UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB

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



For the fiscal year ended October 31, 2007



Commission File Number:0-11518



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PPT VISION, INC.

(Name of Small Business Issuer in its Charter)



MINNESOTA
        
        41-1413345(State or other jurisdictionof incorporation or organization)
        
        (I.R.S. EmployerIdentification No.)




12988 Valley View Road

Eden Prairie, MN 55344

(Address of principal executive offices, including zip code)



Registrants telephone number, including area code:(952) 996-9500



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



Securities registered pursuant to Section 12(g) of the Act:

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



Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Acto



Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.  YESxNOo



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.x



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YESo     NOx



State issuers revenues for its most recent fiscal year:   $4,978,000



The aggregate market value of the voting stock held by nonaffiliates of the issuer (based on the closing sale price of its stock as reported by the OTC Bulletin Board) as of January 2, 2008 was $213,000.



The Company had 9,902,916 shares of common stock, $.10 par value outstanding on January 2, 2008.



DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III of this Form 10-KSB will be incorporated by reference from the definitive proxy statement for the annual meeting of shareholders to be held on March 10, 2008.







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PART I



This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding PPT VISION, Inc.s expectations, beliefs, intentions and strategies regarding the future. Forward-looking statements include, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand. All forward-looking statements included in this document are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statements.



The Companys actual results are subject to risks and uncertainties and could differ materially from those discussed in the forward-looking statements. These statements are based upon the Companys expectations regarding a number of factors, including the Companys ability to obtain additional working capital if necessary to support its operations, changes in worldwide general economic conditions, cyclicality of capital spending by customers, the Companys ability to keep pace with technological developments and evolving industry standards, worldwide competition, and the Companys ability to protect its existing intellectual property from challenges from third parties. A detailed description of the factors that could cause future results to materially differ from the Companys recent results or those projected in the forward-looking statements are contained in
the section of this Form 10-KSB entitled Important Factors Regarding Forward-Looking Statements.



Item 1.
        DESCRIPTION OF BUSINESS




CORPORATE PROFILE



PPT VISION, Inc. (the Company) designs, manufactures, and markets machine vision based intelligent cameras used for automated inspection, measurement, and guidance applications in the manufacturing marketplace. The Companys IMPACT intelligent camera product line enables manufacturers to realize significant economic paybacks by increasing the quality of manufactured parts and improving the productivity of manufacturing processes. The Companys IMPACT intelligent camera product line is sold through a global network of distribution and integration partners to end-user manufacturers, original equipment manufacturers, and manufacturing machine builders, in a wide variety of manufacturing markets including electronics, automotive, medical device, and packaged goods industries.



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



WHAT IS MACHINE VISION?



A machine vision system consists of computer hardware and software working together with cameras and lighting to capture images of objects for the purpose of making a quality control decision. When the image is captured and stored in memory, it is algorithmically compared to a predefined image or quality standard in an effort to detect defects or anomalies. This machine vision technology can be applied in a number of different applications. However, PPT VISION works exclusively developing and applying machine vision technology for manufacturing applications. Using machine vision technology for purposes of inspection and quality control enables manufacturing companies to prevent defective products from being shipped to customers and to improve their manufacturing processes and reduce costs. Commercial use of machine vision technology for manufacturing quality control began to emerge in the
early 1980s. Machine vision systems at that time were complex in programming and maintaining, difficult to install, limited in performance and not cost-effective. Through advances in microprocessor and software technologies, these barriers have been dramatically reduced in recent years, enabling machine vision to emerge as a powerful process control technology that enables manufacturers to improve quality and increase productivity.



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



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THE MACHINE VISION MARKET



The global market for machine vision technology in the manufacturing marketplace is large and highly fragmented with over 200 machine vision suppliers around the world. Many are very small companies focusing on niche applications, products or technologies. A small handful of competitors such as Cognex or Orbotech have emerged as large, global competitors. The total global machine vision market includes hundreds of different market and technology niches ranging from very simple vision sensors priced at less than $1,000 to very high-end application specific machines priced at more than $1,000,000. Within the total machine vision market, PPT VISIONs machine vision product line addresses what is commonly referred to as the general purpose smart camera product segment. A recent market study by the Automated Imaging Association estimates that the total market for smart cameras worldwide in
2006 was approximately $438 million. Demand for machine vision systems comes from end-user manufacturers who apply these systems as an integral part of their manufacturing process, original equipment manufactures (OEMs), system integrators and machine builders. The growth in demand for machine vision technology like smart cameras is being driven by global competitive trends that have led manufacturers worldwide to redesign manufacturing processes in order to reduce cost and increase productivity and quality through greater use of automation technologies. In order to meet todays manufacturing quality requirements, statistical sampling methods are often insufficient and 100% inspection is required. As a result, manufacturers are increasingly adopting machine vision technology solutions such as smart cameras.



BUSINESS STRATEGY



The Companys business objective is to be a worldwide leader in the design, manufacture, and marketing of machine vision-based smart cameras for manufacturing applications. Through the successful integration of the Companys core competencies, including machine vision hardware and software development and machine vision application engineering expertise, the Company believes it will be able to meet its objective and successfully implement its strategy.



The Companys product development strategy is focused on the continuous introduction of new models of its IMPACT brand of intelligent cameras along with new software tools and features within its IMPACT software package in direct response to customer feedback. This enables the Company to continually add new customers, better serve existing customers, and expand the size of the Companys market by expanding its ability to solve new applications.



The Company markets its products through a global network of industrial automation distribution and system integration selling partners. These selling partners use the Companys IMPACT intelligent cameras together with its IMPACT software to create complete automated inspection solutions for end-user manufacturing companies, OEMs, and manufacturing machine builders. The Companys selling strategy is focused on supporting, training, and growing the number of its selling partners. As the size of the Companys trained infrastructure of selling partners grows, it expects its sales results to grow right with it. Thus, the Company is focusing heavily on building up and supporting its selling partner network worldwide.



PRODUCTS



The Company designs, manufactures, and markets machine vision-based smart or intelligent cameras for manufacturing applications such as electronic and mechanical assembly verification, verification and recognition of printed characters, packaging integrity, surface flaw detection, gauging and measurement tasks, and robotic guidance.



The Companys products are all marketed under the IMPACT brand name. The IMPACT intelligent camera product family consists of nineteen individual intelligent camera models with a price range of approximately $3,000 to $9,000 per unit. These nineteen intelligent camera models are broken into three product categories referred to as the C-series, the T-series and the A-series. There are nine models each in the C-series and T-series. These two product categories are distinguished from each other on the basis of a number of different technical performance features with the C-series being a higher performance and slightly more expensive product line than the T-series. The nine different models within these two product categories are distinguished from each other primarily on the basis of resolution. In addition, each of these two product categories includes three color intelligent camera models.



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The newest addition to the Companys intelligent camera product offerings is the A-series, which consists of one model called the IMPACT A10. The IMPACT A10 is a physically smaller and lower priced intelligent camera than those in the C-series and T-series. This intelligent camera product has been developed in direct response to requests from the Companys emerging industrial automation distribution channels.



The Companys IMPACT software package is embedded in each IMPACT intelligent camera model when shipped to a customer. The IMPACT software was developed alongside the IMPACT hardware and is a powerful, easy-to-use machine vision software package. As hardware prices have continued to decrease as a result of very powerful, lower priced semiconductor devices becoming widely available, competitive differentiation in the machine vision marketplace is primarily achieved through software technology. As a result, the Company invests significantly in on-going enhancements to its IMPACT software package in direct response to user feedback. The IMPACT software package includes a library of over one hundred advanced machine vision software tools used to solve wide range of applications. This capability is wrapped in an easy-to-use graphical user interface designed with elements for both novice users
solving simple applications as well as power users solving advanced applications.



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, 2007, the Company had sold more than 19,000 machine vision cameras to over 1,000 customers since inception.



In fiscal 2007 one customer accounted for over 10% of net revenues. This customer, Optima-Tech Co., Ltd., accounted for 10.2% of net revenues. In fiscal 2006 one customer accounted for over 10% of net revenues. This customer, Simac Masic BV PDC, accounted for 11.9% of net revenues. 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. See Risk Factors  We are dependent upon a limited number of principal customers.



SALES, MARKETING AND CUSTOMER SUPPORT



The Company sells its products to end-users, system integrators, distributors, machine builders and OEMs. The Company markets its products through supporting its industrial automation distribution partners, appearances at industry trade shows, advertising in industry trade journals, articles published in industry and technical journals, its own website and through direct-selling certain key accounts. 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 industrial automation distribution partners and end-user customers through its own in-house applications engineering resources. The Company also provides extensive training opportunities for its industrial automation distributors and customers, either at the Companys facilities or on-site at customers facilities.



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 two years:



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YEAR ENDED OCTOBER 31,
        
        2007
        
        2006North America
        
        52
        %
        45
        %Europe
        
        21
        %
        18
        %Asia-Pacific
        
        27
        %
        36
        %South America
        
        0
        %
        1
        %100
        %
        100
        %




Substantially all of the Companys export sales are negotiated, invoiced and paid in United States dollars. However, the Company will from time to time enter into export sales negotiated, invoiced and paid in foreign currencies.



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. Customers in the end-user machine vision market 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 core technical competencies. The Company believes that the ability to integrate these core competencies is a key strength of the Company and is essential to achieving long term success in the machine vision market. The Companys core competencies can be described as follows:



Image Acquisition. This refers to the means 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 by which 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 application development software requires expertise in the disciplines of object-oriented programming, graphical programming environments, man-machine interfaces, device drivers and general software engineering.



Application Expertise. This refers to the capability and experience of individuals in the Company, who are a critical component of successfully deploying this highly specialized technology. Application expertise encompasses 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.



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



PPT VISION believes that continued and timely development of new products and enhancements to existing product characteristics are 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 machine vision solutions for manufacturing applications. 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. Key software capabilities under development are targeted at expanding the number of software algorithms and tools and expanding the ease-of use
of the Companys Inspection Builder software 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 the number of its intelligent camera product offerings to include a wider variety of price points and performance configurations to better enable it to address a wider variety of application niches with the machine vision market.



Research and development expenditures were $1.3 million, and $1.4 million in the fiscal years ended October 31, 2007, and 2006, respectively. We expect these costs to remain relatively flat in fiscal 2008.



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. Although most of the components used in the Companys machine vision systems are available off-the-shelf, 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 focus its resources on the key core competency areas from which it derives its competitive advantages.



COMPETITION



The machine vision industry is highly fragmented. Currently, no competitor holds a significant aggregate market share percentage, although some dominate individual niches within the overall machine 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 focusing on specific niches.



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.



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 these 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.



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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 owns several issued United States and international patents for various inventions used in machine-vision, automated inspection and illumination systems. The Company believes that the patents it owns 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 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 a number of its trademarks including its PPT, PPT VISION, IMPACT, and Inspection Builder trademarks. 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 December 11, 2007, the Company had 39 full-time employees, including 11 employees in research and development, 15 in sales, marketing and application engineering, 9 in manufacturing and 4 in finance and administration. Although the Company has been successful in attracting and retaining qualified technical personnel to date, 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-KSB. 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, that 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:



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RISK FACTORS



We have incurred losses in each of the last three years, have received a going concern opinion and may require additional capital.The Company has incurred net losses and negative cash flows from operating activities in each of the past three years and has an accumulated deficit of $36.6 million at October 31, 2007. In 2007, our net loss was $1.5 million. In 2006, our net loss was $1.3 million. In 2005, our net loss was $2.4 million. In addition, the Company expects to incur losses and negative cash flows for at least the next several fiscal quarters. The Company believes that the amount of the losses in fiscal 2008 will be smaller than in recent fiscal years. In connection with the audit of our financial statements for the year ended October 31, 2007, our independent registered public accountants have issued an opinion on our financial statements that included a
going concern paragraph that states that we have losses and negative cash flows from operating activities in recent years and will require additional working capital to support our future operations which raises substantial doubt about our ability to continue as a going concern.



We have been able to meet our liquidity and capital resources needs for the past several years only as result of continued investments by our largest shareholders.During fiscal years 2006 and 2007, PPT VISION, Inc. met its working capital requirements through investments from P.R. Peterson, the Companys largest shareholder and a director. Mr. Peterson invested a total of $2,190,000 and was issued or will be issued a total of 6,882,143 shares of our common stock, including 2,500,000 shares that will be issued after approval by the shareholders of PPT VISION, Inc. of an increase in its authorized capital. These investments enabled PPT VISION, Inc. to meet its working capital requirements and continue in business. The Company has no commitments or agreements from Mr. Peterson or any other person at the current time to fund its continuing obligations.
Accordingly, if the Company needs additional working capital and Mr. Peterson is unable or unwilling to fund the Company and PPT VISION, Inc. is unable to find other funds elsewhere, its ability to continue as an operating business may be impaired.



We have encountered significantly increased competition from lower-priced competitive products.Several of our competitors have introduced lower-priced 2D vision inspection systems that present a significant challenge to us. Although we have introduced our new lower-priced, IMPACT A10 intelligent camera, we cannot guarantee that this system will successfully compete in this market if competitors continue to introduce lower priced products.



Our market is characterized by rapidly changing technology and new product development.Our future success depends upon our ability to keep pace with the evolving market for machine vision inspection systems. We need to continue enhancing our current products, developing and introducing new products, responding to changes in customer requirements and achieving market acceptance. Our failure 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 our business, results of operations, financial condition and liquidity. Even if we do enhance our current products, develop new products, and remain responsive to our customers, we cannot ensure that we will achieve market acceptance.



We are dependent upon a limited number of principal customers.In both fiscal 2007 and 2006 one customer accounted for over 10% of net revenues. In fiscal 2007, Optima-Tech Co., Ltd., accounted for 10.2% of net revenues. In fiscal 2006, Simac Masic BV PDC, accounted for 11.9% of net revenues. We do not have in effect long-term agreements with any significant customers under which they agree to continue purchasing significant quantities of our products. The loss of, or significant decrease in purchases by, any of our principal customers and subsequent failure to replace those customers could have a material adverse effect on our results of operations.



Our revenues are dependent in part on capital spending in the electronics and semiconductor industries.The electronics and semiconductor industries combined have historically accounted for over 50% of all machine vision industry sales. Capital spending on new manufacturing capacity by these industries has historically been very cyclical. There can be no assurance when capital spending in these industries will begin a cyclical upturn and how long this upturn may last.



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We rely heavily on our proprietary technology, much of which is protected as trade secrets.We rely heavily on our image acquisition and image processing hardware designs, along with proprietary software technology. In the past, we have been issued patents, or obtained licenses to patents, on certain technology. We currently rely most heavily on protecting our proprietary information as trade secrets. We cannot ensure that the steps we take will be adequate to prevent misappropriation of our technology by third parties. We also cannot be certain that the steps taken will be adequate under the laws of some foreign countries, which may not protect our proprietary rights to the same extent as do laws of the United States. In addition, the possibility exists that others may reverse engineer our 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 based on patents with broad, and often questionable, applications. As the number of our products increases, the markets in which our products are sold expand and the functionality of those products grows and overlaps with products offered by competitors. We have been sued for patent infringement in the past and may be subject to patent infringement claims in the future. In addition to being expensive and time consuming for us, protracted litigation to defend or to prosecute intellectual property could result in some customers deferring or limiting their purchase of our product until resolution of the litigation. Although we do not believe that any of our products or proprietary rights infringe upon the valid rights of third parties, we cannot guarantee that
infringement claims will not be asserted against us in the future or that any such claims will not require us to enter into royalty arrangements or result in costly litigation.



Our revenue fluctuates from year to year.We have experienced annual and quarterly fluctuations in revenue and operating results and anticipate that these fluctuations will continue. These fluctuations have been caused by various factors, including the order flow of our principal customers, the timing and acceptance of new product introductions and enhancements and the timing of product shipments. Future operating results may fluctuate as a result of these and other factors, including our ability to continue to develop innovative products, the announcement or introduction of new products by our competitors, our product and customer mix, and the level of competition and overall trends in the economy.



We are dependent on a limited number of outside contractors and suppliers for a substantial portion of our components and assembly needs.We currently contract with third party assembly houses for a substantial portion of our components and assembly needs. Although we inspect these components prior to final assembly, reliance on outside contractors reduces our 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 our results of operations. In addition, a number of the components integral to the functioning of our 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, material changes in the purchase terms, or reductions in their quality
or reliability, could have a material adverse effect on our business or results of operations.



A significant portion of our revenue arises from international markets.In the years ended October 31, 2007, and 2006, sales of our products to customers outside of North America accounted for approximately 48%, and 55%, respectively, of our net revenues. We anticipate that international revenue will continue to account for a significant portion of our net revenues. Our 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 our 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
our future international sales and, consequently, on our operating results.



The costs to remain competitive may adversely affect our financial performance.We compete with other vendors of machine vision systems, some of which have greater financial and other resources than we do. We cannot ensure that we will be able to compete successfully in the future. In addition, to remain competitive we may be required to incur significant costs to increase our engineering research, development, marketing and customer service efforts. Competitive pressures may result in price erosion or other factors that adversely affect our financial performance.



We are dependent on key personnel.Our success depends in large part upon the continued services of many of our highly-skilled personnel involved in management, research and product development and sales. We must also be able to attract and retain additional highly-qualified employees. The loss of services of these key personnel could have a material adverse effect on us. We do not have key-person life insurance on any of our employees.



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We may be unable to utilize our tax net operating loss carryforwards if we fail to generate sufficient taxable income.Our utilization of our net operating loss carryforward is dependent upon our ability to generate sufficient taxable income during the carryforward period. In fiscal 2007, there was no tax provision due to the net loss for the year. At October 31, 2007, we had available federal and state net operating loss and tax credit carryforwards for income tax purposes of approximately $32.5 million, $8.7 million and $1.2 million respectively. These carryforwards expire in the years ending October 31, 2008 through October 31, 2027.



EXECUTIVE OFFICERS AND OTHER KEY MEMBERS OF MANAGEMENT



The executive officers of the Company are as follows:



NAME
        
        AGE
        
        POSITIONJoseph C. Christenson
        
        49
        
        President, Director, and Chief Financial OfficerDavid L. Friske
        
        63
        
        Vice President, Manufacturing




Joseph C. Christensonhas been President of the Company since January, 1989, a director since December, 1987 and Chief Financial Officer since June, 2005. Prior to being elected President of the Company, Mr. Christenson served in a series of positions of increasing responsibility since joining the Company in 1985. Mr. Christenson has a Masters in Business Administration from the University of Michigan and a Bachelor of Arts degree from St. Olaf College.



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



Mr. Christenson and Mr. Friske serve as full time employees of the Company.



Item 2.
        DESCRIPTION OF PROPERTY




The Company currently leases approximately 35,000 square feet in Eden Prairie, Minnesota through a lease that expires in May, 2011. Annual lease expense is approximately $284,000, averaging $23,700 per month. The Company believes our current facility is adequate for our current needs.



Item 3.
        LEGAL PROCEEDINGS




None.



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




None.



PART II



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




PRICE RANGE OF COMMON STOCK



Effective January 23, 2006 the Companys Common Stock began trading on the OTC Bulletin Board under the ticker symbol PPTV.OB. Prior to January 23, 2006, the Companys Common Stock traded on the Nasdaq Capital Market under the symbol PPTV. The following table sets forth the high and low closing sale prices of the Companys Common Stock as reported by Nasdaq for the period from November 1, 2005 to January 22, 2006 and OTC Bulletin Board thereafter. The high and low bid prices per share of the Companys Common Stock after January 22, 2006 established between broker-dealers do not include retail mark-ups and mark-downs or any commissions to the dealer and therefore do not reflect prices of actual transactions.





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HIGH
        
        LOWFISCAL YEAR ENDED OCTOBER 31, 2007First Quarter
        
        $
        0.48
        
        $
        0.25Second Quarter
        
        
        0.54
        
        
        0.36Third Quarter
        
        
        0.50
        
        
        0.33Fourth Quarter
        
        
        0.33
        
        
        0.22FISCAL YEAR ENDED OCTOBER 31, 2006First Quarter
        
        $
        1.85
        
        $
        0.50Second Quarter
        
        
        0.80
        
        
        0.47Third Quarter
        
        
        0.61
        
        
        0.40Fourth Quarter
        
        
        0.55
        
        
        0.30






HOLDERS



On December 7, 2007, there were approximately 600 holders of record of the Companys Common Stock. This figure does not reflect the almost 1,100 beneficial shareholders whose shares are held in nominee names.



DIVIDEND POLICY



The Company has never declared or paid any cash 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.



ISSUER PURCHASES



The Company did not repurchase any equity securities during the years ended October 31, 2007 and 2006.



INFORMATION REGARDING EQUITY COMPENSATION PLANS



The following table sets forth information regarding our equity compensation plans in effect as of October 31, 2007. Each of our equity compensation plans is an employee benefit plan as defined by Rule 405 of Regulation C of the Securities Act of 1933.



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Securities Authorized for Issuance Under Equity Compensation Plans



Plan category
        
        Number of shares ofcommon stockto be issued uponexercise ofoutstandingoptions, warrantsand rights
        
        Weighted-averageexercise price ofoutstandingoptions, warrantsand rights
        
        Number of shares ofcommon stockremaining availablefor future issuanceunder equitycompensation plansEquity compensation plans approved by shareholders:Stock Option Plans
        
        380,440
        
        $
        2.03
        
        661,440Employee Stock Purchase Plan
        
        
        
        
        
        
        12,245Equity compensation plans not approved by shareholders
        
        
        
        
        
        
        Total
        
        380,440
        
        $
        2.03
        
        673,685




The Company has five equity compensation plans, all of which have been approved by its shareholders: 1988 Stock Option Plan, 1997 Stock Option Plan, 2000 Stock Option Plan, 2005 Employee Stock Purchase Plan and 2007 Stock Option Plan.



Item 6.
        MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION




CRITICAL ACCOUNTING POLICIES AND ESTIMATES



Managements discussion and analysis of its financial condition and results of operations are based on the Companys accompanying financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported revenues and expenses during the reporting period. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.



Management believes the Companys critical accounting policies and areas that require more significant judgments and estimates used in the preparation of its financial statements to be:



   revenue recognition;



   estimating valuation allowances, specifically the allowance for doubtful accounts and excess and obsolete inventory; and



   valuation and useful lives of long-lived and intangible assets.



The Company typically recognizes revenue on product sales upon shipment to the end user customers if contractual obligations have been substantially met and title and risk of loss have passed to the customer, which is generally the case for sales of machine vision systems, spare parts and accessories. The Company also recognizes revenue on products sold to distributors upon shipment because contracts with distributors do not include post-shipment obligations or any right of return provisions and pricing is fixed at the time of sale. Revenue related to application engineering, product development and customer training services is recognized when the services are performed.



12

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Management estimates the allowance for doubtful accounts by analyzing accounts receivable balances by age and considering specific factors about each individual customers financial condition. When the Company deems it probable that all or a portion of a customers account is uncollectible, a corresponding amount is added to the allowance for doubtful accounts.



The Companys inventory primarily consists of parts and other materials that are used in the manufacture of vision systems. The Company generally only builds systems based on customer orders and as a result maintains only a minor amount of finished goods inventory. Management establishes valuation reserves for estimated excess and obsolete materials inventory based on the difference between the cost of the inventory and its estimated market value. Market value is estimated based on a variety of assumptions about future product demand and market conditions. In view of the rapid pace of technological change in the machine vision industry, the Company generally considers inventory that has had no usage for one year to be obsolete. In addition, changes in the Companys product offerings or those of its competitors may also result in excess or obsolete inventory. Accordingly, these
factors will also be considered in the determination of the market value of inventory.



Actual results could differ from these estimates under different assumptions. If the financial condition of one or more of our customers were to deteriorate, or if actual product demand or market conditions are less favorable than anticipated by management, additional reserves may be required.



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



RESULTS OF OPERATIONS



The following table contains selected information from our historical consolidated statement of operations, expressed as a percentage of revenue:



YEAR ENDED OCTOBER 31,
        
        2007
        
        2006Revenue
        
        100
        %
        100
        %Cost of sales
        
        50.5
        
        47.0Gross profit
        
        49.5
        
        53.0Operating expenses:Sales and marketing
        
        38.3
        
        38.8Research and development
        
        26.0
        
        24.1General and administrative
        
        18.5
        
        16.9Total expenses
        
        82.8
        
        79.8Operating loss
        
        (33.3
        )
        (26.8
        )Interest and other income, net
        
        0.3
        
        2.9Gain on sale of patents
        
        2.9
        
        Gain on sale of securities
        
        
        
        1.3Net loss
        
        (30.1
        %)
        (22.6
        %)




Comparison of Year Ended October 31, 2007 to Year Ended October 31, 2006



Net Revenuesdecreased to $5.0 million in fiscal 2007 from $5.7 million in fiscal 2006. Unit sales of the Companys machine vision systems increased to 1,127 in fiscal 2007 from 1,074 in fiscal 2006. In fiscal 2007 our new IMPACT product line continued to increase in unit sales. This trend reflects an overall trend in the machine vision industry for more powerful yet lower priced machine vision systems. We expect this trend to continue in fiscal 2008.



13

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The Company sold 1,113 IMPACT units in fiscal 2007 as compared with 1,063 IMPACT units in fiscal 2006, showing a 5% increase in unit sales. The growth in our IMPACT sales indicates a continued acceptance of these products in the market and we expect that sales of our IMPACT units will continue to grow and replace the sales of our other machine vision systems.



Gross Profitdecreased 18.4% to $2.5 million in fiscal 2007 from $3.0 million in fiscal 2006. Gross profit as a percentage of net revenues for fiscal 2007 decreased to 49.5% compared to 53.0% in fiscal 2006. The decrease in gross profit dollars and as a percentage of net revenues reflects the decrease in sales and consequent absorption of overhead over a smaller base of products sold. We expect gross profit and gross profit as a percentage of net revenues to increase as our revenues increase.



Sales and Marketing Expensesdecreased 13.9% to $1.9 million in fiscal 2007, compared to $2.2 million in fiscal 2006. As a percentage of net revenues, fiscal 2007 selling and marketing expenses decreased slightly to 38.2%, compared with 38.8% in fiscal 2006. These decreases are the result of the Companys continuing efforts to control costs. We expect sales and marketing expenses to remain relatively flat or increase slightly as revenues increase for fiscal year 2008.



Research and Development Expensesdecreased 5.5% to $1.3 million in fiscal 2007, from $1.4 million in fiscal 2006. The decrease in research and development spending resulted from a reduction of the outsourcing of our hardware engineering in relation to the completion of the development of a new, lower cost IMPACT vision system. Research and development expenses as a percentage of net revenues for fiscal 2007 increased to 26.0%, compared to 24.1% for fiscal 2006. The percentage increase reflects the decrease in revenue. We expect research and development expenses to remain relatively flat for fiscal year 2008.



General and Administrative Expensesdecreased 4.1% to $920,000 in fiscal 2007, compared to $959,000 in fiscal 2006. This decrease is, again, primarily the result the Companys continuing efforts to control costs. As a percentage of net revenues, general and administrative expenses increased to 18.5% for fiscal 2007, compared to 16.8% for fiscal 2006. We expect the amount of general and administrative expenses to remain relatively flat for fiscal year 2008.



Interest and Other Incomedecreased 32.5% to $160,000 in fiscal 2007, from $237,000 in fiscal 2006. The decrease resulted primary from royalty payments of $110,000 in fiscal 2006. On September 20, 2007 the Company sold patents which resulted in a gain of $145,000.



Income Taxes:There was no tax provision or benefit for fiscal 2007 or 2006 due to the net losses in the periods for which no benefit was recognized.



LIQUIDITY AND CAPITAL RESOURCES



As of October 31, 2007, the Company had cash of $624,000 as compared with $753,000 as of the end of last fiscal year. Due to its continuing losses, the Company has been using its existing cash and cash equivalents and cash provided by its issuance of common stock from two private placements in each fiscal 2007 and 2006, respectively, to fund the shortfall in cash generated from its operating activities.



Because we have working capital of $1.7 million and no long-term debt, the Company believes that a variety of financing alternatives are available including external borrowing secured by accounts receivable, inventory and other assets, customer or vendor financing, or the private placement of common stock or debt instruments to key financial or strategic investors. The Company believes it has sufficient cash to fund its operations, working capital and capital resource needs through the second quarter of fiscal 2008. There can be no assurance, however, that additional capital will be available on acceptable terms or at all, and the failure to obtain additional capital as needed may have an adverse effect on the Companys ability to continue to take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could adversely affect its
business, financial position, results of operations and cash flows.



14

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The Company financed its operations during fiscal 2007 through existing cash and cash equivalents and also cash provided by its issuance of common stock from two private placements in fiscal 2007. Net cash used in operating activities during fiscal 2007 was $1.7 million, a significant increase from $771,000 used in operations in fiscal 2006. Accounts receivable increased $260,000, which is primarily due to strong sales at the end of the fourth quarter. Inventories decreased by $34,000 during fiscal 2007. Accounts payable and accrued expenses increased by $21,000.



Net cash provided by investing activities was $99,000 in fiscal 2007 due, in large part, to the Companys selling of patents, resulting in gross proceeds of $147,000. During fiscal 2007, fixed asset additions totaled $42,000. During fiscal 2006, fixed asset additions totaled $43,000. We expect fixed asset additions to remain relatively flat in fiscal year 2008.



Net cash provided by financing activities was $1.5 million for fiscal 2007 from two private placements of common stock in February and August of 2007. The private placements were funded by the Companys current largest shareholder, Mr. Peter R. Peterson. In the private placement on August 30, 2007, the Company agreed to issue 2,500,000 shares of common stock at a price of $0.20 per share and seven-year warrants to purchase 1,000,000 shares of stock at a price of $0.25 per share. In the private placement on February 26, 2007, the Company issued 2,857,143 shares of common stock at a price of $0.35 per share and seven-year warrants to purchase 1,000,000 shares of stock at a price of $0.50 per share. During fiscal 2006, net cash provided by financing activities was $695,000 from two private placements of common stock in February and September of 2006. As in 2007, the private placements
were funded by the Companys current largest shareholder, Mr. Peter R. Peterson. In the private placement on September 7, 2006, the Company issued 725,000 shares of common stock at a price of $0.40 per share. In the private placement on February 17, 2006, the Company issued 800,000 shares of common stock at a price of $0.50 per share.



The Company incurred a net loss of $1,498,000 for fiscal 2007, and has an accumulated deficit of $36.6 million as of October 31, 2007. There can be no assurance that the Company will not incur additional losses, will generate positive cash flow from its operations, or that the Company will attain or thereafter sustain profitability in any future period. To the extent the Company continues to incur losses or grows in the future, its operating and investing activities may use cash and, consequently, may require the Company to obtain additional sources of financing in the future.



The Company does not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance-sheet financial arrangements. Therefore, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.



The following summarizes our contractual obligations and shows the effect these contractual obligations are expected to have on our liquidity and cash flows as of October 31, 2007 (amounts exclude required payments for common area maintenance expenses):



Total
        
        1 Year or Less
        
        1-3 Years
        
        3-5 Years
        
        Over 5 yearsOperating Leases
        
        $
        1,105,000
        
        $
        293,000
        
        $
        629,000
        
        $
        183,000
        
        




RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



The Financial Accounting Standards Board (FASB) has published FASB Interpretation (FIN) No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes, to address the noncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards (SFAS) No. 109 (SFAS No. 109), Accounting for Income Taxes, on the uncertainty in income taxes recognized in an enterprises financial statements. Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 will apply to fiscal years beginning after
December 15, 2006, with earlier adoption permitted. The Company does not expect the adoption of FIN No. 48 to have a material effect on its consolidated financial statements.



15

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In September, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 108, Considering the Effects on Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (SAB 108). SAB 108 requires registrants to quantify errors using both the income statement method (i.e. iron curtain method) and the rollover method and requires adjustment if either method indicates a material error. If a correction in the current year relating to prior year errors is material to the current year, then the prior year financial information needs to be corrected. A correction to the prior year results that are not material to those years, would not require a restatement process where prior financials would be amended. SAB 108 was effective for our Fiscal 2007 and did not have a material effect on our financial position,
results of operations or cash flows.



In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to initial adoption, the election of the fair value option may only be made at initial recognition of the asset or liability or upon a re-measurement event that gives rise to new-basis accounting. The decision about whether to elect the fair value option is applied on an instrument-by-instrument basis, is irrevocable and is applied only to an entire
instrument and not only to accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company believes the adoption of SFAS No. 159 will not have an impact on its financial statements.



EFFECTS OF INFLATION



The Company believes that the effect of inflation has not been material during each of the years ended October 31, 2007 and 2006.



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company believes it does not have material exposure to quantitative and qualitative market risks. The carrying amounts reflected in the balance sheets of cash and cash equivalents, investments, trade receivables and trade payables approximate fair value at October 31, 2007 due to the short maturities of these instruments.



INTEREST RATE RISK



The Companys cash and cash equivalents represent investments purchased with original maturities of three months or less. Given the short maturities and investment grade quality of the portfolio holdings at October 31, 2007, a 100 basis point rise in interest rates would not be expected to have a material adverse impact on the fair value of the Companys cash and cash equivalents. As a result, the Company does not currently hedge these interest rate exposures.



FOREIGN CURRENCY EXCHANGE RATE RISK



Historically, the Companys international sales, which are primarily in Europe, Canada, South America, Japan and Southeast Asia, have been transacted in U.S. Dollars. The Company does not engage in foreign currency speculation. During the year ended October 31, 2007, the Company signed an agreement, renewable on an annual basis, with a company in the Netherlands to process payroll and related expenses in Euros for an employee hired in July, 2007. In fiscal year 2006, the Company had no foreign exchange contracts outstanding.





16

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Item 7.
        FINANCIAL STATEMENTS




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



Item 8.
        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE




None.



Item 8A.
        CONTROLS AND PROCEDURES




(a)   Evaluation of Disclosure Controls and Procedures.

The Companys President, Chief Executive Officer and Chief Financial Officer Joseph C. Christenson, has reviewed the Companys disclosure controls and procedures as of the end of the period covered by this report and concluded that the Companys disclosure controls and procedures are effective.



(b)   Changes in Internal Control Over Financial Reporting.

There have been no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the registrants internal control over financial reporting.



Item 8B.
        OTHER INFORMATION




None.





PART III



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




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 (the 2008 Proxy Statement), a definitive copy of which will be filed within 120 days of October 31, 2007 and is incorporated herein by reference. Information concerning executive officers is set forth in the Section entitled Executive Officers of the Company in the 2008 Proxy Statement and is incorporated herein by reference.



Information concerning compliance with Section 16(a) is contained in the section entitled Compliance with Section 16(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference. Information concerning the Companys Code of Ethics is included in the Section entitled Governance Matters  Code of Ethics, and is incorporated herein by reference.



Item 10.
        EXECUTIVE COMPENSATION




Information required under this item is contained in the section entitled Executive Compensation and Other Information, in the Companys 2008 Proxy Statement and is incorporated herein by reference.



17

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Item 11.
        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




Information required under this item with respect to share ownership is contained in the section entitled Security Ownership of Principal Shareholders and Management in the Companys 2008 Proxy Statement and is incorporated herein by reference.



Information required under this Item with respect to stock ownership under equity compensation plans is contained in the section entitled Equity Compensation Plan Information in Item 5 of this form 10-KSB.



Item 12.
        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




Information required under this item with respect to share ownership is contained in the section entitled Certain Relationships and Related Transactions in the Companys 2008 Proxy Statement and is incorporated herein by reference.



Item 13.
        EXHIBITS




(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-KSB.




Report of Independent Registered Public Accounting Firm of Virchow, Krause & Company, LLPStatements of Operations for the Years ended October 31, 2007 and 2006Balance Sheets as of October 31, 2007 and 2006Statements of Cash Flows for the Years ended October 31, 2007 and 2006Statements of Shareholders Equity for the Years ended October 31, 2007 and 2006Notes to Financial Statements






18

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(2)
        LISTING OF EXHIBITS




Exhibit No.
        
        Description3.1
        
        Restated Articles of Incorporation of PPT VISION, Inc. (incorporated by reference to Exhibit 3.1 of Form 10-QSB for the quarter ended April 30, 2005)3.1.1
        
        Articles of Amendment to Articles of Incorporation of PPT VISION, Inc. effective March 9, 2007 (incorporated by reference to Form 8-K dated March 8, 2007)3.2
        
        By-Laws of PPT VISION, Inc. (incorporated by reference to Exhibit 3.2 of Form 10-QSB for the quarter ended April 30, 2005)4.1
        
        Preferred Stock Purchase Rights Agreement, as amended (incorporated by reference to Exhibit 1 to June 17, 1999 Registration Statement on Form 8-A, as amended by Exhibit 1 to October 19, 1999 Amendment No. 1 to Registration Statement on Form 8-A/A and as amended by exhibit No. 1 to March 11, 2002 Amendment No. 2 to Registration Statement on Form 8-A/A)4.2
        
        Warrant dated February 26, 2007 to purchase 1,000,000 Shares of common stock of PPT VISION, Inc. issued to P.R. Peterson Keogh Plan (incorporated by reference to Form 10-QSB for the quarter ended January 31, 2007)4.3
        
        Warrant dated August 30, 2007 to purchase 1,000,000 shares of common stock of PPT VISION, Inc. issued to P.R. Peterson Keogh Plan (incorporated by reference to Form 8-K dated August 30, 2007)10.1*
        
        Employment Agreement with Joseph C. Christenson dated as of May 7, 1984 (incorporated by reference from Exhibit 10.4 to May 15, 1996 Form S-2)10.2*
        
        PPT VISION, Inc. 1988 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.6 of 1997 Form 10-K)10.3*
        
        PPT VISION, Inc. 1997 Stock Option Plan (incorporated by reference to Exhibit 10.7 of 1997 Form 10-K)10.4*
        
        PPT VISION, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form S-8 (File No. 333-116481))10.5*
        
        PPT VISION, Inc. 2007 Stock Incentive Plan (incorporated by reference from the Definitive Proxy Statement, dated February 1, 2007 for the PPT VISION, Inc. 2007 Annual Meeting of Shareholders)10.6
        
        Lease Agreement dated July 17, 1998 for facilities at Prairie Crossroads Corporate Center, Eden Prairie, Minnesota (incorporated by reference to Exhibit 10.7 of 1999 Form 10-K)10.6.1
        
        First Amendment of Lease dated October 16, 1999  for facilities at the Prairie Crossroads Corporate Center, Eden Prairie,  Minnesota (incorporated by reference to Exhibit 10.8 of 1999 Form 10-K)10.6.2
        
        Second Amendment dated April 29, 2005 of Lease dated July 17, 1998 for facilities at the Prairie Crossroads Corporate Center, Eden Prairie, Minnesota (incorporated by reference to Exhibit 10.1 of Form 10-QSB for the quarter ended April 30, 2005)10.7*
        
        Employment Agreement with David Friske dated as of March 5, 1984 (incorporated by reference to Exhibit 10.6 of 2005 Form 10-KSB)






19

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10.8*
        
        PPT VISION, Inc. 2005 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form S-8 (File No. 333-125780))10.9
        
        Registration Rights Agreement dated as of February 26, 2007 between PPT VISION, Inc. and the P.R. Peterson Keogh Plan (incorporated by reference to Form 10-QSB for the quarter ended January 31, 2007)10.10
        
        Registration Rights Agreement, dated as of August 30, 2007 between PPT
VISION, Inc. and P.R. Peterson Keogh Plan (incorporated by reference to Form 8-K dated August 30, 2007)10.11
        
        Letter dated August 30, 2007 from PPT VISION, Inc. to P.R. Peterson
regarding issuance of 2,500,000 shares after 2008 Annual Shareholders Meeting (incorporated by reference to Form 8-K Dated
August 30, 2007)21
        
        The Company has no subsidiaries23.1
        
        Consent of Virchow, Krause & Company, LLP31.1
        
        Certification of CEO/CFO Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14 and 15d-14 of the Exchange Act32.1
        
        Certification of CEO/CFO Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Sections 1350




*Indicates compensatory plan





20

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Item 14.
        PRINCIPAL ACCOUNTANT FEES AND SERVICES




Information required under this item is contained in the section entitled Independent Auditors is in the Companys 2008 Proxy Statement and is incorporated herein by reference.





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 25, 2008
        By:
        /s/ Joseph C. ChristensonJoseph C. Christenson, President(Principal Executive Officer and 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 as his true and lawful attorney-in-fact and agent, acting alone, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-KSB and to file the same, with the exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission.



Date:   January 25, 2008
        /s/ Joseph C. ChristensonJoseph C. ChristensonPresident, Director(Principal Executive Officer and Chief Financial Officer)Date:   January 25, 2008
        /s/ Robert W. Heller, DirectorRobert W. Heller, DirectorDate:   January 25, 2008
        /s/ Peter R. Peterson, DirectorPeter R. Peterson, Director






21

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Shareholders and Board of Directors

PPT VISION, Inc.

Eden Prairie, Minnesota



We have audited the accompanying balance sheets of PPT VISION, Inc. as of October 31, 2007 and 2006, and the related statements of operations, shareholders equity and cash flows for the years then ended. 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PPT VISION, Inc. as of October 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.



The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring losses and negative cash flows from operating activities in recent years and requires additional working capital to support future operations, which raises substantial doubt about its ability to continue as a going concern. Managements plans in regards to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Virchow, Krause & Company, LLP



Minneapolis, Minnesota



January 22, 2008



22

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STATEMENTS OF OPERATIONS





YEAR ENDED OCTOBER 31,
        
        2007
        
        2006Net revenues
        
        $
        4,978,000
        
        $
        5,693,000Cost of sales
        
        
        2,516,000
        
        
        2,675,000Gross profit
        
        
        2,462,000
        
        
        3,018,000Expenses:Sales and marketing
        
        
        1,904,000
        
        
        2,211,000Research and development
        
        
        1,296,000
        
        
        1,372,000General and administrative
        
        
        920,000
        
        
        959,000Total expenses
        
        
        4,120,000
        
        
        4,542,000Interest and other income, net
        
        
        15,000
        
        
        165,000Gain on sale of patents
        
        
        145,000
        
        
        Gain on sale of securities
        
        
        
        
        
        72,000Net loss
        
        $
        (1,498,000
        )
        $
        (1,287,000
        )Basic and diluted loss per share:Net loss
        
        $
        (0.22
        )
        $
        (0.35
        )Weighted average shares outstanding:Basic and diluted
        
        
        6,832,466
        
        
        3,675,120




The accompanying notes are an integral part of the financial statements.





23

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BALANCE SHEETS



OCTOBER 31,
        
        2007
        
        2006ASSETSCurrent assetsCash and cash equivalents
        
        $
        624,000
        
        $
        753,000Accounts receivable, net
        
        
        1,199,000
        
        
        903,000Inventories
        
        
        436,000
        
        
        470,000Other current assets
        
        
        69,000
        
        
        85,000Total current assets
        
        
        2,328,000
        
        
        2,211,000Property and equipment, net
        
        
        245,000
        
        
        308,000Intangible assets, net
        
        
        5,000
        
        
        22,000Other assets, net
        
        
        56,000
        
        
        50,000Total assets
        
        $
        2,634,000
        
        $
        2,591,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
        
        $
        490,000
        
        $
        487,000Accrued expenses
        
        
        156,000
        
        
        138,000Deferred revenue
        
        
        3,000
        
        
        2,000Total current liabilities
        
        
        649,000
        
        
        627,000Commitments and contingenciesShareholders equityPreferred stock $.10 par value; authorized 10,000,000 shares, none issued and outstanding
        
        
        
        
        
        Common stock $.10 par value; authorized 10,000,000 shares; issued 9,902,916 and 4,532,845 shares, and outstanding 7,402,916 and 4,532,845 shares, respectively
        
        
        990,000
        
        
        453,000Capital in excess of par value
        
        
        37,607,000
        
        
        36,625,000Accumulated deficit
        
        
        (36,612,000
        )
        
        (35,114,000
        )Total shareholders equity
        
        
        1,985,000
        
        
        1,964,000Total liabilities and shareholders equity
        
        $
        2,634,000
        
        $
        2,591,000




The accompanying notes are an integral part of the financial statements





24

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STATEMENTS OF CASH FLOWS



YEAR ENDED OCTOBER 31,
        
        2007
        
        2006Net loss
        
        $
        (1,498,000
        )
        $
        (1,287,000
        )Adjustment to reconcile net loss to net cash used in operating activities:Depreciation and amortization
        
        
        120,000
        
        
        218,000Stock based compensation
        
        
        15,000
        
        
        2,000Realized gain on sale of patents
        
        
        (145,000
        )
        
        Gain on sale of securities
        
        
        
        
        
        (72,000
        )Change in allowance for doubtful accounts
        
        
        (36,000
        )
        
        Change in operating assets and liabilities:Accounts receivable
        
        
        (260,000
        )
        
        294,000Inventories
        
        
        34,000
        
        
        20,000Other current assets
        
        
        16,000
        
        
        25,000Accounts payable
        
        
        3,000
        
        
        120,000Accrued expenses
        
        
        18,000
        
        
        (85,000
        )Deferred revenue
        
        
        1,000
        
        
        (6,000
        )Total adjustments
        
        
        (234,000
        )
        
        516,000Net cash used in operating activities
        
        
        (1,732,000
        )
        
        (771,000
        )Cash flows from investing activities:Purchase of property and equipment
        
        
        (42,000
        )
        
        (43,000
        )Proceeds from sale of securities
        
        
        
        
        
        94,000Proceeds from sale of assets
        
        
        147,000
        
        
        Purchase of other long term assets
        
        
        (6,000
        )
        
        Net cash provided by (used in) investing activities
        
        
        99,000
        
        
        51,000Cash flows from financing activities:Proceeds from issuance of common stock, net of offering costs
        
        
        1,504,000
        
        
        695,000Net cash provided by financing activities
        
        
        1,504,000
        
        
        695,000Net decrease in cash and cash equivalents
        
        
        (129,000
        )
        
        (25,000
        )Cash and cash equivalents at beginning of year
        
        
        753,000
        
        
        778,000Cash and cash equivalents at end of year
        
        $
        624,000
        
        $
        753,000




The accompanying notes are an integral part of the financial statements.





25

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STATEMENTS OF SHAREHOLDERS EQUITY



COMMONSHARES
        
        STOCKAMOUNT
        
        CAPITAL INEXCESS OFPAR VALUE
        
        ACCUMULATED(DEFICIT)
        
        TOTALSHAREHOLDERSEQUITYOctober 31, 2005
        
        2,998,747
        
        $
        300,000
        
        $
        36,081,000
        
        $
        (33,827,000
        )
        $
        2,554,000Stock based compensation
        
        
        
        
        
        
        
        2,000
        
        
        
        
        
        2,000Stock issued through the employee stock purchase plan
        
        9,098
        
        
        1,000
        
        
        4,000
        
        
        
        
        
        5,000Private placements
        
        1,525,000
        
        
        152,000
        
        
        538,000
        
        
        
        
        
        690,000Net loss
        
        
        
        
        
        
        
        
        
        
        (1,287,000
        )
        
        (1,287,000
        )October 31, 2006
        
        4,532,845
        
        
        453,000
        
        
        36,625,000
        
        
        (35,114,000
        )
        
        1,964,000Stock based compensation
        
        
        
        
        
        
        
        15,000
        
        
        
        
        
        15,000Stock issued through the employee stock purchase plan
        
        12,928
        
        
        1,000
        
        
        3,000
        
        
        
        
        
        4,000Private placements
        
        5,357,143
        
        
        536,000
        
        
        964,000
        
        
        
        
        
        1,500,000Net loss
        
        
        
        
        
        
        
        
        
        
        (1,498,000
        )
        
        (1,498,000
        )October 31, 2007
        
        9,902,916
        
        $
        990,000
        
        $
        37,607,000
        
        $
        (36,612,000
        )
        $
        1,985,000




The accompanying notes are an integral part of the financial statements.





26

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NOTES TO FINANCIAL STATEMENTS

OCTOBER 31, 2007 and 2006



NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



NATURE OF OPERATIONS



PPT VISION, Inc. (the Company) designs, manufactures, and markets machine vision based intelligent cameras used for automated inspection, measurement, and guidance applications in the manufacturing marketplace. The Companys IMPACT intelligent camera product line enables manufacturers to realize significant economic paybacks by increasing the quality of manufactured parts and improving the productivity of manufacturing processes. The Companys IMPACT intelligent camera product line is sold through a global network of distribution and integration partners to end-user manufacturers, original equipment manufacturers (OEMs), and manufacturing machine builders, in a wide variety of manufacturing markets including electronics, automotive, medical device, and packaged goods industries.



USE OF ESTIMATES



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.



REVENUE RECOGNITION



The Company typically recognizes revenue on product sales upon shipment to end-user customers if contractual obligations have been substantially met and title and risk of loss have passed to the customer, which is generally the case for sales of machine vision systems, spare parts and accessories.



The Company also recognizes revenue on products sold to distributors upon shipment because contracts with distributors do not include post shipment obligations or any right of return provisions and pricing is fixed at the time of sale. Revenue related to application engineering, product development and customer training services is recognized when the services are performed. Service revenue is less than 10% of total revenues for each of the years ended October 31, 2007 and 2006.



Royalties are recognized when earned as promulgated by SFAS No. 45, Accounting for Franchise Fee Revenue.  Royalties are required to be paid equal to a percentage of the net sales on a monthly basis.



CASH AND CASH EQUIVALENTS



For purposes of reporting cash flows, cash and cash equivalents include cash on hand and investments with original maturities of three months or less when purchased. The Company deposits its cash in high credit quality financial institutions. The balances, at times, may exceed federally insured limits.



ACCOUNTS RECEIVABLE



The Company reviews customers credit history before extending unsecured credit and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers and other information. Invoices are usually due net 45 days. Accounts receivable over 60 days are considered past due. The Company does not accrue interest on past due accounts receivable.The Company writes off accounts receivable when they are deemed uncollectible. Accounts receivable are shown net of an allowance for doubtful accounts of $24,000 and $60,000 at October 31, 2007 and 2006, respectively.



27

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INVENTORIES



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



PROPERTY AND EQUIPMENT



Property and equipment consist of furniture, 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 ranging from one to ten years and for tax purposes over five and ten years using accelerated and straight-line methods. When assets are retired or disposed of, the cost and related accumulated depreciation are removed from the accounts, and gains or losses are recognized in the same period. Maintenance and repairs are expensed as incurred; significant improvements are capitalized. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term, or the estimated useful life of the assets.



INTANGIBLE ASSETS



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



IMPAIRMENT OF LONG-LIVED ASSETS



The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company believes that there has not been any impairment of long-lived assets as of October 31, 2007.



DEFERRED REVENUE



Deferred revenue results from amounts collected from customers in advance of shipment of systems or in advance of performing engineering services.



RESEARCH AND DEVELOPMENT



Expenditures for research and development are expensed as incurred.



SHIPPING AND HANDLING



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



INCOME TAXES



The Company accounts for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for tax consequences of temporary differences between the financial statement income tax reporting bases of assets and liabilities based on currently enacted rates and laws. These temporary differences include depreciation, allowance for doubtful accounts, inventory valuation adjustments, accrued expenses and net operating losses. Deferred taxes are reduced by a valuation allowance to the extent that realization of the related deferred tax asset is not assured.



ADVERTISING EXPENSE



Advertising expense is expensed as incurred. Advertising expense was $41,000 and $103,000 for the years ended October 31, 2007 and 2006, respectively.



28

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STOCK-BASED COMPENSATION



Prior to November 1, 2006, the Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for employee stock options. Under the intrinsic value method, compensation expense is recorded only to the extent that the market price of the common stock exceeds the exercise price of the stock option on the date of grant.



Effective November 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment SFAS No. 123R, which requires companies to measure and recognize compensation expense for all stock-based payments to fair value. SFAS 123R is being applied on the modified prospective basis. Prior to the adoption of SFAS 123R, the Company had adopted the disclosure-only provisions of SFAS No. 148, Accounting for Stock-Based Compensation and, accordingly, recognized no compensation expense related to the stock-based plans prior to November 1, 2006.



As a result of adopting SFAS 123R on November 1, 2006, the net loss and net loss per share for fiscal 2007, were $15,000 and $0.00 higher, respectively, than if the Company had continued to account for stock-based compensation under SFAS No. 148.



During fiscal 2005, the Company granted 2,500 of seven-year options outstanding to purchase shares of the Companys common stock to a consultant with an exercise price of $1.43 per share. Pursuant to Emerging Issues Task Force 96-18 (EITF 96-18), Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, the Company valued and recorded expenses related to the options. The Company fully expensed these options recording an expense of $2,000 and $1,000 for the years ended October 31, 2006 and 2005, respectively, in accordance with EITF 96-18.



Had compensation cost for stock options been determined based on the fair value methodology prescribed by SFAS 123 in fiscal 2006, the Companys net loss and net loss per share would have been reduced to the pro forma amounts indicated below:



FISCAL YEAR ENDED OCTOBER 31,
        
        
        
        2006Net loss
        
        Reported
        
        $
        (1,287,000
        )Pro forma
        
        $
        (1,501,000
        )Basic and diluted loss per share
        
        Reported
        
        $
        (0.35
        )Pro forma
        
        $
        (0.41
        )Stock based compensation
        
        As reported
        
        $
        2,000Stock based compensation
        
        Pro forma
        
        $
        214,000




The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards with the following weighted average assumptions:



FISCAL YEAR ENDED OCTOBER 31,
        
        2007
        
        2006Risk free interest rates
        
        4.5
        %
        4.6
        %Expected lives
        
        7 Years
        
        7 YearsExpected volatility
        
        282
        %
        254
        %Expected dividends
        
        0
        %
        0
        %




FAIR VALUE OF FINANCIAL INSTRUMENTS



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



29

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



The Financial Accounting Standards Board (FASB) has published FASB Interpretation (FIN) No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes, to address the non-comparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards (SFAS) No. 109 (SFAS No. 109), Accounting for Income Taxes, on the uncertainty in income taxes recognized in an enterprises financial statements. Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 will apply to fiscal years beginning after
December 15, 2006, with earlier adoption permitted. The Company does not expect the adoption of FIN No. 48 to have a material effect on its consolidated financial statements.



In September, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 108, Considering the Effects on Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (SAB 108). SAB 108 requires registrants to quantify errors using both the income statement method (i.e. iron curtain method) and the rollover method and requires adjustment if either method indicates a material error. If a correction in the current year relating to prior year errors is material to the current year, then the prior year financial information needs to be corrected. A correction to the prior year results that are not material to those years, would not require a restatement process where prior financials would be amended. SAB 108 was effective for our Fiscal 2007 and did not have a material effect on our financial position,
results of operations or cash flows.



In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to initial adoption, the election of the fair value option may only be made at initial recognition of the asset or liability or upon a re-measurement event that gives rise to new-basis accounting. The decision about whether to elect the fair value option is applied on an instrument-by-instrument basis, is irrevocable and is applied only to an entire
instrument and not only to accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company believes the adoption of SFAS No. 159 will not have an impact on its financial statements.



RECLASSIFICATIONS



The Company has elected to reclassify certain balance sheet amounts for comparative purposes. The reclassifications specifically relate to the classification of long-term assets that were previously recorded as prepaid expenses (see Note 6).



NOTE 2:  LIQUIDITY AND CAPITAL RESOURCES



The Company has incurred net losses and negative cash flows from operating activities for the years ended October 31, 2007 and 2006 and has an accumulated deficit of $36.6 million at October 31, 2007. As of October 31, 2007, we had a cash balance of approximately $624,000.



Because we have working capital of $1.7 million and no long-term debt, the Company believes that a variety of financing alternatives are available including external borrowing secured by accounts receivable, inventory and other assets, customer or vendor financing, or the private placement of common stock or debt instruments to key financial or strategic investors. The Company believes it has sufficient cash to fund its operations, working capital and capital resource needs through the second quarter of fiscal 2008. There can be no assurance, however, that additional capital will be available on acceptable terms or at all, and the failure to obtain additional capital as needed may have an adverse effect on the Companys ability to continue to take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could adversely affect its
business, financial position, results of operations and cash flows.



30

---

NOTE 3:  INVENTORIES



As of October 31, inventories consist of the following:



2007
        
        2006Manufactured and purchased parts
        
        $
        400,000
        
        $
        440,000Work-in-process
        
        
        12,000
        
        
        15,000Finished goods
        
        
        24,000
        
        
        15,000Totals
        
        $
        436,000
        
        $
        470,000




In view of the rapid pace of technological change in the machine vision industry, the Company periodically reviews the carrying value of its inventories for excess or obsolete inventories. This analysis of the net realizable value of inventories include consideration of a variety of factors including existing inventory quantities, historical usage, expected future demand, the effect of technological advances and the impact of newly introduced products.



NOTE 4:  PROPERTY AND EQUIPMENT



At October 31, furniture, fixtures and equipment consisted of the following:



2007
        
        2006Equipment
        
        $
        950,000
        
        $
        1,020,000Leasehold improvements
        
        
        140,000
        
        
        140,000Furniture and fixtures
        
        
        274,000
        
        
        273,0001,364,000
        
        
        1,433,000Less accumulated depreciation
        
        
        (1,119,000
        )
        
        (1,125,000
        )Total fixed assets
        
        $
        245,000
        
        $
        308,000




Depreciation expense for continuing operations was $106,000 and $172,000 for the years ended October 31, 2007 and 2006, respectively. During fiscal 2007 and 2006, the Company wrote off fully depreciated properties that were no longer in use.



NOTE 5:  INTANGIBLE ASSETS



Intangible assets at October 31, 2007 and October 31, 2006, consisted of the following:



2007
        
        2006Patent and trademark
        
        $
        170,000
        
        $
        549,000Less accumulated amortization
        
        
        (165,000
        )
        
        (527,000
        )Total intangible assets
        
        $
        5,000
        
        $
        22,000




Patent and trademark costs are amortized over five to ten years. Amortization expense was approximately $14,000 and $46,000 in the years ended October 31, 2007 and 2006, respectively. Amortization expense for fiscal 2008, 2009 and 2010 is expected to be approximately $4,000, $1,000 and $0, respectively.



On September 20, 2007 the Company sold patents which resulted in a gain of $145,000.





31

---

NOTE 6:  OTHER ASSETS



Other assets at October 31, 2007 and October 31, 2006 were $56,000 and $50,000. In both fiscal years, $50,000 in other assets represents a security deposit for its headquarters facility in Eden Prairie, Minnesota. In the fiscal year ended October 31, 2007, $6,000 represents a three year vehicle lease PPT VISION signed with DutchLease Rotterdam BV for its new employee in the Netherlands. Other assets in 2005 represented an investment in the common stock of Electro-Sensors, Inc. a related party shareholder of the Company. The Companys percentage ownership was less than 1% of Electro-Sensors, Inc. outstanding common stock. During the second quarter of fiscal 2006, the Company sold 9,500 shares of Electro-Sensors, Inc. common stock, resulting in gross proceeds of $94,000. At October 31, 2006 the Company no longer held shares of Electro-Sensors, Inc. common stock.



The October 31, 2006 other current assets has been reclassified to be consistent with the current-year presentation. The balance decreased by $50,000 and is included in other long-term assets. The reclassification did not affect net loss or shareholders equity.



NOTE 7:  ACCRUED EXPENSES



Accrued expenses at October 31, include:



2007
        
        2006Employee stock purchase plan payroll deductions
        
        $
        
        
        $
        8,000Accrued compensation
        
        
        48,000
        
        
        37,000Professional services
        
        
        65,000
        
        
        60,000Accrued rent
        
        
        23,000
        
        
        14,000Taxes and other
        
        
        20,000
        
        
        19,000Totals
        
        $
        156,000
        
        $
        138,000




Restructuring Costs:



The components of the restructuring charges associated with the lease termination fee and miscellaneous remaining expenses follow:



2007
        
        2006Restructuring costs
        
        $
        
        
        $
        107,000Payments
        
        
        
        
        
        (107,000
        )Ending balance
        
        $
        
        
        $
        




NOTE 8:  OPERATING LEASES



In the second quarter of Fiscal 2005, the Company executed an amended lease agreement with respect to its headquarters facility in Eden Prairie, Minnesota. Under the amended lease terms signed on April 29, 2005, the Company paid $140,000 for certain leasehold improvements associated with the reconfigured space and also paid approximately $300,000 in accrued deferred rent. The Company also paid a $240,000 lease termination fee, which was accrued in the second quarter of fiscal 2005, in equal monthly installments over a 12 month period which started on May 1, 2005 and ended on April 1, 2006. It also extended the current lease term by two years through May, 2011. The Company also terminated its leased space for its regional sales and support office in Michigan effective December 31, 2005. Rent expense for all leased property was $304,000 and $310,000 for the years ended October 31, 2007 and
2006, respectively.



32

---

Minimum future rental payments due under non-cancelable operating lease agreements are as follows (amounts exclude required payments for common area maintenance expenses):



2008
        
        $
        293,0002009
        
        
        308,0002010
        
        
        321,0002011
        
        
        183,000Total
        
        $
        1,105,000




NOTE 9:  INCOME TAXES



The provision for income taxes differs from the statutory U.S. federal tax rate of 34% applied to net loss before income taxes for the years ended October 31, as follows:



2007
        
        2006Expected tax benefit at statutory rate
        
        $
        (500,000
        )
        $
        (430,000
        )State income tax benefit, net of federal tax effect
        
        
        (40,000
        )
        
        (33,000
        )Tax credits and other
        
        
        (41,000
        )
        
        (26,000
        )Expiring loss carryforwards
        
        
        50,000
        
        
        17,000Other
        
        
        4,000
        
        
        16,000Increase in valuation allowance
        
        
        527,000
        
        
        404,000Total income tax expense (benefit)
        
        $
        
        
        $
        




Based on an increase in the valuation allowance for each of the years ended October 31, 2007 and 2006, no benefit for income taxes.



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



2007
        
        2006Depreciation and amortization
        
        $
        (127,000
        )
        $
        (99,000
        )Net operating loss carryforwards
        
        
        11,294,000
        
        
        10,945,000Income tax credits
        
        
        1,196,000
        
        
        1,237,000Inventory allowances
        
        
        8,000
        
        
        7,000Other
        
        
        185,000
        
        
        185,000Total deferred tax assets before valuation allowance
        
        
        12,556,000
        
        
        12,275,000Less valuation allowance
        
        
        (12,556,000
        )
        
        (12,275,000
        )Net deferred tax asset
        
        $
        
        
        $
        




At October 31, 2006, the Company has available federal net operating loss, state net operating loss and tax credit carryforwards for income tax purposes of approximately $32.5 million, $8.7 million and $1.2 million, respectively. These carryforwards expire in the years ending October 31, 2008 through October 31, 2027. The amount of the federal net operating loss carryforwards that expire in the next five fiscal years are  $0, $16,000, $0, $0 and $0, respectively. Approximately $39,000, $43,000, $25,000 and $32,000 and $115,000 of the tax credit carryforwards expire in each of the next five fiscal years.



The utilization of the net operating loss and tax credit carryforwards is dependent upon the Companys ability to generate sufficient taxable income during the carryforward period. Because of the uncertainty of future realization, a valuation allowance equal to the deferred tax asset has been recorded. No benefit has been recorded for any loss or credit carryforwards, and utilization in future years may be limited under Sections 382 and 383 of the Internal Revenue Code if significant ownership changes have occurred or from future tax legislation changes.



33

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NOTE 10:  SHAREHOLDERS EQUITY



STOCK OPTION PLANS



Under the Companys 2000 Stock Option Plan, 1988 Stock Option Plan, 1997 Stock Option Plan and 2007 Stock Option Plan the Company may issue options to purchase up to 300,000 shares of common stock to employees and directors. Options are granted at the fair market value on the date of 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:



NUMBEROF SHARES
        
        WEIGHTEDAVG.OPTIONPRICE
        
        AGGREGATEINTRENSICVALUEBalance at October 31, 2005
        
        354,768
        
        $
        4.92Granted
        
        123,000
        
        $
        0.55Cancelled
        
        (71,315
        )
        $
        7.81Exercised
        
        
        
        $
        Balance at October 31, 2006
        
        406,453
        
        $
        3.04Granted
        
        26,000
        
        $
        0.36Cancelled
        
        (52,013
        )
        $
        9.05Exercised
        
        
        
        $
        Balance at October 31, 2007
        
        380,440
        
        $
        2.03
        
        $
        0.00Exercisable Options at:October 31, 2006
        
        392,281
        
        $
        3.07October 31, 2007
        
        349,315
        
        $
        2.17
        
        $
        0.00




The estimated weighted average grant-date fair value of stock options granted is as follows: 2007 $0.36 and 2006  $0.55.



The following table summarizes stock options outstanding and exercisable at October 31, 2007.



OUTSTANDING
        
        EXERCISABLEExercisePrice Range
        
        Options
        
        WeightedAvg.ContractualLifeRemaining
        
        Weighted Avg.Exercise Price
        
        Options
        
        Weighted Avg.Exercise Price$0.27  $  0.39
        
        18,500
        
        6.69
        
        $
        0.32
        
        
        
        $
        $0.45  $  0.61
        
        121,250
        
        5.80
        
        $
        0.55
        
        109,250
        
        $
        0.55$1.11  $  1.11
        
        15,000
        
        4.85
        
        $
        1.11
        
        15,000
        
        $
        1.11$1.70  $  1.70
        
        101,000
        
        4.53
        
        $
        1.70
        
        101,000
        
        $
        1.70$2.60  $  3.60
        
        89,700
        
        2.09
        
        $
        3.12
        
        89,700
        
        $
        3.12$4.36  $  6.44
        
        25,177
        
        2.26
        
        $
        5.33
        
        24,552
        
        $
        5.36$7.52  $  8.88
        
        5,875
        
        0.64
        
        $
        8.61
        
        5,875
        
        $
        8.61$11.60  $ 13.25
        
        3,938
        
        0.67
        
        $
        12.27
        
        3,938
        
        $
        12.27380,440
        
        4.23
        
        $
        2.03
        
        349,315
        
        $
        2.17




At October 31, 2007 and 2006 there were two million and no warrants outstanding, respectively.



34

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EMPLOYEE STOCK PURCHASE PLAN



In March, 2005, shareholders approved the adoption of the 2005 Employee Stock Purchase Plan (the 2005 Plan) to replace the earlier 2000 Employee Stock Purchase Plan which, by its terms, expired during 2005. The 2005 Plan authorizes the issuance of up to 100,000 shares of common stock. Under the terms of the 2005 Plan, eligible employees may purchase common stock annually up to 85% of the lesser of (1) the fair market value on the first day of the annual offering period or (2) the fair market value on the last day of each offering period.



RECENT FINANCING WITH PRINCIPAL SHAREHOLDER



During fiscal years 2006 and 2007 PPT
VISION, Inc. met its working capital requirements through investments from P.R. Peterson, the Companys largest shareholder
and a director. The Company has agreed to register the resale of Common Stock issuable upon exercise of the Warrants.
Pursuant to FSP EITF 00-19-2, Accounting for Registration Payment Arrangements (FSP), which
addresses an issuers accounting for registration payment arrangements, the Company concluded that no obligation should
be recorded related to the registration rights.



The Company closed on a $500,000 private placement of common stock on August 30, 2007. The placement was made by the Companys current largest shareholder, Mr. Peter R. Peterson. In the August, 2007 private placement, the Company agreed to issue Mr. Peterson (i) 2,500,000 shares of common stock at a price of $0.20 per share and (ii) seven-year warrants purchasing 1,000,000 shares of stock at a price of $0.25 per share. Because the Company did not have sufficient authorized capital to issue the shares, it agreed that it would seek an increase in authorized capital at the 2008 Annual Meeting of shareholders and issue the shares after the increase was approved.



The Company closed on a $1,000,000 private placement of common stock with Mr. Peterson on February 26, 2007. In the February 2007 private placement, the Company issued 2,857,143 shares of common stock at a price of $0.35 per share and seven-year warrants to purchase 1,000,000 shares of stock at a price of $0.50 per share.



The Company closed on a $290,000 private placement of common stock with Mr. Peterson on September 7, 2006. In the September 2006 private placement, the Company issued 725,000 shares of common stock at a price of $0.40 per share.



The Company closed on a $400,000 private placement of common stock with Mr. Peterson on February 17, 2006. In the February 2006 private placement, the Company issued 800,000 shares of common stock at a price of $0.50 per share.



All purchases were made by Mr. Peterson through the P.R. Peterson Keogh Plan.



NOTE 11:  EMPLOYEE SAVINGS PLAN



The Company provides a supplementary retirement savings plan that is structured in accordance with Section 401(k) of the Internal Revenue Code. Employees eligible for the Plan may contribute from one to fifty percent of their monthly earnings on a pre-tax basis, subject to annual contribution limitations. The Company made matching contributions of $1.00 for each $1.00 contributed by each Plan participant up to a maximum of $500 annually for fiscal year ended October 31, 2007. The Company made Safe Harbor matching contributions for fiscal year ended October 31, 2006 by matching 100% of each Plan participants contributions for the first 3% and 50% for the next 2% of participants contributions.



The Companys contributions under this program were approximately $14,000, and $88,000 for the years ended October 31, 2007, and 2006, respectively. In fiscal 2007 and 2006, $14,000 and $11,000, respectively of contributions were funded from accumulated forfeitures and $0 and $77,000, respectively was expensed by the Company.





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NOTE 12:  SHAREHOLDER RIGHTS PLAN



On June 2, 1999, the Company adopted a Shareholder Rights Plan (the Rights Plan) designed to deter coercive or unfair takeover tactics and to prevent a person or a group from gaining control of the Company without offering a fair price to all shareholders. Under the terms of the Rights Plan, a dividend distribution of one Preferred Stock Purchase Right (Right) for each outstanding share of the Companys common stock was made to holders of record on June 22, 1999. These Rights entitle the holder to purchase one one-hundredth of a share of the Companys Series A Junior Participating Preferred Stock (Preferred Stock) at an exercise price of $28. The Rights become exercisable (a) 10 days after a public announcement that a person or group has acquired shares representing 20% or more of the outstanding shares of common stock, or (b) 10 business days
following commencement of a tender or exchange offer for 20% or more of such outstanding shares of common stock. The Company can redeem the Rights for $0.001 per Right at any time prior to their becoming exercisable. The Rights expire on June 2, 2009, unless redeemed earlier by the Company. Under certain circumstances, if a person or group acquires 20% or more of the Companys common stock, the Rights permit shareholders other than the acquirer to purchase common stock having a market value of twice the exercise price of the Rights. In addition, in the event of certain business combinations, the Rights permit shareholders to purchase the common stock of an acquirer at a 50% discount. Rights held by the acquirer will become null and void in both cases.



In October, 1999, the Companys Board of Directors amended the terms of the Rights Plan to enable Mr. P.R. Peterson, a member of the Board of Directors of the Company, to purchase up to 30% of the common stock of the Company without being deemed an Acquiring Person within the meaning of the Rights Agreement. In March, 2002, the Company amended the terms of the Rights Plan to exclude Mr. Peterson completely from the definition of Acquiring Person, regardless of his share ownership.



NOTE 13:  NET LOSS PER SHARE



Basic net loss per share is computed using only weighted average common shares outstanding. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the fiscal reporting periods. Because of our net loss, basic and diluted loss per share is the same.



2007
        
        2006Net loss from operations
        
        $
        (1,498,000
        )
        $
        (1,287,000
        )Weighted average shares outstanding  basic and diluted
        
        
        6,832,466
        
        
        3,675,120Basic and diluted loss per share
        
        $
        (0.22
        )
        $
        (0.35
        )




At October 31, 2007, and 2006, the Company had outstanding options to purchase 380,440, and 406,453 shares of the Companys common stock, respectively. At October 31, 2007 and 2006 the Company had warrants outstanding to purchase two million and zero shares of the Companys common stock, respectively. As the Company had a net loss, the inclusion of the aforementioned shares would have been anti-dilutive for each of the years ended October 31, 2007 and 2006.



NOTE 14:  CUSTOMER AND GEOGRAPHIC INFORMATION



SIGNIFICANT CUSTOMER INFORMATION



During fiscal 2007 revenue from one customer accounted for 10.2% of net revenues. During fiscal 2006 revenue from one customer accounted for 11.9% of net revenues.



At October 31, 2007 four customers accounted for 13%, 12%, 12% and 11% of total accounts receivable. At October 31, 2006 one customer accounted for 11% of total accounts receivable.



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CUSTOMER GEOGRAPHIC DATA



North America and export sales by geographic region as a percentage of net revenues at October 31 are as follows:



2007
        
        2006North America
        
        52
        %
        45
        %Europe
        
        21
        %
        18
        %Asia-Pacific
        
        27
        %
        36
        %South America
        
        0
        %
        1
        %100
        %
        100
        %












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