**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 10-QSB**

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**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly Period Ended July 31, 2006**

**Commission File Number 0-11518**

**PPT VISION,INC.**

(Exact name of Small Business Issuer as specified inits charter)

| **MINNESOTA**                                       | **41-1413345**          |
|-----------------------------------------------------|-------------------------|
| (State or other  jurisdiction of                    | (I.R.S. Employer        |
| incorporation or  organization)                     | Identification  Number) |
|                                                |                    |
| **12988  Valley View Road Eden Prairie, Minnesota** | **55344**               |
| (Address of  principal executive offices)           | (Zip Code)              |

**(952) 996-9500**

(Issuer’s telephone number, including area code)

Check whether theissuer (1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the last 90 days.  Yes x  No o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o  No x

Shares of $.10 parvalue common stock outstanding at August 17, 2006: 3,807,845

 

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INDEX

PPT VISION, INC.
| Part I.  | Financial Information                                                                         |   |
|----------|-----------------------------------------------------------------------------------------------|--------|
|     |                                                                                          |   |
| Item 1.  | Financial Statements                                                                          |   |
|     |                                                                                          |   |
|     | Balance  Sheets as of July 31, 2006 and October 31, 2005                                      |   |
|     |                                                                                          |   |
|     | Statements of Operations  for the Three and Nine months Ended July 31, 2006 and July 31, 2005 |   |
|     |                                                                                          |   |
|     | Statements of Cash  Flows for the Nine months Ended July 31, 2006 and July 31, 2005           |   |
|     |                                                                                          |   |
|     | Notes to  Condensed Financial Statements – July 31, 2006                                 |   |
|     |                                                                                          |   |
| Item 2.  | Management’s  Discussion and Analysis or Plan of Operation                               |   |
|     |                                                                                          |   |
| Item 3.  | Controls and  Procedures                                                                      |   |
|     |                                                                                          |   |
| Part II. | Other Information                                                                             |   |
|     |                                                                                          |   |
| Item 1.  | Legal Proceedings                                                                             |   |
|     |                                                                                          |   |
| Item 2.  | Unregistered  Sales of Equity Securities and Use of Proceeds                                  |   |
|     |                                                                                          |   |
| Item 3.  | Defaults  Upon Senior Securities                                                              |   |
|     |                                                                                          |   |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                          |   |
|     |                                                                                          |   |
| Item 5.  | Other Information                                                                             |   |
|     |                                                                                          |   |
| Item  6. | Exhibits                                                                                      |   |
|     |                                                                                          |   |
|     | Signatures                                                                                    |   |

 

2

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PPT VISION, INC.

BALANCE SHEETS
| ** **                                      | ** ** | **July 31, 2006** | ** ** | **October 31, 2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**             | ** ** | **(audited)**                  | ** ** |
| ASSETS                                          |       |                        |       |                           |       |
| Current assets                                  |       |                        |       |                           |       |
| Cash and cash  equivalents                      |       | $                           | 482,000    |                           | $          | 778,000 |   |
| Accounts  receivable, net                       |       | 1,254,000                   |       | 1,197,000                      |       |
| Inventories:                                    |       |                        |       |                           |       |
| Manufactured and  purchased parts               |       | 388,000                     |       | 454,000                        |       |
| Work-in-process                                 |       | 25,000                      |       | 34,000                         |       |
| Finished goods                                  |       | 13,000                      |       | 2,000                          |       |
| Total inventories                               |       | 426,000                     |       | 490,000                        |       |
| Other current  assets                           |       | 110,000                     |       | 160,000                        |       |
| Total current assets                            |       | 2,272,000                   |       | 2,625,000                      |       |
|                                            |       |                        |       |                           |       |
| Fixed assets, net                               |       | 371,000                     |       | 438,000                        |       |
| Intangible  assets                              |       | 47,000                      |       | 68,000                         |       |
| Other assets                                    |       | —                      |       | 22,000                         |       |
| Total assets                                    |       | $                           | 2,690,000  |                           | $          | 3,153,000 |   |
|                                            |       |                        |       |                           |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY      |       |                        |       |                           |       |
| Current liabilities                             |       |                        |       |                           |       |
| Accounts payable                                |       | $                           | 435,000    |                           | $          | 367,000 |   |
| Accrued expenses                                |       | 137,000                     |       | 223,000                        |       |
| Deferred revenue  - customer advances           |       | 26,000                      |       | 9,000                          |       |
| Total current  liabilities                      |       | 598,000                     |       | 599,000                        |       |
|                                            |       |                        |       |                           |       |
| Shareholders’ equity                       |       |                        |       |                           |       |
| Common stock                                    |       | 381,000                     |       | 300,000                        |       |
| Capital in  excess of par value                 |       | 36,407,000                  |       | 36,081,000                     |       |
| Accumulated  deficit                            |       | (34,696,000                 | )          | (33,827,000                    | )          |
| Total shareholders’  equity                |       | 2,092,000                   |       | 2,554,000                      |       |
| Total liabilities and shareholders’ equity |       | $                           | 2,690,000  |                           | $          | 3,153,000 |   |

 

See accompanyingnotes to condensed financial statements

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PPT VISION, INC.

STATEMENTSOF OPERATIONS

(UNAUDITED)
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **July 31,**                | ** ** | **July 31,**               | ** ** |
| ** **                                   | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                     |       | $                                | 1,377,000  |                            | $          | 1,317,000 |   | $ | 4,367,000 |   | $ | 4,409,000 |   |
| Cost of revenues                             |       | 644,000                          |       | 626,000                         |       | 2,018,000 |   | 2,158,000 |   |
| Gross profit                                 |       | 733,000                          |       | 691,000                         |       | 2,349,000 |   | 2,251,000 |   |
| Expenses:                                    |       |                             |       |                            |       |   |   |   |   |
| Sales and marketing                          |       | 545,000                          |       | 487,000                         |       | 1,647,000 |   | 1,832,000 |   |
| General and administrative                   |       | 227,000                          |       | 246,000                         |       | 712,000 |   | 806,000 |   |
| Research and development                     |       | 347,000                          |       | 286,000                         |       | 1,033,000 |   | 996,000 |   |
| Restructuring charges                        |       | —                           |       | —                          |       | — |   | 390,000 |   |
| Total expenses                               |       | 1,119,000                        |       | 1,019,000                       |       | 3,392,000 |   | 4,024,000 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Interest and other  income                   |       | 5,000                            |       | 34,000                          |       | 174,000 |   | 54,000 |   |
| Loss from  continuing operations             |       | (381,000                         | )          | (294,000                        | )          | (869,000 | ) | (1,719,000 | ) |
| Loss from discontinued  operations           |       | —                           |       | —                          |       | — |   | (55,000 | ) |
| Net loss                                     |       | $                                | (381,000   | )                               | $          | (294,000 | ) | $ | (869,000 | ) | $ | (1,774,000 | ) |
| Per share data:                              |       |                             |       |                            |       |   |   |   |   |
| Weighted average  basic shares outstanding   |       | 3,805,000                        |       | 2,998,000                       |       | 3,484,000 |   | 2,997,000 |   |
| Weighted average  diluted shares outstanding |       | 3,805,000                        |       | 2,998,000                       |       | 3,484,000 |   | 2,997,000 |   |
| Basic and  diluted loss per common share     |       |                             |       |                            |       |   |   |   |   |
| Loss from continuing operations              |       | $                                | (0.10      | )                               | $          | (0.10 | ) | $ | (0.25 | ) | $ | (0.57 | ) |
| Loss from discontinued operations            |       | $                                | —     |                            | $          | — |   | $ | — |   | $ | (0.02 | ) |
| Net loss                                     |       | $                                | (0.10      | )                               | $          | (0.10 | ) | $ | (0.25 | ) | $ | (0.59 | ) |

 

See accompanyingnotes to condensed financial statements

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PPTVISION, INC.

STATEMENTSOF CASH FLOWS

(UNAUDITED)
| ** **                                                                   | ** ** | **Nine Months**        | ** ** | **Nine Months**  | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **Ended**                   | ** ** | **Ended**             | ** ** |
| ** **                                                                   | ** ** | **July 31, 2006** | ** ** | **July 31,2005** | ** ** |
| Net loss                                                                     |       | $                           | (869,000   | )                     | $          | (1,774,000 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                        |       |                  |       |
| Stock option expense                                                         |       | 2,000                       |       | —                |       |
|                                                                         |       |                        |       |                  |       |
| Depreciation and amortization                                                |       | 126,000                     |       | 173,000               |       |
| Gain on sale of securities                                                   |       | (72,000                     | )          | (25,000               | )          |
| Change in allowance for doubtful accounts                                    |       | —                      |       | (19,000               | )          |
|                                                                         |       |                        |       |                  |       |
| Change in assets  and liabilities:                                           |       |                        |       |                  |       |
| Accounts receivable                                                          |       | (57,000                     | )          | 633,000               |       |
| Inventories                                                                  |       | 64,000                      |       | 190,000               |       |
| Other current assets                                                         |       | 50,000                      |       | 94,000                |       |
| Accounts payable                                                             |       | 68,000                      |       | (757,000              | )          |
| Accrued expenses                                                             |       | (86,000                     | )          | (205,000              | )          |
| Deferred revenue - customer advances                                         |       | 17,000                      |       | (45,000               | )          |
| Total adjustments                                                            |       | 112,000                     |       | 39,000                |       |
| Net cash used in operating activities-continuing  operations                 |       | (757,000                    | )          | (1,735,000            | )          |
| Net cash used in operating activities-discontinued  operations               |       | —                      |       | 55,000                |       |
| Net cash used in operating activities                                        |       | (757,000                    | )          | (1,680,000            | )          |
| Cash flows from  investing activities:                                       |       |                        |       |                  |       |
| Purchase of fixed assets                                                     |       | (38,000                     | )          | (188,000              | )          |
| Net investment in other long-term assets                                     |       | —                      |       | (2,000                | )          |
| Proceeds from sale of securities                                             |       | 94,000                      |       | 71,000                |       |
| Net cash provided by (used in) investing activities                          |       | 56,000                      |       | (119,000              | )          |
| Cash flows from  financing activities:                                       |       |                        |       |                  |       |
| Proceeds from the exercise of stock options                                  |       | —                      |       | 3,000                 |       |
| Proceeds from issuance of common stock                                       |       | 405,000                     |       | 2,000                 |       |
| Net cash provided by financing activities                                    |       | 405,000                     |       | 5,000                 |       |
| Net cash provided by discontinued operations                                 |       | —                      |       | 145,000               |       |
|                                                                         |       |                        |       |                  |       |
| Net decrease in  cash and cash equivalents                                   |       | (296,000                    | )          | (1,649,000            | )          |
|                                                                         |       |                        |       |                  |       |
| Cash and cash  equivalents at beginning of year                              |       | 778,000                     |       | 2,617,000             |       |
| Cash and cash  equivalents at end of period                                  |       | $                           | 482,000    |                  | $          | 968,000 |   |

 

See accompanyingnotes to condensed financial statements

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PPT VISION, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

July 31, 2006

(UNAUDITED)

NOTE A -DESCRIPTION OF BUSINESS

PPT VISION, Inc. (“TheCompany”) designs, manufactures, and markets camera-based intelligent systemsfor automated inspection in manufacturing applications. The Company’s products,commercially known as machine vision systems, enable manufacturers to realizesignificant economic paybacks by increasing the quality of manufactured partsand improving the productivity of manufacturing processes.  The Company’s machine vision product line issold on a global basis to end-users, system integrators, distributors andoriginal equipment manufacturers (OEM’s) primarily in the electronic andsemiconductor component, automotive, medical device, and packaged goodsindustries.

NOTE B - BASIS OFPRESENTATION

The accompanyingunaudited condensed financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-QSB.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Results of operations for the interim periods are not necessarily indicative ofthe results to be expected for the full year or of the results for any futureperiods.

The Balance Sheetat October 31, 2005 has been derived from the Company’s audited financialstatements for the fiscal year ended October 31, 2005 but does not include allof the information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements.

For furtherinformation, refer to the financial statements and footnotes thereto includedin the Company’s annual report on Form 10-KSB for the year endedOctober 31, 2005.

NOTE C - REVENUERECOGNITION

The Companytypically recognizes revenue on product sales upon shipment to the end usercustomers if contractual obligations have been substantially met and title andrisk of loss have passed to the customer, which is generally the case for salesof machine vision systems, spare parts and accessories. The Company alsorecognizes revenue on products sold to distributors upon shipment becausecontracts with distributors do not include post-shipment obligations or anyright of return provisions and pricing is fixed at the time of sale. Revenuerelated to application engineering, product development and customer trainingservices is recognized when the services are performed. Service revenue wasless than 10% of total revenues for the three and nine months ended July 31,2006 and 2005.

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NOTE D - LIQUIDITYAND CAPITAL RESOURCES

The Company had a loss fromcontinuing operations for the three and nine months ended July 31, 2006 of$381,000 and $869,000, respectively. Cash used in operations was $757,000 forthe nine months ended July 31, 2006.

The Company believes that a varietyof financing alternatives are available including external borrowing againstaccounts receivable and inventory, customer or vendor financing, the issuanceof additional stock to the public or to strategic partners, orcustomer-sponsored research and development projects.  The Company estimates that, depending onrevenue results and expense levels, some form of external financing will be requiredin the next 6 to 12 months.

There can be no assurance, however,that additional capital will be available on acceptable terms or at all, andthe failure to obtain additional capital as needed may have an adverse effecton the Company’s ability to continue to take advantage of future opportunitiesor respond to competitive pressures or unanticipated requirements, which couldadversely affect its business, financial position, results of operations andcash flows.

NOTE E - LOSS PERSHARE

At July 31, 2006,options to purchase 332,330 shares of the Company’s common stock were notconsidered in the calculation of diluted earnings per share. At July 31, 2005,options to purchase 341,218 shares of the Company’s common stock were notconsidered in the calculation of diluted earnings per share.  As the Company had a net loss for bothperiods, the inclusion of outstanding options and warrants would have beenanti-dilutive.

NOTE F - STOCK-BASED COMPENSATION

The Company uses the intrinsic value methodprescribed by Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations in accounting for employeestock options.  Under the intrinsic valuemethod, compensation expense is recorded only to the extent that the marketprice of the common stock exceeds the exercise price of the stock option on thedate of grant.

In December 2002, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards (SFAS) No. 148, “Accounting for Stock-Based Compensation - Transitionand Disclosure.”  SFAS No. 148 is an amendment to SFAS No. 123 providingalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation and also providesrequired additional disclosures about the method of accounting for stock-basedemployee compensation. The Company adopted the annual disclosure provisionof SFAS No. 148 during the year ended October 31, 2003.  The Company chose to not adopt the voluntarychange to the fair value based method of accounting for stock-based employeecompensation, pursuant to SFAS No. 148.

During fiscal 2005, the Companygranted 2,500 of seven-year options to purchase shares of the Company’s commonstock 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 ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services,”the Company will

7

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value and record an expenserelated to the options on the earlier of the date a performance commitment ismet or the date the performance is complete. The Company recorded an expense of $1,000 and $2,000 for the three andnine months ended July 31, 2006, respectively, in accordance with EITF 96-18.

The Company hasadopted the disclosure-only provisions of SFAS No. 148, Accounting forStock-Based Compensation.  Accordingly,no compensation cost has been recognized with respect to stock options.  Had compensation cost for stock options beendetermined based on the fair value methodology prescribed by SFAS 123, theCompany’s net loss and net loss per share would have been reduced to the proforma amounts indicated below:

| Three Months Ended  July 31, | ** ** | ** **   | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
| Net loss                                    |       | As  reported |       | $        | (381,000   | )        | $          | (294,000 | ) |
|                                        |       | Pro  forma   |       | $        | (425,000   | )        | $          | (351,000 | ) |
|                                        |       |         |       |     |       |     |       |
| Stock based  compensation                   |       | As  reported |       | $        | 1,000      |     | $          | — |   |
|                                        |       | Pro  forma   |       | $        | (44,000    | )        | $          | (57,000 | ) |
|                                        |       |         |       |     |       |     |       |
| Basic and diluted  loss per share           |       | As  reported |       | $        | (0.10      | )        | $          | (0.10 | ) |
|                                        |       | Pro forma    |       | $        | (0.11      | )        | $          | (0.12 | ) |

 

| Nine months Ended  July 31, | ** ** | ** **   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
| Net loss                                   |       | As  reported |       | $        | (869,000   | )        | $          | (1,774,000 | ) |
|                                       |       | Pro  forma   |       | $        | (994,000   | )        | $          | (1,895,000 | ) |
|                                       |       |         |       |     |       |     |       |
| Stock based  compensation                  |       | As  reported |       | $        | 2,000      |     | $          | — |   |
|                                       |       | Pro  forma   |       | $        | (125,000   | )        | $          | (121,000 | ) |
|                                       |       |         |       |     |       |     |       |
| Basic and  diluted loss per share          |       | As  reported |       | $        | (0.25      | )        | $          | (0.59 | ) |
|                                       |       | Pro forma    |       | $        | (0.29      | )        | $          | (0.63 | ) |

 

| For All Periods Ended  July 31, | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Risk free  interest rates                           |       | 4.0      | %          | 4.0      | %          |
| Expected lives                                      |       | 7 years  |       | 6 years  |       |
| Expected  volatility                                |       | 221      | %          | 115      | %          |
| Expected dividends                                  |       | 0        | %          | 0        | %          |

NOTE G - CUSTOMER AND GEOGRAPHIC DATA

The following tables set forth the percentage of theCompany’s net revenues (including sales delivered through internationaldistributors) by geographic location for the three and nine months ended July31, 2006 and 2005:

| Three Months Ended July 31 | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| United States                                  |       | 28       | %          | 48       | %          |
| Europe and  Canada                             |       | 32       | %          | 27       | %          |
| Asia-Pacific                                   |       | 39       | %          | 25       | %          |
| South America                                  |       | 1        | %          | 0        | %          |
|                                           |       | 100      | %          | 100      | %          |

 

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| Nine months Ended July 31 | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| United States             |       | 37       | %          | 47       | %          |
| Europe and Canada         |       | 26       | %          | 29       | %          |
| Asia-Pacific              |       | 36       | %          | 23       | %          |
| South America             |       | 1        | %          | 1        | %          |
|                      |       | 100      | %          | 100      | %          |

In the three-month period ended July 31, 2006,revenues from three customers represented approximately 15%, 15% and 11% oftotal revenue, respectively. In the three-month period ended July 31, 2005,revenues from one customer represented approximately 16%. In the nine-monthperiod ended July 31, 2006, revenues from two customers representedapproximately 14% and 11% of the total revenue, respectively. In the nine-monthperiod ended July 31, 2005, revenues from one customer representedapproximately 12% of total revenue.

NOTE H - NEWACCOUNTING PRONOUNCEMENTS

In December 2004,FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” that focusesprimarily on accounting for transactions in which an entity obtains employee servicesin share-based payment transactions. This statement replaces SFAS No. 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” Beginning with our quarterly period that begins November 1, 2006, wewill be required to expense the fair value of employee stock options andsimilar awards.  As a public company, weare allowed to select from two alternative transition methods, each havingdifferent reporting implications. We have not yet determined the impact of SFASNo. 123R on us.

The FinancialAccounting Standards Board has published FASB Interpretation No. 48 (FIN No.48), “Accounting for Uncertainty in Income Taxes”, to address thenon-comparability in reporting tax assets and liabilities resulting from a lackof specific guidance in FASB Statement of Financial Accounting Standards No.109 (SFAS 109), “Accounting for Income Taxes”, on the uncertainty in incometaxes recognized in an enterprise’s financial statements.  Specifically, FIN No. 48 prescribes (a) aconsistent recognition threshold and (b) a measurement attribute for thefinancial statement recognition and classification, interest and penalties,accounting interim periods, disclosure and transition.  FIN No. 48 will apply to fiscal yearsbeginning after December 25, 2006, with earlier adoption permitted.  The Company does not expect the adoption ofFIN No. 48 to have a material impact on the financial statements.

NOTE I -DISCONTINUED OPERATIONS

In the fourthquarter of fiscal 2004, the Company implemented a strategy to focus all of itsresources on its core 2D machine vision business. In accordance with this plan,in the fourth quarter of fiscal 2004, the Company initiated and completed thesale of its 3D business unit, together with all the related patents,intellectual property, inventory and equipment. The terms of the sale includedcash payments of $1.0 million and the opportunity to receive royalties on salesof certain products by the buyer for the next five years. The royalties, whichwill be recorded as a part of other income in continued operations, areanticipated to be minimal. For the nine months ended July 31, 2006, a royaltypayment of $53,000 was received. As a result of the sale, in

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accordance withappropriate accounting principles, the Company has revised the financialresults for all periods presented to include the 3D business as a discontinuedoperation. Accordingly, all 3D related revenue and expenses have been removedfrom continuing operations and presented in a separate line in the statement ofoperations entitled “loss from discontinued operations.” There were nodiscontinued operations for the three months ended July 31, 2006 and 2005.Below is a Condensed Statement of Operations for the discontinued operationsfor the nine month periods ended July 31, 2006 and 2005.

| Condensed Statement of  Operations | ** ** | **Nine-month Ended  July 31, 2006** | ** ** | **Nine-month Ended  July 31, 2005** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| Revenues                                     |       | $                                                  | —     |                                               | $          | 169,000 |   |
| Cost of revenues                             |       | —                                             |       | 56,000                                             |       |
| Gross profit                                 |       | —                                             |       | 113,000                                            |       |
| Total operating  expenses                    |       | —                                             |       | 168,000                                            |       |
| Loss from discontinued  operations           |       | $                                                  | —     |                                               | $          | (55,000 | ) |

Item 2

MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION

# Overview

PPT VISION, Inc. designs, manufactures, and marketscamera-based intelligent systems for automated inspection in manufacturingapplications. The Company’s products, commercially known as machine visionsystems, enable manufacturers to realize significant economic paybacks byincreasing the quality of manufactured parts and improving the productivity ofmanufacturing processes. The Company’s machine vision product line is sold on aglobal basis to end-users, system integrators, distributors and originalequipment manufacturers (OEM’s) primarily in the electronic and semiconductorcomponent, automotive, medical device, and packaged goods industries.

The Company’srevenues increased 5% to $1,377,000 during the third quarter ended July 31,2006 compared to sales of $1,317,000 in the prior year’s third quarter. TheCompany’s loss from continuing operations for the quarter ended July 31, 2006increased to $381,000 or $.10 per share compared to $294,000 or $.10 per sharein the prior year’s period. The increase in revenues from the third quarter of fiscal 2006 compared to the same period offiscal 2005 resulted from a ramp up of sales of our IMPACT product line.  During the third quarter of fiscal year 2006,approximately 88% of revenue was IMPACT-related compared to 69% of revenueduring the same period of fiscal year 2005. Overall, we had a 34% increase indollar sales in our Impact revenue during the third quarter of 2006 compared tothe same period in fiscal 2005.

Revenues decreased 1% to $4,367,000 during thenine-month period ended July 31, 2006 compared to $4,409,000 during the prioryear’s nine-month period and the net loss decreased to $869,000 or $0.25 pershare compared to a loss of $1,774,000 or $0.59 per share in the prior year’speriod.

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During the fiscal 2006 third quarter, revenues fromoutside the United States accounted for 72% of revenues compared to 52% in thethird quarter of fiscal 2005. During the first nine months of fiscal 2006,revenues from outside the United States accounted for 63% compared to 53% inthe first nine months of fiscal 2005.

Total operating expenses for the three-month periodended July 31, 2006 were $1,119,000, a 10% increase in comparison to totaloperating expenses of $1,019,000 in the prior year’s third quarter. Theoperating expenses for the nine-month period ended July 31, 2006 were $3,392,000,a 16% decrease in comparison to total operating expenses of $4,024,000 in theprior year’s period. The increase in operating expenses from the third quarterof fiscal year 2006 compared to the same period in fiscal 2005 in large partrelates to the need to outsource hardware engineering in our research anddevelopment department along with an increase in our advertising expense.  The decrease in operating expenses for thenine-month period ended July 31, 2006 compared to the same period in 2005relates to our restructuring efforts made in the second quarter of 2005.

CRITICALACCOUNTING POLICIES AND ESTIMATES

Management’sdiscussion and analysis of its financial condition and results of operationsare based on the Company’s accompanying unaudited condensed financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and with the instructions to Form 10-QSB. Accordingly, they do notinclude all of the information required by accounting principles generallyaccepted in United States of America for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.

The preparation ofthese financial statements requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the financial statements and the reported revenues and expensesduring the reporting period. Management bases its estimates on historicalexperience and various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities. Actual resultscould differ from these estimates.

Managementbelieves the Company’s critical accounting policies and areas that require moresignificant judgments and estimates used in the preparation of its financialstatements to be:

·                  revenuerecognition;

·                  estimatingvaluation allowances, specifically the allowance for doubtful accounts andinventory; and

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

### Revenue Recognition

The Companytypically recognizes revenue on product sales upon shipment to the end usercustomers if contractual obligations have been substantially met and title andrisk of loss have passed to the customer, which is generally the case for salesof 2D machine vision systems, spare parts and accessories. The Company

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also recognizesrevenue on products sold to distributors upon shipment because contracts withdistributors do not include post-shipment obligations or any right of returnprovisions and pricing is fixed at the time of sale. Services revenue, whichincludes application engineering, product development, customer training andrepair services, is recognized when the services are performed. Service revenueis less than 10% of total revenues for the three and nine months ended July 31,2006 and 2005.

# ValuationAllowances

Managementestimates the allowance for doubtful accounts by analyzing accounts receivablebalances by age and considering specific factors about the individual customer’sfinancial condition. When it is deemed probable that all or a portion of acustomer’s account is uncollectible, a corresponding amount is added to theallowance for doubtful accounts.

The Company’sinventory primarily consists of parts and other materials that are used in themanufacture of vision systems. The Company generally only builds systems basedon customer orders and as a result maintains only a minor amount of finishedgoods inventory. Management establishes valuation reserves on inventory forestimated excess and obsolete inventory equal to the difference between thecost of inventory and its estimated market value based on assumptions aboutfuture product demand and market conditions. In view of the rapid pace oftechnological change in the machine vision industry, the Company generallyconsiders inventory that has had no usage for one year to be obsolete.  In addition, changes in the Company’s productofferings or those of the Company’s competitors may also result in excess orobsolete inventory levels.  Accordingly,these factors will also be considered in the determination of the market valueof inventory.

Actual resultscould differ from these estimates under different assumptions.  If the financial condition of one or more ofour customers were to deteriorate, or if actual product demand or marketconditions are less favorable than anticipated by management, additionalreserves may be required.

# Long-Lived andIntangible Assets

The Companyreviews its long-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to undiscountedfuture net cash flows expected to be generated by the assets.  If these assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.

RESULTS OFOPERATIONS

Revenues

Net revenuesincreased 5% to $1,377,000 for the three-month period ended July 31, 2006,compared to net revenues of $1,317,000 for the same period in fiscal 2005. Forthe nine-month period ended July 31, 2006, revenues decreased 1% to $4,367,000from $4,409,000 for the same period in fiscal 2005. Unit sales of the Company’smachine vision systems increased to 263 for the third quarter of fiscal 2006versus 192 for the same period in fiscal 2005. Unit sales for the

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nine-month periodended July 31, 2006 increased to 823 from 604 in the same period of fiscal2005.  In the three-month period endedJuly 31, 2006, revenues from three customers represented approximately 15%, 15%and 11% of total revenue, respectively. In the three-month period ended July 31, 2005, revenues from one customerrepresented approximately 16% of total revenue. In the nine-month period endedJuly 31, 2006, revenues from two customers represented approximately 14% and11% of total revenue, respectively. In the nine-month period ended July 31,2005, revenues from one customer represented approximately 12% of totalrevenue.

The increase inrevenues from the third quarter offiscal 2006 compared to the same period of fiscal 2005 resulted from a ramp upof sales of our IMPACT product line. During the third quarter of fiscal year 2006 approximately 88% ofrevenue was IMPACT-related compared to 69% of revenue during the same period offiscal year 2005. Overall, we had a 34% increase in dollar sales in our Impactrevenue during the third quarter of 2006 compared to the same period in fiscal2005.

During the thirdquarter of fiscal 2006, revenues from outside the United States accounted for72% of revenues compared to 52% in the fiscal 2005 third quarter. During thefirst nine months of fiscal 2006, revenues from outside the United Statesaccounted for 63% compared to 53% in the first nine months of fiscal 2005.

Revenue trends may be inconsistent given the nature of the machine visionindustry and the capital nature of our product.

Gross profitincreased 6% to $733,000 for the three-month period ended July 31, 2006,compared to $691,000 for the same period in fiscal 2005. For the nine-monthperiod ended July 31, 2006, gross profit increased 4% to $2,349,000 from$2,251,000 for the same period in fiscal 2005. As a percentage of net revenues,the gross profit for the third quarter of fiscal 2006 increased slightly to 53%compared to 52% in the same period of fiscal 2005. For the nine-month periodended July 31, 2006, gross profit as a percentage of net revenue increased to54% compared 51% in the same period of fiscal 2005. The increase in grossmargin is a reflection that the majority of our revenue in 2006 related to ourIMPACT product line which has a higher gross margin than our older productlines. With a majority of the Company’s revenues consisting of its newer,higher gross margin, IMPACT product line, it is expected that future grossmargins will trend into the 55% to 60% range as our fixed manufacturingoverhead is spread over a higher volume of sales.

Sales and marketing expensesincreased 12% to $545,000 for the three-month period ended July 31, 2006compared to $487,000 for the same period in fiscal 2005. For the nine-monthperiod ended July 31, 2006, sales and marketing expenses decreased 10% to$1,647,000 from $1,832,000 for the same period in fiscal 2005. As a percentageof net revenues, sales and marketing expenses increased to 40% for the thirdquarter of fiscal 2006 compared to 37% for the same period in fiscal 2005. Forthe nine-month period ended July 31, 2006, sales and marketing expenses as apercentage of net revenues decreased to 38% compared to 42% in the same periodin fiscal 2005. The Company expects sales and marketing expenses in absolutedollars to remain relatively flat for the remainder of fiscal 2006. Increasesin sales and marketing expenditures may occur to the extent that revenue growthis achieved.

General and administrative expensesdecreased 8% to $227,000 for the three-month period ended July 31, 2006,compared to $246,000 for the same period in fiscal

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2005. For the nine-month period endedJuly 31, 2006, general and administrative expenses decreased 12% to $712,000compared to $806,000 in the same period in fiscal 2005. As a percentage of netrevenues, general and administrative expenses decreased to 16% for the thirdquarter of fiscal 2006 versus 19% for the same period in fiscal 2005. For thenine-month period ended July 31, 2006, general and administrative expenses as apercentage of net revenues decreased to 16% from 18% in the same period infiscal 2005. The Company expects general and administrative expenses to remainrelatively flat during fiscal 2006.

Research and development expensesincreased 21% to $347,000 for the three-month period ended July 31, 2006,compared to $286,000 for the same period in fiscal 2005. For the nine-monthperiod ended July 31, 2006, research and development expenses increased 4% to$1,033,000 from $996,000 in the same period in fiscal 2005. As a percentage ofnet revenues, research and development expenses increased to 25% for the thirdquarter of fiscal 2006, compared to 22% for the third quarter of fiscal 2005.For the nine-month period ended July 31, 2006, research and developmentexpenses as a percentage of net revenues increased to 24% from 23% in the sameperiod in fiscal 2005. The Company expects research and development expenses toremain relatively flat during fiscal 2006.

The Company did not record an incometax benefit or expense for the three and nine month periods ended July 31, 2006or 2005.

The Company’s net loss from continuing operations for the third quarterof fiscal 2006 increased from year-ago levels to $381,000 or 10 cents pershare, as compared with a loss of $294,000 or 10 cents per share for the sameperiod in fiscal 2005. The Company’s net loss from continuing operations forthe nine-month period ended July 31, 2006 decreased to $869,000 or 25 cents pershare, as compared with a loss of $1,719,000 or 57 cents per share for the sameperiod in fiscal 2005. There were approximately 3.8 million shares outstandingduring the three-month period ended July 31, 2006, as compared withapproximately 3.0 million shares outstanding for the same period in fiscal2005. There were approximately 3.5 million shares outstanding during thenine-month period ended July 31, 2006, as compared with approximately 3.0million shares outstanding for the same period in fiscal 2005.

Our discontinued operations resulted in no gain or loss in the three andnine months ended July 31, 2006 compared to a loss of $0 and $55,000 or 0 and 2cents per share for the three and nine months ended July 31, 2005,respectively.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2006 the Company had cashbalances of $482,000, working capital of approximately $1.7 million and nolong-term debt.

In the third quarter of fiscal 2006the Company incurred a net loss of $381,000 which included non-cash chargesrelated to depreciation and amortization of $40,000. The net loss for thequarter increased $87,000 from the $294,000 loss reported in the third quarterof fiscal 2005. For the quarter ended July 31, 2006, cash used in operatingactivities was $757,000.

The Company hasbeen using its existing cash and cash equivalents to fund the cash needs of itsoperating activities. The Company closed on a $400,000 private placement ofcommon stock on February 17, 2006 in an effort to further strengthen itsbalance sheet and provide for future working capital requirements. The privateplacement was funded by the Company’s current largest

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shareholder, Mr.Peter R. Peterson. In the private placement, the Company issued 800,000 sharesof common stock at a price of $0.50 per share.

We are carefully monitoring our cashposition and evaluating the need for additional capital to enable us to achieveour short and long-term objectives.  Ifthere was a need for additional capital, the Company believes that a variety offinancing alternatives are available including external borrowing againstaccounts receivable and inventory, customer or vendor financing, the issuanceof additional stock to the public or to strategic partners, orcustomer-sponsored research and development projects. The avenues that we taketo satisfy our potential capital requirements will depend in large part on thelevel of our revenues, and we will evaluate these alternatives as we obtainbetter visibility of our revenue expectations. The Company estimates that, depending on revenue results and expenselevels, some form of external financing will be required in the next 6 to 12months.

There can be no assurance, however,that additional capital will be available on acceptable terms or at all, andthe failure to obtain additional capital as needed may have an adverse effecton the Company’s ability to continue to take advantage of future opportunitiesor respond to competitive pressures or unanticipated requirements, which couldadversely affect its business, financial position, results of operations andcash flows.

As of July 31, 2006, the Company hadno outstanding debt.

Working capital decreased $352,000 to$1,674,000 at July 31, 2006 from $2,026,000 at October 31, 2005. The Companyfinanced its operations during the first nine months of fiscal 2006 throughexisting cash and cash equivalents. Net cash used in operating activitiesduring the first nine months of fiscal 2006 was $757,000. Accounts receivableincreased $57,000 and inventories decreased $64,000 during the first ninemonths of fiscal 2006. Accounts payable increased by $68,000 while accruedexpenses decreased by $86,000 during the first nine months of fiscal 2006.

Net cash providedby investing activities was $56,000 during the nine months ended July 31, 2006and included fixed asset additions of $38,000 and a sale of securities withproceeds of $94,000. This compares with $188,000 in fixed asset additions forthe same period in fiscal 2005. The Company expects that fixed asset additionsfor the remaining quarter of fiscal 2006 to continue at approximately the samerate as the first three quarters of fiscal 2006.

The Company does not have relationshipswith unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet financialarrangements. As such, the Company is not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in sucharrangements.

The Company believes it does not havematerial exposure to quantitative and qualitative market risks. The carryingamounts reflected in the balance sheets of cash and cash equivalents, tradereceivables and trade payables approximate fair value at July 31, 2006 due tothe short maturities of these instruments.

NEW ACCOUNTINGPRONOUNCEMENTS

Informationregarding new accounting pronouncements is included in the Notes to CondensedFinancial Statements.

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FORWARD LOOKINGSTATEMENTS

Thediscussion above contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995, including statementsregarding the Company’s expectations, beliefs, intentions and strategiesregarding the future. Forward-looking statements include, without limitation,statements regarding the extent and timing of future revenues and expenses andcustomer demand. All forward-looking statements included in this document arebased on information available to the Company as of the date hereof, and theCompany assumes no obligation to update any such forward-looking statements.

The Company’s actual resultsare subject to risks and uncertainties and could differ materially from thosediscussed in the forward-looking statements. These statements are based uponthe Company’s expectations regarding a number of factors, including the Company’sability to obtain additional working capital if necessary to support itsoperations, changes in worldwide general economic conditions, cyclicality ofcapital spending by customers, the Company’s ability to keep pace withtechnological developments and evolving industry standards, worldwidecompetition, and the Company’s ability to protect its existing intellectualproperty from challenges from third parties. A detailed description of thefactors that could cause future results to materially differ from the Company’srecent results or those projected in the forward-looking statements arecontained in the section entitled“Description of Business” under the caption “Important Factors RegardingForward-Looking Statements” contained in its filing with the Securities and ExchangeCommission on Form 10-KSB for the year ended October 31, 2005 and other reportsfiled with the Securities and Exchange Commission.

Item3:  CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures.

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

(b) Changes in InternalControl Over Financial Reporting.

There have been nochanges in internal control over financial reporting that occurred during thefiscal quarter covered by this report that have materially affected, or arereasonably likely to materially affect, the registrant’s internal control overfinancial reporting.

PART II.    OTHERINFORMATION

Item 1:        LEGALPROCEEDINGS

None.

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Item 2:        UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.        DEFAULTSUPON SENIOR SECURITIES

Not Applicable.

Item 4:        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5:        OTHERINFORMATION

None.

Item 6:        EXHIBITS

(a)   The following exhibits are included herein:

31.1      Certificationof President, Chief Executive Officer and Chief Financial Officer pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a- 14 and 15d-14 of theExchange Act).

32.1      Certificationpursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        | PPT VISION, INC.                                                |
|------------------------|-----------------------------------------------------------------|
|                   |                                                            |
| Date: August 28,  2006 |                                                            |
|                   |                                                            |
|                   | /s/Joseph C. Christenson                                        |   |
|                   | Joseph C. Christenson                                           |
|                   | President, Chief Executive Officer and  Chief Financial Officer |

 

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