stock Purchase Right (“Right”) for each outstanding share of theCompany’s common stock was made to holders of record on June 22,1999.  These Rights entitle the holderto purchase one one-hundredth of a share of the Company’s Series A JuniorParticipating Preferred Stock (“Preferred Stock”) at an exercise price of$28.  The Rights become exercisable(a) 10 days after a public announcement that a person or group hasacquired shares representing 20% or more of the outstanding shares of commonstock, or (b) 10 business days following commencement of a tender orexchange offer for 20% or more of such outstanding shares of common stock.  The Company can redeem the Rights for $0.001per Right at any time prior to their becoming exercisable.  The Rights expire on June 2, 2009, unlessredeemed earlier by the Company.  Undercertain circumstances, if a person or group acquires 20% or more of theCompany’s common stock, the Rights permit shareholders other than the acquirerto purchase common stock having a market value of twice the exercise price ofthe Rights.  In addition, in the eventof certain business combinations, the Rights permit shareholders to purchasethe common stock of an acquirer at a 50% discount. Rights held by the acquirerwill become null and void in both cases.

 

On October 13, 1999, the Company amended the terms of the RightsPlan to enable a certain member of the Board of Directors of the Company topurchase up to 30% of the common stock of the Company without being deemed an“Acquiring Person” within the meaning of the Rights Agreement.

 

### **NOTE 9:  OPERATINGLEASES**

 

The Company leases facilities and equipment under non-cancelableoperating lease agreements.  Rent expensewas $762,000, $729,000, and $450,000 in 2001, 2000, and 1999 respectively.  Minimum future rental payments due undernon-cancelable operating lease agreements are as follows:

 
| 2002       |   | $         | 1,105,000 |   |
|------------|--------|-----------|-----------|--------|
| 2003       |   | 1,066,000 |      |
| 2004       |   | 1,026,000 |      |
| 2005       |   | 1,025,000 |      |
| 2006       |   | 961,000   |      |
| Thereafter |   | 2,229,000 |      |
| Total      |   | $         | 7,412,000 |   |

 

### **NOTE 10:  EMPLOYEESAVINGS PLAN**

 

The Company provides a supplementary retirement savings plan which isstructured in accordance with Section 401(k) of the Internal Revenue Code.  Employees eligible for the Plan maycontribute from one to fifteen percent of their monthly earnings on a pre-taxbasis, subject to annual contribution limitations.  The Company currently makes matching contributions of one dollarfor each dollar contributed by each Plan participant up to a maximum of $500annually.  For fiscal year 2002 thematch is $500.

 

The Company’scontributions under this program were approximately $188,000, $199,000, and$184,000 for the years ended October 31, 2001, 2000, and 1999, respectively.

 

NOTE 11:  INCOME TAXES

 

The provision for incometaxes differs from the statutory U.S. federal tax rate of 34% applied toearnings before income taxes for the fiscal periods ended October 31, asfollows:

 
|                                                   |   | **2001**  |       | **2000**  |   | **1999**   |   |
|--------------------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|
| Expected tax  provision (benefit) at statutory rate    |   | $         | (1,643,000 | )         | $      | (1,223,000 | )      | $ | (2,068,000 | ) |
| State income tax  provision, net of Federal tax effect |   | (191,000  | )          | (142,000  | )      | (241,000   | )      |
| Permanent  differences                                 |   | 7,000     |       | 7,000     |   | 5,000      |   |
| Tax credits and  other                                 |   | (87,000   | )          | 110,000   |   | (408,000   | )      |
| Increase in  valuation allowance                       |   | 1,914,000 |       | 1,248,000 |   | 4,362,000  |   |
| Total income tax  expense (benefit)                    |   | $         | --         |      | $      | --         |   | $ | 1,650,000 |   |

 

Deferred tax assets(liabilities) are comprised of the following at October 31:

 
|                                                 |   | **YEAR  ENDED OCTOBER 31,** |    |
|------------------------------------------------------|--------|----------------------------------|---------|
|                                                 |   | **2001**                         |    | **2000** |   |
|                                                 |   |                             |    |   |   |
| Depreciation                                         |   | $                                | 141,000 |   | $ | 92,000 |   |
| Deferred rent                                        |   | --                               |    | -- |   |
| Other                                                |   | 26,000                           |    | 94,000 |   |
| Net operating loss carryforwards                     |   | 6,062,000                        |    | 4,355,000 |   |
| Income tax credits                                   |   | 1,205,000                        |    | 978,000 |   |
|                                                 |   |                             |    |   |   |
| Total deferred tax assets before valuation allowance |   | 7,434,000                        |    | 5,519,000 |   |
|                                                 |   |                             |    |   |   |
| Less valuation allowance                             |   | (7,434,000                       | )       | (5,519,000 | ) |
|                                                 |   |                             |    |   |   |
| Net deferred tax asset                               |   | $                                | --      |   | $ | -- |   |

 

At October 31, 2001, the Company has available net operating loss andtax credit carryforwards for income tax purposes of approximately $17.8 millionand $0.9 million, respectively.  Thesecarryforwards expire in the years ending October 31, 2002 through October 31,2021.

 

The utilization of the net operating loss and tax credit carryforwardsis dependent upon the Company’s ability to generate sufficient taxable incomeduring the carryforward period.  Becauseof the uncertainty of future realization, a valuation allowance equal to thedeferred tax asset has been recorded.

 

NOTE 12:  QUARTERLY FINANCIAL INFORMATION –UNAUDITED—in thousands

 
|        |   | **Net Sales** |   | **Gross Profit** |   | **Net Income (Loss)** |   | **Basic and Diluted Earnings (Loss) Per Share** |   |
|-------------|--------|---------------|--------|------------------|--------|-----------------------|--------|-------------------------------------------------|--------|
| **Quarter** |   | **2001**      |   | **2000**         |   | **%   Change**        |   | **2001**                                        |   | **2000** |   | **%   Change** |   | **2001** |   | **2000** |   | **%   Change** |   | **2001** |   | **2000** |   | **%   Change** |   |
|        |   |          |   |             |   |                  |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First       |   | $             | 4,801  |             | $      | 4,107                 |   | 16.9                                            | %      | $ | 2,562 |   | $ | 2,330 |   | 10.0 | % | $ | (446 | ) | $ | (541 | ) | 17.6 | % | $ | (0.08 | ) | $ | (0.10 | ) | 20.0 | % |
|        |   |          |   |             |   |                  |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Second      |   | 4,438         |   | 4,125            |   | 7.6                   | %      | 2,381                                           |   | 2,306 |   | 3.3 | % | (597 | ) | (705 | ) | 15.3 | % | (0.11 | ) | (0.13 | ) | 15.4 | % |
|        |   |          |   |             |   |                  |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Third       |   | 2,009         |   | 4,714            |   | (57.4                 | )%     | 890                                             |   | 2,651 |   | (66.4 | )% | (2,049 | ) | (1,648 | ) | (24.3 | )% | (0.37 | ) | (0.31 | ) | (19.4 | )% |
|        |   |          |   |             |   |                  |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fourth      |   | 2,078         |   | 5,326            |   | (61.0                 | )%     | 927                                             |   | 2,823 |   | (67.2 | )% | (1,751 | ) | (704 | ) | (148.9 | )% | (0.32 | ) | (0.13 | ) | (146.2 | )% |
|        |   |          |   |             |   |                  |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total       |   | $             | 13,326 |             | $      | 18,272                |   | (27.1                                           | )%     | $ | 6,760 |   | $ | 10,110 |   | (33.1 | )% | $ | (4,843 | ) | $ | (3,598 | ) | (34.6 | )% | $ | (0.88 | ) | $ | (0.67 | ) | (31.3 | )% |

 

SCHEDULE VIII

 

Valuation and Qualifying Accounts and Reserves

 

Allowance for Doubtful Accounts:

 
|                         |   | **Balance at Beginning of Period** |    | **Additions Charged to Earnings** |   | **Deductions and Write-offs** |   | **Balance at End of Period** |    |
|------------------------------|--------|------------------------------------|---------|-----------------------------------|--------|-------------------------------|--------|------------------------------|---------|
| Year Ended  October 31, 1999 |   | $                                  | 29,000  |                              | $      | 101,000                       |   | $                            | (56,000 | ) | $ | 74,000 |   |
| Year Ended  October 31, 2000 |   | $                                  | 74,000  |                              | $      | 89,000                        |   | $                            | (63,000 | ) | $ | 100,000 |   |
| Year Ended  October 31, 2001 |   | $                                  | 100,000 |                              | $      | 40,000                        |   | $                            | (32,000 | ) | $ | 108,000 |   |

 

Reserve for Obsolete Inventory:

 
|                         |   | **Balance at Beginning of Period** |    | **Additions Charged to Earnings** |   | **Deductions** |   | **Balance at End of Period** |     |
|------------------------------|--------|------------------------------------|---------|-----------------------------------|--------|----------------|--------|------------------------------|----------|
| Year Ended  October 31, 1999 |   | $                                  | 19,000  |                              | $      | 195,000        |   | --                           |     | $ | 214,000 |   |
| Year Ended  October 31, 2000 |   | $                                  | 214,000 |                              | $      | 155,000        |   | $                            | (197,000 | ) | $ | 172,000 |   |
| Year Ended  October 31, 2001 |   | $                                  | 172,000 |                              | $      | 207,000        |   | $                            | (268,000 | ) | $ | 111,000 |   |