CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

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, 2007.

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 March 30,June 29, 2008, and the results of its operations for the three-month and six-month periods ended March 30,June 29, 2008 and AprilJuly 1, 2007, 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 six-month periods ended March 30,June 29, 2008 are not necessarily indicative of the results to be expected for the full year. Certain amounts presented in the prior period have been restated to be consistent with the current period presentation.

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141R, “Business Combinations,” which establishes principles for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed in a business combination, recognizes and measures the goodwill acquired in a business combination, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. The Company is required to apply this Statement prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Earlier application is not permitted.

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

Debt securities are reported at fair value based upon quoted prices in active markets. Short-term municipal bonds at March 30,At June 29, 2008, the Company’s investment portfolio included $2,000,000 of student loan auction rate securities, withrepresenting 0.8% of the Company’s Cash, Cash Equivalents, and Investments balance, that had a fairfailed auction on May 20, 2008. An auction failure means that the parties wishing to sell their securities could not do so as a result of a lack of buying demand. It is important to note that an auction failure does not denote a default in the security, but is merely indicative of a liquidity issue. Because of this development, the Company classified these securities as long-term investments on the Consolidated Balance Sheet at June 29, 2008. Ultimately, the Company believes that the full principal value of $2,000,000 forthese securities will be recovered, and accordingly, has recorded these securities at their principal value, which interest rates reset annually but for whichapproximates fair value. To date, the contractual maturity date is greater than one year. The Company has established guidelines relativecollected all interest payable on these securities when due, and expects to credit ratings, diversification, and maturities of its debtcontinue to do so in the future until a successful auction takes place, the issuer calls or restructures the securities, that maintain safety and liquidity.a buyer outside the auction process emerges, or the securities mature.

Inventories consistedconsist of the following (in thousands):

Except as limited by Massachusetts law, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result 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 person did not act in good faith in the reasonable belief that the 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 provisions is unlimited. The Company has never incurred significant costs related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is minimal.

On January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). Under FIN 48, a tax position is recognized in the financial statements when an entity concludes that the tax position, based solely on its technical merits, is more likely than not (i.e. a likelihood of occurrence greater than fifty percent) to be sustained upon examination by the relevant taxing authority.

During the first quarter ofsix-month period ended June 29, 2008, the Company recorded a $153,000$355,000 increase in liabilities, net of deferred tax benefit, for uncertain tax positions that was recorded as income tax expense.expense, of which $201,000 was recorded in the three-month period ended June 29, 2008. Estimated interest and penalties included in these amounts totaled $104,000.$217,000 for the six-month period ended June 29, 2008, of which $113,000 was included in the three-month period ended June 29, 2008.

The Company’s reserve for income taxes, including gross interest and penalties, was $19,512,000$19,470,000 at March 30,June 29, 2008, of which $1,000,000 would reduce goodwill, $307,000 would increase additional paid in capital, and the remainder would reduce income tax expense, if the Company’s tax positions were sustained. During the three-month period ended June 29, 2008, the Company derecognized $307,000 of its FIN 48 liability, resulting in a corresponding increase to additional- paid-in-capital. This occurred as a result of new information available to the Company during the current quarter indicating that the liablility was no longer required. All of the Company’s liabilities for uncertain tax positions are classified as non-current liabilities at March 30,June 29, 2008.

The Company is currently under audit in two jurisdictions, the United States and Japan. The Internal Revenue Service is auditing tax years 2003 through 2006. The Company believes that this audit will conclude 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 Taxation Bureau is auditing tax years 2002 through 2005 and has recently issued a permanent establishment finding claiming that the Company’s Irish subsidiary should be subject to taxation in Japan. The Company believes it has a substantive defense against this finding and has formally requested Competent Authority intervention in accordance with the Japan/Ireland tax treaty. It is not expected that this audit will be concluded within the next twelve months. To avoid further interest and penalties, the Company has prepaid tax, interest, and penalties through the date of assessment of 766,257,300 Yen (or approximately $7,714,000$7,110,000 based upon the March 30,June 29, 2008 exchange rate) to the Japanese tax authorities. This amount is included in “Other assets” on the Consolidated Balance Sheet.Sheets.

The Company’s share-based payments that result in compensation expense consist solely of stock option grants. At March 30,During the six-month period ended June 29, 2008, the Company had 9,423,750 shares available for grantgranted stock options under three stock option plans: the 1998 Non-Employee Director Stock OptionIncentive Plan, 13,750; the 2001 General Stock Option Plan, 7,110,000;which expired on February 27, 2008, and the 2007 Stock Option and Incentive Plan (the “2007 Plan”), 2,300,000.. At June 29, 2008, the Company had 9,017,200 shares available for grant: 7,110,000 shares under the 2001 General Stock Option Plan, and 1,907,200 under the 2007 Plan. Each of

The following table summarizes the Company’s stock option activity:

The weighted-average grant-date fair value of stock options granted during the first quarter ofthree-month periods ended June 29, 2008 and July 1, 2007 was $7.22$10.67 and $6.84,$8.21, respectively. The weighted-average grant-date fair value of stock options granted during the six-month periods ended June 29, 2008 and July 1, 2007 was $7.80 and $6.86, respectively. The Company recognizes compensation expense using the graded attribution method, in which expense is recognized on a straight-line basis over the service period for each separately vesting portion of the stock option as if the option was, in substance, multiple awards.

The amount of compensation expense recognized at the end of the vesting period is based upon the number of stock options for which the requisite service has been completed. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. The term “forfeitures” is distinct from “expirations” and represents only the unvested portion of the surrendered option. The Company currently expects that approximately 65%66% of its stock options will actually vest, and therefore, has applied a weighted-average annual forfeiture rate of 10% to all unvested options. This rate was revised during the first quarter of 2008, and will be revised, if necessary, in subsequent periods if actual forfeitures differ from this estimate. Ultimately, compensation expense will only be recognized over the vesting period for those options that actually vest.

The total stock-based compensation expense and the related income tax benefit recognized for the first quarter ofthree-month period ended June 29, 2008 was $1,873,000$2,523,000 and $596,000,$818,000, respectively, and for the first quarter ofthree-month period ended July 1, 2007 was $2,992,000$2,529,000 and $977,000,$828,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the six-month period ended June 29, 2008 was $4,396,000 and $1,414,000, respectively, and for the six-month period ended July 1, 2007 was $5,521,000 and $1,805,000, respectively. No compensation expense was capitalized at March 30,June 29, 2008 or December 31, 2007.

At March 30,June 29, 2008, total unrecognized compensation expense related to non-vested stock options was $17,266,000,$17,797,000, which is expected to be recognized over a weighted-average period of 2.12.0 years.

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 March 30,June 29, 2008, the Company had repurchased 3,981,3904,480,589 shares at a cost of $87,067,000$100,000,000 under this program. The Company mayThis repurchase additional shares under this program in future periods depending upon a varietywas completed during the second quarter of factors, including the stock price levels and share availability.

common stock under the plan. The plan does not require Cognex to acquire any specific number of shares and it may be suspended or discontinued at any time.

The Company repurchased a total of 1,666,9002,166,099 shares at a cost of $32,688,000$45,620,000 during the first quarter ofsix-month period ended June 29, 2008, of which 1,532,0572,031,256 shares at a cost of $29,991,000$42,923,000 were repurchased under the July 2006 program, with the remaining shares purchased under the March 2008 program.

On April 17, 2008, the Company’s Board of Directors declared a cash dividend of $0.085 per share. The dividend is payablewas paid on June 13, 2008 to all shareholders of record at the close of business on May 30, 2008.

On July 25, 2008, the Company’s Board of Directors declared a cash dividend of $0.15 per share. The dividend is payable on September 12, 2008 to all shareholders of record at the close of business on August 29, 2008. Future dividends will be declared at the discretion of the Board of Directors and will depend upon such factors as the Board of Directors deems relevant.

Net income per share wasWeighted-average shares is calculated as follows (in thousands, except per share amounts):

Stock options to purchase 10,727,4015,922,656 and 8,690,3489,990,697 shares of common stock were outstanding during the first quarter ofthree-month and six-month periods ended June 29, 2008, respectively, and 8,842,770 and 8,632,663 for the same periods in 2007 respectively, but were not included in the calculation of diluted net income per common sharedilutive stock options because they were anti-dilutive.

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

Reconciling items consist of stock-based compensation expense and unallocated corporate expenses, which primarily include corporate headquarters costs, professional fees, and patent infringement litigation. Additional asset information by segment is not produced internally for use by the chief operating decision maker, and therefore, is not presented. Additional asset information is not provided because cash and investments are commingled and the Divisions share assets and resources in a number of locations around the world.

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) 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 protect the Company’s proprietary technology and intellectual property; (13) our involvement in time-consuming and costly litigation; (14) the impact of competitive pressures; (15) the challenges in integrating acquired businesses; (16) the inability to achieve expected results from acquisitions; and (17) exposure to additional tax liabilities. 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”) is a leading provider of machine vision products that capture and analyze visual information in order to automate tasks, primarily in manufacturing processes, where vision is required. Our Modular Vision Systems Division (MVSD) specializes in machine vision systems that are used to automate the manufacturing of discrete items, while our Surface Inspection Systems Division (SISD) specializes in machine vision systems that are used to inspect the surfaces of materials processed in a continuous fashion.

Revenue amounted to $60,517,000$67,089,000 for the firstsecond quarter of 2008, representing a 19%23% increase over the same period in 2007. This increase was primarily due to higher sales to discrete factory automation customers in a variety of industries around the world.and surface inspection customers. This higher revenue contributed to an increase in operating income to 13%16% of revenue in the firstsecond quarter of 2008 from 9%8% of revenue in the firstsecond quarter of 2007. Net incomeIncome per share from continuing operations also increased to $0.20$0.21 per diluted share in the firstsecond quarter of 2008 from $0.10$0.09 per diluted share in the same period in 2007.

Revenue forincreased by $12,347,000, or 23%, from the quarter ended March 30, 2008three-month period in 2007 and increased 19%by $21,933,000, or 21%, from the six-month period in 2007 due to $60,517,000 from $50,929,000 for the quarter ended April 1, 2007 driven by higher sales to discrete factory automation and surface inspection customers.

Sales to customers who make automation equipment for the semiconductor and electronics industries, which are included in the Company’s MVSD segment, represented 22%19% and 21% of total revenue in the first quarter ofthree-month and six-month periods in 2008, compared to 30%25% and 27% in the first quarter ofsame periods in 2007. Sales to these customers decreased by $766,000, or 6%, from the three-month period in 2007 and decreased by $1,789,000,$2,555,000, or 12%9%, from the prior yearsix-month period in 2007 due to industry cyclicality. Revenue from this sector has been gradually declining since early 2006. We do not expect a significant change in this business in the remainder of 2008.

Sales to manufacturing customers in the discrete factory automation area, which are included in the Company’s MVSD segment, represented 68%67% of total revenue in both the first quarter ofthree-month and six-month periods in 2008, compared to 59%63% and 61% in the first quarter ofsame periods in 2007. Sales to these customers increased by $10,431,000, or 30%, from the three-month period in 2007 and increased by $10,905,000,$21,333,000, or 36%33%, from the prior year.six-month period in 2007. Sales of the Company’s In-Sight, Dataman, and Checker vision products, which are sold to customers in a variety of industries around the world, all increased from the first quarter of 2007.same period in the prior year. We are investing in new product

total revenue to 9%7% and 8% in the first quarter ofthree-month and six-month periods in 2008 from 12%11% in the first quarter ofboth periods in 2007.

Gross margin as a percentage of revenue was consistent at 72% for both the first quarter ofthree-month and six-month periods in 2008, compared to 67% and 69% for the same periodperiods in 2007. The gross marginThis increase was flat year-on-year despite higher revenue in 2008due primarily due to higher manufacturingproduct revenue without a corresponding increase in costs, related to new product introductions.as well as lower provisions for excess and obsolete inventory.

MVSD gross margin as a percentage of revenue was 75% for both the first quarter ofthree-month and six-month periods in 2008, compared to 76%71% and 73% for the firstsame periods in 2007. This increase was due partially to lower provisions for excess and obsolete inventory. In the second quarter of 2007.2007, the 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 material requirements forecasts, together with lower estimates of future demand from both semiconductor and electronics capital equipment and discrete factory automation customers. Similar provisions were lower in 2008 due to improvements made to the Company’s product life cycle planning process. The decreaseremainder of the increase in MVSD margin was due principally to the impact of the increase in product revenue. Although higher new product introduction expenses were incurred to support the release of several new products duringearly in 2008, the first quarterimpact of 2008. the increase in product revenue more than offset these cost increases.

SISD gross margin as a percentage of revenue was 45%53% and 50% for the first quarter ofthree-month and six-month periods in 2008, compared to 38%40% and 39% for the first quarter ofsame periods in 2007. TheThis increase in SISD margin was due to the impact of the higher product revenue whileon relatively flat manufacturing overhead costs, were slightly lower than the prior year due to lower material costscost improvements, and lower provisions for excess and obsolete inventory.warranty provisions.

Product gross margin as a percentage of revenue was 75%74% for the first quarter ofthree-month and six-month periods in 2008, compared to 76%71% and 74% for the first quarter of 2007same periods in 2007. The increase for the three-month period was due to the higher product revenue without a corresponding increase in costs, as well as lower MVSDprovisions for excess and obsolete inventory. Product gross margin was flat for the six-month period despite the higher product margins as described above. revenue due to higher new product introduction costs.

Service gross margin as a percentage of revenue was 45%36% and 41% for the first quarter ofthree-month and six-month periods in 2008, compared to 40%34% and 37% for the first quarter ofsame periods in 2007. Although service revenue was lower than the prior year, costs declined at a greater rate due largely to lower reserves against MVSD service inventory, resulting in the improved service margin.

Research, development, and engineering (R,D&E) expenses increased 15% to $9,097,000 forby $1,420,000, or 18%, from the first quarter of 2008 compared to $7,931,000 forthree-month period in 2007 and increased by $2,468,000, or 16%, from the first quarter ofsix-month period in 2007. MVSD R,D&E expenses increased $1,215,000,by $1,261,000, or 18%, for the three-month period and increased by $2,358,000, or 17%, for the six-month period, while SISD R,D&E expenses were relatively consistent withincreased by $159,000, or 20%, for the prior year. three-month period and increased by $110,000, or 7%, for the six-month period.

The increase in MVSD R,D&E expenses was due primarily to higher personnel-related costs for engineering resources(such as salaries, fringe benefits, and travel) to support new product initiatives.initiatives ($516,000 increase for the three-month period and $1,048,000 increase for the six-month period), as well as higher company bonus accruals due to a higher operating income margin on which the Company’s bonus plan is based ($619,000 increase for the three-month period and $762,000 increase for the six-month period).

R,D&E expenses as a percentage of revenue werewas 14% in both the three-month period and six-month period in 2008, compared to 14% and 15% in the first quarter of 2008 and 16% in the first quarter ofsame periods 2007. We believe 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 expect to continue to make significant R,D&E

investments in the future. In addition, we consider our ability to accelerate time to market for new products critical to our revenue growth. Although we target our R,D&E spending to be between 10% and 15% of revenue, this percentage is impacted by

The Company’s effective tax rate on continuing operations was 26% for both the three-month and six-month periods in 2008, compared to 34% and 30% for the first quarter of 2008 was 25% compared to 26% for the first quarter ofsame periods in 2007. The effective tax rate for the first quarter of 2008 included the impact of the following discrete tax events: an increase in tax expense of $136,000 to increase a reserve against a capital loss carryforward deferred tax asset due to expire in 2007 and a decrease in tax expense of $48,000 to decrease a FIN 48 reserve for the true-up of a prior year estimate. These discrete tax events increased the effective tax rate for the firstsix-month period in 2008 from 25% to 26%. The effective tax rate for the second quarter of 2008 by one hundred basis points2007 included an increase in tax expense of $438,000 to finalize the competent authority settlement between the Company’s U.S. subsidiary and Japan taxing authorities. This discrete event increased the effective tax rate for the three-month period in 2007 from 24%26% to 25%34% and increased the effective tax rate for the six-month period in 2007 from 26% to 30%. The decrease in the effective tax rate for the six-month period from 26% to 24%25%, excluding discrete tax events, was primarily due to more of the Company’s profits being earned in lower tax jurisdictions.

The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash,

of $87,067,000$100,000,000 under this program. The Company mayThis repurchase additional shares under this program in future periods depending upon a varietywas completed during the second quarter of factors, including the stock price levels and share availability.2008.

In March 2008, the Company’s Board of Directors authorized the repurchase of up to an additional $30,000,000 of the Company’s common stock under a Rule 10b5-1 Plan. As of March 30,June 29, 2008, the Company had repurchased 134,843 shares at a cost of $2,697,000 under this program. Repurchases under this new authorization are subject to the parameters of the Rule 10b5-1 Plan, which provides for repurchases during Cognex self-imposed trading blackout periods related to the announcement of quarterly results. The Rule 10b5-1 Plan expires on February 17, 2009 or, if earlier, upon the repurchase of $30,000,000 of Cognex common stock under the plan. The plan does not require Cognex to acquire any specific number of shares and it may be suspended or discontinued at any time.

The Company repurchased a total of 1,666,9002,166,099 shares at a cost of $32,688,000$45,620,000 during the first quarter ofsix-month period ended June 29, 2008, of which 1,532,0572,031,256 shares at a cost of $29,991,000$42,923,000 were repurchased under the July 2006 program, with the remaining shares purchased under the March 2008 program.

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 the first and second quarters of 2008 that amounted to $3,658,000$7,213,000 for the firstsix-month period ended June 29, 2008. On July 25, 2008, the Company’s Board of Directors voted to increase the dividend to $0.15 per share for the third quarter of 2008. 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,On July 1, 2008, the Company acquired AssistWare Technology,sold all of the assets of its lane departure warning business to Takata Holdings Inc. for $2,998,000$3,208,000 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 $500,000 in the fourth quarter of 2007, and up to $1,000,000 inwhich $250,000 was received during the second quarter of 2008 depending uponas a deposit, $2,585,000 was received in July 2008, $58,000 (representing a closing working capital adjustment) is expected to be received before the achievementend of certain performance criteria.the third quarter of 2008, and the remaining $315,000 (representing an amount held in escrow) is expected to be received before the end of 2009. The Company determined thatentered the contingent paymentslane departure warning business in May 2006 with the second and fourth quartersacquisition of 2007 had been earned and made these payments in these periods with a corresponding increase to goodwill. As of December 31, 2007, the Company had also determined that the $1,000,000 contingent payment due inAssistWare Technology, Inc. During the second quarter of 2008, had been earned beyond a reasonable doubt, and accordingly, accruedthe Company made the final contingent payment related to this payment at December 31, 2007 with a corresponding increase to goodwill. This payment will be made during the second quarter of 2008. 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.amount of $1,000,000.

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