SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C.  20549

                                    FORM 10-K
                                    ---------
(Mark One)
   [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended October 31, 1997

                                       OR

   [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                 For the Transition period from              to

                        Commission File Number:  0-11518

                                PPT VISION, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

                             10321 West 70th Street
                             Eden Prairie, MN  55344
              -----------------------------------------------------
              (Address of principal executive offices and zip code)

       Registrant's telephone number, including area code:  (612) 995-9500

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

Securities registered pursuant to Section 12(g) of the Act:  Common Stock ($.10
par value)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
                                   YES  X      NO
                                       ---        ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ( )

As of January 5, 1998, assuming as market value the closing sale price of
$8.125 as reported by the Nasdaq System on that date, the aggregate market value
of shares of Common Stock held by non-affiliates was $33.8 million.

As of January 5, 1998, 5,387,805 shares of common stock, $.10 par value were
outstanding.

Documents Incorporated by Reference:  The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held March 12, 1998 is incorporated by
reference into Part III of this Form 10-K.

Page 2

                                TABLE OF CONTENTS
                                -----------------

PART I                                                                Page
                                                                      ----

     Item 1.   Business..............................................   3
                  Important Factors Regarding
                     Forward-Looking Statements......................  13
                  Executive Officers of the Company..................  17
     Item 2.   Properties............................................  17
     Item 3.   Legal Proceedings.....................................  18
     Item 4.   Submission of Matters for a
                  Vote of Security Holders...........................  18

PART II

     Item 5.   Market for Registrant's Common
                  Equity and Related Stockholder Matters.............  19
     Item 6.   Selected Financial Data...............................  20
     Item 7.   Management's Discussion and Analysis of Financial
                  Condition and Results of Operations................  22
     Item 7A.  Quantitative and Qualitative Disclosures About
                  Market Risk........................................  25
     Item 8.   Financial Statements and Supplementary Data...........  25
     Item 9.   Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure................  25

PART III

     Item 10.  Directors and Executive Officers of the Registrant....  26
     Item 11.  Executive Compensation................................  26
     Item 12.  Security Ownership of Certain
                  Beneficial Owners and Management...................  26
     Item 13.  Certain Relationships and Related Transactions........  26

PART IV

     Item 14.  Exhibits, Financial Statement Schedules, and Reports
                  on Form 8-K........................................  27

     Signatures......................................................  29



Page 3

                                    BUSINESS
                                    --------

OVERVIEW

  PPT Vision, Inc. ("PPT Vision" or the "Company") is a leading designer,
manufacturer, marketer and integrator of a complete family of machine vision
systems for end user manufacturers, system integrators and machine builders. The
Company's machine vision systems consist of a combination of proprietary
computer software and hardware, cameras and lighting, working together to
capture and analyze images of moving parts to determine the quality of
manufactured parts and control manufacturing processes. PPT Vision's systems
enable manufacturers to achieve 100% on-line inspection, thus achieving zero
defect production, in situations where previously only random sampling or less
precise human inspection was used as a means of monitoring quality. In addition
to functioning as a quality control tool, PPT Vision systems provide
manufacturers a window on their manufacturing processes by producing real-time
statistical process control feedback. This allows manufacturers to take earlier
corrective action to improve their manufacturing process.

  The Company's machine vision systems are used for a broad range of
manufacturing applications, including electronic and mechanical assembly
verification, verification of printed characters, packaging integrity, surface
flaw detection and gauging and measurement tasks. The Company's systems are
sold principally throughout North America, Europe and the Far East to various
industries, including electronics, pharmaceutical, medical products, automotive,
consumer products and plastics. Major manufacturing end users of PPT Vision
systems include AMP, Abbott Labs, Berg Electronics, Chrysler, the Delphi
Electronic Division of General Motors, Imation, Johnson & Johnson, Kemet,
Micron Technology, Molex, Siemens, 3M and United Technologies.

  PPT Vision believes that it has a leadership position as the most vertically
integrated developer of machine vision systems and solutions for a wide range
of manufacturing applications. Through this approach, PPT Vision can rapidly
and cost-effectively provide machine vision system solutions to a wide variety
of manufacturing end users while enabling them to concentrate their engineering
and manufacturing expertise on the products they manufacture. PPT Vision's
library of machine vision software tools enables end users to implement machine
vision solutions to a growing number of manufacturing applications quickly and
cost effectively.

BACKGROUND

  A machine vision system consists of computer software and hardware, working
together with cameras and lighting, to perform image analysis and image
processing for automated inspection, measurement and identification functions
in the manufacturing process. Commercial use of machine vision technology for
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. Through
advances in microprocessor and software technologies, these barriers have been

Page 4

removed, enabling machine vision to emerge as a powerful process control
technology that allows manufacturers to improve quality and increase
productivity.

  The machine vision market is large and highly fragmented. The Automated
Imaging Association ("AIA") estimates that the North American market for machine
vision systems in 1996 was approximately $1.0 billion, with worldwide levels
estimated at approximately $2.8 billion. The AIA expects this market to grow at
approximately 13% - 15% per year through the year 2001. According to the AIA,
over 70% of the estimated 200 companies in the North American machine vision
market have less than $5 million in annual revenues. Demand for machine vision
systems comes from end user manufacturers who apply these systems as an integral
part of their manufacturing process, original equipment manufacturers ("OEMs")
who incorporate machine vision systems into their products, systems integrators
and machine builders. The AIA estimates that a substantial majority of the North
American market for machine vision systems consists of sales to end user
manufacturers.

  A key factor in the expansion of the machine vision market is the growth in
the demand for machine vision systems in the semiconductor and electronics
industries. The growth in demand for personal computers, cellular
communications and other electronic devices, as well as the increase in
electronic components inside other products such as consumer appliances and
automobiles, is stimulating demand for electronic and semiconductor components.
In an effort to rapidly ramp up manufacturing capability while at the same time
introducing innovative new designs and improving quality, manufacturers of
these components are increasingly turning to machine vision as a vital part of
their manufacturing process.

  The growth of the end user machine vision market is also being driven by
global competitive trends, which have led manufacturers worldwide to
dramatically redesign manufacturing processes in order to reduce cost and
increase productivity and quality. In order to meet today's manufacturing
quality requirements, statistical sampling methods are insufficient and 100%
on-line inspection is required. To accomplish these objectives, manufacturers
are increasingly adopting machine vision solutions.

  Manufacturers are demanding expanded capabilities from machine vision
systems, including faster processing capabilities and greater ease of use.
Manufacturers are also demanding more comprehensive services from machine
vision providers, including application engineering, technical support and
training. Furthermore, manufacturers are seeking the ability to monitor trends,
to better comprehend the manufacturing process and to identify problems. In
addition, manufacturers are being challenged to maintain high production levels
which require rapid set up times, flexibility and seamless networking with the
host manufacturing control system to provide comprehensive diagnostic and
process control feedback.

THE PPT VISION SOLUTION

  The Company's machine vision systems are primarily targeted at providing
manufacturers with 100% on-line inspection in high speed discrete part
manufacturing applications. This typically replaces older off-line random

Page 5

sampling techniques or human vision inspection techniques as a means of
monitoring quality, thus enabling manufacturers to achieve zero defect
production.

  PPT Vision's family of machine vision systems, which include its proprietary
Vision Program Manager ("VPM") graphical programming software, provide
significant performance advantages that meet manufacturers' critical
requirements. These requirements include high speed, flexibility, ease-of-use,
networkability and statistical feedback, all without sacrificing performance.
All PPT Vision systems are supported by the Company's focus on providing its
customers with complete solutions, not just components, and a major commitment
to providing its customers with value-added application engineering services.

  PPT Vision has developed products that have specific advantages in terms of
speed and ease-of-use. The Company's machine vision systems are capable of
operating speeds of over 12,000 parts per minute performing 100% on-line
inspection. This speed is critical to successfully employing machine vision in
many applications. PPT Vision also pioneered the use of an icon-based visual
programming system (i.e. VPM) operating in the Microsoft(R) Windows(TM)
environment. Users are able to program the Company's systems by creating a
flowchart of icons linked together rather than having to write a computer
program in a programming language such as C or using a complex, pull-down menu-
based system. This results in lower cost and time for implementation.

  The Company is pursuing what it believes is the most fully vertically
integrated business model in the machine vision industry. PPT Vision develops
its own image acquisition and processing hardware, image analysis software,
application specific software tools and general purpose graphical user
interface. The Company also provides lighting solutions and value-added
application engineering services on a direct basis to manufacturers. These
capabilities enable PPT Vision to provide its customers with (i) application
specific software tools such as the Connector Tool used for inspection of fully
assembled electronic connectors, (ii) complete application specific products
such as the Stampede providing high speed inspection for precision metal
stamping applications, and (iii) complete custom solutions. This strategy
enables PPT Vision to leverage its investment in core software and hardware
architectures while providing improved service for the end user manufacturing
customers. In addition, PPT Vision markets its vision systems to manufacturing
system integrators and machine builders who address the end user market with
unique expertise in specific vertical markets. Many system integrators and
machine builders prefer to use the Company's complete vision systems, which
enable them to reduce programming development time, save money and concentrate
their expertise on material handling and integration issues. The Company
believes that this business model gives it a decisive competitive advantage in
providing cost effective, complete solutions to the end user machine vision
market.

Page 6

PPT VISION STRATEGY

  The Company's objective is to be a worldwide leader in the design,
manufacture, marketing and integration of machine vision systems for automated
manufacturing applications in the end user machine vision market. Through the
successful integration of the Company's five core competencies, including
image acquisition, image processing, application development software, optics
and illumination and vision system integration, the Company believes it will
be able to meet its objective and successfully implement its strategy.

  Key elements of the Company's strategy include:

  * Provide Complete Solutions to End Users: The Company focuses on providing
    complete machine vision solutions to end user manufacturers, system
    integrators and machine builders. PPT Vision is pursuing what it believes
    to be the most fully vertically integrated business model in the
    industry, including the design, manufacturing, marketing and integration
    of complete machine vision solutions. The Company believes this provides
    it with a competitive advantage in delivering cost effective complete
    vision solutions.

  * Extend Technology Leadership in Speed and Ease-of-Use: The Company is
    continuing to aggressively invest in next generation software and
    hardware architectures that will expand its lead in speed, ease-of-use
    and the ability to deliver cost effective complete solutions to its
    customers.

  * Target Expanding Markets Through Continued Development of Application
    Specific Software Tools and Hardware Products: The Company's application
    specific software tools are a proven solution for a wide variety of
    electronic component inspection applications. In response to the worldwide
    expansion of the semiconductor and electronics industries, the Company is
    developing additional software tools and hardware products for electronic
    component, electronics and semiconductor applications.

  * Provide a Superior Level of Value-Added Application Engineering Support:
    The Company delivers a high level of value-added application engineering
    support to its end user customers through its own in-house applications
    engineering resources. Manufacturing end users increasingly want to
    concentrate their engineering expertise on the products they manufacture,
    not on engineering machine vision systems. They are seeking complete
    machine vision solutions with the associated application engineering
    support on an on-going basis.

  * Increase International Market Presence: The Company is aggressively focusing
    on increasing its market share in the worldwide machine vision market. The
    Company believes international markets represent a significant opportunity
    and intends to capture a significant share of this market through investment
    and expansion in its international sales distribution and support
    infrastructure.

Page 7

PRODUCTS

  PPT Vision's systems consist of proprietary software and hardware working
together with cameras and lighting to capture and analyze images of parts on-
line. The four key process steps in the PPT Vision solution are lighting and
optics, image acquisition, image processing and outputs. In the lighting and
optics step, cameras, lenses and lighting options are configured to capture a
high-definition image of each part as it passes the camera. Image acquisition
involves capturing an image at an extremely high rate of speed and preparing the
image for further processing. In image processing, the machine vision system
measures critical part features and compares algorithmically the digital image
to a preset standard that has been programmed into the system. The output
function typically involves sending the results of the inspection process to the
production line controller or the host manufacturing control system, as well as
providing real-time process control data which can be used to improve the
production process over time.

  Software Operating System and Tools. All PPT Vision systems run on proprietary
software in a Microsoft(R) Windows(TM) environment using the Company's VPM user
interface. VPM is an icon-based, graphical language which is extremely flexible
and easy to use. It allows the Company's customers to create complete inspection
solutions without the need for knowledge of computer programming languages.
Instead of writing a computer program in a programming language such as C or
using a complex, pull-down menu-based system, the vision system is set up by
creating visual flowcharts. Clicking a trackball, the user graphically grabs
icons (representing machine vision functions) out of system toolboxes and
arranges them in the workspace on the system monitor. The icons are then
connected with different colored lines to indicate execution and data flow
throughout the inspection routine.

  Machine vision functions are performed by the Company's extensive set of
software tools. PPT Vision has developed a library of over 40 vision tools
contained in four toolboxes covering imaging, input/output ("I/O"), utility
and control functions. The Company's imaging toolbox contains all system tools
directly associated with image acquisition, processing and analysis. These
tools provide access to all of the Company's vision algorithms, which are the
vital core of all inspections performed by its vision systems. The I/O toolbox
holds all the tools which permit an inspection developer to control vision
system input and output options. These tools allow for system networking, data
collection and application control. The tools in the utility and control
toolboxes access functions such as counters, reset and display functions, math
and logical operations, data collection and screen controls. These toolboxes
also provide control of data flow to a variety of peripherals such as disk
drives, serial ports and Microsoft(R) Visual Basic(TM) programs.

  Hardware Architecture. PPT Vision's machine vision processor includes the
Company's proprietary high performance board set with a Texas Instruments DSP
(digital signal processor) and high speed pipeline architecture along with an
integrated PC for inspection set-up and networking and fully integrated I/O
capability. All PPT Vision systems are capable of capturing full framed video
images at a rate of up to 3,600 images per minute, in both strobed and shuttered
modes. Most competitors are limited to capturing full frame images at 1,800
images per minute, which is the industry standard. Much higher inspection rates

Page 8

are achieved through the use of the Company's exclusive partial scanning
technology and split-screen imaging, which enables speeds of over 12,000 parts
per minute.

  PPT Vision Product Family. The Company's newest machine vision systems are the
Passport(R) DSL(TM) and Scout(R) DSL(TM) (Digital Serial Link).  The DSL systems
are the world's first completely digital machine vision systems and network.
DSL-based systems are an integrated network of cameras, lighting, image
processors and hubs, which together form a complete machine vision system.  The
Passport DSL and Scout DSL systems are completely digital, which results in much
greater accuracy and repeatability than traditional analog systems.  A key
strength of the DSL network is that it enables the user to put processing power
where it is most needed, out on the network, reducing bottlenecks at the central
machine vision processor. The Passport DSL is housed in an industrially rugged
enclosure while the Scout DSL is packaged in a non-industrial style enclosure.
To complement the new DSL family, the Company has also developed the DSL6000
digital camera.

  The Company also offers the Passport 440, Passport 240, and Scout machine
vision systems.  The Passport 440 is designed to operate with up to four
asynchronously functioning cameras for multiple inspection views and complex
imaging tasks. The Passport 240 has all of the basic capabilities of the
Passport 440 in a two-camera model. Both systems are housed in industrially
rugged enclosures and are capable of operating at speeds of over 12,000
inspections per minute. The Scout is a cost-effective machine vision system
designed for industrial applications that do not require rugged enclosures. It
is packaged in a non-industrial style enclosure and is capable of running two
cameras with similar speed and power to the Passport 240.

  In addition, the Company sells a broad range of peripheral services and
components, including applications engineering, installation and training
services, custom lighting solutions, fixturing, cameras, cabling and various
software options.

MARKETS AND CUSTOMERS

  The Company sells its products to a broad range of industries, including
manufacturers of electronic and semiconductor components, pharmaceuticals,
medical devices, automotive components, consumer products and plastics. As of
October 31, 1997, the Company had sold 2,054 machine vision systems to over 200
customers since inception.

  The following is a representative list of end users of the Company's
products.

AMP                          Imation                      Reynolds Metals
Abbott Labs                  Johnson & Johnson            Siemens
Akzo                         Kemet                        Sumitomo
Allied Signal                Molex                        Suzuki
Berg Electronics             Motorola                     Thomas & Betts
Chrysler                     Novo Nordisk                 3M
Ford                         Philip Morris                Toshiba
GM-Delphi Division           Philips                      United Technologies

Page 9

  In each of the past several years, the Company has had one or more customers
that have accounted for ten percent or more of the Company's net revenues.
During the fiscal year ended October 31, 1997, sales to one customer, Simac
Masic B.V., a European distributor for the Company, represented 14% of net
revenues.  Sales to another customer, Advantek, Inc., represented 14% of net
revenues during fiscal 1997.  The loss of, or significant curtailment of
purchases by, any of the Company's principal customers could have a material
adverse effect on the Company's results of operations.

SALES, MARKETING AND CUSTOMER SUPPORT

  The Company sells its products primarily on a direct basis in the United
States to end users, system integrators, machine builders and OEMs. Outside the
United States, the Company sells primarily through a network of distributors
covering Europe, Asia and South America. The Company markets its products
through appearances at industry trade shows, advertising in industry journals,
articles published in industry and technical journals and through direct-selling
in specific vertical markets. In addition, the Company's strong customer
relationships serve as valuable references.

  The Company focuses on delivering a high level of value-added applications
engineering support to its end user customers through its own in-house
applications engineering resources. The Company also provides extensive
training opportunities for its customers, either at the Company's facilities or
on-site at the customer's facilities.

  The Company's sales and applications engineering departments are structured
along a team concept, with each team having dedicated sales and applications
engineering resources. The Company believes this team approach provides it with
increased flexibility in responding to customers' needs.

  In September of 1997 the Company created a new corporate group, the
Microelectronics Product Group ("MPG"), to develop and market high-speed
inspection equipment for the electronics and semiconductor industries. The first
two product offerings from the group will be a turnkey inspection system for
bumped wafers and a turnkey, total-package inspection system for ball-grid array
("BGA") components, including semiconductor packages and electronic connectors.

  The following table sets forth the percentage of the Company's net revenues
(including sales delivered through international distributors) by geographic
location during the past three years:
                                                    YEAR ENDED
                                                   OCTOBER 31,
                                                  --------------
                                                  1997 1996 1995
                                                  ---- ---- ----
      North America.............................. 78%  73%  67%
      Europe..................................... 14%  14%  21%
      Far East...................................  8%  13%  12%

  Substantially all of the Company's export sales are negotiated, invoiced and
paid in United States dollars.

Page 10

BACKLOG

  The Company does not believe backlog is a key indicator of future revenues in
the end user machine vision market. PPT Vision products are typically shipped
within 30 days after receipt of an order. The Company believes that maintaining
as short a time as practical for delivery is a competitive advantage in the end
user machine vision market. The nature of the end user machine vision market is
that customers do not normally place orders for large multiples of units with
scheduled deliveries over many months. Rather, end user machine vision
addresses a specific application or problem at a specific manufacturing site.

RESEARCH AND PRODUCT DEVELOPMENT

  PPT Vision's products are distinguished by the Company's proprietary
technology and its significant commitment to research and product development
efforts. The Company's research and product development efforts are focused on
its five core competencies, including image acquisition, imaging processing,
application development software, optics and illumination and vision system
integration. The Company believes that the integration of these core
competencies is essential to achieving long term success in the machine vision
market. The Company's five core competencies can be described as follows:

    Image Acquisition. This refers to the means and methods by which an image
  is captured, stored, and then made available for subsequent processing and
  display. Image acquisition combines the disciplines of photo-optics and
  electrical engineering.

    Imaging Processing. This refers to the means and methods whereby an image
  is analyzed or enhanced to produce some desired information, measurements
  or results. Image processing combines the disciplines of software
  engineering, mathematics, algorithm development and electrical engineering
  to implement efficient solutions to computationally complex problems.
  Typical image processing tasks include real-time inspection, guidance,
  gauging and recognition.

    Application Development Software. This refers to the means and methods
  whereby a machine vision system is configured and controlled. The
  development and support of applications development software requires
  expertise in the disciplines of object-oriented programming, graphical
  programming environments, man-machine interfaces, device drivers and
  general software engineering.

    Optics and Illumination. This refers to the means and methods by which a
  scene is illuminated and optically presented to an input device such as a
  video camera. Special optics and illumination techniques are often used to
  reveal features in an image which would otherwise go undetected or to
  optimize an image for subsequent processing. Strobed illumination is often
  used to "freeze" the motion of continuously moving parts. Optics and
  illumination draw on skills from the disciplines of physics, mechanical
  engineering and electrical engineering.

Page 11

    Vision System Integration. This refers to the means and methods whereby a
  machine vision system is interfaced to and combined with other factory
  automation equipment for purposes of creating a complete solution for the
  customer. This may include the development of application specific solutions
  for certain vertical market applications along with mechanical fixturing for
  mounting camera and lighting components, networking and programmable
  controllers for process control, and reject mechanisms for ejection of
  defective parts.

Various configurations of the Company's products include proprietary design
work performed by the Company's employees in each of these five areas.

  PPT Vision believes that continued and timely development of new products and
enhancements to existing product characteristics is essential to maintaining its
competitive position. The Company has committed and expects to continue to
commit substantial resources to its research and development effort, which plays
a significant role in maintaining and advancing its position as a leading
provider of complete machine vision systems. The Company's current research and
development efforts are directed to increasing performance in image acquisition,
image processing and application development software, which could produce
systems with greater speed and accuracy while also providing customers with more
expanded software tools. These efforts include the Company's traditional two-
dimensional ("2D") machine vision systems as well as three- and one-dimensional
("3D" and "1D") sensor products. Key software products under development will
enable support for different hardware and user interfaces, as well as increasing
the development speed of application specific software tools. The Company also
intends to expand its offerings of application specific software and hardware
products for the industries it identifies as being poised to exhibit significant
growth in demand for machine vision solutions, which includes electronics and
semiconductors.

  Research and development expenditures were $2.3 million, $1.8 million, and
$1.3 million in the fiscal years ended October 31, 1997, 1996, and 1995,
respectively.

MANUFACTURING

  The Company assembles, configures and tests its products at its suburban
Minneapolis facility. The Company's printed circuit boards are custom built by
several manufacturers. Most of the components used in the Company's machine
vision systems are available off-the-shelf. However, some components are
available from only a single supplier or from a limited number of suppliers.
The Company typically purchases inventory and builds products in response to
quarterly sales forecasts, enabling it to ship products within 30 days after
receipt of an order.

  Much of the Company's product manufacturing, consisting primarily of circuit
board manufacturing and assembly and machined parts production, is contracted
with outside vendors. Company personnel inspect incoming parts and perform
final assembly and testing of finished products. The Company believes that its
outsourcing strategy enables it to employ its resources on the key core
competency areas from which it derives its competitive advantages.

Page 12

COMPETITION

  The machine vision industry is highly fragmented. Recent data provided by the
AIA show that there were approximately 200 machine vision companies in North
America in 1996, of which over 70% had revenues of less than $5 million.
Currently, no competitor holds a significant aggregate market share percentage,
although some dominate individual niches within the overall machine vision
industry. The Company believes that over the next several years, the industry
will experience a continuing trend toward consolidation. However, given the
application specific nature of the industry, the Company also believes that the
machine vision industry will continue to have a relatively large number of
competitors.

  The Company believes the major competitive factors in the industry are
performance, quality, support and price. Although the Company believes that its
products are unique, competitors offer technologies and systems that are capable
of certain of the functions performed by the Company's products. The Company
faces competition from a number of companies in the machine vision market, some
of which have greater manufacturing and marketing capabilities and greater
financial, technological and personnel resources. Certain competitors in this
market include the machine vision group of Allen Bradley, the Acuity Imaging
division of Robotic Vision Systems, Inc. and Cognex Corporation.

  Although the Company believes that its current products offer several
advantages in terms of speed and ease-of-use and although the Company has
attempted to protect the proprietary nature of such products, it is possible
that any of the Company's products could be duplicated by other companies in
the same general market. There can be no assurances that the Company would be
able to compete with similar products produced by a competitor.

PATENTS AND PROPRIETARY RIGHTS

  The Company relies on a combination of patent, copyright, trademark and trade
secret laws to establish its proprietary rights in its products. The Company has
applied for foreign and domestic patents which are now pending with respect to
several key technologies. United States patent No. 5,530,813, "Field-
programmable electronic crossbar system and method for using same," was  issued
on June 25, 1996 and expires in August of 2014. In September of 1997 the Company
entered into a license agreement with Medar, Inc. ("Medar") under which it
acquired the exclusive worldwide rights for use of Medar's patented (5,646,733,
"Scanning Phase Measurement Method and System for an Object at a Vision
Station") 3D scanning technology for applications in the electronics and
semiconductor industries. This patent was issued on July 8, 1997 and expires in
January of 2016. The Company believes that the patents it owns and licenses may
have been useful in protecting the Company's proprietary products and may be
useful in  protecting  potential future products. The Company also believes its
ability to  efficiently develop and sell high performance, cost-effective vision
systems on  a timely basis, whether patented or not, is crucial to the Company's
future success. The Company requires each of its employees to enter into
standard  agreements pursuant to which the employee agrees to keep confidential
all  proprietary information of the Company and to assign to the Company all

Page 13

rights  in any proprietary information or technology made or contributed by the
employee during his or her employment or made thereafter as a result of any
inventions conceived or work done during such employment. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization or to develop
similar technology independently. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in certain
foreign countries.

  The Company has obtained United States federal registration for its "PPT",
"PPT Vision", "Passport" and "Scout" trademarks. The Company intends to file for
federal registration of additional trademarks in the future. Although no
assurance can be given as to the strength or scope of the Company's trademarks,
the Company believes that its trademarks have been and will be useful in
developing and protecting market recognition for its products.

EMPLOYEES

  As of January 22, 1998, the Company had 88 employees, including 32 employees
in research and development, 33 in sales and marketing, 16 in manufacturing and
7 in finance and administration. To date, the Company has been successful in
attracting and retaining qualified technical personnel, although there can be no
assurance that this success will continue. None of the Company's employees are
covered by collective bargaining agreements or are members of a union. The
Company has never experienced a work stoppage and believes that its relations
with its employees are excellent.

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

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

  Forward-looking statements are subject to risks and uncertainties, including
those identified below, which could cause actual results to differ materially
from such statements.  The words "anticipate", "believe", "expect", "intend",
"optimistic", "will" or similar expressions are intended to identify forward-
looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made.  The Company undertakes no obligation to update publicly or revise any
forward-looking statements.

  Important factors that could cause actual results to differ materially from
the Company's forward-looking statements, as well as affect 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. The market for the Company's
products is characterized by rapidly changing technology. The Company's future
success will continue to depend upon its ability to enhance its current products
and to develop and introduce new products that keep pace with technological

Page 14

developments and evolving industry standards, respond to changes in customer
requirements and achieve market acceptance. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business, results of
operations, financial condition and liquidity. In addition, there can be no
assurance the new products and services or product and service enhancements, if
any, developed by the Company will achieve market acceptance.

  Dependence Upon Principal Customers. In each of the past several years, the
Company has had one or more customers that have accounted for ten percent or
more of the Company's net revenues. During the fiscal year ended October 31,
1997, sales to one customer, Simac Masic B.V., a European distributor for the
Company, represented 14% of net revenues.  Sales to another customer, Advantek,
Inc., represented 14% of net revenues during fiscal 1997. The loss of, or
significant curtailment of purchases by, any of the Company's principal
customers could have a material adverse effect on the Company's results of
operations.

  Cyclicality of Capital Spending by Customers. A significant portion of the
Company's revenues are derived from sales to various segments 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 in capital spending in these markets, or in
any other markets served by the Company's products, could have a material
adverse effect on the Company's business and results of operations.

  Management of Growth. The Company's revenues have increased at an average
annual rate of 23% over the past five years. The Company's future success will
depend on the  ability of its officers and key employees to manage growth
successfully through maintenance of appropriate operational, financial and
management information systems and to attract, retain, motivate and effectively
manage its employees. If the Company's management is unable to manage growth
effectively, the Company's business, results of operations, financial condition
and liquidity could be materially and adversely affected.

  Proprietary Technology. The Company relies heavily on its image acquisition
and image processing hardware designs, along with proprietary software
technology. Although the Company has been issued patents, or obtained licenses
to patents, in the past on certain technology and has patents pending on new
technologies, it currently relies most heavily on protecting its proprietary
information as trade secrets. There can be no assurance that the steps taken by
the Company will be adequate to prevent misappropriation of its technology by
third parties or will be adequate under the laws of some foreign countries,
which may not protect the Company's proprietary rights to the same extent as do
laws of the United States. In addition, the possibility exists that others may
"reverse engineer" the Company's products in order to determine their method of
operation and then introduce competing products. Further, many high technology
markets, including segments of the machine vision industry, are characterized by
the existence of a large number of patents and frequent litigation for financial
gain that is based on patents with broad, and often questionable, application.
As the number of the Company's products increases, the markets in which its

Page 15

products are sold expands and the functionality of those products grows and
overlaps with products offered by competitors. As a result, the Company believes
that it may become increasingly subject to infringement claims in the future.
Although the Company does not believe any of its products or proprietary rights
infringe upon the rights of third parties, there can be no assurance that
infringement claims will not be asserted against the Company in the future or
that any such claims will not require the Company to enter into royalty
arrangements or result in costly litigation.

  Quarterly Fluctuations. The Company has experienced quarterly fluctuations in
operating results and anticipates that these fluctuations will continue. These
fluctuations have been caused by various factors, including the order flow of
its principal customers, the timing and acceptance of new product introductions
and enhancements and the timing of product shipments and marketing. Future
operating results may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop innovative products, the
announcement or introduction of new products 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. The Company currently
contracts with third party assembly houses for a substantial portion of its
components and assembly needs. Although the Company endeavors to inspect and
internally test most components prior to final assembly, reliance on outside
contractors reduces its control over quality and delivery schedules. The
failure by one or more of these subcontractors to deliver quality components in
a timely manner could have a material adverse effect on the Company's results of
operations. In addition, a number of the components integral to the functioning
of the Company's products are available from only a single supplier or from a
limited number of suppliers. Any interruption in or termination of supply of
these components, or a material change in the purchase terms, including pricing,
of any of these components, or a reduction in their quality or reliability,
could have a material adverse effect on the Company's business or results of
operations.

  International Revenue. In the years ended October 31, 1997, 1996 and 1995,
sales of the Company's products to customers outside North America accounted for
approximately 22%, 27% and 33%, respectively, of the Company's net revenues. The
Company anticipates that international revenue will continue to account for a
significant portion of its net revenues. The Company's operating results are
subject to the risks inherent in international sales, including various
regulatory requirements, political and economic changes and disruptions,
transportation delays and difficulties in staffing and managing foreign sales
operations and distributor relationships. In addition, fluctuations in exchange
rates may render the Company's products less price competitive relative to local
product offerings. There can  be no assurance that these factors will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's operating results.

  Competition. The Company competes with other vendors of machine vision
systems, some of which may have greater financial and other resources than the
Company. There can be no assurance that the Company will be able to compete

Page 16

successfully in the future or that the Company will not be required to incur
significant costs in connection with its engineering research, development,
marketing and customer service efforts to remain competitive. Competitive
pressures may result in price erosion or other factors which will adversely
affect the Company's financial performance.

  Dependence on Key Personnel. The Company's success depends in large part upon
the continued services of many of its highly skilled personnel involved in
management, research and product development and sales, and upon its ability to
attract and retain additional highly qualified employees. The loss of services
of these key personnel could have a material adverse effect on the Company. The
Company does not have key-person life insurance on any of its employees.

Page 17

EXECUTIVE OFFICERS OF THE COMPANY

  The executive officers of the Company are as follows:

NAME                            AGE  POSITION
-----                           ---  --------
Joseph C. Christenson..........  39  President, Director
Thomas R. Northenscold.........  39  Chief Financial Officer,
                                     Assistant Secretary
Larry G. Paulson...............  46  Vice President of Research and Development,
                                     Director
Arye Malek.....................  41  Vice President of Marketing

  Joseph C. Christenson has been President of the Company since January 1989
and a director since December 1987. Prior to being elected President of the
Company, he had been its Chief Operating Officer and Chief Financial Officer
from December 1987 to December 1988, General Manager and Chief Financial
Officer from August 1986 to November 1987, and financial analyst and marketing
manager since joining the Company in May 1985. Mr. Christenson has a Masters in
Business Administration from the University of Michigan and a Bachelor of Arts
degree from St. Olaf College.

  Thomas R. Northenscold has been Chief Financial Officer of the Company since
February 1995. Prior to that, he had been the Senior Vice President of
Operations in the City Directory Division of R.L. Polk and Company, a directory
publishing company, from April 1992 to April 1994. Mr. Northenscold was
previously employed at Cardiac Pacemakers, Inc., a medical device company, in
several finance and operations positions from June 1985 to April 1992. He has a
Masters in Business Administration in finance from the University of Michigan
and a Bachelor of Science degree from Mankato State University.

  Larry G. Paulson was a co-founder of the Company and has been Vice President
of Research and Development and a director of the Company since December 1981.
Mr. Paulson is also a Registered Professional Engineer and holds Bachelors and
Masters Degrees in Science from the University of Minnesota.

  Arye Malek has been the Vice President of Marketing of the Company since May
1996. He joined the Company in May 1990 as a Senior Account Manager and became
Director of International Operations in November 1992. Mr. Malek holds a
Bachelor of Science Degree from the University of Minnesota.


Item 2.  PROPERTIES
-------------------
  The Company leases approximately 28,400 square feet of office and
manufacturing space in suburban Minneapolis pursuant to a seven year lease
beginning in March 1994.  Rent payments for its facilities commenced at $7,093
per month during the first year of the lease and increase over the term of the
lease to $16,551 during the final twelve months of the lease.  The Company also
leases space for its regional sales and support offices in Massachusetts,
Michigan and North Carolina.

Page 18

Item 3. LEGAL PROCEEDINGS
-------------------------
  None.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
  None.


Page 19

                                     PART II
                                     -------

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------------------

                          PRICE RANGE OF COMMON STOCK

  Since December 28, 1995, the Company's Common Stock has traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol "PPTV." Prior
to that time, the Common Stock was traded on the Nasdaq SmallCap Market. The
following table sets forth the high and low sales prices of the Company's Common
Stock on the Nasdaq National Market for the period beginning December 28, 1995,
and the high and low closing bid prices for the Company's Common Stock on the
Nasdaq SmallCap Market for the periods prior to December 28, 1995, each as
reported by Nasdaq.


                                                                    HIGH   LOW
                                                                   ------ -----
      FISCAL YEAR ENDED OCTOBER 31, 1996
        First Quarter............................................. $13.17 $8.50
        Second Quarter............................................  16.00  8.83
        Third Quarter.............................................  19.25  6.88
        Fourth Quarter............................................  10.62  7.12
      FISCAL YEAR ENDING OCTOBER 31, 1997
        First Quarter............................................. $ 9.75 $6.50
        Second Quarter............................................   9.00  5.56
        Third Quarter.............................................   8.62  6.25
        Fourth Quarter............................................  10.38  7.62

  The Company estimates that there were approximately 3,100 beneficial holders
of the Company's Common Stock at January 20, 1998.

                                DIVIDEND POLICY

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

                   RECENT ISSUANCES OF UNREGISTERED SECURITIES

  On September 30, 1997, in connection with the execution of a license agreement
between the Company and Medar, Inc. ("Medar"), the Company granted a warrant to
Medar, to purchase Twenty-Five Thousand (25,000) shares of the Company's Common
Stock at a price of $12.00 per share.  The Warrant expires on September 30,
2004.   At the time the warrant was issued, Medar had assets of $50.9 million
and was an accredited investor as defined in Rule 501(a)(3) under the Securities
Act of 1933.  The Company believes the transaction was exempt under Section 4(2)
under the Securities Act of 1933.


Page 20

Item 6.  SELECTED FINANCIAL DATA
--------------------------------

<TABLE>

                                                    YEAR ENDED OCTOBER 31,
                                 ------------------------------------------------------------
                                    1997         1996         1995        1994       1993
                                 -----------  -----------  ----------  ---------- -----------
<S>                              <C>          <C>          <C>         <C>         <C>
INCOME STATEMENT DATA:
 Net revenues..................  $12,055,000  $12,693,000  $9,750,000  $6,587,000  $5,935,000
 Cost of sales.................    4,894,000    5,044,000   4,442,000   3,026,000   2,539,000
                                 -----------  -----------  ----------  ----------  ----------
  Gross profit.................    7,161,000    7,649,000   5,308,000   3,561,000   3,396,000
 Selling expenses..............    3,727,000    2,897,000   2,279,000   1,970,000   1,576,000
 General and administrative
  expenses.....................    1,177,000      976,000     851,000     711,000     550,000
 Research and development
  expenses.....................    2,339,000    1,827,000   1,299,000   1,133,000     831,000
                                 -----------  -----------  ----------  ----------  ----------
  Income (loss) from
   operations..................      (82,000)     879,000    (253,000)    439,000     296,000
 Other income
   (expense), net..............    1,147,000      453,000      61,000      40,000      (4,000)
                                 -----------  -----------  ----------  ----------  ----------
  Net income (loss) before
   taxes.......................    1,065,000    2,402,000     940,000    (213,000)    435,000
 Income tax (expense) benefit..     (405,000)   1,309,000     407,000       ----
                                 -----------  -----------  ----------  ----------  ----------
  Net income (loss)............  $   660,000  $ 3,711,000  $1,347,000  $ (213,000) $  435,000
                                 ===========  ===========  ==========  ==========  ==========
 Net income (loss) per
  share........................  $    0.12    $    0.84    $   0.37    $  (0.06)   $   0.13
                                 ===========  ===========  ==========  ==========  ==========
 Weighted average common
  shares outstanding...........    5,495,000    4,410,000   3,650,000   3,455,000   3,236,000
                                 ===========  ===========  ==========  ==========  ==========
</TABLE>

Page 21

<TABLE>

                                                            OCTOBER 31,
                                    ------------------------------------------------------------
                                       1997         1996         1995        1994        1993
                                    -----------  -----------  ----------  ----------  ----------
<S>                                 <C>          <C>          <C>         <C>         <C>
BALANCE SHEET DATA:
 Working capital................... $22,887,000  $24,083,000  $4,131,000  $3,253,000  $3,071,000
 Total assets......................  29,986,000   28,056,000   6,098,000   4,449,000   4,005,000
 Shareholders' equity..............  27,535,000   26,809,000   5,145,000   3,719,000   3,384,000
</TABLE>

Page 22

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Comparison of Year Ended October 31, 1997 to Year Ended October 31, 1996
------------------------------------------------------------------------
  Net Revenues: Net revenues decreased 5% to $12,055,000 in fiscal 1997,
compared to net revenues of $12,693,000 in fiscal 1996, although unit sales of
the Company's machine vision systems increased to 481 in fiscal 1997 versus 465
in fiscal 1996.  Net revenues decreased primarily because of lower average
selling prices per system due to changes in product mix.  Net revenues in fiscal
1997 were also affected by slowdowns in deliveries to customers in the
electronics segment, which mainly occurred during the first half of fiscal 1997.
Much of this slowdown was experienced in markets outside of North America.
Gross revenues in fiscal 1997 increased 1% in North America and decreased 24%
outside North America.  Sales to customers outside North America represented 22%
of gross revenues in fiscal 1997, compared to 27% for in fiscal 1996.

  Gross Profit: Gross profit decreased 6 percent to $7,161,000 in fiscal 1997,
compared to $7,649,000 in fiscal 1996. Gross profit as a percentage of net
revenues for fiscal 1997 decreased to 59%, compared with 60% in fiscal 1996. The
decrease in gross profit in 1997 is primarily due to the decline in sales.  The
Company anticipates that the gross profit as a percentage of net revenues may
fluctuate and may decline temporarily at certain times in fiscal 1998 due to
normal start-up costs associated with new product introductions.

  Selling Expenses: Selling expenses increased 29% to $3,727,000 in fiscal 1997,
compared to $2,897,000 in fiscal 1996. As a percentage of net revenues, fiscal
1997 selling expenses increased to 31%, compared with 23% in fiscal 1996.  The
increase in expenditures is primarily the result of the addition of several
application engineers and sales people in the latter part of fiscal 1996.
Although the Company anticipates selling expenses to increase in fiscal 1998 as
the Company maintains its investments in sales and applications engineering, the
Company believes that these expenditures will not increase substantially, and
may be reduced somewhat, as a percentage of net revenues in fiscal 1998,
depending on the level of sales growth.

  General and Administrative Expenses: General and administrative expenses
increased 21% to $1,177,000 in fiscal 1997, compared to $976,000 in fiscal 1996.
As a percentage of net revenues, general and administrative expenses increased
to 10% for fiscal 1997, compared to 8% for fiscal 1996.  The increase in
expenditures is primarily attributable to increased expenses associated with
operating the Company as it prepares for continued growth.  In addition, the
Company incurred a one-time charge during the third quarter of fiscal 1997 due
to the write-off of a receivable involving a bankruptcy.  The increase as a
percentage of net revenues is mainly related to the decline in sales.  The
Company believes that during fiscal 1998, general and administrative expenses
will not increase substantially, and may be reduced somewhat, as a percentage of
net revenues compared to fiscal 1997, depending on the level of sales growth.

Page 23

  Research and Development Expenses: Research and development expenses increased
28% to $2,339,000 in fiscal 1997, compared to $1,827,000 in fiscal 1996.
Research and development expenses as a percentage of net revenues for fiscal
1997 increased to 19%, compared to 14% for fiscal 1996.  The increase in
expenditures is mainly due to new product development programs and increased
permanent staffing and contract personnel to support these efforts.  While
research and development expenses may increase somewhat as the Company continues
to invest in next generation software and hardware development, the Company
expects that during fiscal 1998, such expenses will not increase substantially,
and may decline somewhat, as a percentage of net revenues compared to fiscal
1997, depending on the level of sales growth.

  Interest income increased 154% to $1,124,000 in fiscal 1997, compared to
$442,000 in fiscal 1996.  The increase in interest income is primarily due to a
full year of interest on the proceeds of a public stock offering completed in
June of 1996.

  Income Tax Benefit: Income tax expense was $405,000 in fiscal 1998.  In fiscal
1997, an income tax benefit of $1,309,000 was recorded to fully recognize the
potential future tax benefits of loss carry forwards and net deductible
temporary differences available to offset taxable income in future periods. As a
result of this full recognition, in fiscal 1997 the Company began reporting
earnings on a fully-taxed basis.

Comparison of Year Ended October 31, 1996 to Year Ended October 31, 1995
------------------------------------------------------------------------
  Net Revenues: Net revenues increased 30% to $12,693,000 in fiscal 1996,
compared to net revenues of $9,750,000 in fiscal 1995. The increase in net
revenues in fiscal 1996 was due to a 40% growth in unit sales, with sales of the
Company's machine vision systems increasing to 465 in fiscal 1996 versus 333 in
fiscal 1995. The Company attributes its sales growth to increased demand in all
markets. Net revenues in fiscal 1996 increased 42% in North America and 7%
outside North America. Sales to customers outside North America represented 27%
of total revenues in fiscal 1996, compared to 33% in fiscal 1995. The increase
in North America is primarily the result of increased sales to electronic
component and automobile manufacturers.

  Gross Profit: Gross profit increased 44% to $7,649,000 in fiscal 1996,
compared to $5,308,000 in fiscal 1995. Gross profit as a percentage of net
revenues for fiscal 1996 increased to 60%, compared with 54% in fiscal 1995. The
increase in gross profit as a percentage of net revenues in 1996 is primarily
due to economies of scale related to increasing volume, model mix shift, and
decreased material costs.

  Selling Expenses: Selling expenses increased 27% to $2,897,000 in fiscal 1996,
compared to $2,279,000 in fiscal 1995. As a percentage of net revenues, fiscal
1996 selling expenses remained relatively constant at 23%.

  General and Administrative Expenses: General and administrative expenses
increased 15% to $976,000 in fiscal 1996, compared to $851,000 in fiscal 1995.
As a percentage of net revenues, general and administrative expenses decreased
to 8% for fiscal 1996, compared to 9% for fiscal 1995. The increase in

Page 24

expenditures in fiscal 1996 is primarily attributable to increased expenses
associated with operating the Company as it continues to grow and to investments
in management infrastructure. The decrease as a percentage of net revenues is
mainly related to operating leverage provided by the Company's growing revenue
base.

  Research and Development Expenses: Research and development expenses
increased 41% to $1,827,000 in fiscal 1996, compared to $1,299,000 in fiscal
1995. Research and development expenses as a percentage of net revenues for
fiscal 1996 increased to 14%, compared to 13% for fiscal 1995. The increase in
expenses in fiscal 1996 is mainly due to new product development programs and
increased staffing to support these efforts.

  Interest income increased 625% to $442,000 in fiscal 1996, compared to $61,000
in fiscal 1995.  The increase in interest income is primarily due to interest on
the proceeds of a public stock offering completed in June of 1996.

  Income Tax Benefit: The income tax benefit of $1,309,000 recorded in fiscal
1996 reflects full recognition of the potential future tax benefits of loss
carry forwards and net deductible temporary differences available to offset
taxable income in future periods.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
  Working capital decreased to $22,887,000 at October 31, 1997 from $24,083,000
at October 31, 1996.  This decline was primarily due to the recording of a short
term liability of $1,000,000 related to future payments under the September 1997
license agreement with Medar, Inc. ("Medar"), as described below. The Company
financed its operations in fiscal 1997 through internally generated cash flow
and existing cash and cash equivalents. Net cash provided from operating
activities in fiscal 1997 was $1,692,000. Accounts receivable decreased $758,000
due to improvement in collections. Inventories increased $513,000 in fiscal 1997
primarily due to raw material purchases to support new product introductions as
well as a higher level of sales at year-end.

  In September of 1997 the Company entered into a license agreement with Medar
under which it acquired the exclusive worldwide rights to use of Medar's
patented 3D scanning technology for applications in the electronics and
semiconductor industries.  Under the terms of the agreement, the Company agreed
to pay Medar an initial license fee of $1,500,000 based on the achievement of
certain developmental milestones plus a royalty based on sales. The first
$500,000 due under this license agreement was paid upon execution of the
agreement.  The remaining two $500,000 payments comprise the $1,000,000 short-
term liability.

  The Company used $1,959,000 of cash for investing activities, primarily for
the purchase of fixed assets and investment in other long-term assets.  The
Company used $1,095,000 of cash for the purchase of fixed assets, mainly
consisting of computer, lab and manufacturing equipment.  The Company used
$759,000 of cash for investment in other long-term assets, mainly consisting of
a $500,000 payment made under the Medar license agreement as well as capitalized
software development costs.  Investments consist of short-term investment grade

Page 25

securities. In addition, the Company generated $115,000 in cash flow from its
financing activities as a result of issuances of its Common Stock upon exercise
of stock options.

  Current assets increased slightly to $25,202,000 at October 31, 1997 from
$25,164,000 at October 31, 1996.  Investments increased to $15,515,000 at
October 31, 1997 from 15,135,000 at October 31, 1996. Cash and cash equivalents
decreased to $4,027,000 at October 31, 1997 from $4,179,000 at October 31, 1996.

   The Company's current liabilities increased to $2,315,000 at October 31, 1997
from $1,081,000 at October 31, 1996. This was mainly due to the previously
mentioned $1,000,000 short-term liability as well as increased trade accounts
payable associated with a higher level of sales at year-end.

  The Company expects that its capital expenditures for fiscal 1998 will
increase from the $1.1 million in fiscal 1997, primarily for computer, lab and
manufacturing equipment.  At October 31, 1997, the Company had commitments for
approximately $200,000 for capital equipment.  The Company is also obligated to
pay an additional $1 million under the terms of the Medar, Inc. license
agreement, subject to the achievement by Medar of certain developmental
milestones.The Company believes that its cash flow from operations, existing
cash and cash equivalents, and investments at October 31, 1997 will be adequate
for its working capital and capital resource needs, including payments due under
the Medar license agreement, during fiscal 1998.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
  Not applicable.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
  See Item 14 for a list of the financial statements included in this Form 10-K.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
------------------------------------------------------------------------
  Not applicable.

Page 26

                                    PART III
                                    --------

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
  Information required under this item with respect to directors is contained
in the section "Election of Directors" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held in March 1998 (the "1998 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the past fiscal year, and is incorporated herein by
reference.

  Information concerning executive officers is set forth in the Section
entitled "Executive Officers of the Company" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.

Item 11.  EXECUTIVE COMPENSATION
--------------------------------
  Information required under this item is contained in the sections entitled
"Executive Compensation," "Employment Agreements" and "Stock Option Plan" in the
Company's 1998 Proxy Statement and is incorporated herein by reference.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
  Information required under this item is contained in the section entitled
"Shareholdings of Principal Shareholders, Directors and Officers" in the
Company's 1998 Proxy Statement and is incorporated herein by reference.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
  Information required under this item is contained in the section entitled
"Certain Transactions" in the Company's 1998 Proxy Statement which is
incorporated herein by reference.

Page 27

                                     PART IV
                                     -------

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

     (a)  Documents filed as Part of this Report

          (1)  FINANCIAL STATEMENTS.  The following financial statements of the
               Company are hereby included in this Form 10-K.
                                                                      Page
                                                                      ----
               Report of Independent Accountants.....................  31
               Income Statements for the three years ended
                    October 31, 1997, 1996 and 1995..................  32
               Balance Sheets as of October 31, 1997 and 1996........  33
               Statements of Cash Flows for the Years
                    ended October 31, 1997, 1996 and 1995............  34
               Statements of Shareholders' Equity for the Years
                    ended October 31, 1997, 1996 and 1995............  35
               Notes to Financial Statements.........................  36

          (2)  FINANCIAL STATEMENT SCHEDULES FOR THE THREE YEARS
               ENDED OCTOBER 31, 1997


               VIII.  Valuation and Qualifying Accounts..............  45

     All other schedules are omitted because they are not
     applicable or the required information is shown in the
     Financial Statements or the notes thereto.

     (b)  Reports on Form 8-K
          -------------------

     No reports on Form 8-K were filed during the
     quarter ended October 31, 1997.

Page 28

     (c)  Listing of Exhibits
          -------------------

Exhibit
  No.                           Description                           Page
-------  ----------------------------------------------------------   ----

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)

10.1....  Lease Agreement dated February 11, 1993 for facilities at
          10321 West 70th Street, Eden Prairie, Minnesota
          (incorporated by reference to Exhibit 10.3 of
          1993 Form 10-K)

10.2....  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)

10.3....  Employment Agreement with Larry G. Paulson dated as of
          February 1, 1984 (incorporated by reference from
          Exhibit 10.5 to May 15, 1996 Form S-2)

10.4....  Employment Agreement with Tom Northenscold dated as of
          February 27, 1995 (incorporated by reference from
          Exhibit 10.6 to May 15, 1996 Form S-2)

10.5....  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)

10.6*...  PPT Vision, Inc. 1988 Stock Option Plan, as amended........  46

10.7*...  PPT Vision, Inc. 1997 Stock Option Plan....................  61

21......  The Company has no subsidiaries

23......  Consent of Price Waterhouse LLP............................  76

27......  Financial Data Schedule....................................  77


*Indicates compensatory plan

Page 29

                                   SIGNATURES
                                   ----------
     Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                PPT VISION, INC.

Date:  January 26, 1998                 By:/s/Joseph C. Christenson
                                           ----------------------------
                                               Joseph C. Christenson
                                           (Principal Executive Officer)

Date:  January 26, 1998                 By:/s/Thomas R. Northenscold
                                           ----------------------------
                                              Thomas R. Northenscold
                                          (Principal Accounting Officer)
                                             Chief Financial Officer

                        Signatures and Power of Attorney

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant, in
the capacities, and on the dates, indicated.  Each person whose signature
appears below constitutes and appoints Joseph C. Christenson and Thomas R.
Northenscold as his true and lawful attorneys-in-fact and agents, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any or all amendments
to this Annual Report on Form 10-K and to file the same, with the exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission.

        Date                                   Signature and Title
        ----                                   -------------------

  January 26, 1998                         /s/Joseph C. Christenson
                                           ----------------------------
                                              Joseph C. Christenson
                                               President, Director
                                           (Principal Executive Officer)

  January 26, 1998                         /s/Thomas R. Northenscold
                                           ----------------------------
                                              Thomas R. Northenscold
                                          (Principal Accounting Officer)
                                              Chief Financial Officer

  January 26, 1998                         /s/Larry G. Paulson
                                           ----------------------------
                                           Larry G. Paulson, Secretary,
                                            Vice President of Research
                                            and Development, Director

Page 30

  January 26, 1998                         /s/Bruce C. Huber
                                           ----------------------------
                                             Bruce C. Huber, Director

  January 26, 1998                         /s/David C. Malmberg
                                           ----------------------------
                                           David C. Malmberg, Director

  January 26, 1998                         /s/Peter R. Peterson
                                           ----------------------------
                                           Peter R. Peterson, Director






Page 31

REPORT OF INDEPENDENT ACCOUNTANTS


To the Shareholders and Board of Directors of PPT Vision, Inc.

In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) present fairly, in all material respects, the financial
position of PPT Vision, Inc. at October 31, 1997 and 1996, and the results of
its operations and cash flows for each of the three fiscal years in the period
ended October 31, 1997 in conformity with generally accepted accounting
principles.  These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/Price Waterhouse LLP
------------------------
Price Waterhouse LLP
Minneapolis, MN
November 21, 1997

Page 32

                                PPT VISION, INC.

                               INCOME STATEMENTS

<TABLE>
                                               YEAR ENDED OCTOBER 31,
                                         -----------------------------------
                                            1997         1996         1995
                                         -----------  -----------  ----------
<S>                                      <C>          <C>          <C>
Net revenues............................ $12,055,000  $12,693,000  $9,750,000
Cost of sales...........................   4,894,000    5,044,000   4,442,000
                                         -----------  -----------  ----------
    Gross profit........................   7,161,000    7,649,000   5,308,000
                                         -----------  -----------  ----------
Expenses:
  Selling...............................   3,727,000    2,897,000   2,279,000
  General and administrative............   1,177,000      976,000     851,000
  Research and development..............   2,339,000    1,827,000   1,299,000
                                         -----------  -----------  ----------
    Total expenses......................   7,243,000    5,700,000   4,429,000
                                         -----------  -----------  ----------
Income (loss) from operations...........     (82,000)   1,949,000     879,000
Interest income.........................   1,124,000      442,000      61,000
Other income............................      23,000       11,000       --
                                         -----------  -----------  ----------
Net income before taxes.................   1,065,000    2,402,000     940,000
Income tax (expense) benefit............    (405,000)   1,309,000     407,000
                                         -----------  -----------  ----------
    Net income.......................... $   660,000  $ 3,711,000  $1,347,000
                                         ===========  ===========  ==========

  Net income per share.................. $    0.12    $    0.84    $   0.37
                                         ===========  ===========  ==========
  Weighted average common
   shares outstanding...................   5,495,000    4,410,000   3,650,000
                                         ===========  ===========  ==========
</TABLE>


    The accompanying notes are an integral part of the financial statements

Page 33

                                PPT VISION, INC.

                                 BALANCE SHEETS

<TABLE>
                                                           OCTOBER 31,
                                                    -------------------------
                                                       1997           1996
                                                    -----------   -----------
<S>                                                 <C>           <C>
ASSETS
Current assets
  Cash and cash equivalents........................ $ 4,027,000   $ 4,179,000
  Investments......................................  15,515,000    15,135,000
  Accounts receivable, net.........................   3,693,000     4,451,000
  Inventories......................................   1,741,000     1,228,000
  Other current assets.............................     226,000       171,000
                                                    -----------   -----------
    Total current assets...........................  25,202,000    25,164,000
Restricted cash....................................       --          135,000
Fixed assets, net..................................   1,546,000       863,000
Other assets, net..................................   1,828,000        79,000
Deferred income taxes..............................   1,410,000     1,815,000
                                                    -----------   -----------
    Total assets................................... $29,986,000   $28,056,000
                                                    ===========   ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Accounts payable................................. $ 1,010,000   $   754,000
  Commissions payable..............................      60,000        62,000
  Accrued expenses.................................     245,000       265,000
  Other short-term liabilities.....................   1,000,000         --
                                                    -----------   -----------
    Total current liabilities......................   2,315,000     1,081,000

Deferred rent......................................     136,000       166,000

Commitments and contingencies (Note 8)

Shareholders' equity
  Common Stock $.10 par value; authorized
   10,000,000 shares;
   issued and outstanding 5,387,355 and 5,358,422..     539,000       536,000
  Capital in excess of par value...................  29,555,000    29,443,000
  Accumulated (deficit)............................  (2,510,000)   (3,170,000)
  Unrealized loss, investments.....................     (49,000)        --
                                                    -----------   -----------
    Total shareholders' equity.....................  27,535,000    26,809,000
                                                    -----------   -----------
    Total liabilities and shareholders' equity..... $29,986,000   $28,056,000
                                                    ===========   ===========
</TABLE>
    The accompanying notes are an integral part of the financial statements

Page 34
                                PPT VISION, INC.
                            STATEMENT OF CASH FLOWS
<TABLE>
                                                  YEAR ENDED OCTOBER 31,
                                          -------------------------------------
                                              1997         1996         1995
                                          ------------ ------------  ----------
<S>                                       <C>          <C>           <C>
Net income................................$    660,000 $  3,711,000  $1,347,000
Adjustment to reconcile net income to net
  cash provided by operating activities:
  Depreciation and amortization...........     422,000      286,000     164,000
  Deferred rent...........................     (30,000)      (6,000)     44,000
  Deferred income tax benefit.............     405,000   (1,408,000)   (407,000)
  Accrued interest income.................    (322,000)    (149,000)      --
  Realized gain on sales of investments...      (2,000)      (4,000)      --
Change in assets and liabilities:
  Accounts receivable.....................     758,000   (1,764,000)   (749,000)
  Inventories.............................    (513,000)    (285,000)   (158,000)
  Other assets............................     (55,000)    (104,000)     (7,000)
  Restricted cash.........................     135,000       78,000         --
  Accounts payable........................     256,000      190,000     102,000
  Commissions payable.....................      (2,000)       7,000      12,000
  Accrued expenses........................     (20,000)     103,000      65,000
                                          ------------ ------------  ----------
    Total adjustments.....................   1,032,000   (3,056,000)   (934,000)
                                          ------------ ------------  ----------
Net cash provided by operating activities.   1,692,000      655,000     413,000
Cash flows from investing activities:
  Purchase of fixed assets................  (1,095,000)    (662,000)   (349,000)
  Purchase of investments................. (21,353,000) (17,007,000)      --
  Sales and maturities of investments.....  21,248,000    2,025,000       --
  Net investment in other
    long-term assets......................    (759,000)     (20,000)      --
                                          ------------ ------------  ----------
Net cash used by investing activities.....  (1,959,000) (15,664,000)   (349,000)
Cash flows from financing activities:
  Proceeds from issuance of common stock..     115,000   17,953,000      79,000
                                          ------------ ------------  ----------
Net cash provided by financing activities.     115,000   17,953,000      79,000
                                          ------------ ------------  ----------
Net increase in cash and cash equivalents.    (152,000)   2,944,000     143,000
Cash and cash equivalents at beginning
  of year.................................   4,179,000    1,235,000   1,092,000
                                          ------------ ------------  ----------
Cash and cash equivalents at end of year..$  4,027,000 $  4,179,000  $1,235,000
                                          ============ ============  ==========

Supplemental disclosure of cash flow information:
 Cash paid during the year for:
  Income tax..............................  $    3,000 $     89,000  $   42,000
  Interest................................       --           1,000       --
</TABLE>
    The accompanying notes are an integral part of the financial statements

Page 35
                                PPT VISION, INC.
                                        
                        STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
                                                          CAPITAL IN
                                     COMMON     COMMON     EXCESS OF   PREFERRED   PREFERRED  ACCUMULATED
                                     SHARES      STOCK     PAR VALUE     SHARES      STOCK     (DEFICIT)
                                    ---------  ---------  -----------  ---------  ----------  -----------
<S>                                 <C>        <C>        <C>          <C>        <C>         <C>
October 31, 1994..................  3,440,486  $344,000   $11,347,000   87,499    $256,000    $(8,228,000)
  Stock issued through the
   exercise of stock options......     65,370     6,000        37,000
  Stock issued through the
   employee stock purchase plan...     16,599     2,000        35,000
  Stock issued through
   conversion of preferred shares.     56,250     6,000       249,000  (87,499)   (256,000)
  Net income......................                                                              1,347,000
                                    ---------  ---------  -----------  ---------  ----------  -----------
October 31, 1995..................  3,578,705   358,000    11,668,000        0           0     (6,881,000)
  Stock issued through
   public offering
   (net of issue costs)...........  1,600,000   160,000    17,459,000
  Stock issued through the
   exercise of stock options.......    94,526     9,000       123,000
  Stock issued through the
   employee stock purchase plan....    35,691     4,000        74,000
  Stock issued through the
   exercise of warrants............    49,500     5,000       119,000
  Net income.......................                                                             3,711,000
                                    ---------  ---------  -----------  ---------  ----------  -----------
  October 31, 1996................. 5,358,422  $536,000   $29,443,000        0           0     (3,170,000)
  Stock issued through the
   exercise of stock options.......    23,705     2,000        77,000
  Stock issued through the
   employee stock purchase plan....     5,228     1,000        35,000
   Net income......................                                                               660,000
                                    ---------  ---------  -----------  ---------  ----------  -----------
  October 31, 1997................  5,387,355  $539,000   $29,555,000        0           0    $(2,510,000)
                                    =========  =========  ===========  =========  ==========  ============
</TABLE>
    The accompanying notes are an integral part of the financial statements

Page 36

                                PPT VISION, INC.

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION AND OPERATIONS

  The Company designs, manufactures, markets and integrates machine vision
based automated inspection systems. The systems are used to improve
productivity and quality by automating inspection tasks in manufacturing
applications such as assembly verification, flaw detection, character
verification or measurement tasks.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTS RECEIVABLE

  Accounts receivable are shown net of allowance for doubtful accounts of
$30,026 at October 31, 1997, and $35,110 at October 31, 1996.

INVENTORIES

  Inventories are stated at the lower of cost or market, with costs determined
on a first-in, first-out ("FIFO") basis. As of October 31, 1997 and 1996
inventories consist of the following:

                                                        OCTOBER 31,
                                                   ---------------------
                                                      1997      1996
                                                   ----------   --------
      Manufactured and purchased parts............ $1,223,000 $1,015,000
      Work-in-process.............................    448,000    144,000
      Finished goods..............................     70,000     69,000
                                                   ----------  ---------
          Totals.................................. $1,741,000 $1,228,000
                                                   ========== ==========


FAIR VALUE OF FINANCIAL INSTRUMENTS

  The Company's financial instruments consist of cash and cash equivalents,
investments, short-term trade receivables and payables for which current
carrying amounts approximate fair market value.

Page 37

OTHER ASSETS

  Other assets at October 31, 1997 and 1996 consist of the following:

                                                               OCTOBER 31,
                                                           -------------------
                                                              1997       1996
                                                           ----------  --------
      Patent and trademark...............................  $1,654,000  $ 91,000
      Security deposits..................................       --        --
      Investment in related party........................      53,000    53,000
      Software development costs, net....................     196,000     --
                                                           ----------  --------
                                                            1,903,000   144,000
      Less accumulated amortization......................     (75,000)  (65,000)
                                                           ----------  --------
          Total other assets.............................  $1,828,000  $ 79,000
                                                           ==========  ========

  The patent and trademark balance of $1,654,000 as of October 31, 1997 includes
$1,500,000 which represents the value of a license agreement that the Company
entered into with Medar, Inc.  Patent and trademark costs are amortized over
five to ten years.

  The investment in a related party represents common stock the Company intends
to hold as an investment and is recorded at cost. During 1994, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" SFAS. No. 115
requires certain investments in debt and equity securities to be recorded at
fair market value. No adjustment to market value was recorded as of October 31,
1997 and 1996 as the difference was not material.

  Software development costs are treated in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed."  Certain software development costs totaling $196,000 were
capitalized during the fiscal year ended October 31, 1997.  No amortization
expense has yet been recorded related to these software development costs.


OTHER SHORT-TERM LIABILITIES

  In September of 1997 the Company entered into a license agreement with Medar,
Inc. ("Medar") under which it acquired the exclusive worldwide rights to use of
Medar's patented 3D scanning technology for applications in the electronics and
semiconductor industries.  Under the terms of the agreement, the Company will
pay Medar an initial license fee of $1,500,000 based on the achievement of
certain developmental milestones plus a royalty based on sales. The first
$500,000 due under this license agreement was paid upon execution of the
agreement.  The remaining two $500,000 payments comprise the $1,000,000 short-
term liability.

Page 38

FIXED ASSETS

  Fixed assets consist of furniture, fixtures and equipment and are stated at
cost net of accumulated depreciation. Depreciation is computed for book purposes
on a straight-line basis over the estimated useful life of the asset and for tax
purposes over five and ten years using accelerated and straight-line methods. At
October 31, 1997 and 1996 furniture, fixtures and equipment consisted of the
following:

                                                             OCTOBER 31,
                                                       -----------------------
                                                           1997        1996
                                                        ----------  ----------
      Equipment.......................................  $3,271,000  $2,215,000
      Furniture and fixtures..........................     438,000     407,000
                                                        ----------  ----------
                                                         3,709,000   2,622,000
      Less accumulated depreciation...................  (2,163,000) (1,759,000)
                                                        ----------  ----------
          Total fixed assets..........................  $1,546,000  $  863,000
                                                        ==========  ==========


REVENUE RECOGNITION

  The Company records sales revenue upon shipment to the customer.

RESEARCH AND DEVELOPMENT

  Expenditures for research and development are expensed as incurred.

INCOME TAXES

  Income taxes are provided on the liability method. Under the liability
method, deferred income taxes are provided on the difference in basis of assets
and liabilities between financial reporting and tax returns using expected tax
rates.

INCOME PER SHARE

  Income per share computations are based on the weighted average number of
common shares and common share equivalents outstanding during the year. Common
share equivalents consist of stock options and warrants outstanding during the
year.

CASH FLOWS

  For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and investments with original maturities of three months or less.

  Non-cash transactions in 1997 consist of $6,228 related to the transfer of
long-term assets to inventory. Non-cash transactions in 1996 consist of $10,568
related to the transfer of long-term assets to inventory. In 1995 non-cash

Page 39

transactions consist of $255,952 related to the conversion of 87,499 preferred
shares into 56,250 shares of common stock and $37,514 related to the transfer
of long-term assets to inventory.

ESTIMATES BY MANAGEMENT

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

STOCK SPLIT

  On March 14, 1996, the Board of Directors approved a three-for-two stock split
in the form of a fifty percent (50%) stock dividend.  The distribution of shares
was made on April 5, 1996 to shareholders of record as of March 25, 1996.  All
historical share and per share data included in the financial statements have
been restated to reflect the stock split.


NOTE 3: CUSTOMER INFORMATION

SIGNIFICANT CUSTOMER INFORMATION

  During 1997, 1996 and 1995, revenue from one customer accounted for 14%, 14%
and 17% of net revenues respectively.  During 1997 and 1996, revenue from
another customer accounted for 14% and 12% of net revenues respectively.

CUSTOMER GEOGRAPHIC DATA

  North American and export sales as a percentage of net revenues in 1997, 1996
and 1995 are as follows:

                                YEAR ENDED
                                OCTOBER 31,
                             ----------------
                             1997  1996  1995
                             ----  ----  ----
      North America.........  78%   73%   67%
      Europe................  14%   14%   21%
      Far East..............   8%   13%   12%

Page 40

NOTE 4: ACCRUED EXPENSES

  Accrued expenses at October 31, 1997 and 1996 include:

                                                                 OCTOBER 31,
                                                              ----------------
                                                                1997     1996
                                                              -------- --------
      Vacation............................................... $ 25,000 $ 30,000
      Employee Stock Purchase Plan payroll deductions........   78,000   42,000
      Compensation...........................................   64,000   67,000
      Other..................................................   78,000  126,000
                                                              -------- --------
          Total.............................................. $245,000 $265,000
                                                              ======== ========

NOTE 5: COMMON STOCK OPTIONS AND WARRANTS

  Under the Company's 1988 Stock Option Plan and 1997 Stock Option Plan the
Company may issue options to purchase up to 1,100,000 shares of common stock to
employees and directors.  Options are granted at prices equal to the average of
the bid and ask prices on the date of the grant. The granting of options and
their vesting is within the discretion of the Company's Board of Directors.

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

                                                            NUMBER OF SHARES
                                                       -------------------------
                                                        EMPLOYEE    WEIGHTED AVG
                                                         OPTIONS    OPTION PRICE
                                                       -----------  ------------
Balance at October 31, 1994...........................     323,718     $ 2.14
  Granted.............................................      22,125     $ 2.95
  Exercised...........................................     (65,370)    $ 0.66
  Forfeited...........................................      (4,687)    $ 3.07
                                                       -----------  ------------
Balance at October 31, 1995...........................     275,786     $ 2.55
  Granted.............................................     126,850     $11.81
  Exercised...........................................     (94,526)    $ 1.41
  Forfeited...........................................        (350)    $ 9.86
                                                       -----------  ------------
Balance at October 31, 1996...........................     307,760     $ 6.70
  Granted.............................................     364,200     $ 6.91
  Exercised...........................................     (23,705)    $ 3.34
  Forfeited...........................................    (126,375)    $11.68
                                                       -----------  ------------
Balance at October 31, 1997...........................     521,880     $ 5.79
                                                       ===========  ============
Page 41

As of October 31, 1997:
  Price Range of Outstanding Options
    Options...........................................$2.33-$12.00
    Expiration Dates..................................  1997-2004
    Options Exercisable...............................   146,680

  In May of 1997, 122,150 options granted in fiscal years 1996 and 1997 with
exercise prices ranging from $7.19 to $18.13 were repriced to $6.875 per share,
the market price at the time of the repricing.  The repricing is reflected in
the table above as a grant cancellation and a new grant issuance.

  The estimated weighted average grant-date fair value of stock options granted
is as follows: 1997--$4.23 and 1996--$5.64.  The Company accounts for stock
options and other equity instruments in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees."  Statement of Financial Accounting
Standards ("SFAS")No. 123, "Accounting for Stock-Based Compensation," was issued
in October 1995.  SFAS No. 123 establishes a fair value based method of
accounting for employee stock based compensation plans and encourages companies
to adopt that method.  However, it also allows companies to continue to apply
the intrinsic value based method currently prescribed under APB Opinion No. 25,
provided certain pro forma disclosures are made.  Had the Company's stock option
plans and its stock purchase plans compensation costs been determined based on
the fair value at the option grant dates for awards consistent with the
accounting provision of SFAS No. 123 the Company's net income and earnings per
share for fiscal years 1997 and 1996 would have been adjusted to the pro forma
amount indicated below:

  Fiscal Year Ended October 31,              1997          1996
  ------------------------------------    ----------    ----------
  Net income............  As reported...  $  660,000    $3,711,000
                          Pro forma.....  $  197,000    $3,594,000
  Net income per share..  As reported...  $    0.12     $    0.84
                          Pro forma.....  $    0.04     $    0.81

  The following table summarizes stock options outstanding and exercisable at
October 31, 1997.

                       Outstanding                              Exercisable
--------------------------------------------------------  ----------------------
                             Weighted
                              Average        Weighted               Weighted
    Exercise                Contractual       Average               Average
  Price Range    Options  Life Remaining  Exercise Price  Options Exercise Price
---------------  -------  --------------  --------------  ------- --------------
$ 2.33 - $ 3.50  148,630       1.30          $ 3.03       135,880     $ 3.02
$ 3.67 - $ 4.17    6,375       1.69          $ 3.88         6,375     $ 3.88
$ 5.67 - $ 8.19  361,625       6.43          $ 6.88         2,175     $ 5.90
$ 9.62 - $12.00    5,250       5.82          $11.66         2,250     $12.00
                 -------  --------------  --------------  ------- --------------
                 521,880       4.90          $ 5.79       146,680     $ 3.24

Page 42

  The fair value of options granted under the Company's fixed stock option plans
during fiscal 1997 and 1996 was estimated on the dates of grant using the Black-
Scholes options-pricing model.  The assumptions for fiscal 1997 and 1996 were as
follows:

    Fiscal Year Ended October 31           1997         1996
    ---------------------------------  -----------  -----------
    Risk free interest rates.........  5.6% - 5.9%  5.6% - 5.9%
    Expected life....................      6.9          4.0
    Expected volatility..............      54%          54%
    Expected dividends...............       0%           0%

  Pro forma compensation cost related to shares purchased under the Company's
Employee Stock Purchase Plan is measured based on the discount from market
value.  The effects of applying SFAS No. 123 does not apply to awards prior to
fiscal 1996, and additional awards in future years are anticipated.

  In September of 1997, the Company issued a warrant to purchase 25,000 shares
of common stock with an exercise price of $12.00 and an expiration date of
September of 2004.  The warrant becomes exercisable upon completion of certain
technical milestones which have not yet been achieved.

NOTE 6: STOCK OFFERINGS

  In June of 1996, the Company completed a public stock offering, issuing
1,600,000 shares of common stock at $12.00 per share, that raised $17,618,522
net of offering costs of $1,581,478.

NOTE 7: EMPLOYEE STOCK PURCHASE PLAN

  In March 1995 shareholders approved the adoption of the 1995 Employee Stock
Purchase Plan to replace the 1990 Employee Stock Purchase Plan which expired in
1995. Under the terms of the 1995 Plan, 225,000 shares have been
reserved for issuance under the Plan.

  The third phase of the 1995 Plan began on June 1, 1997 and employees were
granted the right to purchase 28,055 shares at $6.69 per share under the Plan.

  The second phase of the 1995 Plan ended on May 31, 1997 and employees
purchased 5,228 shares at $6.69 per share under the Plan.

  The first phase of the 1995 Plan ended on May 31, 1996 and employees purchased
35,691 shares at $2.19 per share under the Plan.


Page 43

NOTE 8: COMMITMENTS & CONTINGENCIES

  Rental expense under operating leases was $188,000, $170,987, and $163,100 in
1997, 1996, and 1995 respectively. Minimum future rental payments due under
noncancelable operating lease agreements are as follows:

             1998............................  185,000
             1999............................  189,000
             2000............................  196,000
             2001............................   66,000
                                              --------
                 Total....................... $636,000
                                              ========


NOTE 9: EMPLOYEE SAVING PLAN

  The Company provides a supplementary retirement savings plan which is
structured in accordance with Section 401(k) of the Internal Revenue Code.
Employees eligible for the Plan may contribute from one to fifteen percent of
their monthly earnings on a pre-tax basis subject to annual contribution
limitations. The Company makes matching contributions of fifty cents for each
dollar contributed by each Plan participant up to a maximum of $1,000 annually.
The Company's contributions under this program were approximately $66,000,
$52,250, and $30,876 for the years ended October 31, 1997, 1996 and 1995
respectively.

NOTE 10: INCOME TAXES

The provision for income taxes differs from the statutory U.S. federal tax rate
of 34% applied to earnings before income taxes as follows:

                                              1997        1996
                                           ----------- -----------
Expected tax provision
at statutory rate..........................$   362,000 $   783,000
State income tax provision,
net of federal tax effect..................     42,000     138,000
Permanent differences......................     11,000     (11,000)
(Reduction) of valuation allowance.........             (2,219,000)
Other......................................    (10,000)
                                           ----------- -----------
   Total...................................$   405,000 $(1,309,000)
                                           =========== ===========

Page 44

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

                                            1997        1996
                                         ----------  ----------
Depreciation.............................$   93,000  $  147,000
Deferred rent............................    52,000      66,000
Other....................................  (199,000)   (129,000)
Net operating loss carry forwards........   959,000   1,281,000
Credit carry forwards....................   505,000     450,000
                                         ----------  ----------
   Net deferred tax asset................$1,410,000  $1,815,000
                                         ==========  ==========

At October 31, 1997, the Company has available net operating loss and tax credit
carry forwards for income tax purposes of $2.8 million and $505,000,
respectively. These carry forwards expire in the years ending October 31, 2001
through 2009.  No current tax provisions were recorded in the fiscal years ended
October 31, 1997 and 1996 due to the utilization of net operating loss (NOL)
carry forwards.  The entire tax provisions consist of deferred taxes.

The utilization of the net operating loss and tax credit carry forwards is
dependent upon the Company's ability to generate sufficient taxable income
during the carry forward period.  A valuation allowance was established in 1994
and subsequent taxable earnings and an analysis of likely taxable income
resulted in the elimination of the allowance for the year ended October 31,
1996.

Page 45

                                  SCHEDULE VIII


Valuation and Qualifying Accounts

Allowance for Doubtful Accounts:

                              Balance at  Additions   Deductions  Balance at
                              Beginning   Charged to  and Write-    End of
                              of Period    Earnings      offs       Period
                              ----------  ----------  ----------  ----------
Year Ended October 31, 1995   $55,000     $ 69,000    ($ 89,000)  $35,000

Year Ended October 31, 1996   $35,000     $  2,000    ($  2,000)  $35,000

Year Ended October 31, 1997   $35,000     $ 95,000    ($100,000)  $30,000