<PAGE>
                                                                      Exhibit 13



COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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) inaccurate
forecasts of customer demand; (10) the technological obsolescence of current
products and the inability to develop new products; (11) the inability to
protect the Company's proprietary technology and intellectual property; (12) the
Company's involvement in time-consuming and costly litigation; (13) the impact
of competitive pressures; (14) the challenges in integrating acquired businesses
and achieving expected results from acquisitions; and (15) the inability to find
attractive acquisition opportunities. 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.

EXECUTIVE OVERVIEW

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 addition to product revenue derived from the sale of machine vision systems,
the Company also generates revenue by providing maintenance and support,
education, consulting, and installation services to its customers. The Company's
customers can be classified into three markets: semiconductor and electronics
capital equipment, discrete factory automation, and surface inspection.
Semiconductor and electronics capital equipment manufacturers purchase Cognex
machine vision systems and integrate them into the capital equipment that they
manufacture and then sell to their customers in the semiconductor and
electronics industries that either make computer chips or make printed circuit
boards containing computer chips. Although the Company sells to original
equipment manufacturers (OEMs) in a number of industries, these semiconductor
and electronics OEMs have historically been large consumers of the Company's
products. Discrete manufacturers in the factory automation area include a wide
array of manufacturers who use machine vision for applications in a variety of
industries, including the automotive, consumer electronics, food and beverage,
healthcare, and pharmaceutical industries. The majority of these customers are
end users who purchase Cognex machine vision systems and install them directly
on their production lines. The last category, surface inspection customers,
includes manufacturers of materials processed in a continuous fashion, such as
paper and metals.

                                     --14--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Over the past few years, the Company has been successful in diversifying its
customer base beyond semiconductor and electronics capital equipment
manufacturers. Demand from these capital equipment manufacturers is highly
cyclical, with periods of investment followed by temporary downturns. During the
first half of 2004, the Company experienced an increase in orders from these
customers that has since been curtailed. Although demand from capital equipment
manufacturers has increased sequentially in each quarter of 2005, it is still
well below the level experienced in the first half of 2004, resulting in a 33%
decrease in sales to this sector for the year ended December 31, 2005 as
compared to the prior year.

Despite the 33% decrease in sales to semiconductor and electronics capital
equipment manufacturers from the prior year, the Company's total revenue in 2005
increased 7% from 2004 to $217 million due to growth in the discrete factory
automation and surface inspection markets, as well as the acquisition of DVT
Corporation on May 9, 2005. This acquisition provided the Company with a
worldwide network of distributors to sell its expanding line of low-cost,
easy-to-use products to the discrete factory automation market. Excluding
revenue from acquired DVT products, discrete factory automation and surface
inspection sales each grew by 22% from the prior year.

During 2005, the Company continued to focus its spending in strategic areas that
help drive revenue growth in the discrete factory automation market. Although
the growth in factory automation revenue exceeded the Company's investment in
sales and marketing, net income decreased from $0.80 per share in 2004 to $0.74
per share in 2005 due to the dramatic decline in the semiconductor and
electronics capital equipment business.

The following table sets forth certain consolidated financial data as a
percentage of revenue:

<TABLE>
<CAPTION>
Year ended December 31,                           2005    2004    2003
----------------------------------------------------------------------
<S>                                               <C>     <C>     <C>
Revenue                                            100%    100%    100%
Cost of revenue                                     29      28      33
                                                  --------------------
Gross margin                                        71      72      67
Research, development, and engineering expenses     13      14      17
Selling, general, and administrative expenses       38      35      37
                                                  --------------------
Operating income                                    20      23      13
Nonoperating income                                  2       3       3
                                                  --------------------
Income before taxes                                 22      26      16
Income tax provision                                 6       7       5
                                                  --------------------
Net income                                          16%     19%     11%
                                                  ====================
</TABLE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005
COMPARED TO YEAR ENDED DECEMBER 31, 2004

REVENUE

Revenue for the year ended December 31, 2005 increased 7% to $216,875,000 from
$201,957,000 for the year ended December 31, 2004. Although sales to customers
who make capital equipment for the semiconductor and electronics industries
declined by $29,566,000, or 33%, from the prior year, this decrease was offset
by increased sales to discrete manufacturing customers in the factory automation
area (including approximately $19,000,000 of revenue from acquired DVT products)
and higher sales to surface inspection customers. Demand from these capital
equipment manufacturers is highly cyclical, with periods of investment followed
by temporary downturns. During the first half of 2004, the Company experienced
an increase in orders from these customers that has since been curtailed.
However, sales to discrete factory automation customers increased $38,221,000,
or 45%, from 2004 and sales to surface inspection customers increased
$6,263,000, or 22%, from the prior year. As a result, revenue from customers
outside of the semiconductor and electronics capital equipment sector grew from
the prior year and represented the

                                     --15--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

majority of the company's total revenue in 2005, increasing as a percentage of
total revenue to 73% in 2005 from 58% in 2004. Geographically, revenue increased
in all of the Company's major regions except in Japan, where many of the
Company's semiconductor and electronics capital equipment customers are located.

Product revenue for the year ended December 31, 2005 increased 9% to
$192,804,000 from $176,569,000 for the year ended December 31, 2004. The
increase in product revenue was due to a higher volume of machine vision systems
sold to discrete manufacturers in the factory automation area, as well as a
higher volume of sales to surface inspection customers. Service revenue, which
is derived from the sale of maintenance and support, education, consulting, and
installation services, decreased 5% to $24,071,000 in 2005 from $25,388,000 in
2004 due principally to lower revenue generated by maintenance and support
programs. In recent years, the Company has expanded its MVSD product offerings
to include a wider range of easy-to-use products that require less maintenance
and support, and this trend has resulted in a decline in service revenue.
Service revenue decreased as a percentage of total revenue to 11% in 2005 from
13% in 2004.

MVSD revenue for the year ended December 31, 2005 increased 5% to $182,544,000
from $173,889,000 for the year ended December 31, 2004. The increase in MVSD
revenue was due to a higher volume of modular vision systems sold to discrete
manufacturing customers in the factory automation area. SISD revenue increased
22% to $34,331,000 in 2005 from $28,068,000 in 2004. The increase in SISD
revenue was due principally to a higher volume of SmartView(R) system deliveries
and installations. SISD revenue increased as a percentage of total revenue to
16% in 2005 compared to 14% in 2004.

GROSS MARGIN

Gross margin as a percentage of revenue was 71% for 2005 compared to 72% for
2004. The decrease in gross margin was primarily due to a higher percentage of
total revenue from the sale of surface inspection systems, which have lower
margins than the sale of modular vision systems, as well as a decline in MVSD
service margins.

Product gross margin as a percentage of revenue was 75% for 2005 compared to 76%
for 2004. The decrease in product margin was primarily due to a shift in product
mix to lower-margin surface inspection systems. Service gross margin as a
percentage of revenue was 36% for 2005 compared to 43% for 2004. The decrease in
service margin was due principally to lower maintenance and support revenue that
is sold bundled with MVSD products, without a corresponding decrease in
expenses.

MVSD gross margin as a percentage of revenue was 75% for 2005 compared to 76%
for 2004. The decrease in MVSD margin was primarily due to lower maintenance and
support revenue. SISD gross margin as a percentage of revenue was 48% for 2005
compared to 45% for 2004. The increase in SISD margin was due principally to the
higher sales volume with relatively flat overhead costs.

OPERATING EXPENSES

Research, development, and engineering (R,D&E) expenses for the year ended
December 31, 2005 increased 2% to $27,640,000 from $27,063,000 for the year
ended December 31, 2004. MVSD R,D&E expenses increased $498,000, or 2%, from the
prior year primarily due to additional engineering personnel resulting from the
acquisition of DVT Corporation on May 9, 2005, partially offset by lower company
bonus accruals in 2005. SISD R,D&E expenses increased $79,000, or 3%, from the
prior year due principally to increased compensation costs.

R,D&E expenses as a percentage of revenue were 13% in 2005 and 14% in 2004. 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 expect to continue to make
significant R,D&E investments in the future. Although the Company 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 believe that none of these projects is
material on an individual basis.

Selling, general, and administrative (S,G&A) expenses for the year ended
December 31, 2005 increased 16% to $82,332,000 from $70,674,000 for the year
ended December 31, 2004. MVSD S,G&A expenses increased $12,570,000, or 23%, from
the prior year, while SISD S,G&A expenses decreased $30,000 from 2004. Corporate
expenses that are not allocated to a division decreased $882,000, or 11%, from
the prior year.

                                     --16--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The increase in MVSD expenses was primarily due to investments in sales and
marketing intended to drive revenue growth in the discrete factory automation
market, including the acquisition of DVT Corporation on May 9, 2005. This
acquisition resulted in additional sales and marketing expenses related to
managing a worldwide distribution network, as well as additional amortization
expense of $2,517,000 related to the acquired intangible assets. In addition to
the personnel added as a result of the DVT acquisition, the Company also made
investments during 2005 in its direct factory automation sales force and in
marketing activities, such as advertising, telemarketing, customer seminars, and
trade shows.

The decrease in corporate expenses was principally due to the reversal of a
$1,000,000 reserve established for possible indemnification of the Company's
customers from patent infringement claims by the Lemelson Partnership, as well
as lower company bonus accruals in 2005. These decreases were partially offset
by higher professional fees in 2005.

NONOPERATING INCOME

Investment and other income for the year ended December 31, 2005 increased 10%
to $5,130,000 from $4,670,000 for the year ended December 31, 2004. Although the
average invested balance declined in 2005 due to $111,607,000 in net cash
outlays related to the acquisition of DVT Corporation on May 9, 2005, investment
and other income increased over the prior year because the Company earned higher
yields on its portfolio of debt securities.

The foreign currency loss for the year ended December 31, 2005 was $888,000
compared to a gain of $1,641,000 for the year ended December 31, 2004. The
Company recognizes foreign currency gains and losses on the revaluation and
settlement of accounts receivable and payable balances that are reported in one
currency and collected or paid in another, as well as intercompany transactions
between its subsidiaries. The gain in 2004 was primarily due to the revaluation
and settlement of intercompany balances between the Company and its Irish
subsidiary. During 2004, the Euro Dollar strengthened versus the U.S. Dollar,
resulting in foreign currency gains on the Irish subsidiary's books when these
intercompany balances were revalued and paid. During 2005, the U.S. Dollar
gained strength versus the Euro Dollar in the months that large intercompany
transactions occurred, resulting in foreign currency losses on the Irish
subsidiary's books. These losses were not as significant as the gains
experienced in the prior year because foreign exchange rates did not fluctuate
as significantly in 2005.

INCOME TAXES

The Company's effective tax rate for 2005 was 26% compared to 29% for 2004. The
decrease in the effective tax rate was primarily due to more of the Company's
profits being earned and taxed in lower tax jurisdictions.

YEAR ENDED DECEMBER 31, 2004 COMPARED
TO YEAR ENDED DECEMBER 31, 2003

REVENUE

Revenue for the year ended December 31, 2004 increased 35% to $201,957,000 from
$150,092,000 for the year ended December 31, 2003. The majority of this growth
came from sales to semiconductor and electronics capital equipment
manufacturers, which increased $33,001,000, or 64%, from the prior year. While
sales to these customers contributed most significantly to the Company's revenue
growth in 2004, sales to discrete manufacturing customers also increased by
$19,872,000, or 29%, from 2003. Surface inspection sales, however, decreased
$1,008,000, or 3%, from the prior year. Although sales to customers outside of
the semiconductor and electronics capital equipment sector grew from the prior
year and represented the majority of the Company's total revenue in 2004, they
decreased as a percentage of total revenue to 58% in 2004 from 66% in 2003 due
to the significant increase in sales to semiconductor and electronics capital
equipment manufacturers. Geographically, revenue increased from the prior year
in all of the Company's major regions, but most significantly in Japan, where
many of the Company's semiconductor and electronics capital equipment customers
are located.

Product revenue for the year ended December 31, 2004 increased 35% to
$176,569,000 from $130,670,000 for the year ended December 31, 2003. The
increase in product revenue was due to a higher volume of machine vision systems
sold to customers in the semiconductor, electronics, automotive, and other
industries. Service revenue, which is derived from the sale of maintenance and
support, education, consulting, and installation services, increased 31% to
$25,388,000 from $19,422,000 due principally to higher revenue generated by
maintenance and support programs that are sold bundled with product offerings.
Service revenue remained constant as a percentage of total revenue at 13% in
both 2003 and 2004.

                                     --17--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MVSD revenue for the year ended December 31, 2004 increased 44% to $173,889,000
from $121,016,000 for the year ended December 31, 2003. The increase in MVSD
revenue was due to a higher volume of modular vision systems sold to customers
in the semiconductor, electronics, automotive and other industries. Although
surface inspection orders increased from the prior year, the timing of shipments
and installations resulted in a 3% decline in SISD revenue to $28,068,000 in
2004 from $29,076,000 in 2003. As a result of the increase in MVSD revenue, SISD
revenue decreased as a percentage of total revenue to 14% in 2004 compared to
19% in 2003.

GROSS MARGIN

Gross margin as a percentage of revenue was 72% for 2004 compared to 67% for
2003. The increase in gross margin was primarily due to the impact of the higher
sales volume without a proportional increase in manufacturing overhead costs, as
well as a greater percentage of total revenue from the sale of modular vision
systems, which have higher margins than the sale of services and surface
inspection systems.

Product gross margin as a percentage of revenue was 76% for 2004 compared to 71%
for 2003. The increase in product margin was primarily due to the increased
sales volume, as well as the shift in product mix to higher-margin modular
vision systems. Service gross margin as a percentage of revenue was 43% for 2004
compared to 37% for 2003. Many of the Company's products are sold with bundled
maintenance and support programs for which the revenue is recognized over the
program period. The increasing volume of product sales in 2003 and 2004 has
resulted in higher service revenue derived from these maintenance and support
programs. Although service costs increased to support the additional revenue,
the increase in revenue was greater than the increase in costs.

MVSD gross margin as a percentage of revenue was 76% for 2004 compared to 71%
for 2003. The increase in MVSD margin was primarily due to the higher sales
volume of modular vision systems. SISD gross margin as a percentage of revenue
was 45% for 2004 compared to 48% for 2003. The decrease in SISD margin was due
principally to the impact of the lower revenue, while costs increased slightly.

OPERATING EXPENSES

Research, development, and engineering (R,D&E) expenses for the year ended
December 31, 2004 increased 9% to $27,063,000 from $24,719,000 for the year
ended December 31, 2003. MVSD R,D&E expenses increased $2,156,000, or 10%, from
the prior year primarily due to higher personnel-related costs, including the
additional engineering personnel resulting from the acquisition of the machine
vision business of Gavitec AG on December 1, 2003 and the accrual of company
bonuses for 2004. SISD R,D&E expenses increased $188,000, or 7%, from the prior
year due principally to the accrual of company bonuses for 2004.

Selling, general, and administrative (S,G&A) expenses for the year ended
December 31, 2004 increased 27% to $70,674,000 from $55,724,000 for the year
ended December 31, 2003. MVSD S,G&A expenses increased $11,577,000, or 27%, from
the prior year, while SISD S,G&A expenses increased $1,031,000, or 14%, from
2003. Corporate expenses that are not allocated to a division increased
$2,342,000, or 41%, from the prior year. The increase in MVSD expenses was
primarily due to the hiring of additional sales personnel and increased
marketing spending to grow the Company's base of discrete manufacturing
customers, higher commissions related to the increased sales volume, and the
accrual of company bonuses for 2004, as well as the unfavorable impact of
foreign exchange rates on the Company's international operations. A significant
amount of the Company's sales and marketing costs are denominated in currencies
other than the U.S. Dollar, primarily the Euro Dollar and Japanese Yen. During
2004, the Euro Dollar and Japanese Yen strengthened versus the U.S. Dollar,
resulting in a higher level of expenses when these amounts were translated into
U.S. Dollars. The increase in SISD expenses was primarily due to higher
personnel-related costs, as well as the accrual of company bonuses for 2004. The
increase in corporate expenses was principally due to the accrual of company
bonuses for 2004, as well as higher professional fees related to services
required to ensure the Company's compliance with the Sarbanes-Oxley Act of 2002.

NONOPERATING INCOME

Investment and other income for the year ended December 31, 2004 decreased 14%
to $4,670,000 from $5,450,000 for the year ended December 31, 2003. This
decrease was due principally to lower average interest rates on the Company's
portfolio of debt securities.

The foreign currency gain for the year ended December 31, 2004 was $1,641,000
compared to a loss of $1,712,000

                                     --18--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

for the year ended December 31, 2003. The loss in 2003 was primarily due to the
revaluation and settlement of the Company's Irish subsidiary's accounts
receivable denominated in U.S. Dollars and Japanese Yen. During 2003, the Euro
Dollar strengthened versus the U.S. Dollar and Japanese Yen, resulting in
foreign currency losses on the Irish subsidiary's books when these receivables
were revalued and collected. Although the Company experienced similar losses in
2004, they were offset by gains on the revaluation and settlement of
intercompany balances and gains on forward contracts.

INCOME TAXES

The Company's effective tax rate for 2004 was 29% compared to 31% for 2003. The
decrease in the effective tax rate was primarily due to more of the Company's
profits being earned and taxed in lower tax jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically been able to generate positive cash flow from
operations, which has funded the Company's operating activities and other cash
requirements and has resulted in an accumulated cash, cash equivalent, and
investment balance of $312,258,000 at December 31, 2005, representing 62% of
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 year ended December 31, 2005 were met
with the Company's existing cash, cash equivalent, and investment balances, as
well as positive cash flow from operations and the proceeds from the issuance of
common stock under stock option and stock purchase plans. Cash requirements
primarily consisted of operating activities, capital expenditures, the payment
of dividends, the repurchase of common stock, and the purchase of DVT
Corporation. Capital expenditures in 2005 totaled $3,819,000 and consisted
primarily of expenditures for computer hardware.

The Company believes that its existing cash, cash equivalent, and investment
balance, together with continued positive cash flow from operations, will be
sufficient to meet its operating, investing, and financing activities in 2006
and the foreseeable future.

The following table summarizes the Company's material contractual obligations,
both fixed and contingent (in thousands):

<TABLE>
<CAPTION>
                                    Limited       Inventory
                                  Partnership      Purchase
Year Ended December 31,            Interest      Commitments      Leases        Total
---------------------------------------------------------------------------------------
<S>                               <C>            <C>            <C>           <C>
2006                              $     5,050    $    10,297    $    4,836    $  20,183
2007                                        -              -         4,504        4,504
2008                                        -              -         2,682        2,682
2009                                        -              -         1,517        1,517
2010                                        -              -           938          938
Thereafter                                  -              -         2,575        2,575
                                  -----------------------------------------------------
                                  $     5,050    $    10,297    $   17,052    $  32,399
                                  =====================================================
</TABLE>

On June 30, 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. In the original
agreement with Venrock, the Company committed to a total investment in the
limited partnership of up to $25,000,000, with the commitment period expiring on
January 1, 2005. In January 2005, the Company signed an amendment to the
original agreement with Venrock, which reduces its commitment to $22,500,000 and
extends the commitment period through December 31, 2010. The Company does not
have the right to withdraw from the partnership prior to December 31, 2010. As
of December 31, 2005, the Company had contributed $17,450,000 to the
partnership, including $1,575,000 during 2005. The remaining commitment of
$5,050,000 can be called by Venrock in any period through 2010.

In addition to the obligations described above, the following items may also
result in future material uses of cash:

STOCK REPURCHASE PROGRAM

On December 12, 2000, the Company's Board of Directors authorized the repurchase
of up to $100,000,000 of the

                                     --19--
<PAGE>
COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company's common stock. The Company repurchased 383,908 shares at a cost of
$11,690,000 in 2005 and 1,768,452 shares at a cost of $26,425,000 in 2002 under
this program. The Company may repurchase additional shares under this program in
future periods depending upon a variety of factors, including the market value
of the Company's common stock and the average return on the Company's invested
balances.

DIVIDENDS

Beginning in the third quarter of 2003, the Company's Board of Directors has
declared and paid a cash dividend in each quarter, including the first quarter
of 2006. Dividend payments amounted to $14,960,000 during 2005 and $3,784,000 in
the first quarter of 2006. These payments represented a dividend of $0.08 per
share in each quarter. Future dividends will be declared at the discretion of
the Board of Directors and will depend upon such factors as the Board deems
relevant.

STANDBY LETTERS OF CREDIT AND INCOME TAXES

On March 23, 2005, the Company provided standby letters of credit totaling
3,264,887,000 Yen (or approximately $27,683,000 based upon the exchange rate at
December 31, 2005) to taxing authorities in Japan that are collateralized by
investments on the Consolidated Balance Sheet. The Tokyo Regional Taxation
Bureau (TRTB) has asserted that Cognex Corporation has a permanent establishment
in Japan that would require certain income, previously reported on U.S. tax
returns for the years ended December 31, 1997 through December 31, 2001, to be
subject instead to taxation in Japan. The Company disagrees with this position
and believes that this assertion is inconsistent with principles under the U.S.
- Japan income tax treaty. The Company has filed a notice of objection and
request for deferral of tax payment and intends to contest this assessment
vigorously, although no assurances can be made that the Company will prevail in
this matter. In September 2003, the Company also filed a request with the
Internal Revenue Service Tax Treaty Division for competent authority assistance.
Until this matter is resolved, the Company is required to provide collateral for
these tax assessments. These letters of credit expire in approximately one year
and will be renewed as required. Should the TRTB prevail in its assertion, the
income in question would be taxable in Japan and the Company would be required
to pay approximately $27,683,000 in taxes, interest, and penalties to Japanese
taxing authorities. The Company would then be entitled to recoup the majority of
this amount from taxing authorities in the U.S. The Company has not provided any
additional accrual or reserve related to this matter.

DERIVATIVE INSTRUMENTS

In certain instances, the Company enters into forward contracts and currency
swaps to hedge against foreign currency fluctuations. Although the settlement of
these instruments may result in significant cash inflows and outflows, they
should not expose the Company to significant foreign currency net gains or
losses because the terms of the derivative instrument and the underlying
exposure are generally matched at inception.

ACQUISITIONS

On March 31, 2003, the Company acquired the wafer identification business of
Siemens Dematic AG for 7,000,000 Euros in cash (or approximately $7,630,000)
paid at closing, with the potential for an additional cash payment of up to
1,700,000 Euros (or approximately $2,013,000) depending upon the achievement of
certain performance criteria. The Company reviewed these performance criteria
during the fourth quarter of 2005 and concluded that they were not met.
Accordingly, the Company does not expect to make additional payments related to
this acquisition. During the first quarter of 2006, Siemens is exercising its
right to review the Company's documentation supporting this conclusion.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2005, the Company had no off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, and expenses, and related disclosure of

                                   --20--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

contingent assets and liabilities. Management bases its estimates on historical
experience and various other assumptions believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from these estimates under different
assumptions or circumstances resulting in charges that could be material in
future reporting periods. The Company believes the following critical accounting
policies require the use of significant estimates and judgments in the
preparation of its consolidated financial statements.

REVENUE RECOGNITION

The Company recognizes revenue from product sales upon delivery if a signed
customer contract or purchase order has been received, the fee is fixed or
determinable, and collection of the resulting receivable is probable. If the
arrangement contains customer-specified acceptance criteria, then revenue is
deferred until the Company can demonstrate that the customer's criteria have
been met. The Company maintains reserves against revenue for potential product
returns. Revenue from maintenance and support programs is deferred and
recognized ratably over the program period. Revenue from education and
consulting services is recognized over the period the services are provided.
Revenue from installation services is recognized when the customer has signed
off that the installation is complete. The Company has established
vendor-specific objective evidence of fair value for each undelivered element.

While the Company applies the guidance of Statement of Position (SOP) No. 97-2,
"Software Revenue Recognition," as amended by SOP No. 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions,"
management exercises judgment in connection with the determination of the amount
of revenue to be recognized each period. Such judgments include, but are not
limited to, assessing the probability of collecting the receivable, assessing
whether the fee is fixed or determinable, and assessing whether
customer-specified acceptance criteria are substantive in nature.

INVESTMENTS

At December 31, 2005, the Company's investment balance totaled $239,402,000, of
which $229,019,000 consisted of municipal bonds, commercial paper, and other
debt securities. Debt securities are reported at fair value, with unrealized
gains and losses, net of tax, recorded in shareholders' equity as other
comprehensive income (loss). At December 31, 2005, the Company's portfolio of
debt securities had gross unrealized losses totaling $1,172,000.

The remaining investment balance of $10,383,000 represented a limited
partnership interest in Venrock Associates III, L.P., a venture capital fund. A
director of the Company is a Managing General Partner of Venrock Associates. The
Company's limited partnership interest is accounted for using the cost method
because the Company's investment is less than 5% of the partnership and the
Company has no influence over the partnership's operating and financial
policies. At December 31, 2005, the carrying value of this investment was
$10,383,000 compared to an estimated fair value of $12,017,000.

The fair value of the Company's limited partnership interest is based upon
valuations of the partnership's investments as determined by the General
Partner. The Company understands that the General Partner adjusts the investment
valuations at least quarterly to reflect both realized and unrealized gains and
losses on partnership investments. Securities of public companies are valued at
market, subject to appropriate discounts to reflect limitations on liquidity.
Securities of private companies are valued at an estimated fair value, which
initially is at cost, adjusted for subsequent transactions that indicate a
higher or lower value is warranted. The value of private securities may be
discounted when, in the General Partner's judgment, the carrying value of such
private securities has been impaired by specific events.

The Company monitors the carrying value of its investments compared to their
fair value to determine whether an other-than-temporary impairment has occurred.
In considering whether a decline in fair value is other than temporary, the
Company considers many factors, both qualitative and quantitative in nature.
Some of these factors include the duration and extent of the fair value decline,
the length of the Company's commitment to the investment, and general economic,
stock market, and interest rate trends. In the case of the Company's limited
partnership investment, specific communications from the General Partner are
also considered in this evaluation. If a decline in fair value is determined to
be other-than-temporary, an impairment

                                     --21--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

charge would be recorded in current operations. There were no
other-than-temporary impairments of investments in 2005, 2004, or 2003.

ACCOUNTS RECEIVABLE

The Company maintains reserves against its accounts receivable for potential
credit losses. Ongoing credit evaluations of customers are performed and the
Company has historically not experienced significant losses related to the
collection of its accounts receivable. Allowances for specific accounts
determined to be at risk for collection are estimated by management taking into
account the length of time receivables have been outstanding, the risks
associated with selling to smaller customers, and the economic conditions of the
primary regions and industries sold to, as well as general economic conditions.
An adverse change in any of these factors may result in the need for additional
bad debt provisions.

INVENTORIES

Inventories are stated at the lower of cost or market. The Company 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. The failure to
accurately forecast demand, in terms of both volume and configuration, and
adjust material requirement plans in a timely manner may lead to additional
excess and obsolete inventory and future charges.

LONG-LIVED ASSETS

The Company has long-lived assets including property, plant, and equipment, as
well as acquired goodwill and other intangible assets. These assets are
susceptible to shortened estimated useful lives and changes in fair value due to
changes in their use, market or economic changes, or other events or
circumstances. In addition, the fair value of goodwill is susceptible to changes
in the fair value of the reporting units in which the goodwill resides, which
are also reportable segments. The Company evaluates the potential impairment of
its long-lived assets annually, as required, or whenever events or circumstances
indicate their carrying value may not be recoverable. If events or circumstances
occur which would require a significant reduction in the estimated useful lives
of these assets or a significant decrease in fair value below their carrying
value, an adjustment to the lives or carrying values would result in a charge to
income in the period of determination.

WARRANTY OBLIGATIONS

The Company records the estimated cost of fulfilling product warranties at the
time of sale based upon historical costs to fulfill warranty obligations.
Provisions may also be recorded subsequent to the time of sale whenever specific
events or circumstances impacting product quality become known that would not
have been taken into account using historical data. While the Company engages in
extensive product quality programs and processes, including actively monitoring
and evaluating the quality of its component suppliers and third-party contract
manufacturers, the Company's warranty obligation is affected by product failure
rates, material usage, and service delivery costs incurred in correcting a
product failure. An adverse change in any of these factors may result in the
need for additional warranty provisions.

CONTINGENCIES

Estimated losses from contingencies are accrued by management based upon the
likelihood of a loss and the ability to reasonably estimate the amount of the
loss. Estimating potential losses, or even a range of losses, is difficult and
involves a great deal of judgment. The Company relies primarily on assessments
made by its internal and external legal counsel to make its determination as to
whether a loss contingency arising from litigation should be recorded or
disclosed. Should the resolution of a contingency result in a loss that the
Company did not accrue because management did not believe that the loss was
probable or capable of being reasonably estimated, then this loss would result
in a charge to income in the period the contingency was resolved.

INCOME TAXES

As part of the process of preparing consolidated financial statements,
management is required to estimate income taxes in each of the jurisdictions in
which the Company operates. This process involves estimating the current tax
liability, as well as assessing temporary differences arising from the different
treatment of items for financial statement and tax purposes. These differences
result in deferred tax assets and liabilities, which are recorded on the
Consolidated Balance Sheet.

At December 31, 2005, the Company had net deferred tax assets of $17,894,000,
primarily resulting from temporary differences between the financial statement
and tax bases of assets and liabilities. Management has evaluated the
realizability of these deferred tax assets and has determined that

                                     --22--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

it is more likely than not that these assets will be realized. In reaching this
conclusion, management has evaluated relevant criteria, including the Company's
historical profitability, current projections of future profitability, and the
lives of tax credits, net operating and capital losses, and other carryforwards,
certain of which have indefinite lives. Should the Company fail to generate
sufficient pre-tax profits in future periods, the Company may be required to
record material adjustments to these deferred tax assets, resulting in a charge
to income in the period of determination.

Significant judgment is required in determining worldwide income tax expense
based upon tax laws in the various jurisdictions in which the Company operates.
The Company has established reserves to provide for additional income taxes that
may be due in future years as these previously filed tax returns are audited.
These reserves have been established based upon management's assessment as to
the potential exposure attributable to permanent differences and interest
applicable to both permanent and temporary differences. All tax reserves are
analyzed periodically and adjustments are made as events occur that warrant
modification, such as the completion of audits or the expiration of statues of
limitations, which may result in future charges or credits to tax expense.

DERIVATIVE INSTRUMENTS

In certain instances, the Company enters into forward contracts and currency
swaps to hedge against foreign currency fluctuations. These contracts are used
to reduce the Company's risk associated with foreign currency exchange rate
changes, as the gains or losses on these contracts are intended to offset the
losses or gains on the underlying exposures. The Company does not engage in
foreign currency speculation.

The Company recorded net foreign currency losses of $888,000 in 2005, net
foreign currency gains of $1,641,000 in 2004, and net foreign currency losses of
$1,712,000 in 2003. The Company's exposure to foreign currency gains and losses
has increased in recent years as a greater portion of its revenues, expenses,
assets, and liabilities are denominated in currencies other than the functional
currencies of the Company or its subsidiaries. In addition, foreign exchange
rates have fluctuated significantly in recent years.

Administering the Company's foreign currency risk management program requires
the use of estimates and the application of judgment, including compiling
forecasts of transaction activity denominated in various currencies. The failure
to identify foreign currency exposures and construct effective hedges may result
in material foreign currency gains or losses.

NEW PRONOUNCEMENTS

SFAS NO. 123R, "SHARE-BASED PAYMENT"

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 cost
for all share-based payments to employees (including stock option and employee
stock purchase plans) at fair value. SFAS No. 123R will be effective for public
companies no later than the beginning of the first fiscal year after June 15,
2005. The Company will adopt SFAS No. 123R beginning in the first quarter of
2006 using the modified prospective method in which compensation cost is
recognized beginning on the effective date.

The Company currently recognizes compensation costs using the intrinsic value
based method and, as such, generally recognizes no compensation cost.
Accordingly, the adoption of SFAS No. 123R's fair value based method will have a
significant impact on the Company's results of operations, although it will have
no impact on its overall financial position. Had the Company adopted SFAS No.
123R in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in the disclosure of pro forma net income
and net income per share in Note 1 to the Company's consolidated financial
statements. The impact of the adoption of SFAS No. 123R in future periods will
depend, in part, upon the level of share-based payments granted in the future.
Based upon preliminary estimates of stock option grants in 2006, as well as
preliminary valuation assumptions, such as expected stock price volatility,
option lives, and forfeiture rates, the Company anticipates total pre-tax
share-based compensation costs for 2006 to approximate $12,000,000.

                                     --23--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SFAS NO. 151, "INVENTORY COSTS"

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment
of Accounting Research Bulletin (ARB) No. 43, Chapter 4." SFAS No. 151 amends
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period charges. In addition,
SFAS No. 151 requires that the allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company has adopted the provisions of SFAS
No. 151 and its adoption did not have a material impact on the Company's
financial condition or results of operations.

AJCA OF 2004

In October 2004, the American Jobs Creation Act of 2004 (the "AJCA") was passed.
The AJCA provides a deduction for income from qualified domestic production
activities, which is being phased in from 2005 through 2010. The AJCA also
provides for a two-year phase-out of the existing extra-territorial income
exclusion for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. In December 2004, the FASB
issued FASB Staff Position (FSP) No. 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004." FSP No. 109-1
treats the deduction as a "special deduction" as described in SFAS No. 109. This
special deduction has no effect on deferred tax assets and liabilities existing
at the enactment date and the effect of this deduction will be reported in the
same period in which the deduction is claimed in the Company's tax return.

The AJCA also creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. This
deduction is subject to a number of limitations. After careful review of the
AJCA temporary incentive for repatriation of accumulated income, the Company has
determined that there will be no immediate changes to its current policy to
reinvest the accumulated earnings of its foreign subsidiaries.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

The Company faces exposure to adverse movements in foreign currency exchange
rates as a significant portion of its revenues, expenses, assets, and
liabilities are denominated in currencies other than the functional currencies
of the Company or its subsidiaries. These exposures may change over time as
business practices evolve. The Company evaluates its foreign currency exposures
on an ongoing basis and makes adjustments to its foreign currency risk
management program as circumstances change.

In certain instances, the Company enters into forward contracts and currency
swaps to hedge against foreign currency fluctuations. Currency swaps are used to
hedge long-term transactions between the Company and its subsidiaries. Forward
contracts are used to provide a hedge against transactions denominated in
currencies other than the functional currencies of the Company or its
subsidiaries. These forward contracts and currency swaps are used to reduce the
Company's risk associated with foreign currency exchange rate changes, as the
gains or losses on these contracts are intended to offset the losses or gains on
the underlying exposures. The Company does not engage in foreign currency
speculation.

The success of the Company's foreign currency risk management program depends
upon forecasts of transaction activity denominated in various currencies. To the
extent that these forecasts are overstated or understated during periods of
currency volatility, the Company could experience unanticipated foreign currency
gains or losses that could have a material impact on the Company's results of
operations. In addition, the failure to identify new exposures and hedge them in
a timely manner may result in material foreign currency gains or losses.

The Company enters into currency swaps to hedge the foreign currency exposure of
its long-term intercompany loans between the parent and certain of its European
subsidiaries. Currency swaps to exchange a total of 41,340,000 Euro Dollars for
U.S. Dollars at a weighted-average settlement price of 1.02 USD/Euro, with
original terms of approximately four to five years, were outstanding at December
31, 2005. These instruments had a fair value of an $8,987,000

                                     --24--
<PAGE>

COGNEX CORPORATION: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

loss at December 31, 2005, which was materially offset by gains on the Company's
intercompany loans. In addition, the Company enters into forward contracts to
hedge the foreign currency exposure of its Irish subsidiary's accounts
receivable denominated in U.S. dollars and Japanese Yen. Forward contracts to
exchange 1,234,500,000 Japanese Yen for Euro Dollars at a weighted-average
settlement price of 137.54 Yen/Euro and contracts to exchange 6,060,000 U.S.
dollars for Euro Dollars at a weighted-average settlement price of 1.19
USD/Euro, both with terms of one to six months, were outstanding at December 31,
2005. These instruments had a fair value of a $131,000 gain at December 31,
2005.

INTEREST RATE RISK

The Company's investment portfolio includes municipal bonds, commercial paper,
and other debt securities. Debt securities with original maturities greater than
three months are designated as available-for-sale and are reported at fair
value. At December 31, 2005, the fair value of the Company's portfolio of debt
securities amounted to $229,019,000, with principal amounts totaling
$233,100,000, maturities that do not exceed three years, and a yield to maturity
of 2.61%. Differences between the fair value and principal amounts of the
Company's portfolio of debt securities are primarily attributable to discounts
and premiums arising at the acquisition date, as well as unrealized gains and
losses at the balance sheet date.

Given the relatively short maturities and investment-grade quality of the
Company's portfolio of debt securities at December 31, 2005, a sharp rise in
interest rates should not have a material adverse effect on the fair value of
these instruments. As a result, the Company does not currently hedge these
interest rate exposures.

The following table presents the hypothetical change in the fair value of the
Company's portfolio of debt securities arising from selected potential changes
in interest rates (in thousands). This modeling technique measures the change in
fair value that would result from a parallel shift in the yield curve plus or
minus 50 and 100 basis points (BP) over a twelve-month time horizon.

<TABLE>
<CAPTION>
                         Valuation of securities given    No change in    Valuation of securities given
Type of security           an interest rate decrease     interest rates     an interest rate increase
----------------           -------------------------     --------------     -------------------------
<S>                      <C>                  <C>        <C>              <C>                 <C>
                           (100 BP)           (50 BP)                        50 BP             100 BP
                           --------           -------                        -----             ------

Municipal Bonds,
Commercial Paper, and
Other Debt Securities    $242,445             $242,586   $243,718         $241,799            $241,936
</TABLE>

OTHER MARKET RISKS

The Company's investment portfolio also includes a limited partnership interest
in Venrock Associates III, L.P., a venture capital fund with an investment focus
on Information Technology and Health Care and Life Sciences. The majority of the
partnership's portfolio consists of investments in early stage, private
companies characterized by a high degree of risk, volatility, and illiquidity. A
director of the Company is a Managing General Partner of Venrock Associates.

The fair value of the Company's limited partnership interest is based upon
valuations of the partnership's investments as determined by the General
Partner. The Company understands that the General Partner adjusts the investment
valuations at least quarterly to reflect both realized and unrealized gains and
losses on partnership investments.

Securities of public companies are valued at market, subject to appropriate
discounts to reflect limitations on liquidity. Securities of private companies
are valued at an estimated fair value, which initially is at cost, adjusted for
subsequent transactions that indicate a higher or lower value is warranted. The
value of private securities may be discounted when, in the General Partner's
judgment, the carrying value of such private securities has been impaired by
specific events.

At December 31, 2005, the carrying value of this investment was $10,383,000
compared to an estimated fair value, as determined by the General Partner, of
$12,017,000. Should the fair value of this investment decline in future periods
below its carrying value, the Company will determine whether this decline is
other-than-temporary and future impairment charges may be required.

                                     --25--
<PAGE>

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

<TABLE>
<CAPTION>
Year Ended December 31,                                               2005         2004        2003
-----------------------                                             ---------    ---------   ---------
<S>                                                                 <C>          <C>         <C>
Revenue
   Product                                                          $ 192,804    $ 176,569   $ 130,670
   Service                                                             24,071       25,388      19,422
                                                                    ---------    ---------   ---------
                                                                      216,875      201,957     150,092

Cost of revenue
   Product                                                             47,611       42,788      37,870
   Service                                                             15,288       14,583      12,269
                                                                    ---------    ---------   ---------
                                                                       62,899       57,371      50,139

Gross margin
   Product                                                            145,193      133,781      92,800
   Service                                                              8,783       10,805       7,153
                                                                    ---------    ---------   ---------
                                                                      153,976      144,586      99,953
Research, development, and engineering expenses                        27,640       27,063      24,719
Selling, general, and administrative expenses                          82,332       70,674      55,724
                                                                    ---------    ---------   ---------
Operating income                                                       44,004       46,849      19,510
Investment and other income                                             5,130        4,670       5,450
Foreign currency gain (loss)                                             (888)       1,641      (1,712)
                                                                    ---------    ---------   ---------
Income before taxes                                                    48,246       53,160      23,248
Income tax provision                                                   12,544       15,416       7,297
                                                                    ---------    ---------   ---------
Net income                                                          $  35,702    $  37,744   $  15,951
                                                                    ==========   =========   =========
Net income per common and common equivalent share:
   Basic                                                            $    0.76    $    0.83   $    0.37
                                                                    ==========   =========   =========
   Diluted                                                          $    0.74    $    0.80   $    0.36
                                                                    ==========   =========   =========

Weighted-average common and common equivalent shares outstanding:
   Basic                                                               46,709       45,480      43,173
                                                                    ==========   =========   =========
   Diluted                                                             47,935       47,358      44,466
                                                                    ==========   =========   =========
Cash dividends per common share                                     $    0.32    $    0.28   $    0.12
                                                                    ==========   =========   =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      -26-
<PAGE>

COGNEX CORPORATION: CONSOLIDATED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
December 31,                                                           2005         2004
------------                                                         ---------    ---------
<S>                                                                  <C>          <C>
ASSETS
Current assets:
   Cash and cash equivalents                                         $  72,856    $  54,270
   Short-term investments                                              169,156      180,409
   Accounts receivable, less reserves of $2,370 and $2,596 in 2005
      and 2004, respectively                                            42,051       33,816
   Inventories, net                                                     18,819       20,091
   Deferred income taxes                                                 7,667        9,504
   Prepaid expenses and other current assets                            16,104       14,871
                                                                     ---------    ---------
         Total current assets                                          326,653      312,961
Long-term investments                                                   70,246      156,397
Property, plant, and equipment, net                                     24,175       23,995
Deferred income taxes                                                   10,227       21,516
Intangible assets, net                                                  50,049        7,506
Goodwill                                                                79,807        7,033
Other assets                                                             3,405        3,900
                                                                     ---------    ---------
                                                                     $ 564,562    $ 533,308
                                                                     =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                  $   7,118    $   5,563
   Accrued expenses                                                     43,476       55,779
   Customer deposits                                                     2,142        3,445
   Deferred revenue                                                      5,305        5,714
                                                                     ---------    ---------
         Total current liabilities                                      58,041       70,501
Commitments (Notes 4, 9, 10, 11, 14, and 17)
Shareholders' equity:
   Common stock, $.002 par value -
      Authorized: 140,000 shares, issued: 47,171 and
            46,155 shares in 2005 and 2004, respectively                    94           92
      Additional paid-in capital                                       216,031      192,860
      Retained earnings                                                304,454      283,712
      Accumulated other comprehensive loss                             (14,058)     (13,857)
                                                                     ---------    ---------
         Total shareholders' equity                                    506,521      462,807
                                                                     ---------    ---------
                                                                     $ 564,562    $ 533,308
                                                                     =========    =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      -27-
<PAGE>

COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
                                                                                                         Common Stock
                                                                                                      -------------------
                                                                                                      Shares    Par Value
                                                                                                      -------   ---------
<S>                                                                                                   <C>       <C>
Balance at December 31, 2002                                                                           46,877   $     94
  Issuance of common stock under stock option, stock purchase, and other plans                          1,309          2
  Tax benefit from exercise of stock options                                                                -          -
  Payment of dividends                                                                                      -          -
  Common stock received for payment of stock option exercises                                               -          -
    Comprehensive income:
      Net income                                                                                            -          -
      Losses on currency swaps, net of gains on long-term intercompany loans, net of tax of $367            -          -
      Net unrealized gain on available-for- sale investments, net of tax of $299                            -          -
      Foreign currency translation adjustment                                                               -          -

      Comprehensive income
                                                                                                      -------   --------
Balance at December 31, 2003                                                                           48,186   $     96
                                                                                                      =======   ========
  Issuance of common stock under stock option, stock purchase, and other plans                          2,232          4
  Tax benefit from exercise of stock options                                                                -          -
  Payment of dividends                                                                                      -          -
  Common stock received for payment of stock option exercises                                               -          -
  Retirement of treasury stock                                                                         (4,263)        (8)
    Comprehensive income:
      Net income                                                                                            -          -
      Losses on currency swaps, net of gains on long-term intercompany loans, net of tax of $1,016          -          -
      Net unrealized loss on available-for-sale investments, net of tax of $696                             -          -
      Foreign currency translation adjustment                                                               -          -

      Comprehensive income
                                                                                                      -------   --------
Balance at December 31, 2004                                                                           46,155   $     92
                                                                                                      =======   ========
  Issuance of stock under stock option, stock purchase, and other plans                                 1,400          2
  Tax benefit from exercise of stock options                                                                -          -
  Payment of dividends                                                                                      -          -
  Repurchase of common stock                                                                             (384)         -
    Comprehensive income:
      Net income                                                                                            -          -
      Gains on long-term intercompany loans, net of losses on currency swaps, net of tax of $82             -          -
      Net unrealized loss on available-for-sale investments, net of tax of $31                              -          -
      Foreign currency translation adjustment                                                               -          -

      Comprehensive income

                                                                                                      -------   --------
Balance at December 31, 2005                                                                           47,171   $     94
                                                                                                      =======   ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      -28-

<PAGE>
<TABLE>
<CAPTION>
                                                     Accumulated
Additional        Treasury Stock                        Other                                Total
 Paid-in     -----------------------    Retained    Comprehensive         Comprehensive   Shareholders'
 Capital       Shares        Cost       Earnings          Loss               Income          Equity
----------   ---------     ---------    ---------   -------------         -------------   -------------
<S>          <C>           <C>          <C>         <C>                   <C>             <C>
$  184,595       4,249     $ (72,311)   $ 248,010    $    (5,868)                         $     354,520
    20,782           -             -            -              -                    -            20,784
     4,302           -             -            -              -                    -             4,302
         -           -             -       (5,237)             -                    -            (5,237)
         -           4          (134)           -              -                    -              (134)
         -           -             -       15,951              -            $  15,951            15,951
         -           -             -            -           (625)                (625)             (625)
         -           -             -            -            509                  509               509
         -           -             -            -         (5,076)              (5,076)           (5,076)

                                                                            ---------
                                                                            $  10,759
----------   ---------     ---------    ---------    -----------            =========     -------------
$  209,679       4,253     $ (72,445)   $ 258,724    $   (11,060)                         $     384,994
==========   =========     =========    =========    ===========                          =============
    44,213           -             -            -              -                    -            44,217
    11,722           -             -            -              -                    -            11,722
         -           -             -      (12,756)             -                    -           (12,756)
         -          10          (317)           -              -                    -              (317)
   (72,754)     (4,263)       72,762            -              -                    -                 -
         -           -             -       37,744              -               37,744            37,744
         -           -             -            -         (1,730)              (1,730)           (1,730)
         -           -             -            -         (1,185)              (1,185)           (1,185)
         -           -             -            -            118                  118               118

                                                                            ---------
                                                                            $  34,947
----------   ---------     ---------    ---------    -----------            =========     -------------
$  192,860           -     $       -    $ 283,712    $   (13,857)                         $     462,807
==========   =========     =========    =========    ===========                          =============
    27,213           -             -            -              -                    -            27,215
     7,648           -             -            -              -                    -             7,648
         -           -             -      (14,960)             -                    -           (14,960)
   (11,690)          -             -            -              -                    -           (11,690)
         -           -             -       35,702              -               35,702            35,702
         -           -             -            -            139                  139               139
         -           -             -            -            (52)                 (52)              (52)
         -           -             -            -           (288)                (288)             (288)

                                                                            ---------
                                                                            $  35,501
----------   ---------     ---------    ---------    -----------            =========     -------------
$  216,031           -     $       -    $ 304,454    $   (14,058)                         $     506,521
==========   =========     =========    =========    ===========                          =============
</TABLE>

                                      -29-
<PAGE>

COGNEX CORPORATION: CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Year Ended December 31,                                              2005           2004           2003
-----------------------                                           -----------    -----------    -----------
<S>                                                               <C>            <C>            <C>
Cash flows from operating activities:
   Net income                                                     $    35,702    $    37,744    $    15,951
   Adjustments to reconcile net income to net cash provided
         by operating activities:
      Depreciation of property, plant, and equipment                    4,387          4,548          5,422
      Amortization of intangible assets                                 4,283          1,526          1,012
      Amortization of investments                                       2,755          3,896          3,728
      Tax benefit from exercise of stock options                        7,648         11,722          4,302
      Deferred income tax benefit                                      (2,996)        (2,568)          (432)
      Net loss (gain) on investment in limited partnership                  -           (154)         1,031
   Changes in current assets and current liabilities:
      Accounts receivable                                              (5,770)        (5,417)        (4,775)
      Inventories                                                       1,048         (3,642)         5,833
      Accounts payable                                                    735           (290)         1,482
      Accrued expenses                                                 (7,089)        15,785            148
      Other current assets and current liabilities                      1,694            (49)        (2,783)
   Other operating activities                                             364             75             45
                                                                  -----------    -----------    -----------
   Net cash provided by operating activities                           42,761         63,176         30,964
Cash flows from investing activities:
   Purchase of investments                                         (1,437,264)      (805,621)      (316,481)
   Maturity and sale of investments                                 1,531,830        716,714        276,529
   Purchase of property, plant, and equipment                          (3,819)        (3,120)        (2,462)
   Cash paid for business acquisitions, net of cash acquired         (111,842)          (123)       (11,787)
                                                                  -----------    -----------    -----------
   Net cash used in investing activities                              (21,095)       (92,150)       (54,201)
Cash flows from financing activities:
   Issuance of common stock under stock option, stock purchase,
      and other plans                                                  27,215         43,900         20,650
   Repurchase of common stock                                         (11,690)             -              -
   Payment of dividends                                               (14,960)       (12,756)        (5,237)
                                                                  -----------    -----------    -----------
   Net cash provided by financing activities                              565         31,144         15,413
Effect of exchange rate changes on cash                                (3,645)         2,120           (660)
                                                                  -----------    -----------    -----------
Net increase (decrease) in cash and cash equivalents                   18,586          4,290         (8,484)
Cash and cash equivalents at beginning of year                         54,270         49,980         58,464
                                                                  -----------    -----------    -----------
Cash and cash equivalents at end of year                          $    72,856    $    54,270    $    49,980
                                                                  ===========    ===========    ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      -30-
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application of
the significant accounting policies described below.

NATURE OF OPERATIONS

Cognex Corporation (the "Company") designs, develops, manufactures, and markets
machine vision systems, or computers that can "see." The Company's products are
used to automate a wide range of manufacturing processes where vision is
required.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities at the
balance sheet date and the reported amounts of revenue and expenses during the
year. Actual results could differ from those estimates.

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Cognex Corporation
and its subsidiaries, all of which are wholly-owned. All intercompany accounts
and transactions have been eliminated. Certain amounts reported in prior years
have been reclassified to be consistent with the current year presentation.

FOREIGN CURRENCY

The financial statements of the Company's foreign subsidiaries, where the local
currency is the functional currency, are translated using exchange rates in
effect at the end of the year for assets and liabilities and average exchange
rates during the year for results of operations. The resulting foreign currency
translation adjustment is recorded in shareholders' equity as other
comprehensive income (loss).

CASH, CASH EQUIVALENTS, AND INVESTMENTS

Debt securities purchased with original maturities of three months or less are
classified as cash equivalents and are stated at amortized cost. Debt securities
with original maturities greater than three months and remaining maturities of
one year or less, as well as auction rate securities for which interest rates
reset in less than 90 days but for which the maturity date is greater than 90
days, are classified as short-term investments. Despite the long-term nature of
their contractual maturities, the Company has the ability to quickly liquidate
auction rate securities. Debt securities with remaining maturities greater than
one year, as well as a limited partnership interest, are classified as long-term
investments. It is the Company's policy to invest in debt securities with
contractual maturities that do not exceed three years.

Debt securities with original maturities greater than three months are
designated as available-for-sale and are reported at fair value, with unrealized
gains and losses, net of tax, recorded in shareholders' equity as other
comprehensive income (loss). Realized gains and losses are included in current
operations, along with the amortization of the discount or premium arising at
acquisition and are calculated using the specific identification method. The
Company's limited partnership interest is accounted for using the cost method
because the Company's investment is less than 5% of the partnership and the
Company has no influence over the partnership's operating and financial
policies.

The Company monitors the carrying value of its investments compared to their
fair value to determine whether an other-than-temporary impairment has occurred.
If a decline in fair value is determined to be other-than-temporary, an
impairment charge related to that specific investment is recorded in current
operations. There were no other-than temporary impairments of investments in
2005, 2004, or 2003.

ACCOUNTS RECEIVABLE

The Company establishes reserves against its accounts receivable for potential
credit losses when it determines receivables are at risk for collection based
upon the length of time receivables have been outstanding, as well as various
other factors. Receivables are written off against these reserves in the period
they are determined to be uncollectible.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined using
standard costs, which approximate the first in, first out (FIFO) method. The
Company 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.

                                     --31--

<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company generally disposes of obsolete inventory upon determination of
obsolescence. The Company does not dispose of excess inventory immediately, due
to the possibility that some of this inventory could be sold to customers as a
result of differences between actual and forecasted demand.

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 would recognize a higher than normal gross margin if the reserved
inventory were subsequently sold.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at cost and depreciated using the
straight-line method over the assets' estimated useful lives. Buildings' useful
lives are 39 years, building improvements' useful lives are 10 years, and the
useful lives of computer hardware, computer software, and furniture and fixtures
range from two to five years. Leasehold improvements are depreciated over the
shorter of the estimated useful lives or the remaining terms of the leases.
Maintenance and repairs are expensed when incurred; additions and improvements
are capitalized. Upon retirement or disposition, the cost and related
accumulated depreciation of the assets disposed of are removed from the
accounts, with any resulting gain or loss included in current operations.

INTANGIBLE ASSETS

Intangible assets are stated at cost and amortized using the straight-line
method over the assets' estimated useful lives. Distribution networks' useful
lives range from 11-12 years, customer contracts and relationships' useful lives
range from 8-12 years, and completed technologies and other intangible assets'
useful lives range from three to six years. The Company evaluates the possible
impairment of long-lived assets, including intangible assets, whenever events or
circumstances indicate the carrying value of the assets may not be recoverable.
At the occurrence of a certain event or change in circumstances, the Company
evaluates the potential impairment of an asset based upon the estimated future
undiscounted cash flows. If an impairment exists, the Company determines the
amount of such impairment based upon the present value of the estimated future
cash flows using a discount rate commensurate with the risks involved.

GOODWILL

Goodwill is stated at cost. The Company evaluates the possible impairment of
goodwill annually each fourth quarter, and whenever events or circumstances
indicate the carrying value of the goodwill may not be recoverable. The Company
evaluates the potential impairment of goodwill by comparing the fair value of
the reporting unit to its carrying value, including goodwill. If the fair value
is less than the carrying value, the Company determines the amount of such
impairment by comparing the implied fair value of the goodwill to its carrying
value.

WARRANTY OBLIGATIONS

The Company warrants its hardware products to be free from defects in material
and workmanship for periods ranging from six months to two years from the time
of sale based upon the product being purchased and the terms of the customer
arrangement. Warranty obligations are accounted for in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies," since
it is probable that customers will make claims under warranties related to
products that have been sold and the amount of these claims can be reasonably
estimated based upon experience. Estimated warranty obligations are evaluated
and recorded at the time of sale based upon historical costs to fulfill warranty
obligations. Provisions may also be recorded subsequent to the time of sale
whenever specific events or circumstances impacting product quality become known
that would not have been taken into account using historical data.

REVENUE RECOGNITION

The Company recognizes revenue in accordance with Statement of Position (SOP)
No. 97-2, "Software Revenue Recognition," as amended by SOP No. 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," since the software is not incidental to the arrangement and the
services in the arrangement do not involve significant production, modification,
or customization of the software. The Company recognizes revenue from product
sales upon delivery if a signed customer contract or purchase order has been
received, the fee is fixed or determinable, and collection of the resulting
receivable is probable. If the arrangement contains customer-specified
acceptance criteria, then revenue is deferred until the Company can demonstrate
that the customer's criteria have been met.

                                     --32--

<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain of the Company's products are sold with multiple elements, such as
maintenance and support programs, education services, and installation services.
The Company accounts for each element separately. The amount allocated to each
undelivered element is the price charged when the item is sold separately, with
the residual value from the arrangement allocated to the delivered element. The
Company has established vendor-specific objective evidence of fair value for
each undelivered element. In addition, the Company also provides consulting
services. Revenue from maintenance and support programs is deferred and
recognized ratably over the program period. Revenue from education and
consulting services are recognized over the period the services are provided.
Revenue from installation services is recognized when the customer has signed
off that the installation is complete.

The Company's products are sold directly to end users, as well as to resellers
including original equipment manufacturers (OEMs), system integrators, and
distributors. Revenue is recognized upon delivery of the product to the
reseller, assuming all other revenue recognition criteria have been met. The
Company establishes reserves against revenue for potential product returns in
accordance with Statement of Financial Accounting Standards No. 48, "Revenue
Recognition When Right of Return Exists," since the amount of future returns can
be reasonably estimated based upon experience.

Amounts billed to customers related to shipping and handling, as well as
reimbursements received from customers for out-of-pocket expenses, are
classified as revenue, with the associated costs included in cost of revenue.

RESEARCH AND DEVELOPMENT

Research and development costs for internally-developed or acquired products are
expensed when incurred until technological feasibility has been established for
the product. Thereafter, all software costs are capitalized until the product is
available for general release to customers. The Company determines technological
feasibility at the time the product reaches beta in its stage of development.
Historically, the time incurred between beta and general release to customers
has been short, and therefore, the costs have been insignificant. As a result,
the Company has not capitalized software costs associated with
internally-developed products.

INCOME TAXES

The Company accounts for income taxes under the liability method. Under this
method, a deferred tax asset or liability is determined based upon the
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates that will be in effect when
these differences reverse. Tax credits are recorded as a reduction in income
taxes. Valuation allowances are provided if, based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.

NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted net income per share is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding for the period plus potential dilutive common shares. All potential
dilutive common shares are excluded from the computation of net loss per share
because they are antidilutive. Dilutive common equivalent shares consist of
stock options and are calculated using the treasury stock method.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as the change in equity of a company
during a period from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distributions to owners.
Accumulated other comprehensive loss consists of foreign currency translation
adjustments of $11,277,000 and $10,989,000 at December 31, 2005 and 2004,
respectively, net unrealized losses on available-for-sale investments, net of
tax, of $728,000 and $676,000 at December 31, 2005 and 2004, respectively, and
losses on currency swaps net of gains on long-term intercompany loans, net of
tax, of $2,053,000 and $2,192,000 at December 31, 2005 and 2004, respectively.

CONCENTRATIONS OF RISK

Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents, investments, and trade
receivables. The Company primarily invests in municipal obligations of state and
local government entities. The Company has established guidelines relative to
credit ratings, diversification,

                                     --33--

<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and maturities of its debt securities that maintain safety and liquidity. The
Company has not experienced any significant realized losses on its debt
securities.

A significant portion of the Company's sales and receivables are from customers
who are either in or who serve the semiconductor and electronics industries. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. The Company has not experienced any
significant losses related to the collection of its accounts receivable.

A significant portion of the Company's MVSD inventory is manufactured by a
third-party contractor. The Company is dependent upon this contractor to provide
quality product and meet delivery schedules. The Company engages in extensive
product quality programs and processes, including actively monitoring the
performance of its third-party manufacturers.

DERIVATIVE INSTRUMENTS

The Company has adopted the accounting and disclosure requirements of Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current operations or in
shareholders' equity as other comprehensive income (loss), depending upon
whether the derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. Hedges of underlying exposures are designated
and documented at the inception of the hedge and are valuated for effectiveness
quarterly.

In certain instances, the Company enters into forward contracts and currency
swaps to hedge against foreign currency fluctuations. Currency swaps are used to
hedge long-term transactions between the Company and its subsidiaries. Forward
contracts are used to provide a hedge against transactions denominated in
currencies other than the functional currencies of the Company or its
subsidiaries. These forward contracts and currency swaps are used to reduce the
Company's risk associated with exchange rate changes, as the gains or losses on
these contracts are intended to offset the losses or gains on the underlying
exposures. The Company does not engage in foreign currency speculation.

STOCK-BASED COMPENSATION PLANS

The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123." The Company continues to
recognize compensation costs using the intrinsic value based method described in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." No compensation costs were recognized in 2005, 2004, or 2003.

Net income and net income per share as reported in these consolidated financial
statements and on a pro forma basis, as if the fair value based method described
in SFAS No. 123 had been adopted, are as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
Year Ended December 31,                                                                              2005      2004         2003
-------------------------                                                                         --------  --------     --------
<S>                                                                                              <C>       <C>          <C>
Net income, as reported                                                                          $ 35,702  $ 37,744     $ 15,951
                                                                                                 --------------------------------
Less: Total share-based compensation costs determined under fair value based method, net of tax    (9,355)  (13,183)     (14,092)
                                                                                                 --------------------------------
Net income, pro forma                                                                            $ 26,347  $ 24,561     $  1,859
                                                                                                 --------------------------------
Basic net income per share, as reported                                                          $   0.76  $   0.83     $   0.37
                                                                                                 --------------------------------
Basic net income per share, pro forma                                                            $   0.56  $   0.54     $   0.04
                                                                                                 --------------------------------
Diluted net income per share, as reported                                                        $   0.74  $   0.80     $   0.36
                                                                                                 --------------------------------
Diluted net income per share, pro forma                                                          $   0.55  $   0.52(1)  $   0.04
                                                                                                 --------------------------------
</TABLE>

(1) Amount was originally reported as $0.49 and has been adjusted to $0.52 for
the year ended December 31, 2004 due to a refinement in the calculation.

                                     --34--

<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the purpose of providing pro forma disclosures, the fair values of stock
options granted were estimated using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants:

<TABLE>
<CAPTION>
Year Ended December 31,                 2005      2004      2003
-----------------------                 ----      ----      ----
<S>                                     <C>       <C>       <C>
Risk-free interest rate                  3.4%      2.5%      2.1%
Expected life (in years)                 2.8       3.1       2.9
Expected volatility                       35%       45%       58%
Expected annualized dividend yield      1.26%      .73%      .85%
</TABLE>

TREASURY STOCK

Effective July 1, 2004, the Massachusetts Business Corporation Act (the "Act")
eliminated the concept of treasury shares. Under the Act, shares previously
classified as treasury shares are to be treated as authorized but unissued
shares of common stock. As a result of this change, the Company reclassified its
treasury shares to authorized but unissued shares of common stock on the
Consolidated Balance Sheet.

NOTE 2: NEW PRONOUNCEMENTS

SFAS NO. 123R, "SHARE-BASED PAYMENT"

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 cost
for all share-based payments to employees (including stock option and employee
stock purchase plans) at fair value. SFAS No. 123R will be effective for public
companies no later than the beginning of the first fiscal year after June 15,
2005. The Company will adopt SFAS No. 123R beginning in the first quarter of
2006 using the modified prospective method in which compensation cost is
recognized beginning on the effective date.

The Company currently recognizes compensation costs using the intrinsic value
based method and, as such, generally recognizes no compensation cost.
Accordingly, the adoption of SFAS No. 123R's fair value based method will have a
significant impact on the Company's results of operations, although it will have
no impact on its overall financial position. Had the Company adopted SFAS No.
123R in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in the disclosure of pro forma net income
and net income per share in Note 1 to the Company's consolidated financial
statements. The impact of the adoption of SFAS No. 123R in future periods will
depend, in part, upon the level of sharebased payments granted in the future.
Based upon preliminary estimates of stock option grants in 2006, as well as
preliminary valuation assumptions, such as expected stock price volatility,
option lives, and forfeiture rates, the Company anticipates total pre-tax
share-based compensation costs for 2006 to approximate $12,000,000.

SFAS NO. 151, "INVENTORY COSTS"

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment
of Accounting Research Bulletin (ARB) No. 43, Chapter 4." SFAS No. 151 amends
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period charges. In addition,
SFAS No. 151 requires that the allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company has adopted the provisions of SFAS
No. 151 and its adoption did not have a material impact on the Company's
financial condition or results of operations.

AJCA OF 2004

In October 2004, the American Jobs Creation Act of 2004 (the "AJCA") was passed.
The AJCA provides a deduction for income from qualified domestic production
activities, which is being phased in from 2005 through 2010. The AJCA also
provides for a two-year phase-out of the existing extra-territorial income
exclusion for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. In December 2004, the FASB
issued FASB Staff Position (FSP) No. 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided

                                     --35--

<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

by the American Jobs Creation Act of 2004." FSP No. 109-1 treats the deduction
as a "special deduction" as described in SFAS No. 109. This special deduction
has no effect on deferred tax assets and liabilities existing at the enactment
date and the effect of this deduction will be reported in the same period in
which the deduction is claimed in the Company's tax return.

The AJCA also creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. This
deduction is subject to a number of limitations. After careful review of the
AJCA temporary incentive for repatriation of accumulated income, the Company has
determined that there will be no immediate changes to its current policy to
reinvest the accumulated earnings of its foreign subsidiaries.

NOTE 3: FOREIGN CURRENCY RISK MANAGEMENT

The Company enters into currency swaps to hedge the foreign currency exposure of
its long-term intercompany loans between the parent and certain of its European
subsidiaries. These contracts, which relate to the Euro Dollar, have original
terms of four to five years. These hedges have been designated for hedge
accounting. They are classified as net investment hedges, with the gains or
losses on the currency swaps, along with the associated losses or gains on the
intercompany loans, net of tax, recorded in shareholders' equity as other
comprehensive income (loss) to the extent they are effective as a hedge. The
Company recorded net foreign currency gains of $139,000 in 2005 and net foreign
currency losses of $1,730,000 and $625,000 in 2004 and 2003, respectively, in
other comprehensive income (loss) on the intercompany loans and associated
currency swaps.

The Company enters into forward contracts to hedge the foreign currency exposure
of its Irish subsidiary's accounts receivable denominated in U.S. Dollars and
Japanese Yen. These contracts, which relate to the Euro Dollar and Japanese Yen,
generally have terms of one to six months. These hedges have not been designated
for hedge accounting. The gains or losses on the forward contracts, along with
the associated losses or gains on the revaluation and settlement of the
intercompany balances and accounts receivable, are recorded in current
operations.

In addition to the transactions described above that are included in the
Company's hedging program, the Company enters into other transactions
denominated in foreign currencies for which the exchange rate gains or losses
are included in current operations. The Company recorded net foreign currency
losses of $888,000 in 2005, net foreign currency gains of $1,641,000 in 2004,
and net foreign currency losses of $1,712,000 in 2003, representing the total
net exchange rate gains or losses that are recognized in current operations.

NOTE 4: CASH, CASH EQUIVALENTS, AND INVESTMENTS

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

<TABLE>
<CAPTION>
December 31,                         2005         2004
-------------                   ---------    ---------
<S>                             <C>          <C>
Cash                            $  72,856    $  54,270
                                ---------    ---------
  Cash and cash equivalents        72,856       54,270
                                =========    =========
Municipal bonds                   140,718      180,409
Commercial paper                   24,584            -
Corporate bonds                     2,500            -
Treasury bills                      1,354            -
                                ---------    ---------
  Short-term investments          169,156      180,409
                                =========    =========
Municipal bonds                    59,863      144,685
Limited partnership interest       10,383       11,712
                                ---------    ---------
  Long-term investments            70,246      156,397
                                =========    =========
                                $ 312,258    $ 391,076
                                =========    =========
</TABLE>

                                     --36--
<PAGE>
COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the Company's available-for-sale investments at
December 31, 2005 (in thousands):

<Table>
<Caption>
                                                    Gross        Gross
                                               Unrealized   Unrealized
                              Amortized Cost        Gains       Losses    Fair Value
                              --------------   ----------   ----------    ----------
<S>                           <C>              <C>          <C>           <C>
Municipal bonds               $      141,296   $        5   $     (583)   $  140,718
Commercial paper                      24,590            -           (6)       24,584
Corporate bonds                        2,500            -            -         2,500
Treasury bills                         1,354            -            -         1,354
                              --------------   ----------   ----------    ----------
  Short-term investments             169,740            5         (589)      169,156
  Long-term municipal bonds           60,434           12         (583)       59,863
                              --------------   ----------   ----------    ----------
                              $      230,174   $       17   $   (1,172)   $  229,019
                              ==============   ==========   ==========    ==========
</Table>

The Company recorded gross realized gains on the sale of debt securities
totaling $14,000 in 2005, $392,000 in 2004, and $1,222,000 in 2003. The Company
recorded gross realized losses on the sale of debt securities totaling $525,000
in 2005, $90,000 in 2004, and $24,000 in 2003.

On June 30, 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. In the original
agreement with Venrock, the Company committed to a total investment in the
limited partnership of up to $25,000,000 with an expiration date of January 1,
2005. In January 2005, the Company signed an amendment to the original agreement
with Venrock, which reduces its total commitment to $22,500,000 and extends the
commitment period through December 31, 2010. The Company does not have the right
to withdraw from the partnership prior to December 31, 2010.

As of December 31, 2005, the Company had contributed $17,450,000 to the
partnership, including $1,575,000 during 2005. The Company received
distributions of $2,904,000 from Venrock during 2005 that were accounted for as
a return of capital. At December 31, 2005, the carrying value of this investment
was $10,383,000 compared to an estimated fair value, as determined by the
General Partner, of $12,017,000.

NOTE 5: INVENTORIES

Inventories consist of the following (in thousands):

<Table>
<Caption>
December 31,        2005       2004
---------------   --------   --------
<S>               <C>        <C>
Raw materials     $  8,958   $  6,311
Work-in-process      3,406      6,285
Finished goods       6,455      7,495
                  --------   --------
                  $ 18,819   $ 20,091
                  ========   ========
</Table>

In the fourth quarter of 2001, the Company recorded a $16,300,000 charge in
"Cost of product revenue" on the Consolidated Statement of Operations for excess
inventories and 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 at
December 31, 2001. The remaining $3,800,000 of the charge represented
commitments to purchase excess components and systems from various suppliers and
accordingly was included in "Accrued Expenses" on the Consolidated Balance Sheet
at December 31, 2001.

                                     --37--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the change in the inventory-related reserve
established in the fourth quarter of 2001 (in thousands):

<Table>
<Caption>
                                                               Balance Sheet                 Statement
                                                       -------------------------------   of Operations
                                                       Inventories    Accrued Expenses        Benefits
                                                       -----------    ----------------   -------------
<S>                                                    <C>            <C>                <C>
Initial charge in the fourth quarter of 2001           $    12,500    $          3,800               -
Inventory sold to customers                                 (1,790)                  -   $       1,790
Settlement of purchase commitments                           1,506              (2,400)            894
                                                       -----------    ----------------   -------------
Reserve balance at December 31, 2002                   $    12,216    $          1,400
Benefits to cost of product revenue recorded in 2002                                     $       2,684
                                                       ===========    ================   =============
Inventory sold to customers                                 (1,290)                  -           1,290
Inventory sold to brokers                                     (667)                  -               -
Write-off and scrap of inventory                              (876)                  -               -
                                                       -----------    ----------------   -------------
Reserve balance at December 31, 2003                   $     9,383    $          1,400
Benefits to cost of product revenue recorded in 2003                                     $       1,290
                                                       ===========    ================   =============
Inventory sold to customers                                   (805)                  -             805
Inventory sold to brokers                                     (387)                  -               -
Write-off and scrap of inventory                              (743)                  -               -
                                                       -----------    ----------------   -------------
Reserve balance at December 31, 2004                   $     7,448    $          1,400
Benefits to cost of product revenue recorded in 2004                                     $         805
                                                       ===========    ================   =============
Inventory sold to customers                                   (759)                  -             759
Inventory sold to brokers                                     (158)                  -               -
Write-off and scrap of inventory                              (647)                  -               -
                                                       -----------    ----------------   -------------
Reserve balance at December 31, 2005                   $     5,884    $          1,400
Benefits to cost of product revenue recorded in 2005                                     $         759
                                                       ===========    ================   =============
</Table>

A favorable settlement of the remaining purchase commitments may result in a
recovery of a portion of the remaining $1,400,000 accrued at December 31, 2005.

NOTE 6: PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consist of the following (in thousands):

<Table>
<Caption>
December 31,                       2005        2004
------------------------------   --------    --------
<S>                              <C>         <C>
Land                             $  3,051    $  3,051
Buildings                          17,571      17,571
Building improvements               5,206       4,622
Computer hardware and software     31,976      33,826
Furniture and fixtures              4,314       4,183
Leasehold improvements              2,105       2,197
                                 --------    --------
                                   64,223      65,450
Less: accumulated depreciation    (40,048)    (41,455)
                                 --------    --------
                                 $ 24,175    $ 23,995
                                 ========    ========
</Table>

Buildings include property held for lease with a cost basis of $4,950,000 at
December 31, 2005 and 2004 and accumulated depreciation of $1,333,000 and
$1,206,000 at December 31, 2005 and 2004, respectively.

                                     --38--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7: INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

<Table>
<Caption>
                                                Gross    Accumulated   Net Carrying
                                       Carrying Value   Amortization          Value
                                       --------------   ------------   ------------
<S>                                    <C>              <C>            <C>
December 31, 2005
Distribution networks                  $       38,060   $      2,191   $     35,869
Customer contracts and relationships           12,186          2,520          9,666
Completed technologies                          9,028          5,491          3,537
Other                                           1,264            287            977
                                       --------------   ------------   ------------
                                       $       60,538   $     10,489   $     50,049
                                       ==============   ============   ============

December 31, 2004
Customer contracts and relationships   $        8,349   $      1,522   $      6,827
Completed technologies                          5,440          4,864            576
Other                                             176             73            103
                                       --------------   ------------   ------------
                                       $       13,965   $      6,459   $      7,506
                                       ==============   ============   ============
</Table>

Aggregate amortization expense was $4,283,000 in 2005, $1,526,000 in 2004, and
$1,012,000 in 2003. Estimated amortization expense for each of the five
succeeding fiscal years and thereafter is as follows (in thousands):

<Table>
<Caption>
Year ended December 31,       Amount
-----------------------     ----------
<S>                         <C>
2006                        $    5,634
2007                             5,584
2008                             5,495
2009                             5,280
2010                             5,188
Thereafter                      22,868
                            ----------
                            $   50,049
                            ==========
</Table>

NOTE 8: GOODWILL

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 value of goodwill are as follows (in thousands):

<Table>
<Caption>
                                          MVSD         SISD      Consolidated
                                       ----------    --------    ------------
<S>                                    <C>           <C>         <C>
Balance at December 31, 2003           $    4,522    $  2,700    $      7,222
Purchase price adjustment (Note 17)          (514)          -            (514)
Foreign exchange rate changes                 113         212             325
                                       ----------    --------    ------------
Balance at December 31, 2004           $    4,121    $  2,912    $      7,033
                                       ==========    ========    ============
Business acquisition (Note 17)             73,478           -          73,478
Foreign exchange rate changes                (333)       (371)           (704)
                                       ----------    --------    ------------
Balance at December 31, 2005           $   77,266    $  2,541    $     79,807
                                       ==========    ========    ============
</Table>

                                     --39--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9: ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

<Table>
<Caption>
December 31,                2005       2004
----------------------    --------   --------
<S>                       <C>        <C>
Income taxes              $ 12,653   $  9,165
Forward contracts and
  currency swaps             9,026     19,527
Salaries, commissions,
  and payroll taxes          3,693      3,452
Company bonuses              3,653      5,979
Vacation                     3,094      2,775
Consumption taxes            2,624      4,900
Warranty obligations         1,447      1,758
Inventory purchase
  commitments (Note 5)       1,400      1,400
Professional fees            1,050      1,698
Other                        4,836      5,125
                          --------   --------
                          $ 43,476   $ 55,779
                          ========   ========
</Table>

The changes in the warranty obligation are as follows (in thousands):

<Table>
<S>                                   <C>
Balance at December 31, 2003          $ 2,119
Provisions for warranties                 797
Fulfillment of warranty obligations    (1,298)
Foreign exchange rate changes             140
                                      -------
Balance at December 31, 2004          $ 1,758
                                      =======
Provisions for warranties                 696
Warranty obligations assumed in
  business acquisition (Note 17)          200
Fulfillment of warranty obligations    (1,055)
Foreign exchange rate changes            (152)
                                      -------
Balance at December 31, 2005          $ 1,447
                                      =======
</Table>

NOTE 10: COMMITMENTS

At December 31, 2005, the Company had purchase orders totaling $10,297,000 to
purchase inventory from various vendors. These purchase commitments relate to
expected sales in 2006.

At December 31, 2005, the Company had irrevocable letters of credit totaling
$444,000 used to guarantee the Company's performance under certain of its SISD
sales arrangements.

The Company conducts certain of its operations in leased facilities. These lease
agreements expire at various dates through 2016 and are accounted for as
operating leases. Certain of these leases contain renewal options. Annual rental
expense totaled $5,062,000 in 2005, $4,662,000 in 2004, and $4,427,000 in 2003.
Future minimum rental payments under these agreements are as follows
(in thousands):

<Table>
<Caption>
Year ended December 31,     Amount
-----------------------    --------
<S>                        <C>
2006                       $  4,836
2007                          4,504
2008                          2,682
2009                          1,517
2010                            938
Thereafter                    2,575
                           --------
                           $ 17,052
                           ========
</Table>

The Company owns an 83,000 square-foot office building adjacent to its corporate
headquarters. The building is currently occupied with tenants who have lease
agreements that expire at various dates through 2009. Annual rental income
totaled $763,000 in 2005, $818,000 in 2004, and $1,137,000 in 2003. Rental
income and related expenses are included in "Investment and other income" on the
Consolidated Statement of Operations. Future minimum rental receipts under
non-cancelable lease agreements are $313,000 in 2006 and 2007, $258,000 in 2008,
and $40,000 in 2009.

                                     --40--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11:  INDEMNIFICATION PROVISIONS

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.

The Company accepts standard limited indemnification 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 use of the Company's products.
The term of these indemnification provisions generally coincides with the
customer's use of the Company's products. The maximum potential amount of future
payments the Company could be required to make under these provisions is always
subject to fixed monetary limits. The Company has never incurred significant
costs to defend lawsuits or settle claims related to these indemnification
provisions provided to the Company's customers. As a result, the Company
believes the estimated fair value of these provisions is minimal.

The Company also accepts limited indemnification provisions from time to time,
whereby it indemnifies customers for certain direct damages incurred in
connection with bodily injury and property damage arising from the installation
of the Company's products. The term of these indemnification provisions
generally coincides with the period of installation. The maximum potential
amount of future payments the Company could be required to make under these
provisions is limited and is likely recoverable under the Company's insurance
policies. As a result of this coverage, and the fact that the Company has never
incurred significant costs to defend lawsuits or settle claims related to these
indemnification provisions, the Company believes the estimated fair value of
these provisions is minimal.

NOTE 12: SHAREHOLDERS' EQUITY

PREFERRED STOCK

The Company has 400,000 shares of authorized but unissued $.01 par value
preferred stock.

STOCK REPURCHASE PROGRAM

On December 12, 2000, the Company's Board of Directors authorized the repurchase
of up to $100,000,000 of the Company's common stock. The Company repurchased
383,908 shares at a cost of $11,690,000 in 2005 and 1,768,452 shares at a cost
of $26,425,000 in 2002 under this program.

STOCK OPTION PLANS

At December 31, 2005, the Company had 9,920,714 shares available for grant under
the following stock option plans: the 1998 Non-Employee Director Stock Option
Plan, 4,000; the 1998 Stock Incentive Plan, 2,416,714; no shares under the 2001
Interim General Stock Incentive Plan; and the 2001 General Stock Option Plan,
7,500,000.

The 2001 General Stock Option Plan was adopted by the Board of Directors on
December 11, 2001 without shareholder approval. This plan provides for the
granting of nonqualified stock options to any employee who is actively employed
by the Company and is not an officer or director of the Company. The maximum
number of shares of common stock available for grant under the plan is 7,500,000
shares. All option grants must have an exercise price per share that is no less
than the fair market value per share of the Company's common stock on the grant
date and must have a term that is no longer than fifteen years from the grant
date. No stock options have been granted under the 2001 General Stock Option
Plan.

The 2001 Interim General Stock Incentive Plan was adopted by the Board of
Directors on July 17, 2001 without shareholder approval. This plan provides for
the granting of nonqualified stock options to any employee who is actively

                                     --41--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

employed by the Company and is not an officer or director of the Company. The
maximum number of shares of common stock available for grant under the plan is
400,000 shares. All option grants have an exercise price per share that is no
less than the fair market value per share of the Company's common stock on the
grant date and must have a term that is no longer than fifteen years from the
grant date. All 400,000 stock options have been granted under the 2001 Interim
General Stock Incentive Plan.

On April 21, 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 1,
1999 and each January 1st 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 31st of the preceding year.

Stock options generally vest over four years and generally expire no later than
ten years from the date of grant.

The following table summarizes the status of the Company's stock option plans at
December 31, 2005, 2004, and 2003, and changes during the years then ended
(shares in thousands):

<TABLE>
<CAPTION>
                                                      2005                   2004                   2003
                                            ----------------------    -------------------   ---------------------
                                                          Weighted-             Weighted-               Weighted-
                                                           Average               Average                 Average
                                                          Exercise               Exercise                Exercise
                                              Shares        Price     Shares      Price      Shares       Price
                                            ----------    --------    --------  ---------   --------    ---------
<S>                                         <C>           <C>         <C>       <C>         <C>         <C>
Outstanding at beginning of year                10,620    $  24.74      10,986   $ 22.85      10,381      $ 22.40
  Granted at fair market value                   1,914       25.22       2,253     29.31       2,402        21.54
  Exercised                                     (1,378)      19.39      (2,210)    19.78      (1,279)       15.84
  Forfeited                                       (481)      28.09        (409)    26.06        (518)       25.75
                                            ----------    --------    --------  ---------   --------    ---------
Outstanding at end of year                      10,675       25.36      10,620     24.74      10,986        22.85
                                            ==========    ========    ========  =========   ========    =========
Options exercisable at year-end                  5,648       25.51       5,074     24.52       5,182        22.37
Weighted-average grant-date fair value
  of options granted during the year at
  fair market value                         $     6.01                $   9.22              $   8.32
</TABLE>

No stock options were granted above fair market value in 2005, 2004, or 2003.

The following table summarizes information about stock options outstanding at
December 31, 2005 (shares in thousands):

<TABLE>
<CAPTION>
                                 Options Outstanding                Options Exercisable
                   -------------------------------------------    -----------------------
                                      Average
                                     Weighted-       Weighted-                  Weighted-
                                     Remaining        Average                    Average
Range of              Number      Contractual Life    Exercise      Number       Exercise
Exercise Prices    Outstanding       (in years)       Price       Exercisable     Price
---------------    -----------    ----------------   ---------    -----------   ---------
<C>                <C>            <C>                <C>          <C>           <C>
$  1.00 - 18.13          1,397                 4.8     $ 14.34          1,195      $13.88
  18.19 - 21.20          1,478                 7.3       21.03            545       20.84
  21.42 - 24.93          1,870                 6.3       19.13          1,297       23.02
  25.02 - 28.51          2,211                 8.6       17.79            395       26.46
  28.67 - 30.81          2,611                 7.3       16.71          1,351       29.31
  30.86 - 59.69          1,108                 7.2       39.83            865       41.85
                   -----------    ----------------   ---------    -----------   ---------
                        10,675                 7.1       25.36          5,648       25.51
                   ===========    ================   =========    ===========   =========
</TABLE>

                                     --42--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EMPLOYEE STOCK PURCHASE PLAN

Under the Company's Employee Stock Purchase Plan (ESPP), employees who have
completed six months of continuous employment with the Company may purchase
common stock semi-annually at the lower of 85% of the fair market value of the
stock at the beginning or end of the six-month payment period through
accumulation of payroll deductions. Employees are required to hold common stock
purchased under the ESPP for a period of one year from the date of purchase.
Effective for the purchase period beginning on January 1, 2006, the purchase
price was amended to equal 95% of the fair market value of the stock at the end
of the six-month payment period, and the holding period was reduced to three
months.

The maximum number of shares of common stock available for issuance under the
ESPP is 250,000 shares. Effective January 1, 2001 and each January 1st
thereafter during the term of the ESPP, 250,000 shares of common stock will
always be available for issuance. Shares purchased under the ESPP totaled 21,721
in 2005, 21,031 in 2004, and 31,667 in 2003. The weighted-average fair value of
shares purchased under the ESPP was $7.63 in 2005, $10.61 in 2004, and $9.89 in
2003.

For the purpose of providing pro forma disclosures, the fair values of shares
purchased were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions:

<TABLE>
<CAPTION>
Year Ended December 31,                2005        2004          2003
-----------------------                ----        ----          ----
<S>                                    <C>         <C>           <C>
Risk-free interest rate                 3.2%        2.3%          2.0%
Expected life (in months)                12          12            12
Expected volatility                      35%         39%           58%
Expected annualized
  dividend yield                       1.15%       1.00%          .85%
</TABLE>

NOTE 13: EMPLOYEE SAVINGS PLAN

Under the Company's Employee Savings Plan, a defined contribution plan,
employees who have attained age 21 may contribute up to 25% of their salary on a
pre-tax basis subject to the annual dollar limitations established by the
Internal Revenue Service. The Company contributes fifty cents for each dollar an
employee contributes, with a maximum contribution of 3% of an employee's pre-tax
salary.

Company contributions vest 20%, 40%, 60%, and 100% after two, three, four, and
five years of continuous employment with the Company, respectively. Company
contributions totaled $1,060,000 in 2005, $967,000 in 2004, and $917,000 in
2003. Cognex stock is not an investment alternative, nor are Company
contributions made in the form of Cognex stock.

NOTE 14: INCOME TAXES

Domestic income before taxes was $19,206,000, $22,507,000, and $24,852,000 and
foreign income (loss) before taxes was $29,040,000, $30,653,000, and
$(1,604,000) in December 31, 2005, 2004, and 2003, respectively.

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,            2005          2004            2003
-----------------------           -------       -------        -------
<S>                               <C>           <C>            <C>
Current:
  Federal                         $ 3,502       $ 9,662        $ 6,330
  State                               507           758            431
  Foreign                           3,279           983          2,181
                                  -------       -------        -------
                                    7,288        11,403          8,942
Deferred:
  Federal                           3,501          (177)          (616)
  State                               438           306             48
  Foreign                           1,317         3,884         (1,077)
                                  -------       -------         ------
                                    5,256         4,013         (1,645)
                                  -------       -------         ------
                                  $12,544       $15,416         $7,297
                                  =======       =======         ======
</TABLE>

                                     --43--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the United States federal statutory corporate tax rate to
the Company's effective tax rate is as follows (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,               2005         2004           2003
-----------------------               ----         ----           ----
<S>                                   <C>          <C>            <C>
Income tax provision at
  federal statutory rate               35%          35%            35%
State income taxes,
  net of federal benefit                1            2              1
Tax-exempt investment
  income                               (3)          (3)            (8)
Foreign tax rate
  differential                         (9)          (6)             4
Other                                   2            1             (1)
                                       --           --             --
Provision for income taxes             26%          29%            31%
                                       ==           ==             ==
</TABLE>

Deferred tax assets consist of the following (in thousands):

<TABLE>
<CAPTION>
December 31,                                2005          2004
------------                              ---------     -------
<S>                                       <C>           <C>
Current deferred tax assets:
  Inventory and revenue related           $   4,805     $  6,321
  Bonus, commission, and other
    compensation                                943          937
  Other                                       1,919        2,246
                                          ---------     --------
Total net current deferred
  tax assets                              $   7,667     $  9,504
                                          =========     ========
Noncurrent deferred tax assets:
  Federal and state tax credit
    carryforwards                         $  11,434     $  8,138
  Net operating loss carryforwards            5,600        3,989
  Acquired completed technologies
    and other intangible assets               3,664        3,180
  Federal and state capital loss
    carryforwards                             1,708        1,640
  Depreciation                                1,478        1,339
  Unrealized investment gains
    and losses                                1,390        1,573
  Acquired in-process technology                924          972
  Other                                         762          685
                                          ---------     --------
                                             26,960       21,516

Noncurrent deferred tax liabilities:
  Nondeductible intangible assets           (16,703)           -
  Other                                         (30)           -
                                          ---------     --------
                                            (16,733)           -

Total net noncurrent
    deferred tax assets                   $  10,227     $ 21,516
                                          =========     ========
</TABLE>

At December 31, 2005, the Company had federal research and experimentation tax
credit carryforwards of approximately $5,091,000, which may be available to
offset future federal income tax liabilities and will begin to expire in 2015.
The Company also had approximately $2,467,000 of alternative minimum tax credits
and approximately $1,824,000 of foreign tax credits, which may be available to
offset future regular income tax liabilities. The alternative minimum tax
credits have an unlimited life and the foreign tax credits will begin to expire
in 2007. In addition, the Company had approximately $2,052,000 of state research
and experimentation tax credit carryforwards, which will begin to expire in
2015.

At December 31, 2005, the Company's subsidiaries had net operating loss
carryforwards of approximately $16,000,000, which will expire in 2010,
representing a tax benefit of $5,600,000.

The Company recorded certain intangible assets as a result of the acquisition of
DVT Corporation on May 9, 2005. The amortization of these intangible assets is
not deductible for U.S. tax purposes. A deferred tax liability was established
to reflect the federal and state liability associated with not deducting the
acquisition-related amortization expenses. The balance of this liability at
December 31, 2005 was $16,703,000.

The Company did not establish valuation allowances against its deferred tax
assets at December 31, 2005 and 2004. While these assets are not assured of
realization, the Company has evaluated the realizability of these deferred tax
assets and has determined that it is more likely than not that these assets will
be realized. In reaching this conclusion, the Company has evaluated certain
relevant criteria including the Company's historical profitability, current
projections of future profitability, and the lives of tax credits, net operating
and capital losses, and other carryforwards. Should the Company fail to generate
sufficient pre-tax profits in future periods, the Company may be required to
establish valuation allowances against these deferred tax assets, resulting in a
charge to income in the period of determination.

The Company has established reserves to provide for additional income taxes that
may be due in future years as previously filed income tax returns are audited.
These reserves

                                     --44--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

have been established based upon management's assessment as to the potential
exposure attributable to permanent differences and interest applicable to both
permanent and temporary differences. All tax reserves are analyzed periodically
and adjustments are made as events occur that warrant modification, such as the
completion of audits or the expiration of statutes of limitations, which may
result in future charges or credits to tax expense.

The Company does not provide U.S. income taxes on its foreign subsidiaries'
undistributed earnings, as they are deemed to be permanently reinvested outside
the U.S. Non-U.S. income taxes are, however, provided on those foreign
subsidiaries' undistributed earnings. Upon repatriation, the Company would
provide the appropriate U.S. income taxes on these earnings.

On March 23, 2005, the Company provided standby letters of credit totaling
3,264,887,000 Yen (or approximately $27,683,000 based upon the exchange rate at
December 31, 2005) to taxing authorities in Japan that are collateralized by
investments on the Consolidated Balance Sheet. The Tokyo Regional Taxation
Bureau (TRTB) has asserted that Cognex Corporation has a permanent establishment
in Japan that would require certain income, previously reported on U.S. tax
returns for the years ended December 31, 1997 through December 31, 2001, to be
subject instead to taxation in Japan. The Company disagrees with this position
and believes that this assertion is inconsistent with principles under the U.S.
- Japan income tax treaty. The Company has filed a notice of objection and
request for deferral of tax payment and intends to contest this assessment
vigorously, although no assurances can be made that the Company will prevail in
this matter. In September 2003, the Company also filed a request with the
Internal Revenue Service Tax Treaty Division for competent authority assistance.
Until this matter is resolved, the Company is required to provide collateral for
these tax assessments. These letters of credit expire in approximately one year
and will be renewed as required. Should the TRTB prevail in its assertion, the
income in question would be taxable in Japan and the Company would be required
to pay approximately $27,683,000 in taxes, interest and penalties to Japanese
taxing authorities. The Company would then be entitled to recoup the majority of
this amount from taxing authorities in the U.S. The Company has not provided any
additional accrual or reserve related to this matter.

NOTE 15: NET INCOME PER SHARE

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

<TABLE>
<CAPTION>
Year Ended December 31,                                                     2005          2004           2003
-------------------------                                                 --------      --------       --------
<S>                                                                       <C>           <C>            <C>
Net income                                                                $ 35,702      $ 37,744       $ 15,951
                                                                          --------      --------       --------

Basic:
  Weighted-average common shares outstanding                                46,709        45,480         43,173
                                                                          --------      --------       --------
  Net income per common share                                             $   0.76      $   0.83       $   0.37
                                                                          ========      ========       ========

Diluted:
  Weighted-average common shares outstanding                                46,709        45,480         43,173
  Effect of dilutive stock options                                           1,226         1,878          1,293
                                                                          --------      --------       --------
  Weighted-average common and common equivalent shares outstanding          47,935        47,358         44,466
                                                                          --------      --------       --------
  Net income per common and common equivalent share                       $   0.74      $   0.80       $   0.36
                                                                          ========      ========       ========
</TABLE>

Stock options to purchase 3,903,178, 1,656,927, and 2,934,936 shares of common
stock were outstanding in 2005, 2004, and 2003, respectively, but were not
included in the calculation of diluted net income per share because the options'
exercise prices were greater than the average market price of the Company's
common stock during those years.

                                     --45--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16: SEGMENT AND GEOGRAPHIC INFORMATION

The Company has two reportable segments: the Modular Vision Systems Division
(MVSD) and the Surface Inspections Systems Division (SISD). MVSD designs,
develops, manufactures, and markets modular vision systems that are used to
control the manufacturing of discrete items by locating, identifying,
inspecting, and measuring them during the manufacturing process. SISD designs,
develops, manufactures, and markets surface inspection vision systems that are
used to inspect surfaces of materials that are processed in a continuous
fashion to ensure there are no flaws or defects in the surfaces. Segments are
determined based upon the way that management organizes its business for making
operating decisions and assessing performance. The Company evaluates segment
performance based upon income or loss from operations, excluding unusual items.

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

<TABLE>
<CAPTION>
                                                                Reconciling
                                      MVSD           SISD          Items       Consolidated
                                    --------       -------      -----------    ------------
<S>                                 <C>            <C>          <C>            <C>
Year Ended December 31, 2005
  Product revenue                   $168,342       $24,462              -       $ 192,804
  Service revenue                     14,202         9,869              -          24,071
  Depreciation and amortization        8,168           286       $    216           8,670
  Operating income                    46,225         4,956         (7,177)         44,004
Year Ended December 31, 2004
  Product revenue                   $155,966       $20,603              -       $ 176,569
  Service revenue                     17,923         7,465              -          25,388
  Depreciation and amortization        5,526           341       $    207           6,074
  Operating income                    53,572         1,336         (8,059)         46,849
Year Ended December 31, 2003
  Product revenue                   $108,170       $22,500              -       $ 130,670
  Service revenue                     12,846         6,576              -          19,422
  Depreciation and amortization        5,863           392       $    179           6,434
  Operating income                    21,397         3,830         (5,717)         19,510
</TABLE>

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

No customer accounted for greater than 10% of revenue in 2005, 2004, or 2003.

                                     --46--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about geographic areas (in
thousands):

<TABLE>
<CAPTION>
                                     United
                                     States             Japan          Europe           Other      Consolidated
                                   -----------       ----------      ----------       ---------    ------------
<S>                                <C>               <C>             <C>              <C>          <C>
Year Ended December 31, 2005
  Product revenue                  $    70,921       $   53,761      $   56,150       $  11,972     $  192,804
  Service revenue                        9,531            6,513           7,299             728         24,071
  Long-lived assets                    144,432            1,895          10,999             110        157,436
Year Ended December 31, 2004
  Product revenue                  $    52,979       $   69,270      $   43,983       $  10,337     $  176,569
  Service revenue                        9,703            8,301           6,596             788         25,388
  Long-lived assets                     26,221            2,396          13,700             117         42,434
Year Ended December 31, 2003
  Product revenue                  $    42,327       $   44,968      $   32,585       $  10,790     $  130,670
  Service revenue                        8,238            5,645           4,808             731         19,422
  Long-lived assets                     27,936            2,434          14,242              26         44,638
</TABLE>

Revenue is presented geographically based upon the customer's country of
domicile.

NOTE 17: ACQUISITIONS

ACQUISITION OF DVT CORPORATION VISION SENSOR BUSINESS On May 9, 2005, the
Company acquired all of the outstanding shares of DVT Corporation, a provider of
low-cost, easy-to-use vision sensors, for approximately $111,607,000, net of
$4,702,000 cash acquired. The purchase price consisted of $110,346,000 in cash
paid at closing (net of acquired cash) and $1,261,000 in transaction costs. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, DVT Corporation's results of operations have been included in the
Company's consolidated results of operations since the date of acquisition.

In recent years, the Company has expanded its product line by adding low-cost
and easy-to-use vision products, such as its In-Sight and Checker products.
However, reaching the many prospects for these products in factories around the
world requires a large third-party distribution channel to supplement the
Company's own direct end-user sales force. During 2004, the Company started to
build a third-party distribution channel and prior to this acquisition had
signed over 40 distributors, primarily in North America. With the acquisition of
DVT Corporation, the Company immediately gained a worldwide network of more than
150 additional distributors, all fully trained in selling and supporting machine
vision products. The Company plans to sell its low-cost, easy-to-use vision
products, including the acquired DVT's vision sensors, through these
distribution networks.

                                     --47--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The purchase price was allocated as follows (in thousands):

<Table>
<Caption>
                                                                            Weighted-Average
                                                            Estimated    Amortization Period
                                                           Fair Value              (in years)
                                                           -----------  ---------------------
<S>                                                        <C>          <C>
Accounts receivable                                         $    5,785
Inventories                                                      1,995
Prepaid expenses and other current assets                        5,250
Property, plant, and equipment                                     766
Other assets                                                        57
Intangible assets
  Distribution networks                                         38,060                11.6
  Customer relationships                                         4,740                  12
  Completed technologies                                         3,680                   6
  Trade names, trademarks, and non-competition agreement         1,110                   4
Goodwill                                                        73,478
                                                           -----------
    Total assets acquired                                      134,921
Accounts payable                                                 1,388
Accrued expenses                                                 6,110
Net deferred tax liabilities                                    15,816
                                                           -----------
    Total liabilities assumed                                   23,314
                                                           -----------
Total purchase price                                       $   111,607
                                                           ===========
</Table>

The goodwill is assigned to the MVSD segment. None of the acquired intangible
assets, including goodwill, are deductible for tax purposes. The Company
obtained third-party valuations of the acquired intangible assets. The
allocation of the purchase price is subject to adjustment through the second
quarter of 2006.

The following summarized, pro forma results of operations assume the acquisition
took place at the beginning of the respective periods (in thousands, except per
share amounts).

<Table>
<Caption>
Year Ended December 31,           2005          2004
----------------------------   -----------   -----------
<S>                            <C>           <C>
Revenue                        $   227,431   $   230,196
Net income                     $    35,266   $    36,263
Net income per diluted share   $      0.74   $      0.77
</Table>

ACQUISITION OF SIEMENS DEMATIC AG WAFER IDENTIFICATION BUSINESS

On March 31, 2003, the Company acquired the wafer identification business of
Siemens Dematic AG, a subsidiary of Siemens AG. Siemens Dematic is a leading
supplier of logistics and factory automation equipment and has been a leading
supplier of wafer identification systems to semiconductor manufacturers in
Europe. Under the terms of the agreement, the Company acquired the rights to all
of Siemens' patented and unpatented wafer identification technology, as well as
substantially all of the assets related to its wafer identification business.
This acquisition enhances the Company's position as a leading provider of wafer
identification systems worldwide. The results of operations of the acquired
business have been included in the Company's consolidated results of operations
since the date of the acquisition. The historical results of operations of the
acquired business were not material compared to the consolidated results of
operations, and therefore, pro forma results are not presented.

The original purchase price consisted of 7,000,000 Euros in cash (or
approximately $7,630,000) paid at closing, with the potential for an additional
cash payment of up to 1,700,000 Euros (or approximately $2,013,000) depending
upon the achievement of certain performance criteria. The Company reviewed these
performance criteria during the fourth quarter of 2005 and concluded that they
were not met. Accordingly, the Company does not expect to make additional
payments related to this acquisition. During the first quarter of 2006, Siemens
is exercising its right to review the Company's documentation supporting this
conclusion. The March 31, 2003 cash payment of 7,000,000 Euros was based upon an
estimated balance sheet for the wafer identification business as of March 31,
2003. After receipt of a final March 31, 2003 balance sheet and resolution of
certain items in dispute, Siemens reimbursed Cognex 796,000 Euros (or $868,000).

                                     --48--
<PAGE>

COGNEX CORPORATION: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The final purchase price of 6,204,000 Euros (or approximately $6,762,000) was
allocated as follows: $616,000 to inventories; $274,000 to receivables; $25,000
to accrued expenses; $4,469,000 to customer contracts and relationships, to be
amortized over eight years; $447,000 to completed technologies, to be amortized
over five years; $98,000 to patents, to be amortized over five years; $44,000 to
non-competition agreements, to be amortized over three years; and $839,000 to
goodwill, which is assigned to the MVSD segment and is not deductible for tax
purposes.

ACQUISITION OF GAVITEC AG MACHINE VISION BUSINESS

On December 1, 2003, the Company acquired the machine vision business of Gavitec
AG. Gavitec produces machine vision products for direct part mark identification
(or Industrial ID), which can read markings on the surfaces of manufactured
items to collect data about product components during the manufacturing process
and trace the manufacturing history of the components during the product's
lifetime. Under the terms of the agreement, the Company acquired all of the
tangible and intangible assets and assumed certain liabilities associated with
Gavitec's machine vision business. This acquisition strengthens the Company's
overall market position in Germany and combines Gavitec's experience in the
design of easy-to-use Industrial ID products with Cognex's global sales force
and engineering support to enable the Company to provide additional products for
the growing Industrial ID market. The results of operations of the acquired
business have been included in the Company's consolidated results of operations
since the date of the acquisition. The historical results of operations of the
acquired business were not material compared to the consolidated results of
operations, and therefore, pro forma results are not presented.

The purchase price consisted of 3,777,000 Euros in cash (or approximately
$4,516,000), including 3,477,000 Euros paid at closing, 100,000 Euros (or
approximately $123,000) paid on December 1, 2004, and 200,000 Euros (or
approximately $235,000) paid on December 1, 2005. There was the potential for
two additional cash payments of up to 250,000 Euros (or approximately $323,000)
each in the third quarter of 2004 and first quarter of 2005 depending upon the
achievement of certain performance criteria. These criteria were not met, and
therefore, these contingent payments were not made.

The purchase price was allocated as follows: $213,000 to inventories; $76,000 to
receivables; $60,000 to fixed assets; $114,000 to accrued expenses; $2,726,000
to customer contracts and relationships, to be amortized over nine years;
$155,000 to completed technologies, to be amortized over three years; and
$1,400,000 to goodwill, which is assigned to the MVSD segment and is not
deductible for tax purposes.

NOTE 18: DIVIDENDS

Beginning in the third quarter of 2003, the Company's Board of Directors has
declared and paid a cash dividend in each quarter. During the third quarter of
2004, the Company's Board of Directors voted to increase the quarterly cash
dividend from $0.06 per share to $0.08 per share. Dividend payments amounted to
$14,960,000 in 2005, $12,756,000 in 2004, and $5,237,000 in 2003.

NOTE 19: SUBSEQUENT EVENT

On January 27, 2006, the Company's Board of Directors declared a cash dividend
of $0.08 per share. The dividend was paid on February 24, 2006 to all
shareholders of record at the close of business on February 10, 2006 and
amounted to $3,784,000.

NOTE 20: SUPPLEMENTAL DISCLOSURES

Cash paid for income taxes totaled $2,970,000 in 2005, $2,327,000 in 2004, and
$4,169,000 in 2003.

Common stock received as payment for stock option exercises totaled $317,000 in
2004 and $134,000 in 2003.

The Company retired certain fully depreciated property, plant, and equipment
totaling $4,234,000 in 2005, $1,824,000 in 2004, and $2,497,000 in 2003.

Advertising costs are expensed as incurred and totaled $3,057,000 in 2005,
$2,000,000 in 2004, and $1,684,000 in 2003.

                                     --49--
<PAGE>

COGNEX CORPORATION:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF COGNEX CORPORATION:

We have audited the accompanying consolidated balance sheets of Cognex
Corporation as of December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2005. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cognex Corporation
at December 31, 2005 and 2004, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Cognex
Corporation's internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 1, 2006 expressed an unqualified opinion thereon.

                                                           /s/ Ernst & Young LLP
Boston, Massachusetts
March 1, 2006

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal
control over financial reporting. Management has evaluated the effectiveness of
the Company's internal control over financial reporting based upon the framework
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

Our evaluation for fiscal year 2005 excluded DVT Corporation, a business which
Cognex acquired on May 9, 2005 for approximately $112 million. During the period
from the acquisition date to December 31, 2005, approximately $23 million of
revenue was recorded on the books of DVT Corporation. Management's report on
internal control over financial reporting for fiscal year 2006 will include an
evaluation of DVT Corporation.

Based upon our evaluation, management has concluded that the Company's internal
control over financial reporting was effective as of December 31, 2005.

Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their
report which is included herein.

                                     --50--
<PAGE>

COGNEX CORPORATION: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF COGNEX CORPORATION:

We have audited management's assessment, included in the accompanying Report of
Management on Internal Control Over Financial Reporting, that Cognex Corporation
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Cognex Corporation's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

As indicated in the accompanying Report of Management on Internal Control Over
Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of DVT Corporation, a business which Cognex Corporation
acquired on May 9, 2005 for approximately $112 million. The results of
operations for DVT Corporation are included in the 2005 consolidated financial
statements of Cognex Corporation from the date of acquisition and included $23
million of revenues for the period May 9, 2005 through December 31, 2005. During
the period from the acquisition date to December 31, 2005, approximately $23
million of revenue was recorded on the books of DVT Corporation. Our audit of
internal control over financial reporting of Cognex Corporation also did not
include an evaluation of the internal control over financial reporting of DVT
Corporation.

In our opinion, management's assessment that Cognex Corporation maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Cognex Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on the
COSO criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2005 consolidated financial
statements of Cognex Corporation and our report dated March 1, 2006 expressed an
unqualified opinion thereon.

                                                        /s/ Ernst & Young LLP

Boston, Massachusetts
March 1, 2006

                                     --51--
<PAGE>

COGNEX CORPORATION: FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share amounts)

STATEMENT OF OPERATIONS DATA:

<Table>
<Caption>
Year Ended December 31,                     2005       2004         2003        2002         2001
--------------------------------------   ---------   ---------   ---------   ---------    ---------
<S>                                      <C>         <C>         <C>         <C>          <C>
Revenue                                  $ 216,875   $ 201,957   $ 150,092   $ 114,107    $ 140,729
Cost of revenue                             62,899      57,371      50,139      39,859       62,345
                                         ---------   ---------   ---------   ---------    ---------
Gross margin                               153,976     144,586      99,953      74,248       78,384
Research, development, and
engineering expenses                        27,640      27,063      24,719      25,630       30,094
Selling, general, and
administrative expenses                     82,332      70,674      55,724      58,376       61,262
Amortization of goodwill                        --          --          --          --        3,108
Charge for intangible asset impairment          --          --          --          --       10,932
                                         ---------   ---------   ---------   ---------    ---------
Operating income (loss)                     44,004      46,849      19,510      (9,758)     (27,012)
Nonoperating income                          4,242       6,311       3,738       1,554       11,341
                                         ---------   ---------   ---------   ---------    ---------
Income (loss) before taxes                  48,246      53,160      23,248      (8,204)     (15,671)
Income tax provision (benefit)              12,544      15,416       7,297      (2,177)      (4,544)
                                         ---------   ---------   ---------   ---------    ---------
Net income (loss)                        $  35,702   $  37,744   $  15,951   $  (6,027)   $ (11,127)
                                         =========   =========   =========   =========    =========
Basic net income (loss) per share        $    0.76   $    0.83   $    0.37   $   (0.14)   $   (0.25)
                                         =========   =========   =========   =========    =========
Diluted net income (loss) per share      $    0.74   $    0.80   $    0.36   $   (0.14)   $   (0.25)
                                         =========   =========   =========   =========    =========
Basic weighted-average common shares
outstanding                                 46,709      45,480      43,173      43,503       43,639
                                         =========   =========   =========   =========    =========
Diluted weighted-average
common shares outstanding                   47,935      47,358      44,466      43,503       43,639
                                         =========   =========   =========   =========    =========
Cash dividends per common share          $    0.32   $    0.28   $    0.12    $     --    $      --
                                         =========   =========   =========   =========    =========
</Table>

BALANCE SHEET DATA:

<Table>
<Caption>
December 31,             2005       2004       2003       2002       2001
--------------------   --------   --------   --------   --------   --------
<S>                    <C>        <C>        <C>        <C>        <C>
Working capital        $268,612   $242,460   $150,311   $162,808   $143,712
Total assets            564,562    533,308    432,533    385,934    406,904
Long-term debt               --         --         --         --         --
Shareholders' equity    506,521    462,807    384,994    354,520    378,044
</Table>

                                     --52--
<PAGE>

COGNEX CORPORATION: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)

<Table>
<Caption>
2005 QUARTER ENDED                  APRIL 3      JULY 3     OCTOBER 2    DECEMBER 31
-------------------------------   ----------   ----------   ----------   -----------
<S>                               <C>          <C>          <C>          <C>
Revenue                           $   43,198   $   54,603   $   58,256   $   60,818
Gross margin                          29,408       38,538       42,501       43,529
Operating income                       5,585        9,859       13,926       14,634
Net income                             5,294        7,800       10,858       11,750
Basic net income per share              0.11         0.17         0.23         0.25
Diluted net income per share            0.11         0.17         0.22         0.24
Cash dividends per common share         0.08         0.08         0.08         0.08
Common stock prices:
 High                                  28.44        27.28        33.76        32.70
 Low                                   23.80        21.40        25.43        26.78
</Table>

<Table>
<Caption>
2004 Quarter Ended                  April 4      July 4     October 3    December 31
-------------------------------   ----------   ----------   ----------   -----------
<S>                               <C>          <C>          <C>          <C>
Revenue                           $   48,169   $   54,467   $   55,412   $   43,909
Gross margin                          33,380       38,562       40,526       32,118
Operating income                      10,168       14,339       15,875        6,467
Net income                             8,567       10,878       11,655        6,644
Basic net income per share              0.19         0.24         0.26         0.15
Diluted net income per share            0.18         0.23         0.25         0.14
Cash dividends per common share         0.06         0.06         0.08         0.08
Common stock prices:
 High                                  35.05        38.48        37.06        29.90
 Low                                   28.24        30.09        23.50        23.14
</Table>

                                     --53--
<PAGE>
COGNEX CORPORATION: COMPANY INFORMATION

TRANSFER AGENT

National City Bank
Corporate Trust Operations
3rd Floor, North Annex
4100 West 150th Street
Cleveland, OH 44135-1385
Telephone: (216) 257-8663
Toll free: (800) 622-6757

GENERAL COUNSEL

Goodwin Procter LLP
Boston, Massachusetts

INDEPENDENT AUDITORS

Ernst & Young LLP
Boston, Massachusetts

FORM 10-K

A copy of the Annual Report on Form 10-K filed with the Securities and Exchange
Commission is available to shareholders, without charge, upon request to:

Department of Investor Relations
Cognex Corporation
One Vision Drive
Natick, MA 01760

Additional copies of this annual report are also available, without charge, upon
request to the above address. Or request information on-line at
http://www.cognex.com

The Company's common stock is traded on The NASDAQ Stock Market, under the
symbol CGNX. As of February 26, 2006, there were approximately 600 shareholders
of record of the Company's common stock. The Company believes the number of
beneficial owners of the Company's common stock on that date was substantially
greater.

The Company declared and paid a cash dividend of $0.06 per share in the first
and second quarters of 2004, and $0.08 per share in the third and four quarters
of 2004 and in each quarter of 2005. Any future declaration and payment of cash
dividends will be subject to the discretion of the Board of Directors and will
depend upon such factors as the Board deems relevant.

                                     --56--