• Semiconductor and electronics capital equipment manufacturers purchase Cognex vision products and integrate them into the automation equipment that they manufacture and then sell to their customers to either make semiconductor chips or assemble printed circuit boards. Demand from these capital equipment manufacturers has historically been highly cyclical, with periods of investment followed by downturn. This market has been in a prolonged downturn since early 2006.

Sales to semiconductor and electronics capital equipment manufacturers represented approximately 10% and 7% of total revenue for the three-month and nine-month periods in 2009, respectively.

• Surface inspection customers are manufacturers of materials processed in a continuous fashion, such as metals, paper, non-wovens, plastics, and glass. These customers need sophisticated machine vision to detect and classify defects on the surfaces of those materials as they are being processed at high speeds. Surface inspection sales represented approximately 20% of total revenue in both the three-month and nine-month periods in 2009.

Revenue for the third quarter of 2009 totaled $41,178,000, representing a 35% decrease from the same quarter in 2008. This decrease in revenue resulted primarily from lower sales to customers in the semiconductor and electronics capital equipment and discrete factory automation markets of the Company's MVSD segment, which have been impacted by the current worldwide economic slowdown. In the fourth quarter of 2008 and again during 2009, the Company announced a number of cost-cutting measures intended to reduce expenses in response to lower revenue expectations. As a result of these actions, operating expenses were down 25% from the prior year and the Company recorded operating income of $880,000 for the third quarter of 2009.
Although lower demand in the summer months has historically translated to lower revenue in the third quarter as compared to the second quarter, revenue for the third quarter of 2009 was slightly higher than the prior quarter and there are indications that order levels within the Company's MVSD segment may have stabilized. For the fourth quarter of 2009, we anticipate that both revenue and operating expenses will increase from the levels reported in the third quarter. The anticipated increase in operating expenses is due to savings from mandatory shutdown days in the third quarter of 2009 that will not recur in the fourth quarter, as well as spending related to strategic initiatives. Despite increased operating expenses, the Company does expect to generate operating income in the fourth quarter of 2009.
Results of Operations
Revenue
Revenue decreased by $22,078,000, or 35%, for the three-month period and decreased by $66,425,000, or 35%, for the nine-month period due to lower sales to customers in all three of the markets the Company serves. Discrete Factory Automation Market
Sales to manufacturing customers in the discrete factory automation area, which are included in the Company's MVSD segment, represented 70% and 73% of total revenue for the three-month and nine-month periods in 2009, respectively, compared to 67% and 68% for the same periods in 2008. Sales to these customers decreased by $13,640,000, or 32%, for the three-month period and decreased by $39,606,000, or 30%, for the nine-month period. Demand from the Company's factory automation customers has been affected by the worldwide economic slowdown, which first began to impact the Company's orders from these customers in the third quarter of 2008. For the second quarter in a row, demand from these customers increased slightly over the prior quarter, which is a positive indication that these order levels may have stabilized. Based on current order trends, we anticipate revenue for this market will be higher in the fourth quarter of 2009 compared to the third quarter of 2009. Semiconductor and Electronics Capital Equipment Market Sales to customers who make automation equipment for the semiconductor and electronics industries, which are included in the Company's MVSD segment, represented 10% and 7% of total revenue for the three-month and nine-month periods in 2009, respectively, compared to 16% and 18% for the same periods in 2008. Sales to these customers decreased by $5,866,000, or 60%, for the three-month period and decreased by $25,395,000, or 74%, for the nine-month period due to industry cyclicality, as well as competitive market pressures. In recent years, the competitive landscape in this market has changed, and price and flexibility of purchasing hardware from other vendors have become more important factors in our customers' purchasing decisions. To address this market change, the Company has introduced software-only products; however, the average selling price of these offerings is significantly lower than for a complete vision system, and therefore, we expect this trend to have a negative impact on our revenue in this market. Although, for the second quarter in a row, demand from these customers increased over the prior quarter, order levels are still extremely low. As a result of the continued impact of a prolonged industry downturn and

pricing pressure, together with current worldwide economic conditions, we do not expect a significant change in this business in the fourth quarter of 2009. Surface Inspection Market
Sales to surface inspection customers, which comprise the Company's SISD segment, represented 20% of total revenue for both the three-month and nine-month periods in 2009, compared to 17% and 14% for the same periods in 2008. Revenue from these customers decreased by $2,572,000, or 23%, for the three-month period and decreased by $1,424,000, or 5%, for the nine-month period due to lower product revenue resulting from both the timing of shipments, as well as the impact of revenue deferrals. While demand for the Company's surface inspection customers has not been significantly impacted by current worldwide economic conditions to date, these conditions have increased competitive market pressures resulting in higher discounting of products in order to maintain and grow market share.
Product Revenue
Product revenue decreased by $20,871,000, or 36%, for the three-month period and decreased by $63,514,000, or 36%, for the nine-month period primarily due to a lower volume of vision systems sold to customers in the semiconductor and electronics capital equipment and discrete factory automation markets. The timing of SISD shipments and the impact of revenue deferrals on that market also contributed to the decline in product revenue for both the three-month and nine-month periods. Product revenue in the first quarter of 2009 included $4,400,000 related to an arrangement with a single customer for which product was shipped over the last two years, but revenue was deferred until the final unit was delivered in the first quarter of 2009. Service Revenue
Service revenue, which is derived from the sale of maintenance and support, education, consulting, and installation services, decreased by $1,207,000, or 24%, for the three-month period and decreased by $2,911,000, or 19%, for the nine-month period due to lower maintenance and support revenue. In the nine-month period, the lower maintenance and support revenue was partially offset by higher revenue from surface inspection installation services. Maintenance and support revenue has declined due to the introduction of new products and functionality that make vision easier to use and require less maintenance and support. Service revenue increased as a percentage of total revenue to 9% and 10% for the three-month and nine-month periods in 2009, respectively, from 8% in both periods in 2008. Gross Margin
Gross margin as a percentage of revenue was 71% and 67% for the three-month and nine-month periods in 2009, respectively, compared to 72% for both periods in 2008. This decrease was primarily due to lower MVSD product margins, as well as a higher percentage of total revenue from the sale of surface inspection systems, which have lower margins than the sale of modular vision systems. MVSD Margin
MVSD gross margin as a percentage of revenue was 76% and 73% for the three-month and nine-month periods in 2009, respectively, compared to 77% and 76% for the same periods in 2008. The decrease in MVSD margin was primarily due to a lower product margin resulting from the impact of relatively flat new product introduction costs on a lower revenue base, as well as higher provisions for excess and obsolete inventory. These negative impacts were partially offset for the nine-month period by the higher-than-average margin achieved on a $4,400,000 revenue arrangement recognized in the first quarter of 2009. This arrangement included the transfer of source code, as well as the delivery of product, which resulted in a higher selling price and a higher margin on the overall arrangement.
SISD Margin
SISD gross margin as a percentage of revenue was 50% and 45% for the three-month and nine-month periods in 2009, respectively, compared to 50% in both periods in 2008. The decrease in SISD margin for the nine-month period was due to a lower service margin resulting from a higher percentage of service revenue from installation services, which have lower margins than the sale of maintenance and support, spare parts, and repairs. A lower product margin due to higher discounting of products in response to

competitive market pressures, as well as a higher material and labor component for the systems sold in 2009, also contributed to the decline in the SISD margin for the nine-month period. Although the service margin for the three-month period was also impacted by a higher percentage of service revenue from relatively low-margin installation services, an increase in the product margin offset this decrease. The higher product margin for the three-month period was due to a lower material and labor component for the systems sold in 2009. We anticipate that SISD margins will decline over the next year as orders booked in 2009, with a higher discount as a result of competitive market pressures, are recognized as revenue.
Product Margin
Product gross margin as a percentage of revenue was 74% and 72% for the three-month and nine-month periods in 2009, respectively, compared to 75% for both periods in 2008. This decrease was primarily due to the lower MVSD product margin as described above, as well as a higher percentage of total revenue from the sale of surface inspection systems, which have lower margins than the sale of modular vision systems. This decrease was partially offset for the nine-month period by the higher-than-average margin achieved on a $4,400,000 revenue arrangement recognized in the first quarter of 2009. Service Margin
Service gross margin as a percentage of revenue was 35% and 30% for the three-month and nine-month periods in 2009, respectively, compared to 38% and 40% for the same periods in 2008. This decrease was due to the lower SISD service margin as described above. A lower MVSD service margin also contributed to the decline in the service margin for the nine-month period. Although maintenance and support costs for the nine-month period declined from the prior year due to improvements in product ease of use, service revenue declined at a greater rate.
Operating Expenses
Research, Development, and Engineering Expenses Research, development, and engineering (RD&E) expenses decreased by $2,317,000, or 26%, for the three-month period and decreased by $3,997,000, or 15%, for the nine-month period. MVSD RD&E expenses decreased by $2,234,000, or 27%, for the three-month period and decreased by $3,809,000, or 15%, for the nine-month period, while SISD RD&E expenses were $83,000, or 10%, lower for the three-month period and $188,000, or 7%, lower for the nine-month period.
The decrease in MVSD RD&E expenses was due to lower company bonus accruals ($140,000 for the three-month period and $759,000 for the nine-month period) and lower stock-based compensation expense ($333,000 for the three-month period and $930,000 for the nine-month period), as well as the favorable impact of changes in foreign currency exchange rates ($128,000 for the three-month period and $556,000 for the nine-month period). The U.S. Dollar was stronger relative to the Euro in 2009 compared to 2008, resulting in lower RD&E costs when expenses of the Company's European operations were translated to U.S. Dollars. In November 2008 and again in April 2009, the Company announced a number of cost-cutting measures intended to reduce expenses in response to lower revenue expectations. These measures included MVSD RD&E headcount reductions, primarily in the United States, which lowered the Company's personnel-related costs, such as salaries and fringe benefits ($535,000 for the three-month period and $694,000 for the nine-month period). Other cost cutting measures, including mandatory shutdown days and a lower Company contribution to employees' 401(k) plans in the third quarter of 2009, also lowered the Company's fringe benefit costs ($447,000 for the three-month period and $477,000 for the nine-month period).
The decrease in SISD RD&E expenses was primarily due to the timing of outside services ($77,000 for the three-month period and $223,000 for the nine-month period).
RD&E expenses as a percentage of revenue were 16% and 19% for the three-month and nine-month periods in 2009, respectively, and 14% for both periods in 2008. We believe that a continued commitment to RD&E activities is essential in order to maintain or achieve product leadership with our existing products and to provide innovative new product offerings, and therefore, we expect to continue to make RD&E investments in the future in strategic areas, such as the ID Products business and the development of a "Vision System on a Chip." In addition, we consider our ability to accelerate time to market for new products critical to our ability to maintain and gain market share. Although we target our RD&E spending to be

between 10% and 15% of revenue, this percentage is impacted by revenue levels and the Company anticipates RD&E spending as a percentage of revenue will be higher than these targets during 2009.
Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses decreased by $7,507,000, or 26%, for the three-month period and decreased by $13,536,000, or 16%, for the nine-month period. MVSD SG&A expenses decreased by $7,206,000, or 31%, for the three-month period and decreased by $11,715,000, or 18%, for the nine-month period, while SISD SG&A expenses decreased $358,000, or 12%, for the three-month period and decreased by $196,000, or 2%, for the nine-month period. Corporate expenses that are not allocated to either division were $57,000, or 2%, higher for the three-month period and $1,625,000, or 17%, lower for the nine-month period.
The decrease in MVSD SG&A expenses was due to the impact of cost-cutting measures announced by the Company in November 2008 and again in April 2009 intended to reduce expenses in response to lower revenue expectations. These measures included headcount reductions across all regions, which lowered the Company's personnel-related costs, such as salaries, fringe benefits, commissions, and travel ($2,488,000 for the three-month period and $3,081,000 for the nine-month period). Other cost-cutting measures, including mandatory shutdown days and a lower Company contribution to employees' 401(k) plans in the third quarter of 2009, also lowered the Company's fringe benefit costs for the three-month period ($755,000). In addition to lower spending related to headcount levels, commissions also decreased due to business levels ($1,063,000) while travel decreased due to tighter controls over discretionary spending and lower air travel rates ($1,044,000) for the nine-month period. Other reductions in discretionary spending included lower marketing and promotional expenses ($1,058,000 for the three-month period and $2,330,000 for the nine-month period), lower expenses related to the Company's sales kick-off meetings held during the first quarter each year ($609,000 for the nine-month period only), and lower company bonus accruals ($204,000 for the three-month period and $760,000 for the nine-month period). The favorable impact of changes in foreign currency exchange rates also contributed to the decrease in expenses ($248,000 for the three-month period and $1,845,000 for the nine-month period). Finally, the Company recorded intangible asset impairment charges of $1,000,000 in the first quarter of 2009 and $1,500,000 in the third quarter of 2008 (refer to Note 6 to the Consolidated Financial Statements), resulting in a $1,500,000 decrease in expenses for the three-month period and a $500,000 decrease in expenses for the nine-month period.
The decrease in SISD SG&A expenses for the three-month period was due to lower sales commissions ($102,000), lower marketing and promotional expenses ($82,000), as well as additional savings from shutdown days and other cost-cutting measures implemented in the third quarter ($92,000). For the nine-month period, the decrease in SISD SG&A expenses was due to lower sales commissions ($128,000) and the favorable impact of foreign currency exchange rates ($253,000), which were partially offset by costs related to the opening of a sales office in China ($178,000).
The decrease in corporate expenses for the nine-month period was due to lower company bonus accruals ($414,000) and lower stock-based compensation expense ($1,002,000). In addition, fewer employees were dedicated to corporate activities in 2009 ($637,000) and tax services related to a Japanese tax audit were lower ($417,000). These savings were partially offset by increased legal fees primarily for patent-infringement actions ($1,248,000 - refer to Note 8 to the Consolidated Financial Statements). For the three-month period, savings from lower stock-based compensation expense ($658,000) and the cost-cutting measures implemented in the third quarter ($117,000) were offset by higher legal fees primarily for patent-infringement actions ($959,000). Restructuring Charges
November 2008
In November 2008, the Company announced the closure of its facility in Duluth, Georgia, which the Company anticipates will result in long-term cost savings. This facility included a distribution center for MVSD customers located in the Americas, an engineering group dedicated to supporting the Company's MVSD Vision Systems products, and a sales training and support group, as well as a team of finance support staff. During the second quarter of 2009, this distribution center was consolidated into the Company's headquarters in Natick, Massachusetts resulting in a single distribution center for MVSD

customers located in the Americas. Although a portion of the engineering and sales training and support positions have been transferred to other locations, the majority of these positions, and all of the finance positions, have been eliminated. The Company expects to achieve expense savings of approximately $2,000,000 in 2009, which will be partially offset by $992,000 of restructuring costs, and expense savings of approximately $3,500,000 per year thereafter related to the closure of its Duluth, Georgia facility. The Company hired fewer employees to staff the new distribution center in Natick, Massachusetts than originally planned, resulting in higher estimated cost savings than the original estimate. These savings will be realized in "Cost of revenue," "Research, development, and engineering expenses," and "Selling, general, and administrative expenses" on the Consolidated Statements of Operations. The Company estimates the total restructuring charge to be approximately $1,250,000, of which $1,216,000 has been recorded to date and included in "Restructuring charges" on the Consolidated Statements of Operations in the MVSD reporting segment. The remaining cost will be recognized during the fourth quarter of 2009. The following table summarizes the restructuring plan (in thousands):

                                                                           Incurred in              Incurred in              Cumulative
                                                  Total Amount             the Three-                the Nine-             Amount Incurred
                                                 Expected to be           months Ended             months Ended                through
                                                    Incurred             October 4, 2009          October 4, 2009          October 4, 2009
One-time termination benefits                   $            552        $             (40 )      $             298        $             552
Contract termination costs                                   374                        -                      374                      374
Other associated costs                                       324                       29                      286                      290

                                                $          1,250        $             (11 )      $             958        $           1,216

One-time termination benefits include severance and retention bonuses for 31 employees who were terminated. Severance and retention bonuses for those employees who continued to work after the notification date were recognized over the service period. Contract termination costs primarily include rental payments for the Duluth, Georgia facility for periods subsequent to the date the distribution activities were transferred to Natick, Massachusetts, for which the Company will not receive an economic benefit. These contract termination costs were recognized in the second quarter of 2009 when the Company ceased using the Duluth, Georgia facility. Other associated costs primarily include travel and transportation expenses between Georgia and Massachusetts related to the closure of the Georgia facility and relocation costs related to employees transferred to other locations, as well as outplacement services for the terminated employees. These costs are being recognized when the services are performed. The following table summarizes the activity in the Company's restructuring reserve, which is included in "Accrued expenses" on the Consolidated Balance Sheets (in thousands):

                                                One-time             Contract              Other
                                               Termination          Termination         Associated
                                                Benefits               Costs               Costs            Total
Balance as of December 31, 2008               $         207        $           -        $         -        $    207
Restructuring charges                                   393                  374                286           1,053
Cash payments                                          (505 )               (268 )             (267 )        (1,040 )
Restructuring adjustments                               (95 )                  -                  -             (95 )
. . .