SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-Q


QUARTERLY  REPORT UNDER  SECTION 13 or 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
1934


For Quarter Ended  June 30, 2006                   Commission File No.  1-7939
                  -------------------------------                      --------



                            Vicon Industries, Inc.
                            ----------------------

        New York State                                      11-2160665
        --------------                                      ----------
 (State or other jurisdiction of                         (I.R.S. Employer
 incorporation or organization)                         identification No.)


            89 Arkay Drive, Hauppauge, New York                     11788
- -----------------------------------------------------------------------------
          (Address of principal executive offices)               (Zip Code)


Registrant's telephone number, including area code:   (631) 952-2288
                                                    -------------------------


      (Former name, address, and fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                               Yes    X       No
                                   -------       -------------


Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer or a  non-accelerated  filer.  See definition of "accelerated
filer and large  accelerated  filer" in Rule  12b-2 of the  Exchange  Act (Check
one):

Large accelerated filer      Accelerated filer ___  Non-accelerated filer  X
                        ---                                               ------

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

                               Yes            No    X
                                   -------       -------------


At June 30, 2006,  the  registrant had  outstanding  4,573,084  shares of Common
Stock, $.01 par value.








PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------

                     VICON INDUSTRIES, INC. AND SUBSIDIARIES
                     ---------------------------------------
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 -----------------------------------------------
                                   (UNAUDITED)

                                                 Three Months Ended
                                                 ------------------

                                           6/30/06                6/30/05
                                           -------                -------

Net sales                                $14,674,683            $13,990,499
Cost of sales                              8,760,459              8,671,516
                                         -----------            -----------
    Gross profit                           5,914,224              5,318,983

Operating expenses:
  Selling, general and
    administrative expense                 4,705,977              4,864,210
  Engineering & development expense        1,154,364              1,016,147
                                         -----------            -----------
                                           5,860,341              5,880,357

    Operating income (loss)                   53,883               (561,374)

Interest expense                              40,833                 46,316
Interest and other income                    (23,820)               (14,184)
                                         -----------            -----------

    Income (loss) before income taxes         36,870               (593,506)

Income tax benefit                              -                   (45,472)
                                         -----------            -----------

    Net income (loss)                    $    36,870            $  (548,034)
                                         ===========            ===========



Basic and diluted earnings
  (loss) per share                       $       .01            $      (.12)
                                         ===========            ===========


Shares used in computing earnings (loss) per share:

            Basic                          4,573,084              4,569,584
            Diluted                        4,667,823              4,569,584









See Accompanying Notes to Condensed Consolidated Financial Statements.




                                       -2-




                     VICON INDUSTRIES, INC. AND SUBSIDIARIES
                     ---------------------------------------
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 -----------------------------------------------
                                   (UNAUDITED)

                                                 Nine Months Ended
                                                 -----------------

                                           6/30/06                6/30/05
                                           -------                -------

Net sales                                $41,156,338            $42,374,700
Cost of sales                             25,028,433             26,479,697
                                         -----------            -----------
    Gross profit                          16,127,905             15,895,003

Operating expenses:
  Selling, general and
    administrative expense                13,444,825             14,716,661
  Engineering & development expense        3,315,533              3,713,823
                                         -----------            -----------
                                          16,760,358             18,430,484

    Operating loss                          (632,453)            (2,535,481)

Interest expense                             124,592                135,280
Interest and other income                    (93,557)               (56,869)
Loss on sale of marketable securities           -                    44,936
                                         -----------            -----------

    Loss before income taxes                (663,488)            (2,658,828)

Income tax expense                              -                     9,528
                                         -----------            ------------

    Loss before extraordinary gain          (663,488)            (2,668,356)

Extraordinary gain                              -                   210,968
                                         -----------            -----------

    Net loss                             $  (663,488)           $(2,457,388)
                                         ===========            ===========



Basic and diluted loss per share:

Loss before extraordinary gain           $      (.15)           $      (.58)

Extraordinary gain                               -                      .04
                                         -----------            -----------

    Net loss                             $      (.15)           $      (.54)
                                         ===========            ===========


Shares used in computing basic
 and diluted loss per share                4,571,507              4,565,622






See Accompanying Notes to Condensed Consolidated Financial Statements.




                                       -3-




                     VICON INDUSTRIES, INC. AND SUBSIDIARIES
                     ---------------------------------------
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      -------------------------------------

ASSETS                                               6/30/06        9/30/05
- ------                                               -------        -------
                                                   (Unaudited)
CURRENT ASSETS
- --------------
Cash and cash equivalents                         $ 4,640,783     $ 5,818,178
Marketable securities                                 123,018         121,830
Accounts receivable, net                           10,912,882      10,125,967
Inventories:
  Parts, components, and materials                  2,535,405       2,277,415
  Work-in-process                                   2,179,396       2,782,761
  Finished products                                 6,703,825       5,406,593
                                                  -----------     -----------
                                                   11,418,626      10,466,769
Prepaid expenses and other current assets             538,695         419,942
                                                  -----------     -----------
   TOTAL CURRENT ASSETS                            27,634,004      26,952,686

Property, plant and equipment                      13,454,270      12,890,801
Less accumulated depreciation and amortization     (7,058,115)     (6,274,975)
                                                 ------------     -----------
                                                    6,396,155       6,615,826
Other assets                                          585,413         623,393
                                                  -----------     -----------
   TOTAL ASSETS                                   $34,615,572     $34,191,905
                                                  ===========     ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------

CURRENT LIABILITIES
- -------------------
Current maturities of long-term debt              $   348,976     $   409,343
Accounts payable                                    3,178,744       2,462,671
Accrued compensation and employee benefits          2,346,974       2,353,849
Accrued expenses                                    1,574,035       1,403,734
Unearned revenue                                      660,044         566,065
Income taxes payable                                    8,703          44,306
                                                  -----------     -----------
   TOTAL CURRENT LIABILITIES                        8,117,476       7,239,968

Long-term debt                                      1,809,177       2,061,825
Unearned revenue                                      492,129         582,679
Other long-term liabilities                           419,700         328,953

SHAREHOLDERS' EQUITY
- --------------------
Common stock, par value $.01                           48,609          48,574
Additional paid in capital                         22,515,922      22,459,478
Retained earnings                                   1,617,557       2,281,045
                                                  -----------     -----------
                                                   24,182,088      24,789,097
Less treasury stock, at cost                       (1,299,999)     (1,299,999)
Accumulated other comprehensive income                895,001         557,045
Deferred compensation                                   -             (67,663)
                                                  -----------     -----------
   TOTAL SHAREHOLDERS' EQUITY                      23,777,090      23,978,480
                                                  -----------     -----------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     $34,615,572     $34,191,905
                                                  ===========     ===========





See Accompanying Notes to Condensed Consolidated Financial Statements.



                                       -4-


                     VICON INDUSTRIES, INC. AND SUBSIDIARIES
                     ---------------------------------------
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 -----------------------------------------------
                                   (UNAUDITED)


                                                        Nine Months Ended
                                                        -----------------

                                                       6/30/06       6/30/05
                                                       -------       -------
Cash flows from operating activities:
  Net loss                                         $  (663,488)   $(2,457,388)
  Adjustments to reconcile net loss to net
   cash used in operating activities:
    Depreciation and amortization                      717,768        833,710
    Amortization of deferred compensation                7,558         57,295
    Stock compensation expense                         108,882        (67,718)
    Extraordinary gain on acquisition                     -          (210,968)
    Loss on sale of marketable securities                 -            44,936
  Change in assets and liabilities:
      Accounts receivable, net                        (593,748)      (239,989)
      Inventories                                     (820,013)     2,014,547
      Recoverable income taxes                            -           239,402
      Prepaid expenses and other current assets       (104,676)       (57,577)
      Other assets                                      41,123          4,687
      Accounts payable                                 672,295       (918,400)
      Accrued compensation and employee benefits       (20,449)       249,082
      Accrued expenses                                 162,206       (102,524)
      Unearned revenue                                   3,429        (66,744)
      Income taxes payable                             (35,404)      (339,767)
      Other liabilities                                 68,837       (379,871)
                                                   ------------   -----------
       Net cash used in operating activities          (455,680)    (1,397,287)

Cash flows from investing activities:
  Capital expenditures                                (436,377)      (543,950)
  Acquisition, net of cash acquired                       -          (868,000)
  Net decrease (increase) in marketable securities      (3,174)     2,064,099
                                                   ------------   -----------
       Net cash provided by (used in)
         investing activities                         (439,551)       652,149

Cash flows from financing activities:
  Repayments of long-term debt                        (316,723)      (258,829)
  Proceeds from exercise of stock options                7,700         22,180
  Repurchases of common stock                             -           (21,115)
                                                   ------------   -----------
       Net cash used in financing activities          (309,023)      (257,764)
                                                   ------------   -----------
Effect of exchange rate changes on cash                 26,859        (27,190)
                                                   ------------   -----------

Net decrease in cash                                (1,177,395)    (1,030,092)
Cash at beginning of year                            5,818,178      6,063,198
                                                   ------------   ------------
Cash at end of period                              $ 4,640,783    $ 5,033,106
                                                   ============   ===========






See Accompanying Notes to Condensed Consolidated Financial Statements.




                                       -5-


                     VICON INDUSTRIES, INC. AND SUBSIDIARIES
                     ---------------------------------------
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
        ----------------------------------------------------------------
                                  June 30, 2006
                                  -------------


Note 1: Basis of Presentation
- -----------------------------

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America for interim financial  information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,  they do not include
all 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.
Operating  results for the nine months  ended June 30, 2006 are not  necessarily
indicative  of the  results  that may be  expected  for the  fiscal  year  ended
September 30, 2006. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the fiscal year ended  September  30, 2005.  Certain prior year amounts
have been reclassified to conform to the current period presentation.

Note 2: Marketable Securities
- -----------------------------

Marketable securities consist of mutual fund investments in U.S. government debt
securities.  Such  securities  are stated at market value and are  classified as
available-for-sale  under Financial  Accounting Standards Board (FASB) Statement
of Financial  Accounting  Standards  (SFAS) No. 115, with  unrealized  gains and
losses reported in other  comprehensive  income as a component of  shareholders'
equity.  The cost of such securities at June 30, 2006 was $127,055,  with $4,037
of cumulative unrealized losses reported at June 30, 2006.

Note 3: Accounts Receivable
- ---------------------------

Accounts receivable is stated net of an allowance for uncollectible  accounts of
$1,372,000  and  $1,297,000  as  of  June  30,  2006  and  September  30,  2005,
respectively.

Note 4: Earnings per Share
- --------------------------

Basic earnings (loss) per share (EPS) is computed based on the weighted  average
number of common  shares  outstanding  for the period.  Diluted EPS reflects the
maximum dilution that would have resulted from the exercise of stock options and
incremental common shares issuable under deferred compensation agreements.

The  following  table  provides  the  components  of the basic and  diluted  EPS
computations for the three and nine month periods ended June 30, 2006 and 2005:

                                    Three Months            Nine Months
                                   Ended June 30,          Ended June 30,
                               ---------------------   ---------------------
                                  2006       2005         2006        2005
                                  ----       ----         ----        ----
Basic EPS Computation
- ---------------------
Net income (loss)...........  $   36,870  $ (548,034) $  (663,488) $(2,457,388)

Weighted average
 shares outstanding.........   4,573,084   4,569,584    4,571,507    4,565,622

Basic earnings (loss)
 per share..................  $      .01  $    (.12)  $      (.15) $      (.54)
                              =========== ==========  ============ ============

                                       -6-

                                    Three Months            Nine Months
                                   Ended June 30,          Ended June 30,
                                   --------------          --------------
                                  2006         2005       2006         2005
                                  ----         ----       ----         ----
Diluted EPS Computation
- -----------------------
Net income (loss)...........  $   36,870  $ (548,034) $  (663,488) $(2,457,388)

  Weighted average
   shares outstanding.......   4,573,084   4,569,584    4,571,507    4,565,622
  Stock compensation
   arrangement..............      76,795       -            -            -
  Stock options.............      17,944       -            -            -
                              ----------  ----------   ----------   ----------

Diluted shares outstanding..   4,667,823   4,569,584    4,571,507    4,565,622

Diluted earnings (loss)
 per share..................  $      .01  $    (.12)  $      (.15) $      (.54)
                              =========== ==========  ============ ============

For the three months ended June 30, 2005,  100,631 shares have been omitted from
the calculation of diluted EPS as their effect would have been antidilutive. For
the nine  months  ended June 30,  2006 and 2005,  100,193  and  167,876  shares,
respectively,  have been  omitted from the  calculation  of diluted EPS as their
effect would have been antidilutive.

Note 5: Comprehensive Income (Loss)
- -----------------------------------

The  Company's  total  comprehensive  income (loss) for the three month and nine
month periods ended June 30, 2006 and 2005 was as follows:

                                  Three Months               Nine Months
                                 Ended June 30,             Ended June 30,
                             -----------------------     --------------------
                                2006         2005          2006         2005
                                ----         ----          ----         ----

Net income (loss)          $    36,870   $  (548,034)  $  (663,488) $(2,457,388)
Other comprehensive income
 (loss), net of tax:
  Decrease (increase) in
   unrealized loss on
    securities                    (610)          445        (1,986)      47,367
  Unrealized gain (loss)
   on derivatives              (19,534)      (17,044)      (21,910)      22,431
  Foreign currency
   translation adjustment      408,101      (460,246)      361,852     (156,746)
                           -----------    -----------  ------------ ------------
Comprehensive income (loss)$   424,827   $(1,024,879)  $  (325,532) $(2,544,336)
                           ===========   ============  ============ ============

The  accumulated  other  comprehensive  income  balances  at June  30,  2006 and
September 30, 2005 consisted of the following:

                                                    June 30,     September 30,
                                                      2006           2005
                                                  ------------   --------------
Foreign currency translation adjustment           $  934,698      $ 572,846
Unrealized loss on derivatives                       (35,660)       (13,750)
Unrealized loss on securities                         (4,037)        (2,051)
                                                  -----------     ---------
Accumulated other comprehensive income            $  895,001      $ 557,045
                                                  ===========     ==========

Note 6: Derivative Instruments
- ------------------------------

At June 30,  2006,  the Company  had  interest  rate swaps and forward  exchange
contracts  outstanding  with  notional  amounts  aggregating  $1.5  million  and
$500,000,   respectively,   whose  aggregate  fair  value  was  a  liability  of
approximately  $36,000.  The  change in the  amount of the  liability  for these
instruments is shown as a component of accumulated other comprehensive income.


                                       -7-


Note 7: Stock-Based Compensation
- --------------------------------

The Company  maintains  stock  option  plans that  include  both  incentive  and
non-qualified options reserved for issuance to key employees, including officers
and directors. All options are issued at fair market value at the grant date and
are exercisable in varying installments  according to the plans. The plans allow
for the payment of option  exercises  through the surrender of previously  owned
mature  shares  based on the fair  market  value of such  shares  at the date of
surrender.


Prior to October 1, 2005,  the  Company  followed  Accounting  Principles  Board
Opinion No. 25,  "Accounting  for Stock Issued to Employees"  ("APB No. 25") and
related interpretations in accounting for its employee stock-based compensation.
Under APB No. 25,  compensation  expense was  recorded if, on the date of grant,
the market  price of the  underlying  stock  exceeded  its  exercise  price.  As
permitted by Statement of Financial  Accounting  Standards No. 123,  "Accounting
for Stock-Based  Compensation" ("SFAS No. 123") and SFAS No. 148 "Accounting for
Stock-Based  Compensation  -  Transition  and  Disclosure - An Amendment of FASB
Statement  No. 123" ("SFAS No.  148"),  the Company had retained the  accounting
prescribed by APB No. 25 and presented the disclosure  information prescribed by
SFAS No. 123 and SFAS No. 148.


Had  compensation  expense for stock option grants issued been determined  under
the fair value method of SFAS No. 123, the Company's net loss and loss per share
(EPS) for the three-month and nine-month  periods ended June 30, 2005 would have
been:


                                   Three Months Ended       Nine Months Ended
                                      June 30, 2005           June 30, 2005
                                      -------------           -------------

Reported net loss                      $  (548,034)            $(2,457,388)
Stock-based compensation cost              (50,381)               (147,504)
                                       -----------             -----------
Pro forma net loss                     $  (598,415)            $(2,604,892)
                                       ===========             ===========

Reported basic and diluted EPS            $ (.12)                 $ (.54)
Pro forma basic and diluted EPS           $ (.13)                 $ (.57)


Effective  October 1, 2005, the Company  adopted SFAS No.  123(R),  "Share-Based
Payment",  which requires that all share based payments to employees,  including
stock  options,  be  recognized  as  compensation  expense  in the  consolidated
financial  statements based on their fair values and over the requisite  service
period.  For the  three-month  and  nine-month  periods ended June 30, 2006, the
Company  recorded  non-cash   compensation  expense  of  $43,522  and  $108,882,
respectively, ($.01 and $.02 per basic and diluted share, respectively) relating
to stock  options.  The  Company  elected  to utilize  the  modified-prospective
application  method,  whereby  compensation  expense is recorded  for all awards
granted  after  October 1, 2005 and for the unvested  portion of awards  granted
prior to this date.  Accordingly,  prior period  amounts have not been restated.
The adoption of SFAS No. 123(R) resulted in an immaterial  cumulative  change in
accounting as of the date of adoption. The fair value for options was determined
using a Black-Scholes valuation model and the straight-line attribution approach
using the following weighted average  assumptions for the nine-months ended June
30, 2006:


                  Risk-free interest rate              4.44%
                  Dividend yield                       0.00%
                  Volatility factor                   75.91%
                  Weighted average expected life     5 years


                                       -8-


The risk-free interest rate used in the Black-Scholes  valuation method is based
on the implied yield currently available in U.S. Treasury securities at maturity
with an  equivalent  term.  The  Company has not  recently  declared or paid any
dividends  and  does  not  currently  expect  to do so in the  future.  Expected
volatility  is  based  on the  annualized  daily  historical  volatility  of the
Company's stock over a representative period. The weighted-average expected life
represents  the  period  over  which  stock-based  awards  are  expected  to  be
outstanding  and  was  determined  based  on  a  number  of  factors,  including
historical  weighted  average and  projected  holding  periods for the remaining
unexercised  shares, the contractual terms of the Company's  stock-based awards,
vesting schedules and expectations of future employee behavior.

A summary of stock option  activity for the  nine-months  ended June 30, 2006 is
presented below:

                                                        Weighted
                                                        Average
                                             Weighted   Remaining
                                   Number    Average   Contractual  Aggregate
                                     of      Exercise     Term      Intrinsic
                                   Options    Price    (in years)     Value
                                   -------    -----    ----------     -----

Balance at October 1, 2005         582,741    $3.35
Granted                             39,975    $3.17
Exercised                           (3,500)   $2.20
Forfeited or expired               (73,933)   $3.79
                                   -------    -----
Balance at June 30, 2006           545,283    $3.28         2.9      $ 18,500
                                   =======    =====         ===      ========
Exercisable at June 30, 2006       292,328    $3.24         2.1      $ 18,500
                                   =======    =====         ===      ========

The  weighted-average  grant  date fair value of  options  granted  for the nine
months  ended June 30,  2006 was  $2.05.  The total  intrinsic  value of options
exercised during the nine months ended June 30, 2006 was $3,150.

A summary of the status of the Company's nonvested shares as of June 30, 2006 is
as follows:

                                                             Weighted-Average
                                                                 Grant-Date
Nonvested Shares                        Shares                   Fair Value
- ----------------                        ------                   ----------

Nonvested at October 1, 2005            294,253                     $1.79
Granted                                  39,975                     $2.05
Vested                                  (47,773)                    $1.53
Forfeited                               (33,500)                    $2.40
                                        -------                     -----
Nonvested at June 30, 2006              252,955                     $1.79

As of June 30, 2006, there was $249,208 of total unrecognized compensation cost,
net of  estimated  forfeitures,  related to nonvested  share-based  compensation
arrangements,  which is expected to be recognized over a weighted-average period
of 1.2 years. The total fair value of shares vested during the nine months ended
June 30, 2006 was $73,039.




                                       -9-



Note 8: Litigation
- ------------------

The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm  Custom  Systems,  Inc. in May 2003 in the United States  District
Court for the Western  District of Tennessee.  The alleged  infringement  by the
Company  relates to its camera dome systems and other  products  that  represent
significant  sales to the Company.  Among other things,  the suit seeks past and
enhanced  damages,  injunctive  relief and attorney's fees. In January 2006, the
Company  received the plaintiff's  claim for past damages  through  December 31,
2005 that approximated $11.7 million. The Company and its outside patent counsel
believe that the complaint  against the Company is without merit. The Company is
vigorously defending itself and is a party to a joint defense with certain other
named  defendants.  The  Company  is unable to  reasonably  estimate  a range of
possible loss, if any, at this time.  Although the Company  believes that it has
meritorious  defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial  position.  The Company has
held  discussions  with the  plaintiff  in the  interest of  settling  the case.
However, there can be no assurance that any settlement can be reached.

In connection  with this suit, the Company filed a request with the U.S.  Patent
and Trademark  Office (USPTO) for  reexamination of the plaintiff's  patent.  In
April 2006,  the USPTO issued a non-final  office  action  rejecting  all of the
plaintiff's  patent  claims  asserted  against the Company.  The  plaintiff  has
multiple appeals available to it in the USPTO and,  thereafter,  in the Court of
Appeals for the Federal  Circuit.  On June 30, 2006, the Federal  District Court
granted the defendants' motion for continuance (delay) of the trial, pending the
outcome of the  USPTO's  reexamination  office  proceedings.  Subsequently,  the
Federal District Court designated a new trial date in April 2007.

In the normal course of business, the Company is a party to certain other claims
and  litigation.  Management  believes  that the  settlement  of such claims and
litigation, considered in the aggregate, will not have a material adverse effect
on the Company's financial position and results of operations.

Note 9: Asset Purchase
- ----------------------

On October 1, 2004, the Company entered into an agreement to purchase all of the
operating assets of Videotronic Infosystems GmbH ("Videotronic"), a German based
video products  supplier  operating  under  insolvency  protection,  for 700,000
Eurodollars (approximately $868,000).

Note 10: Recent Accounting Pronouncement
- ----------------------------------------

In June 2006, the FASB issued FASB  Interpretation  No. ("FIN") 48,  "Accounting
for Uncertainty in Income Taxes--An  Interpretation  of FASB Statement No. 109",
which  prescribes a  recognition  threshold  and  measurement  attribute for the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected to be taken in a tax return. FIN 48 will be effective  beginning fiscal
2008.  We have  not yet  evaluated  the  impact  of this  implementation  on our
condensed consolidated financial statements.









                                      -10-


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------


Results of Operations
- ---------------------
Three Months Ended June 30, 2006 Compared with June 30, 2005
- ------------------------------------------------------------


Net sales for the quarter  ended June 30,  2006  increased  5% to $14.7  million
compared with $14.0 million in the year ago period. Domestic sales increased 10%
to $8.3 million compared with $7.5 million in the year ago period. International
sales for the quarter decreased 1% to $6.4 million compared with $6.5 million in
the year ago period. The backlog of unfilled orders was $6.4 million at June 30,
2006 compared with $6.7 million at September 30, 2005.

Gross  profit  margins for the third  quarter of fiscal 2006  increased to 40.3%
compared with 38.0% in the year ago period due  principally  to production  cost
reductions  within the  Company's  digital  video  product  line and a favorable
product sales mix.

Total  operating  expenses for the third  quarter of fiscal 2006 were  virtually
unchanged  from  the year ago  period  at $5.9  million.  Selling,  general  and
administrative  expense for the third  quarter of fiscal 2006  decreased to $4.7
million  compared  with $4.9  million in the year ago  period.  Current  quarter
expense  included  $296,000 of legal costs incurred in the ongoing  defense of a
patent  infringement  suit,  compared  with  $184,000  incurred  in the year ago
period. In addition,  the Company continued to invest in new product development
in the current  quarter,  incurring $1.2 million of engineering  and development
expenses compared with $1.0 million in the year ago period.

The Company generated operating income of $54,000 in the third quarter of fiscal
2006 compared with an operating loss of $561,000 in the year ago period.

Interest  expense  decreased  to $41,000  for the third  quarter of fiscal  2006
compared  with  $46,000  in the year ago period  principally  as a result of the
paydown of bank borrowings  offset, in part, by the effect of increased interest
rates during the current quarter. Interest and other income increased to $24,000
for the third  quarter  of fiscal  2006  compared  with  $14,000 in the year ago
period  principally  as a result of increased  interest rates during the current
quarter.

The Company  recorded no income tax expense for the third quarter of fiscal 2006
compared  with an income tax benefit of $45,000 in the year ago period  relating
principally  to results  reported  by the  Company's  European  operations.  The
Company has ceased  recognizing tax benefits on its U.S. operating losses due to
the uncertainty of their future realization.

As a result of the foregoing, the Company reported net income of $37,000 for the
third  quarter of fiscal 2006  compared  with a net loss of $548,000 in the year
ago period.



                                      -11-


Results of Operations
- ---------------------
Nine Months Ended June 30, 2006 Compared with June 30, 2005
- -----------------------------------------------------------


Net sales for the nine months ended June 30, 2006  decreased 3% to $41.2 million
compared with $42.4 million in the year ago period.  Domestic sales increased 3%
to  $22.3  million   compared  with  $21.5  million  in  the  year  ago  period.
International sales decreased 9% to $18.9 million compared with $20.9 million in
the year ago period.  International sales for the prior year period included the
shipment of a $2.2 million system order to one foreign customer.

Gross profit margins for the first nine months of fiscal 2006 increased to 39.2%
compared with 37.5% in the year ago period due  principally  to production  cost
reductions  within the  Company's  digital  video  product  line and a favorable
product sales mix.

Operating  expenses  for the first nine  months of fiscal 2006  decreased  9% to
$16.8 million  compared with $18.4 million in the year ago period.  The decrease
was  spread  among all  reported  operating  expense  categories  as a result of
planned cost cutting  initiatives.  In connection  with the ongoing defense of a
patent infringement suit, the Company incurred $492,000 of legal costs in fiscal
2006 compared with $580,000 in the year ago period ($1.8 million  incurred since
inception in 2003).

The Company  incurred an operating loss of $632,000 for the first nine months of
fiscal 2006  compared  with an  operating  loss of $2.5  million in the year ago
period.

Interest expense  decreased to $125,000 for the first nine months of fiscal 2006
compared  with  $135,000 in the year ago period  principally  as a result of the
paydown of bank borrowings  offset, in part, by the effect of increased interest
rates  during the current year  period.  Interest and other income  increased to
$94,000 for the first nine months of fiscal 2006  compared  with  $57,000 in the
year ago period  principally as a result of increased  interest rates during the
current year period.  During the prior year period,  the Company  liquidated the
principal  portion of its  investment  in marketable  securities  resulting in a
$45,000 loss for the period.

There was no income tax  expense  reported  for the first nine  months of fiscal
2006  compared  with  $10,000 in the year ago  period  relating  principally  to
profits reported by the Company's  European  operations.  The Company has ceased
recognizing tax benefits on its U.S.  operating losses due to the uncertainty of
their future realization.

An  extraordinary  gain in the amount of $211,000 was recorded in the prior year
period relating to the Company's acquisition of its Videotronic subsidiary.  The
gain  represents the recovery of tangible net assets acquired in excess of their
purchase price.

As a result of the  foregoing,  the Company  incurred a net loss of $663,000 for
the first nine months of fiscal 2006 compared with a net loss of $2.5 million in
the year ago period.





                                      -12-


Liquidity and Capital Resources
- -------------------------------

Net cash used in operating  activities was $456,000 for the first nine months of
fiscal 2006 due principally to increases in inventories and accounts  receivable
of $820,000 and $594,000, respectively, offset in part by a $672,000 increase in
accounts  payable.  In  addition,  the $663,000 net loss for the period was more
than  offset  by  $834,000  of  non-cash  charges.  Net cash  used in  investing
activities was $440,000 for the first nine months of fiscal 2006 due principally
to  $436,000  of  general  capital  expenditures.  Net  cash  used in  financing
activities was $309,000 principally  representing  repayments of bank debt. As a
result of the  foregoing,  cash  decreased  by $1.2  million  for the first nine
months of fiscal  2006 after the  effect of  exchange  rate  changes on the cash
position of the Company.

The Company's European based subsidiary maintains a bank overdraft facility that
provides for maximum  borrowings of one million Pounds  Sterling  (approximately
$1,850,000)  to support its local working  capital  requirements.  This facility
expires in March 2007. At June 30, 2006 and  September  30, 2005,  there were no
outstanding borrowings under this facility.

The following is a summary of the Company's  long-term  debt and material  lease
obligations as of June 30, 2006:

Fiscal         Debt                 Lease
 Year       Repayments           Commitments         Total
- ------      ----------           -----------         -----
 2006       $   94,000             $ 82,000       $  176,000
 2007          324,000              176,000          500,000
 2008        1,740,000               38,000        1,778,000

The Company has incurred  operating  losses in recent years which, if continued,
could  exhaust  the  Company's  cash  reserves  and limit its  ability to secure
additional bank financing,  if needed.  The Company has instituted certain plans
to preserve its cash,  including cost cutting  measures and inventory  reduction
initiatives. Based upon the achievement of such plans, the Company believes that
it will have sufficient cash to meet its anticipated  operating  costs,  capital
expenditures and debt service requirements for at least the next twelve months.

The Company does not have any off-balance  sheet  transactions,  arrangements or
obligations  (including  contingent  obligations)  that have, or are  reasonably
likely to have, a material effect on the Company's financial condition,  results
of operations, liquidity, capital expenditures or capital resources.

The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm  Custom  Systems,  Inc. in May 2003 in the United States  District
Court for the Western  District of Tennessee.  The alleged  infringement  by the
Company  relates to its camera dome systems and other  products  that  represent
significant  sales to the Company.  Among other things,  the suit seeks past and
enhanced  damages,  injunctive  relief and attorney's fees. In January 2006, the
Company  received the plaintiff's  claim for past damages  through  December 31,
2005 that approximated $11.7 million. The Company and its outside patent counsel
believe that the complaint  against the Company is without merit. The Company is
vigorously defending itself and is a party to a joint defense with certain other
named  defendants.  The  Company  is unable to  reasonably  estimate  a range of
possible loss, if any, at this time.  Although the Company  believes that it has
meritorious  defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial  position.  The Company has
held  discussions  with the  plaintiff  in the  interest of  settling  the case.
However, there can be no assurance that any settlement can be reached.


                                      -13-


In connection  with this suit, the Company filed a request with the U.S.  Patent
and Trademark  Office (USPTO) for  reexamination of the plaintiff's  patent.  In
April 2006,  the USPTO issued a non-final  office  action  rejecting  all of the
plaintiff's  patent  claims  asserted  against the Company.  The  plaintiff  has
multiple appeals available to it in the USPTO and,  thereafter,  in the Court of
Appeals for the Federal  Circuit.  On June 30, 2006, the Federal  District Court
granted the defendants' motion for continuance (delay) of the trial, pending the
outcome of the  USPTO's  reexamination  office  proceedings.  Subsequently,  the
Federal District Court designated a new trial date in April 2007.

Critical Accounting Policies
- ----------------------------

The Company's  significant  accounting policies are fully described in Note 1 to
the Company's  consolidated  financial  statements included in its September 30,
2005 Annual  Report on Form 10-K.  Management  believes the  following  critical
accounting  policies,  among others,  affect its more significant  judgments and
estimates used in the preparation of its consolidated financial statements.

The Company  recognizes  revenue  when  persuasive  evidence  of an  arrangement
exists,  delivery has occurred or services have been rendered, the selling price
is fixed or  determinable,  and  collectibility  of the resulting  receivable is
reasonably  assured.  As it  relates  to product  sales,  revenue  is  generally
recognized when products are sold and title is passed to the customer.  Shipping
and handling costs are included in cost of sales. Advance service billings under
equipment  maintenance  agreements  are deferred and recognized as revenues on a
pro rata basis over the term of the service  agreements.  The Company  evaluates
multiple-element  revenue arrangements for separate units of accounting pursuant
to EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables",  and
follows  appropriate  revenue  recognition  policies  for  each  separate  unit.
Elements are  considered  separate  units of  accounting  provided  that (i) the
delivered item has  stand-alone  value to the customer,  (ii) there is objective
and reliable  evidence of the fair value of the delivered  item,  and (iii) if a
general  right of return  exists  relative to the  delivered  item,  delivery or
performance of the  undelivered  item is considered  probable and  substantially
within the control of the Company. As applied to the Company, under arrangements
involving the sale of product and the  provision of services,  product sales are
recognized  as  revenue  when the  products  are sold and title is passed to the
customer,  and service  revenue is  recognized  as services are  performed.  For
products that include more than incidental  software,  and for separate licenses
of the Company's software products, the Company recognizes revenue in accordance
with  the   provisions  of  Statement  of  Position  97-2,   "Software   Revenue
Recognition", as amended.

The Company  maintains  allowances  for doubtful  accounts for estimated  losses
resulting from the inability of its customers to make required payments.  If the
financial  condition  of its  customers  were to  deteriorate,  resulting  in an
impairment  of their  ability to make  payments,  additional  allowances  may be
required.

The Company  provides for the estimated  cost of product  warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes,  including  monitoring  and  evaluating  the quality of its component
suppliers,  its  warranty  obligation  is  affected  by product  failure  rates,
material  usage and service  delivery  costs  incurred in  correcting  a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates,  revisions to the estimated  warranty liability
may be required.



                                      -14-


The Company writes down its inventory for estimated obsolescence and slow moving
inventory  equal  to the  difference  between  the  cost  of  inventory  and the
estimated net realizable market value based upon assumptions about future demand
and market conditions.  Technology changes and market conditions may render some
of the Company's products obsolete and additional  inventory  write-downs may be
required.  If actual future demand or market  conditions are less favorable than
those projected by management, additional inventory write-downs may be required.

The Company assesses the  recoverability of the carrying value of its long-lived
assets,  including  identifiable  intangible  assets with finite  useful  lives,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable.  The Company evaluates the  recoverability of
such assets based upon the  expectations  of  undiscounted  cash flows from such
assets. If the sum of the expected future undiscounted cash flows were less than
the carrying  amount of the asset, a loss would be recognized for the difference
between the fair value and the carrying amount.

The  Company's  ability to recover the reported  amounts of deferred  income tax
assets is  dependent  upon its ability to  generate  sufficient  taxable  income
during the periods over which net temporary tax differences  become  deductible.
The Company maintains a full valuation allowance against its deferred tax assets
due  to the  uncertainty  of  future  realization.  The  establishment  of  such
valuation  allowance  was  determined  to be  appropriate  due to the  Company's
operating  losses in recent years and the inherent  uncertainties  of predicting
future operating  results in periods over which such net tax differences  become
deductible.  The Company plans to provide a full valuation allowance against its
deferred  tax assets  until such time that it can achieve a  sustained  level of
profitability  or other  positive  evidence  arises  that would  demonstrate  an
ability to recover such assets.

The Company is subject to  proceedings,  lawsuits  and other  claims  related to
labor,  product and other  matters.  The Company  assesses the  likelihood of an
adverse  judgment  or  outcomes  for  these  matters,  as well as the  range  of
potential  losses.  A determination  of the reserves  required,  if any, is made
after careful  analysis.  The required  reserves may change in the future due to
new developments.

Recent Accounting Pronouncement
- -------------------------------

In June 2006, the FASB issued FASB  Interpretation  No. ("FIN") 48,  "Accounting
for Uncertainty in Income Taxes--An  Interpretation  of FASB Statement No. 109",
which  prescribes a  recognition  threshold  and  measurement  attribute for the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected to be taken in a tax return. FIN 48 will be effective  beginning fiscal
2008.  We have  not yet  evaluated  the  impact  of this  implementation  on our
condensed consolidated financial statements.




                                      -15-



Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------

Statements in this Report on Form 10-Q and other  statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation,   statements   included  herein  under  the  captions   "Results  of
Operations",   "Liquidity  and  Capital  Resources"  and  "Critical   Accounting
Policies"  are  "forward-looking"  statements  within the meaning of the Private
Securities Litigation Reform Act of 1995 that should be considered as subject to
the many risks and  uncertainties  that exist in the  Company's  operations  and
business  environment.  The  forward-looking  statements  are  based on  current
expectations  and involve a number of known and unknown risks and  uncertainties
that could cause the actual  results,  performance  and/or  achievements  of the
Company  to  differ   materially  from  any  future   results,   performance  or
achievements, express or implied, by the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking  statements,  and
that in light  of the  significant  uncertainties  inherent  in  forward-looking
statements,  the  inclusion  of such  statements  should  not be  regarded  as a
representation  by the Company or any other person that the  objectives or plans
of the Company will be  achieved.  The Company  also  assumes no  obligation  to
update its forward-looking statements or to advise of changes in the assumptions
and factors on which they are based.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------

The Company is exposed to various  market  risks,  including  changes in foreign
currency  exchange  rates and  interest  rates.  The  Company  has a policy that
prohibits the use of currency  derivatives or other  financial  instruments  for
trading or speculative purposes.

The Company  enters into forward  exchange  contracts to hedge  certain  foreign
currency  exposures  and  minimize the effect of such  fluctuations  on reported
earnings and cash flow (see Note 6 "Derivative  Instruments" to the accompanying
condensed  consolidated  financial  statements).  The Company's  ongoing foreign
currency  exchange  risks  include  intercompany  sales of product and  services
between subsidiary companies operating in differing functional currencies.

At June 30, 2006, the Company had $1.5 million of outstanding floating rate bank
debt which was  covered by an  interest  rate swap  agreement  that  effectively
converts the  foregoing  floating rate debt to a stated fixed rate (see "Note 6.
Long-Term  Debt"  to  the  consolidated  financial  statements  included  in the
Company's  Annual  Report on Form 10-K for the year ended  September  30, 2005).
Thus,  the Company has  substantially  no net interest  rate  exposures on these
instruments.  However,  the Company had approximately  $609,000 of floating rate
bank  debt that is  subject  to  interest  rate  risk as it was not  covered  by
interest  rate  swap  agreements.  The  Company  does  not  believe  that  a 10%
fluctuation in interest rates would have a material  effect on its  consolidated
financial position and results of operations.




                                      -16-


ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------

Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------

The Company's management,  with the participation of its Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Company's  disclosure  controls and  procedures,  as
required  by  Exchange  Act Rule  13a-15.  Based on that  evaluation,  the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period  covered by this report,  the  Company's  disclosure  controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports  that it files or submits  under the  Exchange Act is
recorded,  processed,  summarized and reported within the time periods specified
by the Securities and Exchange Commission's rules and forms.

Changes in Internal Controls
- ----------------------------

There were no changes in the Company's internal control over financial reporting
identified in  connection  with the  evaluation  referred to above that occurred
during the quarter that have materially  affected,  or are reasonably  likely to
materially affect, the registrant's internal control over financial reporting.

The Company's  size dictates that it conducts  business with a minimal number of
financial and  administrative  employees,  which inherently results in a lack of
documented  controls  and  segregation  of duties  within  the  Company  and its
operating  subsidiaries.  Management  will  continue to evaluate  the  employees
involved and the control  procedures in place,  the risks  associated  with such
lack of segregation  and whether the potential  benefits of adding  employees to
clearly  segregate  duties  justifies  the  expense  associated  with such added
personnel.  In addition,  management is aware that many of the internal controls
that are in place at the Company are undocumented controls.

Limitations on the Effectiveness of Controls
- --------------------------------------------

The Company  believes  that a control  system,  no matter how well  designed and
operated,  cannot provide absolute  assurance that the objectives of the control
system are met, and no  evaluation  of controls can provide  absolute  assurance
that all control  issues and instances of fraud,  if any,  within a company have
been detected.




                                      -17-


PART II - OTHER INFORMATION
- ---------------------------

ITEM 1 - LEGAL PROCEEDINGS
- --------------------------

The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm  Custom  Systems,  Inc. in May 2003 in the United States  District
Court for the Western  District of Tennessee.  The alleged  infringement  by the
Company  relates to its camera dome systems and other  products  that  represent
significant  sales to the Company.  Among other things,  the suit seeks past and
enhanced  damages,  injunctive  relief and attorney's fees. In January 2006, the
Company  received the plaintiff's  claim for past damages  through  December 31,
2005 that approximated $11.7 million. The Company and its outside patent counsel
believe that the complaint  against the Company is without merit. The Company is
vigorously defending itself and is a party to a joint defense with certain other
named  defendants.  The  Company  is unable to  reasonably  estimate  a range of
possible loss, if any, at this time.  Although the Company  believes that it has
meritorious  defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial  position.  The Company has
held  discussions  with the  plaintiff  in the  interest of  settling  the case.
However, there can be no assurance that any settlement can be reached.

In connection  with this suit, the Company filed a request with the U.S.  Patent
and Trademark  Office (USPTO) for  reexamination of the plaintiff's  patent.  In
April 2006,  the USPTO issued a non-final  office  action  rejecting  all of the
plaintiff's  patent  claims  asserted  against the Company.  The  plaintiff  has
multiple appeals available to it in the USPTO and,  thereafter,  in the Court of
Appeals for the Federal  Circuit.  On June 30, 2006, the Federal  District Court
granted the defendants' motion for continuance (delay) of the trial, pending the
outcome of the  USPTO's  reexamination  office  proceedings.  Subsequently,  the
Federal District Court designated a new trial date in April 2007.

ITEM 2 - CHANGES IN SECURITIES,  USE OF PROCEEDS AND ISSUER  PURCHASES OF EQUITY
- --------------------------------------------------------------------------------
SECURITIES
- ----------

On April 26, 2001, the Company announced that its Board of Directors  authorized
the  repurchase  of up to $1 million of shares of the  Company's  common  stock,
which represented  approximately  9.8% of shares outstanding on the announcement
date. The following table  summarizes  repurchases of common stock for the three
month period ended June 30, 2006:

                     Total Number    Average      Approximate Dollar Value
                      of Shares    Price Paid     of Shares that May Yet Be
     Period          Purchased (1)  per Share   Purchased Under the Program
     ------          -------------  ---------   ----------------------------

4/01/06-4/30/06            -          $ -                 $459,664
5/01/06-5/31/06            -          $ -                 $459,664
6/01/06-6/30/06            -          $ -                 $459,664
                        ------        -----
      Total                -          $ -
                        ======        =====

(1) All repurchases were executed in open market transactions.








                                      -18-



ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------

None

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------

The Company's annual meeting was held on May 25, 2006.

Proposal 1: Election of Director
- --------------------------------

The following director was elected by the votes indicated:

                                   For               Withheld
                                   ---               --------

Peter F. Neumann                4,040,981             503,911


The terms of the following directors continued after the meeting:

                         Kenneth M. Darby
                         Clifton H. W. Maloney
                         W. Gregory Robertson
                         Arthur D. Roche

Proposal 2: Ratification of Appointment of Independent Auditors
- ---------------------------------------------------------------

The  selection  of BDO  Seidman,  LLP as  auditors  was  approved  by the  votes
indicated:

                 For          Against       Abstain
                 ---          -------       -------

              4,510,456        19,026        15,410

ITEM 5 - OTHER INFORMATION
- --------------------------

None

ITEM 6 - EXHIBITS
- -----------------

          31.1 Certification of Chief Executive  Officer pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002.

          31.2 Certification of Chief Financial  Officer pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002.

          32.1 Certification  of Chief Executive  Officer  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  906  of  the
               Sarbanes-Oxley Act of 2002.

          32.2 Certification  of Chief Financial  Officer  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  906  of  the
               Sarbanes-Oxley Act of 2002.





                                      -19-


                                   Signatures
                                   ----------

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



VICON INDUSTRIES, INC.





August 11, 2006




/s/ Kenneth M. Darby                       /s/ John M. Badke
- --------------------                       --------------------
Kenneth M. Darby                           John M. Badke
Chairman and                               Senior Vice President, Finance
Chief Executive Officer                    Chief Financial Officer






                                      -20-