10QSB

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 April 30, 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 May 31, 2005: 2,996,805

INDEX

PPT VISION, INC.

Part I.	Financial Information
Item 1.	Financial Statements
	Balance Sheets as of April 30, 2005 and October 31, 2004
	Statements of Operations for the Three and Six Months Ended April 30, 2005 and April 30, 2004
	Statements of Cash Flows for the Six Months Ended April 30, 2005 and April 30, 2004
	Notes to Condensed Financial Statements – April 30, 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

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PPT VISION, INC.

BALANCE SHEETS

	April 30, 2005			October 31, 2004
	(unaudited)			(audited)
ASSETS
Current assets
Cash and cash equivalents	$	1,357,000		$	2,617,000
Accounts receivable, net	1,311,000			1,912,000
Inventories:
Manufactured and purchased parts	865,000			828,000
Work-in-process	85,000			105,000
Finished goods	39,000			44,000
Total inventories, net	989,000			977,000
Other current assets	162,000			243,000
Assets of discontinued operations	—			200,000
Total current assets	3,819,000			5,949,000
Fixed assets, net	256,000			323,000
Intangible assets, net	87,000			109,000
Other assets	193,000			53,000
Total assets	$	4,355,000		$	6,434,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	439,000		$	944,000
Accrued expenses	458,000			513,000
Deferred revenue – customer advances	12,000			54,000
Total current liabilities	909,000			1,511,000
Shareholders’ equity
Common stock	300,000			300,000
Capital in excess of par value	36,078,000			36,075,000
Accumulated deficit	(32,932,000		)	(31,452,000		)
Total shareholders’ equity	3,446,000			4,923,000
Total liabilities and shareholders’ equity	$	4,355,000		$	6,434,000

See accompanying notes to condensed financial statements

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PPT VISION, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2005			2004			2005			2004
Revenues	$	1,567,000		$	2,084,000		$	3,092,000		$	4,060,000
Cost of revenues	803,000			970,000			1,532,000			2,043,000
Gross profit	764,000			1,114,000			1,560,000			2,017,000
Expenses:
Sales and marketing	659,000			706,000			1,345,000			1,340,000
General and administrative	269,000			300,000			560,000			582,000
Research and development	336,000			414,000			710,000			824,000
Non-recurring charges	390,000			—			390,000			—
Total expenses	1,654,000			1,420,000			3,005,000			2,746,000
Interest and other Income	20,000			2,000			20,000			2,000
Loss from continuing operations	(870,000		)	(304,000		)	(1,425,000		)	(727,000		)
Income (loss) from discontinued operations	—			81,000			(55,000		)	158,000
Net loss	$	(870,000	)	$	(223,000	)	$	(1,480,000	)	$	(569,000	)
Per share data:
Weighted average basic shares outstanding	2,997,000			2,951,000			2,996,000			2,951,000
Weighted average diluted shares outstanding	2,997,000			2,951,000			2,996,000			2,951,000
Basic and diluted loss per common share
Loss from continuing operations	$	(0.29	)	$	(0.10	)	$	(0.47	)	$	(0.25	)
Income (loss) from discontinued operations	$	—		$	0.02		$	(0.02	)	$	0.06
Net loss	$	(0.29	)	$	(0.08	)	$	(0.49	)	$	(0.19	)

See accompanying notes to condensed financial statements

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PPT VISION, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months			Six Months
	Ended			Ended
	April 30, 2005			April 30, 2004
Net loss	$	(1,480,000	)	$	(569,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	127,000			247,000
Loss (income) from discontinued operations	55,000			(158,000		)
Change in assets and liabilities:
Accounts receivable	601,000			67,000
Inventories	(12,000		)	(187,000		)
Other assets	81,000			58,000
Accounts payable	(505,000		)	218,000
Accrued expenses	(55,000		)	65,000
Deferred revenue - customer advances	(42,000		)	(55,000		)
Total adjustments	250,000			255,000
Net cash used in operating activities	(1,230,000		)	(314,000		)
Cash flows from investing activities:
Purchase of fixed assets	(36,000		)	(76,000		)
Net investment in other long-term assets	(142,000		)	(5,000		)
Net cash used in investing activities	(178,000		)	(81,000		)
Cash flows from financing activities:
Proceeds from the exercise of stock options	3,000			1,000
Net cash provided by financing activities	3,000			1,000
Net cash provided by discontinued operations	145,000			366,000
Net decrease in cash and cash equivalents	(1,260,000		)	(28,000		)
Cash and cash equivalents at beginning of year	2,617,000			2,086,000
Cash and cash equivalents at end of period	$	1,357,000		$	2,058,000

See accompanying notes to condensed financial statements

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PPT VISION, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

April 30, 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.

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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.

NOTE D – LIQUIDITY AND CAPITAL RESOURCES

The Company had a loss from continuing operations for the three and six months ended April 30, 2005 of $870,000 and $1,425,000 respectively.  Cash used in operations was $1,230,000 for the six months ended April 30, 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 will receive a reduction in its base rental rates and its facility will shrink 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 also agreed to pay a $240,000 lease termination fee in equal monthly installments over a 12 month period starting May 1, 2005 and extend the current lease term by two years through May, 2011.  As a result, cash balances dropped to $1,357,000 as of April 30, 2005 from $2,617,000 at October 31, 2004.

The Company believes that existing cash balances and 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 sources of financing that are 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, 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

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presented in this report have been restated to give effect to the 1-for-4 reverse split.

At April 30, 2005, options to purchase 218,478 shares of the Company’s common stock were not considered in the calculation of diluted earnings per share.  At April 30, 2004, options to purchase 265,446 shares and warrants to purchase 6,250 shares of the Company’s common stock were not considered in the calculation of diluted earnings per share.  As the Company had a net loss for both periods, the inclusion of outstanding options and warrants would have been anti-dilutive.

NOTE F – STOCK-BASED COMPENSATION

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

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

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

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Three Months Ended April 30,		2005			2004
Net loss	As reported	$	(870,000	)	$	(223,000	)
	Pro forma	$	(893,000	)	$	(273,000	)
Stock based compensation	As reported	$	—		$	—
	Pro forma	$	(23,000	)	$	(50,000	)
Basic and diluted loss per share	As reported	$	(0.29	)	$	(0.08	)
	Pro forma	$	(0.30	)	$	(0.09	)

Six Months Ended April 30,		2005			2004
Net loss	As reported	$	(1,480,000	)	$	(569,000	)
	Pro forma	$	(1,530,000	)	$	(670,000	)
Stock based compensation	As reported	$	—		$	—
	Pro forma	$	(50,000	)	$	(101,000	)
Basic and diluted loss per share	As reported	$	(0.49	)	$	(0.19	)
	Pro forma	$	(0.51	)	$	(0.23	)

For All Periods Ended April 30,	2005		2004
Risk free interest rates	4.0	%	4.0	%
Expected lives	6.0		6.0
Expected volatility	115	%	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 six months ended April 30, 2005 and 2004:

Three Months Ended April 30	2005		2004
United States	42	%	40	%
Europe and Canada	30	%	16	%
Asia-Pacific	26	%	43	%
South America	2	%	1	%
Six Months Ended April 30	2005		2004
United States	46	%	37	%
Europe and Canada	30	%	18	%
Asia-Pacific	23	%	44	%
South America	1	%	1	%

In the three month period ended April 30, 2005, revenues from two customers represented approximately 14% and 12% of total revenue, respectively.  In the

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three month period ended April 30, 2004, revenues from three customers accounted for 30%, 13%, and 10% of total revenue, respectively.  In the six month period ended April 30, 2005, revenues from two customers represented approximately 11% and 11% of total revenue, respectively.  In the six month period ended April 30, 2004, revenues from one customer accounted for 32% of total revenue.

NOTE H – NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets,” which amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” APB No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.  The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance.  A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.   SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date SFAS No. 153 was issued.  SFAS No. 153 is to be applied prospectively.  The Company does not expect the adoption of SFAS No. 153 to have a material effect on its financial statements.

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.

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.”

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Condensed Statement of Operations	Quarter Ended April 30, 2005				Quarter Ended April 30, 2004
Revenues	$	—			$	536,000
Cost of revenues	—				118,000
Gross profit	—				418,000
Total operating expenses	—				337,000
Income from discontinued operations	$		—		$		81,000
Condensed Statement of Operations	Six-Month Ended April 30, 2005				Six-Month Ended April 30, 2004
Revenues	$	169,000			$	991,000
Cost of revenues	56,000				176,000
Gross profit	113,000				815,000
Total operating expenses	168,000				657,000
Income from discontinued Operations	$	(55,000		)	$	158,000
Assets	April 30, 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 will receive a reduction in its base rental rates and its facility will shrink 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 will also pay a $240,000 lease termination fee, which was accrued in the second quarter of fiscal 2005, in equal monthly installments over a 12 month period starting May 1, 2005 and extend the current lease term by two years through May, 2011. The third part of the plan included certain other operating expense reductions which 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.

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An analysis of the components of the nonrecurring 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	$	390,000

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 25% to $1,567,000 during the second quarter ended April 30, 2005 compared to sales of $2,084,000 in the prior year’s second quarter.  The Company’s loss for the quarter ended April 30, 2005 increased to $870,000 or $.29 per share compared to $223,000 or $.08 per share in the prior year’s period.  The decrease in revenues in the second quarter resulted from the discontinuation of sales of our older analog vision units to a large OEM customer, which accounted for approximately $620,000 of revenue in the second quarter of fiscal 2004.  Sales to other customers approximated $1.5 million in the second quarter of last year.  The increase in the net loss for the quarter is due in large part to the $390,000 non-recurring restructuring charge recorded in the quarter.

Revenues decreased 24% to $3,092,000 during the six-month period ended April 30, 2005 compared to the prior year’s six-month period and the loss increased to $1,480,000 or $0.49 per share compared to a loss of $569,000 or $0.19 per share in the prior year’s period.  Again, the decrease in revenues in the six-month period ended April 30, 2005 resulted from the discontinuation of sales of our older analog vision units to a large OEM customer, which accounted for approximately $1,280,000 of revenue in the six-month period ended April 30, 2004.  Sales to other customers approximated $2.8 million in the six-month period of last year.

During 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

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Prairie, Minnesota. The third part of the plan included certain other operating expense reductions which primarily consisted of an approximately 15% workforce reduction.  The Company recorded a non-recurring expense of $390,000 related to these actions in the second quarter.  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.

During the fiscal 2005 second quarter, revenues from outside the United States accounted for 58% of revenues compared to 60% in the fiscal 2004 second quarter.  During the first six months of fiscal 2005, revenues from outside the United States accounted for 54% compared to 63% in the first six months of fiscal 2004.

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

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 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,

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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 25% to $1,567,000 for the three-month period ended April 30, 2005, compared to net revenues of $2,084,000 for the same period in fiscal 2004.  For the six-month period ended April 30, 2005, revenues decreased 24% to $3,092,000 from $4,060,000 for the same period in fiscal 2004.  Unit sales of the Company’s machine vision systems decreased to 191 for the second quarter of fiscal 2005 versus 204 for the same period in fiscal 2004.  Unit sales for the first half of fiscal 2005 increased to 412 from 393 in the first half of fiscal

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2004.  In the three month period ended April 30, 2005, revenues from two customers represented approximately 14% and 12% of total revenue, respectively. In the three month period ended April 30, 2004, revenues from three customers accounted for 30%, 13%, and 10% of total revenue, respectively.  In the six month period ended April 30, 2005, revenues from two customers represented approximately 11% and 11% of total revenue, respectively.  In the six month period ended April 30, 2004, revenues from one customer accounted for 32% of total revenue.

The decrease in revenues in the second quarter and the six-month period ended April 30, 2005 resulted from the discontinuation of sales of our older analog vision units to a large OEM customer, which accounted for approximately $620,000 of revenue in the second quarter of fiscal 2004 and $1,280,000 for the six-month period ended April 30, 2004.  Sales to other customers approximated $1.5 million in the second quarter of last year and $2.8 million for the six-month period ended April 30, 2004.

During the fiscal 2005 second quarter, revenues from outside the United States accounted for 58% of revenues compared to 60% in the fiscal 2004 second quarter.  During the first six months of fiscal 2005, revenues from outside the United States accounted for 54% compared to 63% in the first six months of fiscal 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 third quarter as we will no longer be 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 31% to $764,000 for the three-month period ended April 30, 2005, compared to $1,114,000 for the same period in fiscal 2004.  For the six-month period ended April 30, 2005, gross profit decreased 23% to $1,560,000 from $2,017,000 for the same period in fiscal 2004.  As a percentage of net revenues, the gross profit for the second quarter of fiscal 2005 decreased to 49% compared to 53% in the same period in fiscal 2004.  For the six-month periods ended April 30, 2004 and 2005, gross profits as a percentage of net revenues were 50%.  The gross margins this year were adversely impacted by the low volume, which resulted in our manufacturing overhead being spread over a smaller number of units.  We would expect to see our margins improve slightly in the remainder of the year as our fixed manufacturing costs have decreased due to amendment of our facility lease.

Sales and marketing expenses decreased 7% to $659,000 for the three-month period ended April 30, 2005 compared to $706,000 for the same period in fiscal 2004.    For the six-month period ended April 30, 2005, sales and marketing expenses increased slightly to $1,345,000 from $1,340,000 for the same period in fiscal 2004.  As a percentage of net revenues, sales and marketing expenses increased to 42% for the second quarter of fiscal 2005 compared to 34% for the same period in fiscal 2004.  For the six-month period ended April 30, 2005, sales and marketing expenses as a percentage of net revenues increased to 43% compared to 33% in the same period in fiscal 2004.  This increase is the result of sales and marketing expenses remaining relatively flat with a decrease in sales. The Company expects sales and marketing expenses in absolute dollars to decrease on a quarterly basis for the remainder of fiscal 2005 due to our second quarter

15

restructuring actions. Increases in sales and marketing expenditures may occur to the extent that revenue growth is achieved.

General and administrative expenses decreased 10% to $269,000 for the three-month period ended April 30, 2005, compared to $300,000 for the same period in fiscal 2004.  For the six-month period ended April 30, 2005, general and administrative expenses decreased 4% to $560,000 as compared to $582,000 in the same period in fiscal 2004.  As a percentage of net revenues, general and administrative expenses increased to 17% for the second quarter of fiscal 2005 versus 14% for the same period in fiscal 2004.  For the six-month period ended April 30, 2004, general and administrative expenses as a percentage of net revenues increased to 18% from 14% in the same period in fiscal 2004.  The Company expects general and administrative expenses on a quarterly basis to decrease from their current levels due to the second quarter corporate restructuring.

Research and development expenses decreased 19% to $336,000 for the three-month period ended April 30, 2005, compared to $414,000 for the same period in fiscal 2004. For the six-month period ended April 30, 2005, research and development expenses decreased 14% to $710,000 from $824,000 in the same period in fiscal 2004.  As a percentage of net revenues, research and development expenses increased slightly to 21% for the second quarter of fiscal 2005, compared to 20% for the second quarter of fiscal 2004.  For the six-month period ended April 30, 2005, research and development expenses as a percentage of net revenues increased to 23% from 20% in the same period in fiscal 2004.  Again, the Company expects research and development expenses on a quarterly basis to decrease from their current levels due to the second quarter corporate restructuring.

The Company did not record an income tax benefit or expense for the three and six month periods ended April 30, 2005 or 2004.

The Company’s net loss from continuing operations for the second quarter of fiscal 2005 increased from year-ago levels to $870,000 or 29 cents per share, as compared with a loss of $304,000 or 10 cents per share for the same period in fiscal 2004.  The Company’s net loss from continuing operations for the six-month period ended April 30, 2005 increased to $1,425,000 or 47 cents per share, as compared with a loss of $727,000 or 25 cents per share for the same period in fiscal 2004.  There were approximately 3.0 million shares outstanding during the three and six month periods in fiscal 2005 and 2004.

The results of our discontinued operations resulted in no loss for the second quarter and income of $81,000 or $0.02 per share in the second quarter of fiscal 2004.  Our discontinued operations resulted in a loss of $55,000 or $0.02 for the six-month ended April 30, 2005 compared to income of $158,000 or $0.06 per share in the same period of fiscal 2004.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2005 the Company had cash balances of $1.4 million, working capital of approximately $2.9 million and no long-term debt.

In the second quarter of fiscal 2005 the Company incurred a net loss from continuing and discontinued operations of $870,000 which included non-cash charges related to depreciation and amortization of $59,000.  The net loss for the quarter increased $647,000 from the $223,000 loss reported in the second

16

quarter of fiscal 2004.  For the quarter ended April 30, 2004, cash used in operating activities was $781,000 and for the six-month period ended April 30, 2005, cash used in operating activities was $1,230,000.  For the six-month period, this represents a decrease of $913,000.  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 restructure the Company’s lease obligation with respect to its headquarters facility in Eden Prairie, Minnesota.  Under the amended lease terms, the Company will receive a reduction in its base rental rates and its facility will shrink 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.

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.

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

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, 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 April 30, 2005, the Company had no outstanding debt.

Working capital decreased 34% to $2,910,000 at April 30, 2005 from $4,438,000 at October 31, 2004.  The Company financed its operations during the first six months of fiscal 2005 through existing cash and cash equivalents.  Net cash used in operating activities during the first six months of fiscal 2005 was $1,230,000.  Accounts receivable decreased $601,000 and inventories increased $12,000 during the first six months of fiscal 2005.  Accounts payable and accrued expenses decreased by $505,000 and $55,000, respectively.

Net cash used in investing activities was $178,000 during the six months ended April 30, 2005 and 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

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with fixed asset additions.  This compares with $76,000 in fixed asset additions for the same period in fiscal 2004.  The Company expects that fixed asset additions for the remaining quarters of fiscal 2005 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 April 30, 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.

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Item 3:  CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

The Company’s Chief Executive Officer, Joseph C. Christenson and Chief Financial Officer, Timothy C. Clayton have reviewed the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based upon this review, 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

The Company previously reported the results of its Annual Meeting of Sharheolders held on March 10, 2005 in its Form 10-QSB for the quarter needed January 31, 2005, filed with the SEC on March 17, 2005

Item 5:OTHER INFORMATION

Reverse Stock Split

As previously reported by the Company, on March 10, 2005 the Company’s 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.  In connection with the conversion to book-entry share registration, the Board of Directors approved amendments to Sections 5.01 and 5.02 of the Company’s Bylaws on March 10, 2005 to allow for the issuance and transfer of shares of the Company’s common stock in uncertificated form.

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Change in Chief Financial Officer

Timothy C. Clayton is resigning as Chief Financial Officer of the Company at the close of business on May 31, 2005.  Joseph C. Christenson, the President and Chief Executive Officer of the Company will also assume the duties of Chief Financial Officer, on June 1, 2005.

Item 6:EXHIBITS

(a)The following exhibits are included herein:

3.1Articles of Incorporation

3.2 Bylaws

10.1Second Amendment To Lease Agreement

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

31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a- 14 and 15d-14 of the Exchange Act).

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

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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: May 31, 2005
	/s/Joseph C. Christenson
	Joseph C. Christenson
	President
	(Principal Executive Officer)
	/s/Timothy C. Clayton
	Timothy C. Clayton
	Chief Financial Officer
	(Principal Financial and
	Accounting Officer)

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EX-3.1

Exhibit 3.1

ARTICLES OF INCORPORATION

OF

PPT VISION, INC.

as in effect on March 10, 2005

ARTICLE 1

Name

1.1The name of the corporation shall be PPT VISION, Inc.

ARTICLE 2

Registered Office

2.1The location and post office address of the registered office of the corporation shall be 12988 Valley View Road, Eden Prairie, MN 55344.

ARTICLE 3

Purposes

3.1The corporation shall have general business purposes.

ARTICLE 4

Capital Stock

4.1Authorized Capital Stock - The authorized capital stock of this corporation shall be Five Million (5,000,000) shares of Common Stock with $.10 par value per share and Ten Million (10,000,000) shares of Preferred Stock with no par value per share.  In accordance with the Statutes of the State of Minnesota, the Board of Directors may subdivide the Common Stock and Preferred Stock into one or more series and may designate the relative rights and preferences of the different classes and series to the extent the relative rights and preferences of the different classes and series are not otherwise fixed in the Articles, including with respect to the Preferred Stock, the right to create voting, dividend and liquidation preferences greater than those of the Common Stock.  All shares are to be held, sold and paid for at such times and in such manner as the Board of Directors may from time to time determine, in accordance with the statutes of Minnesota.

4.2Voting Rights - Each holder of record of the common stock of the corporation shall be entitled to one (1) vote for each share of common stock held by him at each meeting of the shareholders and in respect to any matter on which the shareholders have a right to vote.  The right to vote shall be subject to the provisions of the by-laws of the corporation in effect from time to time with re spect to closing the transfer books and fixing a record date for the determination of shareholders entitled to vote.  Cumulative voting for directors is not permitted.

4.3Pre-emptive Rights - The shareholders of the corporation shall not have the pre-emptive right of subscription to any shares of common stock of the corporation to be issued or sold, or hereafter authorized, or an y obligations or securities exchangeable for or convertible into stock of the corporation which has not yet been authorized.

4.4Stock Rights and Options - The Board of Directors shall have the power to create and issue rights, warrants, or options entitling the holders thereof to purchase from the corporation any shares of its capital stock of any class or series, upon such terms and conditions and at such times and prices as the Board of Directors may provide, which terms and conditions shall be incorporated in an instrument evidencing such rights.

4.5Dividends - The holders of the common stock shall be entitled to receive, when and as declared by the Board of Directors, out of earnings or surplus legally available therefor, any and all dividends, payable either in cash, in property or in shares of the capital stock of the corporation.  The Board of Directors may authorize dividends only if the corporation will be able to pay its debts in the ordinary course of business after paying the dividend.

4.6Other Distributions - The Board of Directors may authorize, and the holders of the common stock may receive, distributions other than dividends on ly if the corporation will be able to pay its debts in the ordinary course of business after making the distribution.

4.7Board of Directors’ Powers - The capital stock may be issued as and when the Board of Directors shall determine, and, under and pursuant to the laws of the State of Minnesota, the Board of Directors shall have the power to fix or alter, from time to time, in re spect to shares then unissued, any or all of the following:  dividend rate; redemption price; the liquidation price; the conversion rights and the sinking or purchase fund rights of shares of any class, or of any series of any class, or the number of shares constituting any series of any class.

ARTICLE 5

Directors

5.1The Board of Directors is expressly authorized to make and alter by-laws of this corporation subject to the power of the shareholders to change or repeal such by-laws;

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provided, the Board of Directors shall not adopt, amend or repeal any by-laws fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the board or fixing the number of directors or their classifications or terms of office.

5.2Any action required or permitted to be t aken at a duly called Board of Directors meeting may be taken by written action signed by the number of directors that would be required to take the same action at a meeting of the board, except that on an action which requires shareholder approval the written action must be signed by all the directors.

ARTICLE 6

Voluntary Transfer of Corporate Assets

6.1The holders of a majority of all the shares entitled to vote at any duly constituted meeting of the shareholders shall have the power to authorize the Board of Directors to sell, lease, exchange or otherwise dispose of all or substantially all of the property and assets of this corporation, including its goodwill, upon such terms and conditions and for such consideration as the Board of Directors deems advisable; to adopt or reject an agreement of merger, provided, however, that notice of such proposal shall have be en mailed to each shareholder entitled to vote at such meeting at least fourteen (14) days prior to such meeting, or the written consent of such shareholder is given to such action as provided by statute.

ARTICLE 7

Amendment of Articles

7.1The holders of a majority of all shares entitled to vote at any duly constituted meeting of the shareholders shall have the power to amend, alter or repeal the Articles of Incorporation to the extent and the manner prescribed by the laws of the State of Minnesota.

ARTICLE 8

Limitation of Director Liability

8.1No director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its shareholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under Section 302A.559 or 80A.23 of

3

Minnesota Statutes; (iv) for any transaction from which the director derived any improper personal benefit; or (v) for any act or omission occurring prior to the date when this provision becomes effective.

8.2The provisions of this Article 8 shall not be deemed to limit or preclude indemnification of a directo r by the corporation for any liability of a director which has not been eliminated by the provisions of this Article 8.

8.3If Minnesota Statutes hereafter are amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Statutes, as so amended.

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EX-3.2

Exhibit 3.2

BYLAWS

OF

PPT VISION, INC.

As amended through March 10, 2005

ARTICLE I

OFFICES AND CORPORATE SEAL

Section 1.01.  Registered and Other Offices.  The registered office of the corporation in Minnesota shall be that set forth in the Articles of Incorporation or in the most recent amendment of the Articles of Incorporation or statement of the Board of Directors filed with the Secretary of State of Minnesota changing the registered office in the manner prescribed by law.  The corporation may have such other offices, within or without the State of Minnesota, as the Board of Directors shall, from time to time, determine.

Section 1.02.  Corporate Seal.  The corporation shall have no corporate seal.

ARTICLE II

MEETINGS OF SHAREHOLDERS

Section 2.01.  Time and Place of Meeti ngs.  Regular or special meetings of the shareholders, if any, shall be held on the date and at the time and place fixed by the Chairman of the Board of Directors or if a Chairman of the Board of Directors has not been elected, by the President in the absence of Board action, or the Board, except that a special meeting called by, or at the demand of a shareholder or shareholders, shall be held in the county where the principal executive office is located.

Section 2.02.  Regular Meetings.  At any regular meeting of the shareholders there shall be an election of qualified successors for directors who serve for an indefinite term and whose terms have expired or are due to expire within six (6) months after the date of the meeting.  Any b usiness appropriate for action by the shareholders may be transacted at a regular meeting.  No meeting shall be considered a regular meeting unless specifically designated as such in the notice of meeting or unless all the shareholders are present in person or by proxy and none of them objects to such designation.

Section 2.03.  Demand by Shareholders.  Regular or special meetings may be demanded by a shareholder or shareholders, pursuant to the provisions of Minnesota Statutes Sections 302A.431, Subd. 2, and 302A.433, Subd. 2, respectively.

Section 2.04.  Quorum, Adjourned Meetings.  The holders of fifty percent (50%) of the voting power of the shares entitled to vote at a meeting constitute a quorum for the transaction of business; said holders may be present at the meeting either in person or by proxy.  In the absence of a quorum, any meeting may be adjourned to a subsequent date.  If a quorum ispresent, a meeting may be adjourned from time to time without notice other than announcement at such meeting.  At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed.  If a quorum is present

when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though withdrawal of shareholders originally present leaves less than the proportion or number otherwise required for a quorum.

Section 2.05.  Voting.  At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote either in person or by proxy.  Unless otherwise provided by the Articles of Incorporation or a resolution of the Board of Directors filed with the Secretary of State, each shareholder shall have one vote for each share held.  Upon demand of any shareholder , the vote upon any question before the meeting shall be by ballot.

Section 2.06.  Notice of Meetings.  Notice of all meetings of shareholders shall be given to every holder of voting shares, except where the meeting is an adjourned meeting at which a quorum was present and the date, time and place of the meeting were announced at the time of adjournment.  The notice shall be given at least five (5), but not more than sixty (60) days before the date of the meeting, except that written notice of a meeting at which there is to be considered either (i) an agreement of merger or consolidation, (ii) a proposal to dispose of all or substantially all of the property and assets of the corporation, (iii) a proposal to dissolve the corporation, or ( iv) a proposal to amend the Articles of Incorporation, shall be mailed to all shareholders, whether entitled to vote or not, at least fourteen days prior thereto.  Every notice of any special meeting shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purpose stated in the call, unless all of the shareholders are present in person or by proxy and none of them objects to consideration of a particular item of business.

Section 2.07.  Waiver of Notice.  A shareholder may waive notice of any meeting of shareholders.  A waiver of notice by a shareholder entitled to notice is effective whether given before, at or after the meeting and whether given in writing, orally or by attendance.

Section 2.08.  Authorization Without a Meeting.  Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting by written action signed by all of the shareholders entitled to vote on that action.

ARTICLE III

DIRECTORS

Section 3.01.  General Powers.  Except as authorized by the shareholders by unanimous affirmative vote, the business and affairs of the corporation shall be managed by and shall be under the direction of the Board of Directors.

Section 3.02.  Number, Qualifications and Term of Office.  The Board of Directors of this corporation shall consist of one or more directors, but not less than three, the exact number to be fixed from time to time solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office.

Section 3.03.  Board Meetings; Place and Notice.  Meetings of the Board of Directors may be held from time to time at any place within or without the State of Minnesota that the

2

Board of Directors may designate.  In the absence of designation by the Board of Directors, Board meetings shall be held at the principal executive office of the corporation, except as may be otherwise unanimously agreed orally or in writing or by attendance.  The Chairman of the Board, the President, or directors comprising at least one third of the number of directors then in office may call a Board meeting by giving five (5) days, notice if by mail or two (2) days, notice if by telephone, telex, telegram or in person, to all directors of the day or date and time of the meeting.  The notice need not state the purpose of the meeting.  If a meeting schedule is adopted by the Board, or if the date and time of a Board meeting has been announced at a previous meeting, no notice is required.

Section 3.04.  Action Without Meeting.  An action required or permitted to be taken at a Board meeting may be taken by written action signed by all of the directors.  Any such written action is effective when signed by the required number of directors, unless a different effective time is provided in the written action.

Section 3.05.  Waiver of Notice.  A director may waive notice of a meeting of the Board.  A waiver of notice by a director is effective, whether given before, at or after the meeting and whether given in writing, orally or by attendance.

Section 3.06.  Quorum.  A majority of the directors currently holding office is a quorum for the transaction of business.  If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though withdrawal of directors originally present leaves less than the proportion or number otherwise required for a quorum.

Section 3.07.  Vacancies.  Vacancies on the Board resulting from the death, resignation or removal of a director may be filled by the affirmative vote of a majority of the remaining directors, even though less than a quorum.  Each director elected under this Section to fill a vacancy shall hold office until a qualified successor is elected by the shareholders at the next regular or special meeting of the shareholders.

ARTICLE IV

OFFICERS

Section 4.01.  Numbers.  The officers of the corporation shall consist of a President and may also consist of one or more Vice Presidents, a Secretary and Chief Financial Officer.  The Board may elect or appoint any officers it deems necessary for the operation and management of the corporation, each of whom shall have the powers, rights, duties, responsibilities and terms of office determined by the Board from time to time.  Any number of officers or functions of those offices may be held or exercised by the same person.

Section 4.02.  Election and Term of Office.  The Board of Directors shall from time to time elect a President and may elect one or more Vice Presidents, a Secretary and Chief Financial Officer and any other officers or agents the Board deems necessary.& #160; Such officers shall hold their offices until their successors are elected and qualified.

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Section 4.03.  President.  Unless otherwise stipulated, the President shall be the chief executive officer of the corporation and shall have responsibility for the general active management of the corporation.  When present, he shall preside at all meetings of the shareholders, and unless a Chairman of the Board of Directors has been elected and is present, shall preside at all meetings of the Board of Directors and see that all orders and resolutions of the Board of Directors are carried into effect.  The President, unless some other person is specifically authorized by vote of the Board of Directors, shall sign all certificates of stock, bonds, deeds, mortgages, agreements, modification of mortgage agreements, leases, and contracts of the corporation.  The President, if no Secretary has been elected, shall maintain records of and whenever necessary, shall certify all proceedings of the Board of Directors and the shareholders.  The President shall perform such other duties as the Board of Directors shall designate.

Section 4.04.  Vice President.  If a Vice President or Vice Presidents have been elected, they shall have such powers and perform such duties as may be prescribed by the Board of Directors or by the President.  In the event of absence or disability of the President, Vice Presidents shall succeed to the Board President’s power and duties in the order designated by the Board of Directors.

Section 4.05.  Secretary.  If a Secretary has been elected, the Secretary shall keep accurate minutes of all meetings of the shareholders and the Board of Directors, shall give proper notice of meetings of shareholders and directors, and shall perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe.  In the Secretary’s absence at any meeting, the President, an Assistant Secretary or a Secretary Pro Tempore shall perform the Secretary’s duties.

Section 4.06.  Chief Financial Officer.  The Chief Financial Officer shall keep accurate financial records of the corporation; deposit all money, dra fts and checks in the name of and to the credit of the corporation in the banks and depositories designated by the Board of Directors; endorse for deposit all notes, checks and drafts received by the corporation as ordered by the Board of Directors, making proper vouchers therefor; and disburse corporate funds and issue checks and drafts in the name of the corporation, as ordered by the Board of Directors.  The Chief Financial Officer shall perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe.

Section 4.07.  Removal and Vacancies.  Any officer may be removed from office by a majority of the whole Board of Directors, with or without cause. Such removal, however, shal l be without prejudice to the contract rights of the person so removed.  If there is a vacancy among the officers of the corporation by reason of death, resignation or otherwise, such vacancy may be filled for the unexpired term by the Board of Directors.

Section 4.08.  Delegation of Authority.  An officer elected or appointed by the Board may delegate some or all of the duties or powers of such office to other persons, provided that such delegation is in writing.

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ARTICLE V

SHARES AND THEIR TRANSFER

Section 5.01. Certificates for Shares. Shares of the corporation’s stock may be certificated or uncertificated, as provided under Minnesota law.  All certificates of stock of the corporation shall be numbered and shall be entered in the books of the corporation as they are issued.  All certificates shall exhibit the holder’s name and number of shares and shall be signed by the President.  If a Secretary has been elected, the certificates may also be signed by the Secretary.  Every certificate surrendered to the corporation for exchange or transfer shall be cancelled and no shares (whether certificate or uncertificated) shall be issued in exchange for any existing certificate until such existing certificate has been so cancelled.  Any or all of the signatures on the certificate may be a facsimile.

Section 5.02. Transfer of Shares.  Transfers of stock shall be made on the books of the corporation only by the record holder of such stock, or by attorney lawfully constituted in writing, and, in the case of stock represented by a certificate, upon surrender of the certificate.  Subsequent to consent, the corporation may treat, as the absolute owner of the shares of the corporation, the person or persons in whose name or names the shares are registered on the books of the corporation.

Section 5.03.  Lost Certificates.  A new share certificate may be issued in place of one that is alleged to have been lost, stolen or destroyed, but only in accordance with applicable law and such other reasonable requirements imposed by the Board of Directors.

ARTICLE VI

AMENDMENTS

Section 6.01.  Subject to the power of shareholders to adopt, amend, or repeal these Bylaws as provided in Minnesota Statutes Section 302A.181, subdivision 3, any Bylaw may be amended or repealed by the Board of Directors at any meeting, provided that, after adoption of these Bylaws by the shareholders of the Company, the Board shall not adopt, amend, or repeal a Bylaw fixing a quorum for meetings for shareholders, prescribing procedures for removing directors or filling vacancies in the Board, or fixing the number of directors or their classifications, qualifications or terms of office.

ARTICLE VII

INDEMNIFICATION

Section 7.01.  Any person who at any time shall serve or shall have served as director, officer or employee of the corporation, or of any other enterprise at the request of the corporation, and the heirs, executors and administrators of such person shall be indemnified by the corporation, in accordance with and to the fullest extent permitted by Minnesota law as it may be amended from time to time.

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EX-10.1

Exhibit 10.1

SECOND AMENDMENT TO LEASE AGREEMENT

THIS SECOND AMENDMENT TO LEASE AGREEMENT (“Amendment”) is made and entered into as of the 29^th day of April, 2005, by and between CSM PROPERTIES, INC., a Minnesota corporation (“Landlord”) and PPT VISION, INC., a Minnesota corporation (“Tenant”).

RECITALS

A.Landlord and Tenant entered into that certain Lease dated July 17, 1998, as amended by that certain Addendum to Lease dated July 26, 1999, as further amended by that certain First Amendment of Lease dated October 28, 1999 (collectively, the “Lease”) pursuant to which Tenant leases from Landlord approximately 64,112 square feet of space located in the Prairie Crossroads Corporate Center, as more particularly described in the Lease (the “Premises”).

B.The parties desire to amend the Lease in accordance with the terms and conditions set forth below.

AGREEMENT

NOW THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Lease is hereby supplemented, amended and modified as follows:

1.Reduction of Premises.  As of May 1, 2005 (the “Reduction Date”), Tenant shall surrender to Landlord that portion of the Premises consisting of approximately 28,977 rentable square feet which is depicted on the attached Exhibit A attached hereto (the “Surrender Space”).  As of the Reduction Date (i) the Premises shall consist of approximately 35,135 rentable square feet as depicted on Exhibit A-1 attached hereto, subject to final measurement, and (ii) Tenant’s Pro-Rata Share of operating expenses shall be forty three and 45/100 percent (43.45%).  Tenant’s Base Rent for the remaining Premises shall reduced in accordance with Section 3 of this Amendment.

2.Lease Term.  The term of the Lease shall be extended for an additional twenty four (24) month period, commencing June 1, 2009 and expiring May 31, 2011.  Section 14.14 (Right to Terminate) of the Lease is hereby deleted.

3.Base Rent.  As of April 29, 2005, Tenant is in default on its payment of Base Rent and operating expenses under the Lease in the amount of Two Hundred Ninety Eight Thousand Three Hundred One and No/100 Dollars ($298,301.00) (the “Delinquent Rent”).  Tenant shall pay the Delinquent Rent to Landlord concurrently with the execution of this Amendment.  Tenant shall also pay a lease reduction penalty (“Penalty”) in the amount of Two Hundred Forty Thousand and No/100 Dollars ($240,000.00) in twelve (12) equal monthly installments of Twenty Thousand and No/100 Dollars ($20,000.00) on or prior to the first day of each month commencing May 1, 2005 through April 1, 2006, in addition to Tenant’s existing rent obligations.  Landlord has also agreed to reduce Tenant’s Base Rent for the remaining Premises to Eight and 10/100 Dollars ($8.10) per rentable square foot for the period commencing May 1, 2005 through May 31, 2009, and Eight and 91/100 Dollars ($8.91) per rentable square foot for

the period commencing June 1, 2009 through May 31, 2011.  Tenant’s revised Base Rent obligations (including the Penalty) are summarized as follows:

Months	Monthly Base Rent		Per Rentable Sq. Ft.
5/1/2005 – 4/30/2006	$	43,716.13	$	14.93
5/1/2006 – 5/31/2009	$	23,716.13	$	8.10
6/1/2009 – 5/31/2011	$	26,087.74	$	8.91

Notwithstanding the foregoing, if Tenant fails to pay Base Rent and the installments of the Penalty on time during the period commencing May 1, 2005 through April 30, 2006 (with time being of the essence) then Landlord shall have the right to (i) withdraw the foregoing alternative rent schedule and to require Tenant to immediately pay all delinquent amounts under the original terms of the Lease, and (ii) exercise any and all other remedies available to Landlord under the Lease, at law or in equity.

4.Surrender.  On the Reduction Date, Tenant shall surrender possession of the Surrender Space in the condition required by Section 5.3 of the Lease, the same as if the Lease were being terminated.  As of the Reduction Date, Tenant shall and hereby does transfer, convey, quitclaim and assign to Landlord all of its rights and interests in and to the Surrender Space; provided the foregoing does not in any way relieve Tenant from its obligations under Section 5.3 with respect to the Surrender Space or Tenant’s obligation to pay Base Rent and its Pro-Rata Share of operating expenses on the remaining Premises.

5.Failure to Surrender.  Notwithstanding anything to the contrary contained herein or in the Lease, Tenant shall have no right to extend the term of the Lease with regard to the Surrender Space beyond the Reduction Date.  If Tenant fails to surrender possession of the Surrender Space to Landlord in the condition required by this Amendment by 12:00 noon on the Reduction Date, then Landlord or its authorized agent, in addition to any and all remedies it may have under the Lease, this Amendment, at law or in equity, shall have the right to immediately recover from Tenant (i) possession of the Surrender Space, and Tenant agrees not to contest any court action or proceedings brought by Landlord or its agent to recover possession of the Surrender Space from Tenant, and (ii) damages that may be asserted against Landlord or that Landlord may incur from such holding over by Tenant.  Tenant further specifically agrees to indemnify, hold harmless and defend Landlord from and against any and all liability, loss, cost, damages, claims, actions, or causes of action (including court costs, witness fees, and reasonable attorneys’ fees) asserted against or incurred by Landlord by reason of Tenant’s failure to timely surrender possession of the Premises in accordance with the terms of this Amendment.

Without limiting the foregoing, and in addition to any other rights or remedies of Landlord under the Lease, this Amendment, at law or in equity, if Tenant does not return possession of the Surrender Space to Landlord in the physical condition required by this Amendment, then (i) any of Tenant’s personal property, furniture, fixtures, equipment or belongings that are not removed on or before the Reduction Date shall be deemed abandoned, and Tenant agrees that Landlord shall have no duty of care with respect to such property and that Landlord or its authorized agent may remove and dispose of such property as it deems prudent and any cost in regard thereto shall be payable by Tenant to Landlord as additional rent, (ii) Landlord may repair and restore the Surrender Space to the condition required by the terms of this Amendment and recover the costs of doing

so from Tenant and (iii) Tenant agrees to indemnify, hold harmless and defend Landlord from and against any and all liability, loss, cost, damages, claims, actions, or causes of action (including court costs, witness fees and reasonable attorneys’ fees) incurred by or asserted against Landlord by reason of Tenant’s failure to return possession of the Surrender Space in the physical condition required by this Amendment.

6.Landlord’s Work.  Landlord, at its sole cost and expense (except as provided below), will complete the construction of the interior improvements to the Premises described in the floor plan and specifications attached hereto as EXHIBIT B (collectively, “Landlord’s Work”).  Any changes or modifications to Landlord’s Work shall be made and accepted by written change orders or agreement signed by Landlord and Tenant and shall constitute an amendment to this Lease.  Tenant shall reimburse Landlord, within fifteen (15) days after written request, for the cost of any change orders that increase the total cost of Landlord’s Work.  Notwithstanding anything to the contrary, Tenant shall pay One Hundred and Forty Thousand and No/100 Dollars ($140,000.00) (the “Tenant Improvement Funds”) to Landlord for the cost of the Landlord’s Work concurrently with the execution of this Amendment.

7.Final Measurement.  As soon as reasonably possible after the Reduction Date, Landlord will provide Tenant with a calculation of the rentable area of the Premises as determined by Landlord.  Thereafter, Landlord and Tenant shall execute an addendum to the Lease substantially in the form attached hereto as Exhibit C, confirming said determination and adjusting, to the extent applicable, (i) the area of the Premises, (ii) the Base Rent, and (iii) Tenant’s Pro-Rata Share of operating expenses to reflect the actual rentable square foot area of the Premises.  Until such time as said as-built measurements are available, Tenant agrees that the estimated square feet of rentable area of the Premises set forth in Section 1 above shall be utilized to compute Base Rent, Tenant’s Pro-Rata Share of Operating Expenses and any other sums due hereunder based in whole or in part on the square footage of the Premises and Landlord shall reconcile such amounts paid if the actual rentable square footage is different than that set forth in Section 1 hereof.

8.Utilities.  Any utilities that cannot be separately metered to the remaining Premises shall be paid by Landlord and included within the definition of operating expenses of which Tenant shall reimburse Landlord it Pro-Rata Share thereof.

9.Brokerage.  Each of the parties represent and warrant that there are no claims for brokerage commissions or finder’s fees in connection with this Amendment, and agrees to indemnify the other against, and hold it harmless from all liabilities arising from any such claim, including without limitation, the costs of attorney’s fees in connection therewith.

10.Miscellaneous.  Except as otherwise provided herein, all capitalized terms used herein shall have the meaning ascribed to them in the Lease.  Except as specifically modified herein, all of the covenants, conditions, and obligations under the Lease shall remain unchanged and in full force and effect. In the event of a conflict between the terms of the Lease and this Amendment, the terms of this Amendment shall prevail. This Amendment shall be binding upon the parties hereto and their respective successors and assigns.  This Amendment may be executed in one or more counterparts each of which when so executed and delivered shall constitute an original, but together said counterparts shall constitute one and the same instrument.  Execution

copies of this Amendment may be delivered by facsimile, and the parties hereto agree to accept and be bound by facsimile signatures hereto.  The signature of any party on a facsimile document, for purposes hereof, is to be considered to have the same binding effect as an original signature on an original document.  At the request of either party, any facsimile document is to be re-executed in original form by the party who executed the original facsimile document.  Neither party may raise the use of a facsimile machine or the fact that any signature was transmitted through the use of a facsimile machine as a defense to the enforcement of this Amendment.  Notwithstanding anything to the contrary contained herein, if Tenant does not pay to Landlord the Delinquent Rent and the Tenant Improvement Funds within five (5) business days of the execution of this Amendment, then Landlord may terminate this Amendment by delivering written notice to Tenant.

IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written.

LANDLORD:	TENANT:
CSM PROPERTIES, INC.	PPT VISION, INC.
By:	By:
Print Name:	Print Name:
Print Title:	Print Title:

EXHIBIT A

SURRENDER SPACE

EXHIBIT A-1

PREMISES

EXHIBIT B

LANDLORD’S WORK

EXHIBIT C

ADDENDUM TO SECOND AMENDMENT TO LEASE

THIS ADDENDUM TO SECOND AMENDMENT TO LEASE (“Addendum”) is entered into this        day of                     , 2005 between CSM PROPERTIES, INC., a Minnesota corporation (“Landlord”) and PPT VISION, INC., a Minnesota corporation (“Tenant”) and modifies that certain Second Amendment to Lease dated April 29, 2005 (the “Amendment”).

The Amendment is amended as follows:

1.Premises.  Landlord and Tenant acknowledge and confirm that according to the “as-built” measurements the Premises consists of                        rentable square feet.

2.Base Rent.

Months	Monthly Base Rent	Per Rentable Sq. Ft.
5/1/2005 – 4/30/2006	$	$	14.93
5/1/2006 – 5/31/2009	$	$	8.10
6/1/2009 – 5/31/2011	$	$	8.91

3.Pro-Rata Share.  Landlord and Tenant acknowledge and confirm that Tenant’s Pro-Rata Share of operating expenses shall be        percent (      %).

4.Miscellaneous.  If any provision of the Amendment is inconsistent with the provisions contained herein, then and in such event, the provisions of this Addendum shall control.  Except as expressly modified herein, all other terms and conditions of the Amendment shall remain unchanged, and in full force and effect.

LANDLORD:	TENANT:
CSM PROPERTIES, INC.	PPT VISION, INC.
By:	By:
Print Name:	Print Name:
Print Title:	Print Title:

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Joseph C. Christenson, certify that:

1) I have reviewed this Form 10-QSB of PPT Vision, Inc.

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 31, 2005
	/s/ Joseph C. Christenson
	Joseph C. Christenson, President

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Timothy C. Clayton, certify that:

1) I have reviewed this Form 10-QSB of PPT Vision, Inc.

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 31, 2005
	/s/ Timothy C. Clayton
	Timothy C. Clayton, Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

The undersigned certify pursuant to 18 U.S.C. § 1350, that:

(1)   The accompanying Quarterly Report on Form 10-QSB for the period ended April 30, 2005, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)   The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 31, 2005

/s/ Joseph C. Christenson	/s/ Timothy C. Clayton
Joseph C. Christenson	Timothy C. Clayton
President	Chief Financial Officer