Indicate by check mark whether the registrant: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.

     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):

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

     As of April 29,October 28, 2007, there were 44,239,83543,321,700 shares of Common Stock, $.002 par value, of the registrant outstanding.

As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

In the opinion of the management of Cognex Corporation (the “Company”), the accompanying consolidated unaudited financial statements contain all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly the Company’s financial position at April 1,September 30, 2007, and the results of its operations for the three-month and nine-month periods ended April 1,September 30, 2007 and April 2,October 1, 2006, and changes in shareholders’ equity and cash flows for the periods presented.

The results disclosed in the Consolidated Statements of Operations for the three-month periodand nine-month periods ended April 1,September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides companies with an option to report selected financial assets and liabilities at fair value.  This Statement is effective for the Company’s fiscal year ended December 31, 2008, although earlier adoption is permitted.  The Company does not expect this Statement to have a material impact on its financial condition or results of operations.

Cash, cash equivalents, and investments consistconsisted of the following (in thousands):

In June 2000, Cognex Corporation became a Limited Partner in Venrock Associates III, L.P. (Venrock), a venture capital fund. A Director of the Company is a Managing General Partner of Venrock Associates. The Company has committed to a total investment in the limited partnership of up to $20,500,000 with an expiration date of December 31, 2010.

The Company periodically reviews inventory quantities on hand and estimates excess and obsolescence exposures based upon assumptions about future demand, product transitions, and market conditions, and records reserves to reduce the carrying value of inventories to their net realizable value. In Januarythe second quarter of 2007, Venrock reducedthe Company recorded provisions for excess and obsolete MVSD inventory totaling $2,126,000 resulting from lower actual demand than was previously estimated as part of the Company’s total commitmentmaterial requirements forecasts, together with lower estimates of future demand from $22,500,000both semiconductor and electronics capital equipment and discrete factory automation customers. Provisions of $303,000 and $285,000 were also recorded in the first and third quarters of 2007, respectively.

When inventory has been written down below cost, such reduced amount is considered the new cost basis for subsequent accounting purposes. As a result, the Company may recognize a higher than normal gross margin if the reserved inventory is subsequently sold. The Company recognized benefits to $20,500,000.cost of product revenue from the sale of reserved inventory for the three-month and nine-month periods ended September 30, 2007 of $164,000 and $436,000, respectively, and $298,000 and $902,000 for the same periods in 2006.

As of April 1, 2007,The changes in the Company had contributed $18,975,000 to the partnership, including $512,000excess and obsolete inventory reserve during the quarternine-month period ended April 1, 2007. The Company received a distribution of $2,548,000 from Venrock during the quarter ended April 1,September 30, 2007 that was accounted forwere as a return of capital. At April 1, 2007, the carrying value of this investment was $8,910,000 compared to an estimated fair value, as determined by the General Partner, of $11,184,000.

In addition to reserves against existing inventory, in 2001 the Company recorded a $16,300,000 charge in “Cost of product revenue” on the Consolidated Statement of Operations for excess inventories andaccrued $1,400,000 related to inventory purchase commitments resulting from an extended slowdown in the semiconductor and electronics industries, as well as the expected transition to newer Cognex hardware platforms by the Company’s OEM customers. A total of $12,500,000 of this charge represented reserves against existing inventories and was accordingly included in “Inventories” on the Consolidated Balance Sheet. The remaining $3,800,000 of this charge represented commitments to purchase excess components and systems from various suppliers and accordingly was included in “Accrued expenses” on the Consolidated Balance Sheet.commitments. A favorable settlement or outcome of these purchase commitments would result in a recovery of a portion of the remaining $1,400,000 accrued at April 1, 2007.this accrual.

The Company has two reporting units with goodwill, the Modular Vision Systems Division (MVSD) and the Surface Inspection Systems Division (SISD), which are also reportable segments.

The changes in the carrying valueamount of goodwill during the three-monthnine-month period ended April 1,September 30, 2007 arewere as follows (in thousands):

From time to time,Except as limited by Massachusetts law, the by-laws of the Company provides indemnification provisions in agreements with customers covering potential claims by third partiesrequire it to indemnify certain current or former directors, officers, and employees of intellectual property infringement. These agreements generally provide that the Company will indemnify customers for lossesagainst expenses incurred by them in connection with an infringement claim brought byeach proceeding in which he or she is involved as a third partyresult of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the Company’s products. These indemnification provisions generally offer coverage for infringement claims based uponperson did not act in good faith in the products covered byreasonable belief that the agreement.action was in the best interests of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is theoretically unlimited; however, to date, theunlimited. The Company has notnever incurred materialsignificant costs related to these indemnification provisions. As a result, the Company believes the estimated fair value of these indemnification provisions is minimal.

Except asThe Company accepts standard limited by Massachusetts law, and pursuantindemnification provisions in the ordinary course of business, whereby it indemnifies its customers for certain direct damages incurred in connection with third-party patent or other intellectual property infringement claims with respect to the by-lawsuse of the Company, the Company is obligated to indemnify its current and former officers and directors for certain events that occur or occurred while the officer or director is or was serving in such capacity.Company’s products. The term of these indemnification provisions generally coincides with the indemnification period is for each respective officer’s or director’s lifetime.customer’s use of the Company’s products. The maximum potential amount of future payments the Company could be required to make under these indemnification obligationsprovisions is unlimited; however, thegenerally subject to fixed monetary limits. The Company has mitigated the exposure through the purchase of directors and officers insurance, which is intendednever incurred significant costs to limit the risk and, in most cases, enable the Companydefend lawsuits or settle claims related to recover all or a portion of any future amounts paid.these indemnification provisions. As a result, of this insurance policy coverage, the companyCompany believes the estimated fair value of these indemnification obligationsprovisions is minimal.

totaled $592,000 for the quarter,nine-month period ended September 30, 2007, of which $206,000$180,000 was estimated interest and penalties.included in the three-month period ended September 30, 2007.

Under FIN 48, only the portion of the liability that is expected to be paid within one year is classified as a current liability. As a result, liabilities expected to be resolved without the payment of cash (e.g., resolution due to the expiration of the statute of limitations) or are not expected to be paid within one year are not classified as current. The Company reclassified $8,367,000 of current liabilities for uncertain tax positions as of December 31, 2006 to non-current liabilities to conform to the balance sheet presentation requirements of FIN 48. All of the Company’s liabilities for uncertain tax positions are classified as non-current liabilities at April 1,September 30, 2007. These liabilities include $2,376,000$2,763,000 of estimated interest and penalties, for which it is the Company’s policy to record as income tax expense.

The tax years 20001999 through 2006 remain open to examination by various taxing authorities in the jurisdictions in which the Company operates. The Company is currently under audit in two jurisdictions, the United States and Japan. The Internal Revenue Service (IRS) is auditing tax years 2003 through 2005.2006. The Company believes that it will conclude this audit within the next twelve months and if the Company’s tax positions are sustained, this would result in a reduction in income tax expense. An estimate of the range of possible changes to existing reserves cannot be made at this time. The Tokyo Regional Tax Board (TRTB)Taxation Bureau is auditing tax years 2002 through 2005 and has recently issued a finding that a permanent establishment exists with a Cognex subsidiary located in Ireland.the Company’s Irish subsidiary. The Company believes it has a substantive defense against this finding and is preparing to request Competent Authority intervention in accordance with the Japan/Ireland tax treaty. It is not expected that this tax audit will be concluded within the next twelve months. To avoid further interest and penalties, the Company has paid antax, interest, and penalties through the date of assessment of 699,289,000766,257,300 Yen (or approximately $5,984,000)$6,631,000 based on the exchange rate as of September 30, 2007) to the Japanese tax authorities. This amount is included in “Other assets” on the Consolidated Balance Sheet.

The changes in the reserve for income taxes arewere as follows (in thousands):

The Company’s share-based payments that result in compensation expense consist solely of stock option grants. At April 1,September 30, 2007, the Company had 11,943,7208,823,962 shares available for grant under threetwo stock option plans: the 1998 Stock Incentive Plan, 4,433,470; the 1998 Non-Employee Director Stock Option Plan, 10,250;1,713,962; and the 2001 General Stock Option Plan, 7,500,000.7,110,000. Each of these plans expireexpires ten years from the date the plan was approved. The Company has not granted any stock options from the 2001 General Stock Option Plan.

In April 1998, the shareholders approved the 1998 Stock Incentive Plan, under which the Company initially was able to grant stock options and stock awards to purchase up to 1,700,000 shares of common stock. Effective January 1999 and each January 1^st thereafter during the term of the 1998 Stock Incentive Plan, the number of shares of common stock available for grants of stock options and stock awards is increased automatically by an amount equal to 4.5% of the total number of issued shares of common stock as of the close of business on December 31^st of the preceding year.

In April 2007, the shareholders of the Company approved the Cognex Corporation 2007 Stock Option and Incentive Plan (the “2007 Plan”). The 2007 Plan will take effect when the Company’s 1998 Stock Incentive Plan expires in February 2008. The 2007 Plan permits awards of stock options (both incentive and non-qualified options), stock appreciation rights, and restricted stock. The maximum number of shares to be issued under the 2007 Plan is 2,300,000 shares of the Company’s common stock. In addition, the Company will reduce the number of shares authorized for issuance under its existing stock option plans by an aggregate of 4,000,000 shares. The reduction will be made from the shares remaining for future issuance under the Company’s 1998 Non-Employee Director Stock Option Plan, the 1998 Stock Incentive Plan, and/or the 2001 General Stock Option Plan.

Stock options are generally granted with an exercise price equal to the market value of the Company’s common stock at the grant date, generally vest over four years based on continuous service, and generally expire ten years from the grant date. Historically, the majority of the Company’s stock options have been granted during the first quarter of each year to reward existing employees for their performance. In addition, the Company grants stock options throughout the year for new employees and promotions.

The following is a summary of the Company’s stock option activity for the quarternine-month period ended April 1,September 30, 2007 (shares and values in thousands):

The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:

At April 1,September 30, 2007, total unrecognized compensation expense related to non-vested stock options was $15,946,000,$11,365,000, which is expected to be recognized over a weighted-average period of 1.81.4 years.

Net income per share iswas calculated as follows (in thousands, except per share amounts):

The following table summarizes information about the Company’s segments (in thousands):

On October 26, 2007, the Company’s Board of Directors declared a cash dividend of $0.085 per share. The dividend is payable on November 30, 2007 to all shareholders of record at the close of business on November 16, 2007. Future dividends will be allocated to goodwill.declared at the discretion of the Board of Directors and will depend upon such factors as the Board of Directors deems relevant.

Certain statements made in this report, as well as oral statements made by the Company from time to time, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these forward-looking statements by the Company’s use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” and similar words and other statements of a similar sense. These statements are based upon the Company’s current estimates and expectations as to prospective events and circumstances, which may or may not be in the Company’s control and as to which there can be no firm assurances given. These forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) global economic conditions that impact the capital spending trends of manufacturers in a variety of industries; (2) the cyclicality of the semiconductor and electronics industries; (3) the inability to achieve significant international revenue; (4) fluctuations in foreign exchange rates; (5) the loss of, or a significant curtailment of purchases by, any one or more principal customers; (6) the reliance upon certain sole-source suppliers to manufacture and deliver critical components for the Company’s products; (7) the inability to attract and retain skilled employees; (8) the inability to design and manufacture high-quality products; (9) the technological obsolescence of current products and the inability to develop new products; (10) the failure to effectively manage product transitions or accurately forecast customer demand; (11) the failure to properly manage the distribution of products; (12) the inability to enter new commercial markets for machine vision systems; (13) the inability to protect the Company’s proprietary technology and intellectual property; (14) the Company’s involvement in time-consuming and costly litigation; (15) the impact of competitive pressures; (16) the challenges in integrating acquired businesses; and (17) the inability to achieve expected results from acquisitions. The foregoing list should not be construed as exhaustive and the Company encourages readers to refer to the detailed discussion of risk factors included in Part I -— Item 1A of the Company’s Annual Report on Form 10-K. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to subsequently revise forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such statements are made.

Cognex Corporation (the “Company”) designs, develops, manufactures, and markets machine vision systems, or computers that can “see,” which are used to automate a wide range of manufacturing processes where vision is required. The Company’s Modular Vision Systems Division (MVSD) specializes in machine vision systems that are used to automate the manufacturing of discrete items, while the Company’s Surface Inspection Systems Division (SISD) specializes in machine vision systems that are used to inspect the surfaces of materials processed in a continuous fashion.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R requires companies to recognize compensation expense for all share-based payments to employees at fair value.

SFAS No. 123R was adopted by the Company on January 1, 2006 using the modified prospective method in which compensation expense is recognized beginning on the effective date. Under this transition method, compensation expense recognized after January 1, 2006 includes: (1) compensation expense for all share-based payments granted prior to but not yet vested as of December 31, 2005, based on the grant-date fair value estimated under SFAS No. 123, and (2) compensation expense for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated under SFAS No. 123R.

The fair values of stock options granted after January 1, 2006 were estimated on the grant date using a binomial lattice model. The fair values of options granted prior to January 1, 2006 were estimated using the Black-Scholes option pricing model for footnote disclosure under SFAS No. 123. The Company believes that a binomial lattice model results in a better estimate of fair value because it identifies

At April 1,September 30, 2007, total unrecognized compensation expense related to non-vested stock options was $15,946,000,$11,365,000, which is expected to be recognized over a weighted-average period of 1.81.4 years.

Revenue for the quarterthree-month period ended April 1,September 30, 2007 decreased 14%6% to $50,929,000$54,745,000 from $59,040,000$58,005,000 for the quarterthree-month period ended April 2,October 1, 2006, and revenue for the nine-month period ended September 30, 2007 decreased 11% to $160,416,000 from $180,119,000 for the nine-month period ended October 1, 2006. This decrease was primarily due to lower sales of PC-based vision systems to customers in the semiconductor and electronics capital equipment market,industries. Sales of PC-based vision systems to all customers were down 19% for the three-month period and to a lesser extent,30% for the discrete factory automation andnine-month period. Excluding the correction in the second quarter of 2007 of the prior-period revenue misstatements, sales of PC-based vision systems were down 29% for the nine-month period. Lower surface inspection markets.revenue also contributed to the decrease in each period. Geographically, revenue decreased from the prior year in all of the Company’s major regions,Americas, Japan, and Asia, but most significantly in Japan for the nine-month period, where many of the Company’s semiconductor and electronics capital equipment customers are located.

Sales to customers who make capital equipment for the semiconductor and electronics industries, which are included in the Company’s MVSD segment, represented 30%27% of the Company’s total revenue in both the firstthree-month and nine-month periods ended September 30, 2007, compared to 32% in the same periods in 2006. Sales decreased $4,085,000, or 22%, and $14,803,000, or 26%, in the three-month and nine-month periods ended September 30, 2007, respectively, of which $757,000 in the nine-month period ended September 30, 2007 was due to the correction in the second quarter of 2007 and decreased by $4,572,000, or 23%, from the first quarter of 2006.prior-period revenue misstatements. Revenue from this sector haswas relatively flat from the prior quarter after adjusting for the prior-period revenue misstatements, and had been gradually declining since the first quarter of 2006 due to industry cyclicality, and thecyclicality. The Company does not expect a significant increasechange in this business in 2007.through the first half of 2008.

Sales to manufacturing customers in the discrete factory automation area, which are included in the Company’s MVSD segment, represented 59%64% and 62% of the Company’s total revenue in the first quarter ofthree-month and nine-month periods ended September 30, 2007, and decreased by $2,697,000,respectively, compared to 56% in the same periods in 2006. Sales increased $2,536,000, or 8%, fromand remained relatively flat in the first quarter of 2006.three-month and nine-month periods ended September 30, 2007, respectively. The Company offers a full range of machine vision products to its factory automation customers at different capability/price points, from its programmable PC-based vision systems to its low-cost, easy-to-use vision sensors. Sales of the Company’s In-Sight vision sensors, Industrial ID products, and Checker expert sensors all increased from the prior year. This increase, however, was offset by lower sales of the Company’s PC-based vision systems decreased from the prior yearto factory automation customers primarily in the electronics industry. This decline, however, was partially offset by higher sales of the Company’s Industrial ID products, including Dataman and In-Sight ID readers. The Company is investing in new product offerings and distribution channels for the factory automation market with the goal of growing this business in 2007.business.

Sales to surface inspection customers, which comprise the Company’s SISD segment, represented 9% and 11% of the Company’s total revenue in the first quarter ofthree-month and nine-month periods ended September 30, 2007, respectively, compared to 12% in the same periods in 2006. Sales decreased $1,626,000, or

24%, and declined by $850,000,$4,653,000, or 13%21%, fromin the first quarter of 2006.three-month and nine-month periods ended September 30, 2007, respectively. This decrease is attributedwas primarily due to lowerthe deferral of product revenue as a resultfor surface inspection systems that have shipped to customers, but are part of customers delaying projects duemultiple-element arrangements for which the Company does not have vendor-specific objective evidence (VSOE) of fair value for all of the undelivered elements. In these instances, the Company is required to a slowing manufacturing economy. Furthermore, atdefer the endproduct revenue related to the system that shipped until all of 2006 a larger than normal portion of systemsthe elements in the backlog werearrangement have been delivered to the customer or the Company has VSOE of fair value for new production lines that will not ship until the line is ready, which can be unpredictable. Since the average order size for a SmartView^® surface inspection system is relatively large, the timing of customer projects, system deliveries, and installations can have a significant impact on the quarterly, and even annual, distribution of revenue.remaining obligations.

Product revenue fordecreased $3,053,000, or 6%, and $20,416,000, or 13%, in the three-month and nine-month periods ended September 30, 2007, respectively, of which $757,000 in the nine-month period ended September 30, 2007 was due to the correction in the second quarter ended April 1, 2007 decreased 16% to $44,913,000 from $53,649,000 forof the quarter ended April 2, 2006.prior-period revenue misstatements. The remaining decrease was primarily due to a lower volume of PC-based vision systems sold to semiconductor and electronics capital equipment manufacturers, as well as discrete factory automation andcustomers in the electronics industry. Sales of surface inspection customers. In addition, the average selling price of the Company’s

to higher SISD servicemaintenance and support revenue sold bundled with MVSD products, without a corresponding increase in expenses due to improved installation efficiencies.service costs.

Research, development, and engineering (R,D&E) expenses were relatively consistent year-on-year amounting to $7,931,000 for the quarterthree-month period ended April 1,September 30, 2007 comparedincreased 9% to $7,917,000$8,704,000 from $7,997,000 for the quarterthree-month period ended April 2,October 1, 2006, and R,D&E expenses for the nine-month period ended September 30, 2007 increased 1% to $24,654,000 from $24,496,000 for the nine-month period ended October 1, 2006. MVSD R,D&E expenses decreased $78,000,increased $684,000, or 9%, and $190,000, or 1%, for the three-month and nine-month periods ended September 30, 2007, respectively. The increase for the three-month period was due principally to higher labor costs resulting from additional employees and contractors, as well as higher outside services and patent-related costs, to support new product initiatives. Although these same costs were also higher for the nine-month period, these increases were partially offset by lower company bonus accruals and stock-based compensation expense. SISD R,D&E expenses were relatively consistent in each period presented from the prior year. SISD R,D&E expenses increased $92,000, or 12%, from the prior year, due to higher spending on activities related to the Smartview^® product line.

R,D&E expenses as a percentage of revenue were 16% inand 15% for the three-month and nine-month periods ended September 30, 2007, respectively, and 13%14% for the same periods in 2006. The Company believes that a continued commitment to R,D&E activities is essential in order to maintain product leadership with our existing products and to provide innovative new product offerings, and therefore, we expectexpects to continue to make significant R,D&E investments in the future. Although the Company generally targets its R,D&E spending to be between 10% and 15% of revenue, this percentage is impacted by revenue cyclicality. At any point in time, the Company has numerous research and development projects underway, and we believethe Company believes that none of these projects is material on an individual basis.

Selling, general, and administrative (S,G&A) expenses were relatively consistent amounting to $23,973,000 for the quarterthree-month period ended April 1,September 30, 2007 comparedincreased 4% to $23,779,000$24,303,000 from $23,414,000 for the quarterthree-month period ended April 2,October 1, 2006, and SG&A expenses for the nine-month period ended September 30, 2007 increased 1% to $72,870,000 from $72,470,000 for the nine-month period ended October 1, 2006. MVSD S,G&A expenses increased $581,000,$722,000, or 3%4%, fromand $1,143,000, or 2%, for the prior year, whilethree-month and nine-month periods ended September 30, 2007, respectively. SISD S,G&A expenses increased $214,000, or 10%,were relatively consistent in each period presented from 2006.the prior year. Corporate expenses that are not allocated to either division increased $158,000, or 6%, and decreased $601,000,$862,000, or 15%9%, fromfor the prior year.three-month and nine-month periods ended September 30, 2007, respectively.

The increase in MVSD S,G&A expenses resultedfor the three-month period was primarily due to higher salary expense resulting from additional sales headcount intended to grow factory automation revenues. Although salary expense was also higher for the unfavorable impact of foreign exchange rate changes onnine-month period, this increase was partially offset by lower company bonus accruals and stock-based compensation expense. Higher company meeting costs also contributed to the Company’s international operations, andincrease for the nine-month period due to the timing of the Company’s annual sales kick-off meetings, partially offset by lower costs relatedwhich were held during the first quarter in 2007 compared to the timingfourth quarter in 2006. In addition, a stronger Euro Dollar versus the U.S. Dollar in 2007 resulted in higher S,G&A costs when expenses of marketing activities such as advertising and customer seminars.the Company’s European operations were translated into U.S. Dollars. The increase in SISD S,G&Acorporate expenses for the three-month period was due principally to increased compensation expenses. Thehigher professional fees, including fees related to the investigation of unsubstantiated orders in Japan, while the decrease in corporate expensesthe nine-month period was due primarily due to the costs associated with the Company’s 25^th Anniversary party held in January 2006, as well as lower company bonus accruals, partially offset by severance costs accrued in the first quarter of 2007.higher professional fees.

portfolio of debt securities. Other income also increased over the prior year due to higher rental income from leasing buildings adjacent to the Company’s corporate headquarters.

TheDuring the three-month and nine-month periods ended September 30, 2007, the Company recorded foreign currency lossgains of $353,000 and losses of $88,000, respectively, compared to losses of $282,000 and $707,000 for the quarter ended April 1, 2007 was $118,000 compared to a loss of $145,000 for the quarter ended April 2,same periods in 2006. The loss ingains during the three-month period ended September 30, 2007 waswere primarily due to the revaluation and settlement of accounts receivable and intercompany balances that are reported in one currency and collected or paid in another. The loss in 2006 was due principally to the revaluation and settlement of accounts receivable balances that are reported in one currency and collected or paid in another, as well asanother. While the Company also experienced similar gains during the nine-month period in 2007, they were offset by losses on the revaluation and settlement of intercompany balances that are reported in one currency and collected or paid in another. The losses during the three-month period ended October 1, 2006 were primarily due to the revaluation and settlement of intercompany balances, whereas the losses during the nine-month period were primarily due to the revaluation of cash balances on the Company’s subsidiaries’ books that are denominated in a currency other than the subsidiaries’ functional currency.

The Company’s effective tax rate for the quarterthree-month and nine-month periods ended April 1,September 30, 2007 was 21% and 26%, respectively, compared to 27%18% and 21% for the quarter ended April 2,same periods in 2006. The decreaseeffective tax rate for the third quarter of 2007 included the impact of the following discrete tax events: a reduction of tax expense of $444,000 from the final true-up of the prior year’s tax accrual upon filing the actual tax returns and a $51,000 reduction of tax expense upon the favorable settlement of an Internal Revenue Service audit relating to the DVT acquisition and upon the expiration of the statute of limitations for certain state tax issues, partially offset by a $74,000 increase to tax expense for certain state tax issues. The second quarter of 2007 included an increase to tax expense of $438,000 due to the final adjustment to the U.S. tax returns related to the settlement in the third quarter of 2006 of the case brought by the Tokyo Regional Taxation Bureau (TRTB) against the Company’s US subsidiary for tax years 1997 through 2001. The third quarter of 2006 included the settlement of the TRTB case brought against the Company’s US entity that required an increase to tax expense of $1,058,000, offset by a reduction of tax expense due to expiration of the statute of limitations of $1,220,000 and the final true-up of the prior year’s tax accrual of $405,000.

The discrete tax events in 2007 decreased the effective tax rate by five hundred basis points from 26% to 21% for the three-month period in 2007, and had no net impact on the effective tax rate for the nine-month period in 2007. The discrete tax events in 2006 decreased the effective tax rate by five hundred basis points from 23% to 18% for the three-month period in 2006, and four hundred basis points from 25% to 21% for the nine-month period in 2006. The remaining change in the effective tax rate from 23% to 26% for the three-month period and 25% to 26% for the nine-month period was primarily due to more of the Company’s profits being earned in lowerhigher tax jurisdictions. The adjustment to increase the year-to-date 2006 effective tax rate (excluding discrete tax events) from 25% to 26% was recorded in the third quarter of 2006.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 supersedes SFAS No. 5, “Accounting for Contingencies,” as it relates to income tax liabilities and lowers the minimum threshold a tax position is required to meet before being recognized in the financial statements from “probable” to “more likely than not” (i.e., a likelihood of occurrence greater than fifty percent). Under FIN 48, the recognition threshold is met when an entity concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority.

Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. Derecognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained.

Differences between the amounts recognized in the financial statements prior to the adoption of FIN 48 and the amounts recognized after adoption are accounted for as a cumulative effect adjustment recorded

to the beginning balance of retained earnings. As required, the Company adopted FIN 48 on January 1, 2007, and as a result, recognized a $4,021,000 increase in liabilities and a corresponding reduction to the January 1, 2007 retained earnings balance for uncertain tax positions that existed at December 31, 2006, but previously did not meet the requirements for liability recognition under SFAS No. 5. During the first quarter ofnine-month period ended September 30, 2007, the Company recognized a $355,000$1,089,000 increase in liabilities for uncertain tax positions as part of its income tax accrual, of which $379,000 was recognized in the three-month period ended September 30, 2007. Estimated interest and penalties included in these amounts totaled $592,000 for the quarter,nine-month period ended September 30, 2007, of which $206,000$180,000 was estimated interest and penalties.included in the three-month period ended September 30, 2007.

Under FIN 48, only the portion of the liability that is expected to be paid within one year is classified as a current liability. As a result, liabilities expected to be resolved without the payment of cash (e.g., resolution due to the expiration of the statute of limitations) or are not expected to be paid within one year are not classified as current. The Company reclassified $8,367,000 of current liabilities for uncertain tax positions as of December 31, 2006 to non-current liabilities to conform to the balance sheet presentation requirements of FIN 48. All of the Company’s liabilities for uncertain tax positions are classified as non-current liabilities at April 1,September 30, 2007. These liabilities include $2,376,000$2,763,000 of estimated interest and penalties, for which it is the Company’s policy to record as income tax expense.

The tax years 20001999 through 2006 remain open to examination by various taxing authorities in the jurisdictions in which the Company operates. The Company is currently under audit in two jurisdictions, the United States and Japan. The Internal Revenue Service (IRS) is auditing tax years 2003 through 2005.2006. The Company believes that it will conclude this audit within the next twelve months and if the Company’s tax positions are sustained, this would result in a reduction in income tax expense. An estimate of the range of possible changes to existing reserves cannot be made at this time. The Tokyo Regional Tax Board (TRTB)Taxation Bureau is auditing tax

shareholders’ equity. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity.

The Company’s cash requirements during the quarternine-month period ended April 1,September 30, 2007 were met with its existing cash, cash equivalent, and investment balance, as well as positive cash flow from operations. Cash requirements primarily consisted of operating activities, capital expenditures, the repurchase of common stock, and the payment of dividends. Capital expenditures forduring the quarternine-month period ended April 1,September 30, 2007 totaled $1,487,000$3,307,000 and consisted primarily of expenditures for computer hardware and software, as well as various building improvements to the Company’s corporate headquarters.

In June 2000, Cognex Corporation became a Limited Partner in Venrock Associates III, L.P. (Venrock), a venture capital fund. A Director of the Company is a Managing General Partner of Venrock Associates. The Company has committed to a total investment in the limited partnership of up to $20,500,000, with the commitment period expiring on December 31, 2010. In January 2007, Venrock reduced the Company’s total commitment from $22,500,000 to $20,500,000. The Company does not have the right to withdraw from the partnership prior to December 31, 2010. As of April 1,September 30, 2007, the Company had contributed $18,975,000$19,488,000 to the partnership, including $512,000$1,025,000 during the quarternine-month period ended April 1, 2007. In addition, the Company contributed $512,000 in AprilSeptember 30, 2007. The remaining commitment of $1,013,000$1,012,000 can be called by Venrock in any period through 2010.

In July 2006, the Company’s Board of Directors authorized the repurchase of up to $100,000,000 of the Company’s common stock. As of April 1,September 30, 2007, the Company had repurchased 1,143,7412,449,333 shares at a cost of $27,083,000$57,076,000 under this program, including 124,162program. The Company did not repurchase any shares at a cost of $2,670,000 during the quarterthree-month period ended April 1,September 30, 2007. The Company may repurchase additional shares under this program in future periods depending upon a variety of factors, including the stock price levels and share availability.

Beginning in the third quarter of 2003, the Company’s Board of Directors has declared and paid a cash dividend in each quarter, including a dividend of $0.085 per share in each quarter of 2007 that amounted to $3,778,000$11,215,000 for the quarternine-month period ended April 1,September 30, 2007. Future dividends will be declared at the discretion of the Company’s Board of Directors and will depend upon such factors as the Board deems relevant.

In May 2006, the Company acquired AssistWare Technology, Inc. for $2,998,000 in cash paid at closing, with the potential for an additional cash payment of up to $500,000 in the second quarter of 2007, up to $1,000,000$500,000 in the fourth quarter of 2007, and up to $500,000$1,000,000 in the second quarter of 2008 depending upon the achievement of certain performance criteria. The Company has determined that the contingent payment in the second quarter of 2007 had been earned and made a payment of $502,000 that was allocated to goodwill. This payment included a $2,000 adjustment related to the final closing balance sheet of AssistWare. The Company has also determined that the second contingent payment totaling $500,000 has been earned and expects to make athis payment of $500,000 during the secondfourth quarter that will beof 2007, with this amount allocated to goodwill. The Company’s business strategy includes selective expansion into new machine vision applications through the acquisition of businesses and technologies, which may result in significant cash outlays in the future.

of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures were effective as of that date. From time to time, the Company reviews its disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended April 1,September 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. During the second quarter of 2007, the Company issued new order acceptance and customer credit limit policies for orders originating from the Company’s Japanese subsidiary, Cognex K.K. The Company implemented these changes to its internal control over financial reporting in response to the Company’s identification of the unsubstantiated customer orders that resulted in the prior-period misstatements described in this report. See “Part I–Item 2–Management’s Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations–Correction of Prior-Period Misstatements” for further information.