UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 31, 2005

Commission File Number 0-11518

PPT VISION, INC.

(Exact name of Small Business Issuer as specified in its 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 the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes ý No o

Shares of $.10 par value common stock outstanding at August 31, 2005: 2,998,747

PPT VISION, INC.

BALANCE SHEETS

	July 31, 2005			October 31, 2004
	(unaudited)			(audited)
ASSETS
Current assets
Cash and cash equivalents	$	968,000		$	2,617,000
Accounts receivable, net	1,298,000			1,912,000
Inventories:
Manufactured and purchased parts	693,000			828,000
Work-in-process	58,000			105,000
Finished goods	36,000			44,000
Total inventories, net	787,000			977,000
Other current assets	149,000			243,000
Assets of discontinued operations	—			200,000
Total current assets	3,202,000			5,949,000

Fixed assets, net	372,000			323,000
Intangible assets, net	77,000			109,000
Other assets	7,000			53,000
Total assets	$	3,658,000		$	6,434,000

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	187,000		$	944,000
Accrued expenses	308,000			513,000
Deferred revenue – customer advances	9,000			54,000
Total current liabilities	504,000			1,511,000

Shareholders’ equity
Common stock	300,000			300,000
Capital in excess of par value	36,080,000			36,075,000
Accumulated deficit	(33,226,000		)	(31,452,000		)
Total shareholders’ equity	3,154,000			4,923,000
Total liabilities and shareholders’ equity	$	3,658,000		$	6,434,000

See accompanying notes to condensed financial statements

PPT VISION, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2005			2004			2005			2004
Revenues	$	1,317,000		$	2,505,000		$	4,409,000		$	6,565,000
Cost of revenues	626,000			1,192,000			2,158,000			3,234,000
Gross profit	691,000			1,313,000			2,251,000			3,331,000

Expenses:
Sales and marketing	487,000			742,000			1,832,000			2,083,000
General and administrative	246,000			278,000			806,000			860,000
Research and development	286,000			400,000			996,000			1,224,000
Restructuring charges	—			—			390,000			—
Total expenses	1,019,000			1,420,000			4,024,000			4,167,000
Interest and other Income	34,000			(14,000		)	54,000			(12,000		)
Loss from continuing operations	(294,000		)	(121,000		)	(1,719,000		)	(848,000		)
Income (loss) from discontinued operations	—			(122,000		)	(55,000		)	36,000
Net loss	$	(294,000	)	$	(243,000	)	$	(1,774,000	)	$	(812,000	)
Per share data:
Weighted average basic shares outstanding	2,998,000			2,980,000			2,997,000			2,961,000
Weighted average diluted shares outstanding	2,998,000			2,980,000			2,997,000			2,961,000
Basic and diluted loss per common share
Loss from continuing operations	$	(0.10	)	$	(0.04	)	$	(0.57	)	$	(0.28	)
Income (loss) from discontinued operations	$	—		$	(0.04	)	$	(0.02	)	$	0.01
Net loss	$	(0.10	)	$	(0.08	)	$	(0.59	)	$	(0.27	)

See accompanying notes to condensed financial statements

PPT VISION, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months			Nine Months
	Ended			Ended
	July 31, 2005			July 31, 2004

Net loss	$	(1,774,000	)	$	(812,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	173,000			325,000
Gain on sale of securities	(25,000		)	—
Loss (income) from discontinued operations	55,000			(36,000		)

Change in assets and liabilities:
Accounts receivable	614,000			(120,000		)
Inventories	190,000			(258,000		)
Other assets	94,000			80,000
Accounts payable	(757,000		)	237,000
Accrued expenses	(205,000		)	(41,000		)
Deferred revenue - customer advances	(45,000		)	(52,000		)
Total adjustments	94,000			135,000
Net cash used in operating activities	(1,680,000		)	(677,000		)

Cash flows from investing activities:
Purchase of fixed assets	(188,000		)	(89,000		)
Net investment in other long-term assets	(2,000		)	(14,000		)
Proceeds from sale of securities	71,000			—
Net cash used in investing activities	(119,000		)	(103,000		)

Cash flows from financing activities:
Proceeds from the exercise of stock options	3,000			6,000
Proceeds from the issuance of stock	2,000			109,000
Net cash provided by financing activities	5,000			115,000
Net cash provided by discontinued operations	145,000			504,000
Net decrease in cash and cash equivalents	(1,649,000		)	(161,000		)
Cash and cash equivalents at beginning of year	2,617,000			2,086,000
Cash and cash equivalents at end of period	$	968,000		$	1,925,000

See accompanying notes to condensed financial statements

PPT VISION, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

July 31, 2005

(UNAUDITED)

NOTE A – DESCRIPTION OF BUSINESS

PPT VISION, Inc. (“The Company”) designs, manufactures, and markets camera-based intelligent systems for automated inspection in manufacturing applications. The Company’s products, commercially known as machine vision systems, enable manufacturers to realize significant economic paybacks by increasing the quality of manufactured parts and improving the productivity of manufacturing processes. The Company’s machine vision product line is sold on a global basis to end-users, system integrators, distributors and original equipment manufacturers (OEM’s) primarily in the electronic and semiconductor component, automotive, medical device, and packaged goods industries.

NOTE B - BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or of the results for any future periods.

The Balance Sheet at October 31, 2004 has been derived from the Company’s audited financial statements for the fiscal year ended October 31, 2004 but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended October 31, 2004.

NOTE C – REVENUE RECOGNITION AND COST OF REVENUES

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.

Cost of revenues include the cost of products sold and the cost of third-party application engineers who perform certain installation services at our request for customers. Cost of revenues does not include any costs associated with engineering services performed by PPT employees as these costs are a fixed component of our operating cost structure and an allocation of a portion of these costs to cost of revenues would be arbitrary and lead to inconsistent presentation of gross margins and operating costs.

NOTE D – LIQUIDITY AND CAPITAL RESOURCES

The Company had a loss from continuing operations for the three and nine months ended July 31, 2005 of $294,000 and $1,719,000, respectively. Cash used in operations was $1,680,000 for the nine months ended July 31, 2005. Effective May 1, 2005, the Company finalized an agreement with its current landlord to restructure the Company’s lease obligation with respect to its headquarters facility in Eden Prairie, Minnesota. Under the amended lease terms, the Company received a reduction in its base rental rates and its leased facility decreased from approximately 64,000 square feet to approximately 35,000 square feet, resulting in a savings of approximately $120,000 per quarter. In exchange for these amended lease terms, the Company paid and capitalized $140,000 for certain leasehold improvements associated with the reconfigured space which will be amortized over the revised lease term and also paid approximately $300,000 in accrued deferred rent. The Company also agreed to pay a $240,000 lease termination fee (which was expensed) in equal monthly installments over a twelve-month period starting May 1, 2005 and to extend the current lease term by two years through May, 2011. As a result, cash balances dropped to $968,000 as of July 31, 2005 from $2,617,000 at October 31, 2004.

The Company believes that existing cash balances and potentially available sources of capital will enable the Company to meet its operating, working capital and capital resource obligations through the next twelve months.

The other potential sources of capital that may be available to the Company include sales of its common or preferred stock, external borrowing, customer or vendor financing, customer sponsored research and development projects or investments by strategic partners.

There can be no assurance that the Company will not incur additional losses for a longer period of time, will generate positive cash flow from operations, raise additional capital, or that the Company will attain or thereafter sustain profitability in any future period.

NOTE E – LOSS PER SHARE

On March 10, 2005, the Company announced that its Board of Directors approved a 1-for-4 reverse split of its common stock effective as of the close of business on March 31, 2005 and the conversion to book-entry share registration also effective as of March 31, 2005. In connection with the reverse split, the Board of Directors also approved an amendment to Article 4.1 of the Company’s Articles of Incorporation to proportionately reduce the number of shares of common stock authorized from 20,000,000 shares to 5,000,000 shares. All share numbers

Three Months Ended July 31,		2005			2004
Net loss	As reported	$	(294,000	)	$	(243,000	)
	Pro forma	$	(351,000	)	$	(299,000	)

Stock based compensation	As reported	$	—		$	—
	Pro forma	$	(57,000	)	$	(56,000	)

Basic and diluted loss per share	As reported	$	(0.10	)	$	(0.08	)
	Pro forma	$	(0.12	)	$	(0.10	)

Nine Months Ended July 31,		2005			2004
Net loss	As reported	$	(1,774,000	)	$	(812,000	)
	Pro forma	$	(1,895,000	)	$	(978,000	)

Stock based compensation	As reported	$	—		$	—
	Pro forma	$	(121,000	)	$	(166,000	)

Basic and diluted loss per share	As reported	$	(0.59	)	$	(0.27	)
	Pro forma	$	(0.63	)	$	(0.33	)

For All Periods Ended July 31,	2005		2004
Risk free interest rates	4.0	%	4.0	%
Expected lives	6.0		6.0
Expected volatility	180	%	115	%
Expected dividends	0	%	0	%

NOTE G – CUSTOMER AND GEOGRAPHIC DATA

The following tables set forth the percentage of the Company’s net revenues (including sales delivered through international distributors) by geographic location for the three and nine months ended July 31, 2005 and 2004:

Three Months Ended July 31	2005		2004
United States	48	%	42	%
Europe and Canada	27	%	16	%
Asia-Pacific	25	%	41	%
South America	0	%	1	%

Nine Months Ended July 31	2005		2004
United States	47	%	38	%
Europe and Canada	29	%	18	%
Asia-Pacific	23	%	43	%
South America	1	%	1	%

In the three-month period ended July 31, 2005, revenues from one customer represented approximately 16% of total revenue. In the three-month period ended

July 31, 2004, revenues from one customer accounted for 28% of total revenue. In the nine-month period ended July 31, 2005, revenues from one customer represented approximately 12% of total revenue. In the nine-month period ended July 31, 2004, revenues from one customer accounted for 30% of total revenue.

NOTE H – NEW ACCOUNTING PRONOUNCEMENTS

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

In June, 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. The statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement. The Company does not expect the adoption of SFAS No. 154 to have a material effect on its financial statements.

NOTE I – DISCONTINUED OPERATIONS

In the fourth quarter of fiscal 2004, the Company implemented a strategy to focus all of its resources on its core 2D machine vision business. In accordance with this plan, in the fourth quarter of fiscal 2004, the Company initiated and completed the sale of its 3D business unit, together with all the related patents, intellectual property, inventory and equipment. The terms of the sale included cash payments of $1.0 million and the opportunity to receive royalties on sales of certain products by the buyer for the next five years. The royalties, which will be recorded as a part of discontinued operations, are anticipated to be minimal, if any. To date there have been no royalties. As a result of the sale, in accordance with appropriate accounting principles, the Company has revised the financial results for all periods presented to include the 3D business as a discontinued operation. Accordingly, all 3D related revenue and expenses have been removed from continuing operations and presented in a separate line in the statement of operations entitled “income or (loss) from discontinued operations.” Below is a Condensed Statement of Operations for

the discontinued operations for the three and nine month periods ended July 31, 2004 and 2005.

Condensed Statement of Operations	Quarter Ended July 31, 2005		Quarter Ended July 31, 2004
Revenues	$	—	$	228,000
Cost of revenues	—		7,000
Gross profit	—		221,000
Total operating expenses	—		343,000
Loss from discontinued Operations	$	—	$	(122,000	)

Condensed Statement of Operations	Nine-Month Ended July 31, 2005			Nine-Month Ended July 31, 2004
Revenues	$	169,000		$	1,219,000
Cost of revenues	56,000			183,000
Gross profit	113,000			1,036,000
Total operating expenses	168,000			1,000,000
Income (loss) from discontinued operations	$	(55,000	)	$	36,000

Assets	July 31, 2005		October 31, 2004
Accounts receivable	$	—	$	200,000

NOTE J – RESTRUCTURING ACTIONS

In the second quarter of fiscal 2005, the Company completed a three part corporate restructuring in an effort to bring the Company’s cost structure into closer alignment with current revenues. The first part of this plan involved the closing of the Company’s Michigan office. The functions of the Michigan office have been transferred to several of the Company’s system integration partners. The second part of the plan involved the restructuring of the Company’s lease obligation with respect to its headquarters facility in Eden Prairie, Minnesota. Under the amended lease terms signed on April 29, 2005, the Company received a reduction in its base rental rates and its leased facility decreased from approximately 64,000 square feet to approximately 35,000 square feet resulting in a savings of approximately $120,000 per quarter. In exchange for these amended lease terms, 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 is also paying a $240,000 lease termination fee, which was accrued in the second quarter of fiscal 2005, in equal monthly installments over a twelve-month period which started on May 1, 2005. The amended lease terms also extended the current lease term by two years through May, 2011. The third part of the plan included other operating expense reductions primarily consisted of an approximately 15% workforce reduction. When taken together, the three parts of this restructuring will result in a reduction of the Company’s total cost structure by over $1,200,000 per year.

An analysis of the components of the restucturing charge related to these restructuring actions is as follows:

Lease termination fee and related costs	$	280,000
Michigan office closure costs	60,000
Severance costs	50,000
Total restructuring charge	$	390,000
Less: Payment through July 31, 2005	(182,000		)
Amount included in accrued expenses at July 31, 2005	$	208,000

NOTE K – SALE OF ELECTRO-SENSORS, INC. COMMON STOCK

During the third quarter of fiscal 2005, the Company sold 13,000 shares of Electro-Sensors, Inc. common stock, resulting in gross proceeds of $71,000. At July 31, 2005 the Company continued to own 9,500 shares of Electro-Sensors, Inc. common stock.

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

PPT VISION, Inc. designs, manufactures, and markets camera-based intelligent systems for automated inspection in manufacturing applications. The Company’s products, commercially known as machine vision systems, enable manufacturers to realize significant economic paybacks by increasing the quality of manufactured parts and improving the productivity of manufacturing processes. The Company’s machine vision product line is sold on a global basis to end-users, system integrators, distributors and original equipment manufacturers (OEM’s) primarily in the electronic and semiconductor component, automotive, medical device, and packaged goods industries.

The Company’s revenues decreased 47% to $1,317,000 during the third quarter ended July 31, 2005 compared to sales of $2,505,000 in the prior year’s third quarter. The Company’s loss for the quarter ended July 31, 2005 increased to $294,000 or $.10 per share compared to $243,000 or $.08 per share in the prior year’s period. The decrease in revenues in the third quarter resulted largely from the discontinuation of sales of our older analog vision units to a large OEM customer, which accounted for approximately $703,000 of revenue in the third quarter of fiscal 2004. Sales to other customers approximated $1.8 million in the third quarter of fiscal 2004.

Revenues decreased 33% to $4,409,000 during the nine-month period ended July 31, 2005 compared to the prior year’s nine-month period and the loss increased to $1,774,000 or $0.59 per share compared to a loss of $812,000 or $0.27 per share in the prior year’s period. Again, the decrease in revenues in the nine-month period ended July 31, 2005 resulted from the discontinuation of sales of our

older analog vision units to a large OEM customer, which accounted for approximately $1,983,000 of revenue in the nine-month period ended July 31, 2004. Sales to other customers approximated $4.6 million in the nine-month period of last year.

During the fiscal 2005 third quarter, revenues from outside the United States accounted for 52% of revenues compared to 58% in the fiscal 2004 third quarter. During the first nine months of fiscal 2005, revenues from outside the United States accounted for 53% compared to 62% in the first nine months of fiscal 2004.

Total operating expenses for the three-month period ending July 31, 2005 were $1,019,000 a 28% decrease in comparison to total operating expenses of $1,420,000 in the prior years third quarter. Total operating expenses in the nine-month period ending July 31, 2005 were $4,024,000 compared to $4,167,000 for the prior year’s nine-month period. These reductions in operating expenses reflect the effect of the restructuring actions implemented in the second quarter ending April 30, 2005 as described in Note J.

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 unaudited condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information required by accounting principles generally accepted in United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

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 and cost of revenues;

• estimating valuation allowances, specifically the allowance for doubtful accounts and inventory; and

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

Revenue Recognition and Costs of Revenues

for sales of 2D 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. Services revenue, which includes application engineering, product development, customer training and repair services, is recognized when the services are performed.

Costs of revenues include the cost of products sold and the cost of third party application engineers who perform certain installation services at our request for customers. Cost of revenues does not include any costs associated with engineering services performed by PPT employees as these costs are a fixed component of our operating cost structure and an allocation of a portion of these costs to cost of revenues would be arbitrary and lead to inconsistent presentation of gross margins and operating costs.

Valuation Allowances

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

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 on inventory for estimated excess and obsolete inventory equal to the difference between the cost of inventory and its estimated market value based on 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 the Company’s competitors may also result in excess or obsolete inventory levels. Accordingly, these factors will also be considered in the determination of the market value of inventory.

Long-Lived and Intangible 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.

RESULTS OF OPERATIONS

Revenues

Net revenues decreased 47% to $1,317,000 for the three-month period ended July 31, 2005, compared to net revenues of $2,505,000 for the same period in fiscal

2004. For the nine-month period ended July 31, 2005, revenues decreased 33% to $4,409,000 from $6,565,000 for the same period in fiscal 2004. Unit sales of the Company’s machine vision systems decreased to 192 for the third quarter of fiscal 2005 versus 281 for the same period in fiscal 2004. Unit sales for the nine-month period ended July 31, 2005 decreased to 604 from 682 in the same period of fiscal 2004. In the three-month period ended July 31, 2005, revenues from one customer represented approximately 16% of total revenue. In the three-month period ended July 31, 2004, revenues from one customer accounted for 28% of total revenue. In the nine-month period ended July 31, 2005, revenues from one customer represented approximately 12% of total revenue. In the nine-month period ended July 31, 2004, revenues from one customer accounted for 30% of total revenue.

The decrease in revenues in the three-month and nine-month period ended July 31, 2005 primarily resulted from the discontinuation of sales of our older analog vision units to a large OEM customer, which accounted for approximately $703,000 of revenue in the third quarter of fiscal 2004 and $1,983,000 for the nine-month period ended July 31, 2004. Sales to other customers approximated $1.8 million in the third quarter of last year and $4.6 million for the nine-month period ended July 31, 2004.

We will continue to experience adverse quarter-over-quarter revenue comparisons as we transition almost exclusively to product development and sales of the IMPACT family of products. In addition, revenue comparisons may be unfavorable for the current fiscal year compared to 2004 as we are no longer shipping product to the one large OEM customer who was a significant customer in each of the first three quarters of fiscal 2004. Revenue trends may also be inconsistent given the nature of the machine vision industry and the capital nature of our product.

Gross profit decreased 47% to $691,000 for the three-month period ended July 31, 2005, compared to $1,313,000 for the same period in fiscal 2004. For the nine-month period ended July 31, 2005, gross profit decreased 32% to $2,251,000 from $3,331,000 for the same period in fiscal 2004. As a percentage of net revenues, the gross profit for the third quarter of fiscal 2005 and fiscal 2004 was 52%. For the nine-month periods ended July 31, 2005 and 2004, gross profits as a percentage of net revenues were 51%. The gross margins this year were approximately the same as last year for both the three and nine month periods, even though revenues were substantially lower. This is due to the fact that a significant portion of last years sales consisted of older, lower gross margin Passport and Scout product lines. Now that a majority of the Company’s revenues consist of its newer, higher gross margin, IMPACT product line, it is expected that future gross margins will trend into the 55% to 60% range as our fixed manufacturing overhead is spread over a higher volume of sales.

Sales and marketing expenses decreased 34% to $487,000 for the three-month period ended July 31, 2005 compared to $742,000 for the same period in fiscal 2004. For the nine-month period ended July 31, 2005, sales and marketing expenses decreased 12% to $1,832,000 from $2,083,000 for the same period in fiscal 2004. As a percentage of net revenues, sales and marketing expenses

increased to 37% for the third quarter of fiscal 2005 compared to 30% for the same period in fiscal 2004. For the nine-month period ended July 31, 2005, sales and marketing expenses as a percentage of net revenues increased to 42% compared to 32% in the same period in fiscal 2004. This increase is the result of a decrease in sales. The Company expects sales and marketing expenses in absolute dollars to remain relatively flat for the remainder of fiscal 2005. Increases in sales and marketing expenditures may occur to the extent that revenue growth is achieved.

General and administrative expenses decreased 12% to $246,000 for the three-month period ended July 31, 2005, compared to $278,000 for the same period in fiscal 2004. For the nine-month period ended July 31, 2005, general and administrative expenses decreased 6% to $806,000 as compared to $860,000 in the same period in fiscal 2004. As a percentage of net revenues, general and administrative expenses increased to 19% for the third quarter of fiscal 2005 versus 11% for the same period in fiscal 2004. For the nine-month period ended July 31, 2005, general and administrative expenses as a percentage of net revenues increased to 18% from 13% in the same period in fiscal 2004. The Company expects general and administrative expenses to remain relatively flat for the remainder of fiscal 2005.

Research and development expenses decreased 29% to $286,000 for the three-month period ended July 31, 2005, compared to $400,000 for the same period in fiscal 2004. For the nine-month period ended July 31, 2005, research and development expenses decreased 19% to $996,000 from $1,224,000 in the same period in fiscal 2004. As a percentage of net revenues, research and development expenses increased to 22% for the third quarter of fiscal 2005, compared to 16% for the third quarter of fiscal 2004. For the nine-month period ended July 31, 2005, research and development expenses as a percentage of net revenues increased to 23% from 19% in the same period in fiscal 2004. Again, the Company expects research and development expenses to remain relatively flat for the remainder of fiscal 2005.

The Company did not record an income tax benefit or expense for the three and nine month periods ended July 31, 2005 or 2004.

The Company’s net loss from continuing operations for the third quarter of fiscal 2005 increased from year-ago levels to $294,000 or 10 cents per share, as compared with a loss of $121,000 or 4 cents per share for the same period in fiscal 2004. The Company’s net loss from continuing operations for the nine-month period ended July 31, 2005 increased to $1,719,000 or 57 cents per share, as compared with a loss of $848,000 or 28 cents per share for the same period in fiscal 2004. There were approximately 3.0 million shares outstanding during the three and nine month periods in fiscal 2005 and 2004.

The results of our discontinued operations resulted in no loss for the third quarter of fiscal 2005 and a loss of $122,000 or $0.04 per share in the third quarter of fiscal 2004. Our discontinued operations resulted in a loss of $55,000 or 2 cents for the nine-month ended July 31, 2005 compared to income of $36,000 or 1 cent per share in the same period of fiscal 2004.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2005 the Company had cash balances of $968,000, working capital of approximately $2.7 million and no long-term debt.

In the third quarter of fiscal 2005 the Company incurred a net loss from continuing and discontinued operations of $294,000 which included non-cash charges related to depreciation and amortization of $46,000. The net loss for the quarter increased $51,000 from the $243,000 loss reported in the third quarter of fiscal 2004. For the quarter ended July 31, 2005, cash used in operating activities was $425,000 and for the nine-month period ended July 31, 2005, cash used in operating activities was $1,680,000. For the nine-month period, this represents a decrease of $981,000 from fiscal 2004 to fiscal 2005. The increase in cash used in operations during fiscal 2005 relates to the Company’s second quarter corporate restructuring actions. The Company finalized an agreement with its current landlord to restructure the Company’s lease obligation with respect to its headquarters facility in Eden Prairie, Minnesota. Under the amended lease terms, the Company received a reduction in its base rental rates and its leased facility decreased from approximately 64,000 square feet to approximately 35,000 square feet resulting in a savings of approximately $120,000 per quarter. In exchange for these amended lease terms, 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 expects that the restructuring actions will reduce operating expenses by approximately $1.2 million annually. Future building rent commitments for the next five years are as follows:

Three Months ended Oct 31,	2005	$	71,000
	2006	285,000
	2007	285,000
	2008	285,000
	2009	285,000
Nine months ended July 31,	2010	214,000
	Total	$	1,425,000

The Company has been using its existing cash and cash equivalents to fund the cash needs of its operating activities. We are carefully monitoring our cash position and evaluating the need for additional capital to enable us to achieve our short and long-term objectives. If there was a need for additional capital, the Company believes that other sources of financing are available including sales of its common or preferred stock, external borrowing, customer or vendor financing, customer sponsored research and development projects or investments by strategic partners. The avenues that we take to satisfy our potential capital requirements will depend in large part on the level of our revenues, and we will evaluate these alternatives as we obtain better visibility of our revenue expectations.

There can be no assurance that the Company will not incur additional losses for a longer period of time, will generate positive cash flow from it operations, raise additional capital, or that the Company will attain or thereafter sustain profitability in any future period. To the extent that the Company continues to incur losses or achieves revenue growth in the future requiring an increase in working capital, its operating and investing activities may use cash and, consequentially, such losses or growth will require the Company to obtain additional sources of financing to provide for these cash needs.

As of July 31, 2005, the Company had no outstanding debt.

Working capital decreased 39% to $2,698,000 at July 31, 2005 from $4,438,000 at October 31, 2004. The Company financed its operations during the first nine months of fiscal 2005 through existing cash and cash equivalents. Net cash used in operating activities during the first nine months of fiscal 2005 was $1,680,000. Accounts receivable decreased $614,000 and inventories decreased $190,000 during the first nine months of fiscal 2005. Accounts payable and accrued expenses decreased by $757,000 and $205,000, respectively.

Net cash used in investing activities was $119,000 during the nine months ended July 31, 2005 and is mostly related to the $140,000 leasehold improvement costs that were paid during the second quarter of fiscal 2005 related to the amended lease agreement of the Company’s corporate office in Eden Prairie, Minnesota along with other fixed asset additions. This compares with $89,000 in fixed asset additions and $14,000 of other long term asset additions for the same period in fiscal 2004. The Company expects that fixed asset additions will be approximately $30,000 for the remainder of fiscal 2005.

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, which would have been established for the purpose of facilitating off-balance sheet financial arrangements. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such arrangements.

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, trade receivables and trade payables approximate fair value at July 31, 2005 due to the short maturities of these instruments.

NEW ACCOUNTING PRONOUNCEMENTS

Information regarding new accounting pronouncements is included in the Notes to Condensed Financial Statements.

FORWARD LOOKING STATEMENTS

The discussion above contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the Company’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 such 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 entitled “Description of Business” under the caption “Important Factors Regarding Forward-Looking Statements” contained in its filing with the Securities and Exchange Commission on Form 10-KSB for the year ended October 31, 2004 and other reports filed with the Securities and Exchange Commission.

Item 3: 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.

PART II.		OTHER INFORMATION

Item 1:		LEGAL PROCEEDINGS

		None.

Item 2:		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

		None.

Item 3.		DEFAULTS UPON SENIOR SECURITIES

		Not Applicable

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

		None.

Item 5:		OTHER INFORMATION

		None.

Item 6:

EXHIBITS

(a) The following exhibits are included herein:

31.1		Certification of President, Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a- 14 and 15d-14 of the Exchange Act).

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

SIGNATURES

Pursuant to the requirements 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: September 9, 2005

		/s/ Joseph C. Christenson
		Joseph C. Christenson
		President, Chief Executive Officer and Chief Financial Officer

Part I.	Financial Information

Item 1.	Financial Statements

	Balance Sheets as of July 31, 2005 and October 31, 2004

	Statements of Operations for the Three and Nine Months Ended July 31, 2005 and July 31, 2004

	Statements of Cash Flows for the Nine Months Ended July 31, 2005 and July 31, 2004

	Notes to Condensed Financial Statements – July 31, 2005

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

Date: September 9, 2005
	/s/ Joseph C. Christenson
	Joseph C. Christenson, President,
	Chief Executive Officer and Chief Financial
	Officer