Overview

The following is a brief discussion and explanation of significant financial data, which is presented to help the reader understand the results of the Company's financial performance for the three-month periods ended March 31, 2012 and March 31, 2011 and the Company's financial position at March 31, 2012. The information includes discussions of sales, expenses, capital resources and other significant financial items.

This discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. The ensuing discussion and analysis contains both statements of historical fact and forward-looking statements. 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, generally are identified by the words "expects," "believes," "anticipates" or words of similar import. Examples of forward-looking statements include: (a) projections regarding sales, revenue, liquidity, capital expenditures and other financial items; (b) statements of the plans, beliefs and objectives of the Company or its management; (c) statements of future economic performance; and (d) assumptions underlying statements regarding the Company or its business. Forward-looking statements are subject to factors and uncertainties that could cause actual results to differ materially from the forward-looking statements, including, but not limited to, those factors and uncertainties described below under "Liquidity and Capital Resources," "Factors Affecting Future Results" and "Risk Factors," and those factors set forth under "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Cimetrix is a software company that designs, develops, markets and supports factory automation and equipment control solutions worldwide. The Company offers software products and professional services tailored to meet the needs of equipment suppliers in the areas of advanced equipment control, general purpose equipment connectivity, and specialized connectivity for 300mm semiconductor wafer fabrication facilities.

Revenues are derived from the sales of software and services. Software includes the initial sale of software development kits, the ongoing runtime licenses that equipment suppliers purchase for each machine shipped with Cimetrix software and annual contracts for software license updates and product support. Services include the sale of professional services that provide customers with software solutions typically incorporating Cimetrix software products. While Cimetrix products are installed in equipment in a wide range of industries, the Company has focused on the global semiconductor, photovoltaic (PV) and high brightness light emitting diode (HB-LED) industries.

Critical Accounting Policies

The Company prepares its condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. The Company's condensed consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1-Summary of Significant Accounting Policies to the Company's audited financial statements included in the Company's 2011 Annual Report filed on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations.

Operations Review

Revenues

The following table summarizes revenues by category and as a percent of total
revenues:
                                                                Three Months Ended
                                                                     March 31,
                                                         2012                        2011
New software licenses                          $   968,000         61%     $ 1,448,000         71%
Software license updates and product support       242,000         15%         222,000         11%
Total software revenues                          1,210,000         76%       1,670,000         81%
Professional services                              378,000         24%         383,000         19%
Total revenues                                 $ 1,588,000        100%     $ 2,053,000        100%

Total revenue decreased by $465,000, or 23%, to $1,588,000 for the three months ended March 31, 2012, compared to total revenue of $2,053,000 for the three months ended March 31, 2011. On a sequential basis, total revenue decreased by $139,000 or 8%, compared to the three months ended December 31, 2011. The decrease in revenue year-over-year was aligned with industry analysts' 2012 forecasts for the overall semiconductor capital equipment market to decline 10-20% year-over-year, along with declines in the PV and HB-LED capital markets of 60% and 40%, respectively. The primary markets served by Cimetrix customers are the semiconductor, PV, HB-LED, and other electronics markets.

New software license revenues include the initial sale of software development kits and the ongoing runtime licenses that equipment suppliers purchase for each machine shipped with Cimetrix software. New software license revenue decreased by $480,000, or 33%, to $968,000 for the three months ended March 31, 2012, compared to new software license revenue of $1,448,000 for the three months ended March 31, 2011. On a sequential basis, new software license revenue increased by $148,000, or 18%, compared to the three months ended December 31, 2011. As expected, new software license revenue decreased significantly year-over-year, but increased on a sequential basis as the semiconductor capital equipment market began to recover from its lower levels in the second half of 2011.

Revenue associated with software license updates and product support increased 9% year-over-year for the three months ended March 31, 2012. The increase in revenues from software license updates and product support was a result of new customers added since March 31, 2011.

Total software revenues decreased to $1,210,000 for the three months ended March 31, 2012, as compared to $1,670,000 for the three months ended March 31, 2011. Again, this decrease in revenues is attributable to the overall decline in the semiconductor capital, PV and HB-LED capital markets since the second half of 2011. On a sequential basis, total software revenues increased 12%, compared to the three months ended December 31, 2011.

Professional services revenue was essentially flat, year-over-year for the three months ended March 31, 2012. On a sequential basis, professional services revenue decreased 42% as a number of major professional services engagements were completed in the fourth quarter of 2011. While Cimetrix is a software products company, professional services is a complementary service we offer to assist customers in using Cimetrix products. Some customers purchase Cimetrix software development kits and perform the integration work themselves. Other customers will only purchase Cimetrix products if Cimetrix is also able to provide professional services assistance.

Results of Operations

The following table sets forth the percentage of costs and expenses to total
revenues derived from the Company's Condensed Consolidated Statements of
Operations:

                                                     Three Months Ended
                                                          March 31,
                                                     2012           2011
             Total Revenues                            100 %          100 %

             Operating costs and expense:
             Cost of revenues                           47             40
             Sales and marketing                        17             13
             Research and development                   14             13
             General and administrative                 20             18
             Depreciation and amortization               1              1

             Total operating costs and expenses         99             85

             Income from operations                      1             15
             Other expense, net                          -             (1 )
             Total other expenses, net                   -             (1 )

             Income before income taxes                  1             14
             Provision for income taxes                  -              -

             Net income                                  1 %           14 %

The Company reported net income of $15,000 for the three months ended March 31, 2012, compared to $290,000 for the three months ended March 31, 2011.As stated earlier, a recent pull-back in the semiconductor, PV and HB-LED capital markets that began in the middle of 2011 impacted our first quarter 2012 software revenues and operating results. The net results for all periods include non-cash stock-based compensation expense and non-cash depreciation and amortization expense. For the three-month periods ended March 31, 2012 and March 31, 2011, stock-based compensation expense was $25,000 and $11,000, respectively, and depreciation and amortization expense was $15,000 and $11,000, respectively.

The Company used net cash from operating activities totaling $229,000 for the three months ended March 31, 2012, compared to $344,000 for the three months ended March 31, 2011.

Cost of Revenues

The Company's cost of revenues for the three months ended March 31, 2012 decreased by $80,000, or 10% to $744,000 from $824,000 for three months ended March 31, 2011. This decrease was a combination of investment in our current products and reduction of the use of service partners to augment our engineering team to deliver Professional Services netted against the increased head-count and related payroll and benefit costs. While cost of revenues decreased by $80,000 for the three months ended March 31, 2012, as a percentage of total revenue, cost of revenues increased from 40% of total revenues for the three months ended March 31, 2011 to 47% for the same period in 2012. This increase in cost of revenues, as a percentage of total revenues, was primarily a result of lower revenues for the three months ended March 31, 2012 compared to the same period in 2011. Cost of revenues as a percentage of total revenues will vary from period to period depending on the mix of software and professional service revenues, the type of service projects completed, the pricing strategy for the projects, the extent of utilization of outside resources, and other factors.

Sales and Marketing

Sales and marketing expenses decreased $2,000, or 1%, to $271,000 during the three months ended March 31, 2012, from $273,000 during the three months ended March 31, 2011. The decrease was primarily a result of reduced commissions on lower revenues offset by increased costs for our Japan operations. While sales and marketing expenses decreased by $2,000 for the three months ended March 31, 2012, as a percentage of total revenue, sales and marketing expenses increased from 13% of total revenues for the three months ended March 31, 2011 to 17% for the same period in 2012. This increase in sales and marketing expenses, as a percentage of total revenues, was a result of lower revenues for the three months ended March 31, 2012 compared to the same period in 2011. Sales and marketing expenses reflect the direct payroll and related travel expenses of the Company's sales and marketing staff, the development of product brochures and marketing materials, costs associated with press releases, branding, search engine optimization, website design improvements and costs related to the Company's representation at industry trade shows.

Research and Development

Research and development expenses decreased $59,000 or 21%, to $218,000 during the three months ended March 31, 2012, from $277,000 during the three months ended March 31, 2011. The decrease was primarily due to the reduction of use of service partners to augment our engineering team. While research and development expenses decreased by $59,000 for the three months ended March 31, 2012, as a percentage of total revenue, research and development expenses increased from 13% of total revenues for the three months ended March 31, 2011 to 14% for the same period in 2012. This increase in research and development expenses, as a percentage of total revenues, was a result of lower revenues for the three months ended March 31, 2012 compared to the same period in 2011. Research and development expenses include only direct costs for wages, benefits, materials, and education of technical personnel involved in new product development activities. All indirect costs such as rents, utilities, depreciation and amortization are included in general and administrative expenses, as discussed below.

General and Administrative

General and administrative expenses decreased $42,000 or 12%, to $323,000 in the three months ended March 31, 2012, from $365,000 in the three months ended March 31, 2011. The decrease was primarily due to lower net income and related profit sharing costs. While general and administrative expenses decreased by $42,000 for the three months ended March 31, 2012, as a percentage of total revenue, general and administrative expenses increased from 18% of total revenues for the three months ended March 31, 2011 to 20% for the same period in 2012. This increase in general and administrative expenses, as a percentage of total revenues, was a result of lower revenues for the three months ended March 31, 2012 compared to the same period in 2011. General and administrative expenses include all direct costs for administrative and accounting personnel, and all rents and utilities for maintaining Company offices.

Depreciation and Amortization

Depreciation and amortization expense increased $4,000 or 36% to $15,000 in the three months ended March 31, 2012, from $11,000 in the three months ended March 31, 2011. The increase is a result the Company's investment in equipment upgrades and new financial software.

Other Income (Expense)

Interest expense for the three months ended March 31, 2012 was $0, compared to $14,000 for the three months ended March 31, 2011. The decrease in interest expense for the three months ended March 31, 2012, compared to the same period in 2011 was due to the repayment of the Company's Senior Notes in July 2011.

Interest income for the three months ended March 31, 2012 was $0 and $1,000 for the three months ended March 31, 2011. The absence of interest income in 2012 was a result of lower cash reserves combined with near zero interest rates.

Liquidity and Capital Resources

At March 31, 2012, the Company had current assets of $1,732,000, including cash and cash equivalents of $635,000, and current liabilities of $703,000, resulting in a working capital of $1,029,000. Excluding deferred revenue of $318,000, which requires the Company to provide services and support, but does not represent a scheduled obligation requiring the outlay of Company funds, the Company's current assets exceeded current liabilities by $1,347,000 at March 31, 2012.

Revolving Bank Line of Credit - The Company and Silicon Valley Bank (the "Bank") entered into a Loan and Security Agreement, effective as of September 27, 2011. Line of credit advances are available to the Company in accordance with a defined "Availability Amount", based in part on qualifying accounts receivable, up to a maximum of $1 million. The line of credit bears interest at the prime rate plus 1.75%, payable monthly, and matures September 26, 2012. The line of credit is collateralized by substantially all operating assets of the Company. Interest payments are payable on the first day of each month with all principal advances payable on the maturity date of the line of credit. As of March 31, 2012, the Company had no borrowings against the line of credit.

Under the line of credit agreement, the Company is required to comply with the following financial covenants:
· Maintain a ratio of quick assets to current liabilities minus deferred revenue of at least: 1.50 to 1.00

· Maintain a tangible net worth equal to or greater than the sum of (i) $500,000, plus (ii) for each successive quarter, commencing as of the quarter ending December 31, 2011, 50% of net proceeds received by Company in the preceding quarter from bona-fide issuances of new equity or bridge financing which constitutes "subordinated debt".

The line of credit agreement also contains numerous negative comments restricting certain actions by the Company without the bank's consent, such as are typically included in similar loan agreements, including restrictions on the payment of dividends, restrictions on incurring additional debt, prohibitions restricting major corporation transactions, including a sale of the business, and a requirement that the Company retain certain key employees.

At March 31, 2012, the Company was in compliance with all covenants.

Results of Operations and Cash Flows - The Company has posted eleven consecutive quarters of positive net income, beginning in mid-2009. As of March 31, 2012, the Company had total stockholders' equity of $1,225,000. During the three months ended March 31, 2012, the Company reported net income of $15,000 compared to $290,000 for the same period in 2011. The Company used net cash in operating activities of $229,000 for the three months ended March 31, 2012 as compared to net cash used in operating activities of $344,000 for the same period in 2011.

Net cash used in investing activities during the three months ended March 31, 2012, was $7,000. Net cash used in investing activities during the three months ended March 31, 2011, was $26,000 and consisted of hardware and software upgrades.

Net cash used in financing activities for the three months ended March 31, 2012 was $0, compared to $70,000 for the three months ended March 31, 2011 which comprised of $5,000 in proceeds from the issuance of common stock related to the exercise of Senior Note warrants, and payments of debt to related parties of $75,000.

The Company has not been adversely affected by inflation. Revenues from foreign customers were $595,000 during the three months ended March 31, 2012, representing 37% of the Company's total revenues, compared to $891,000 or 43%, of total revenues during the same period in 2011. Most of Cimetrix's PV and HB-LED sales came from customers outside the United States and the decrease in foreign customer sales year over year is mainly attributable to the significant downturn in the PV and HB-LED markets as described in the Operations Review section above. There are potential economic risks inherent in foreign trade. To minimize the risk from changes in foreign currency exchange rates, the Company's export sales are primarily transacted in United States dollars.

Factors Affecting Future Results

Total revenues for the first three months of 2012 decreased 23% compared to the first three months of 2011, reflecting the significant decline in the semiconductor, PV and HB-LED capital equipment markets beginning in the second half of 2011. As anticipated, however, new software license revenues increased on a sequential basis from the fourth quarter of 2011, providing evidence that at least the semiconductor capital equipment market is growing from its low levels in the second half of 2011. Sales of software development kits are difficult for the Company to forecast, as the Company is highly dependent on the timing of the equipment suppliers' decision to initiate a new machine development program and utilize the Company's products.

The Company continues to focus on incrementally expanding its customer base and product line in order to increase revenues. In 2008, the Company introduced its CIMControlFramework product for equipment control, which enables the Company to provide equipment makers with a complete software solution that reduces their time-to-market for new equipment developments. As equipment makers reduce costs and internal resources, Cimetrix believes the market for CIMControlFramework will continue to grow as equipment makers invest in new machine development programs.

Ultimately, the Company's business is driven by the global demand for electronic devices by consumers and businesses. Any changes in the global economic conditions could adversely affect Cimetrix's business and results of operations.

The Company continues to pursue customers through its professional services group, which is available to assist customers by providing professional services and complete turnkey solutions. The ability of the Company to provide both products and services to its customer base is becoming a more important factor as customers seek to limit the number of suppliers, reduce their internal staff, and prefer single source responsibility. The experience gained delivering professional services also provides valuable inputs to new product development roadmaps.

The Company's future operating results and financial condition are difficult to predict and will be affected by a number of factors. The markets for the Company's products are emerging and specialized. There can be no assurance that the markets for industrial motion control, factory connectivity, and equipment control that are served by the Company will continue to grow, or that the Company's existing and new products will satisfy the requirements of those markets and achieve a successful level of customer acceptance.

Because of these and other factors, past financial performance is not necessarily indicative of future performance, and historical trends should not be used to anticipate future operating results.