Cimetrix (CMXX) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2008
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From             to               

Commission File Number:  0-16454

CIMETRIX INCORPORATED

(Exact name of registrant as specified in its charter)

Nevada	87-0439107
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
6979 South High Tech Drive, Salt Lake City, Utah	84047-3757
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code:  (801) 256-6500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x    No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-3 of the Exchange Act.  (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
(Do not check if a smaller reporting company)

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

Yes o  No x

The number of shares outstanding of the registrant’s common stock as of August 14, 2008:

Common stock, par value $.0001 – 32,828,294 shares

CIMETRIX INCORPORATED

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2008

INDEX

PART I  Financial Information
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Operations	4
	Consolidated Condensed Statements of Cash Flows	5
	Notes to Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4T.	Controls and Procedures	23
PART II Other Information
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
Signatures		25

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PART 1 - - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CIMETRIX INCORPORATED AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

	June 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	82,000		$	339,000
Accounts receivable, net	586,000			1,035,000
Inventories	7,000			8,000
Prepaid expenses and other current assets	51,000			52,000
Total current assets	726,000			1,434,000
Property and equipment, net	132,000			165,000
Intangible assets, net	225,000			284,000
Goodwill	64,000			64,000
Other assets	29,000			29,000
	$	1,176,000		$	1,976,000
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	150,000		$	438,000
Accrued expenses	233,000			602,000
Deferred revenue	421,000			328,000
Notes payable – related parties, net	163,000			163,000
Current portion of notes payable and capital lease obligations	734,000			543,000
Total current liabilities	1,701,000			2,074,000
Long-term liabilities:
Long-term portion of notes payable and capital lease obligations	38,000			38,000
Total long-term liabilities	38,000			38,000
Total liabilities	1,739,000			2,112,000
Commitments and contingencies
Stockholders’ deficit:
Common stock; $.0001 par value, 100,000,000 shares authorized, 32,853,294 and 31,952,432 shares issued, respectively	3,000			3,000
Additional paid-in capital	32,396,000			32,004,000
Treasury stock, 25,000 shares at cost	(49,000		)	(49,000		)
Accumulated deficit	(32,913,000		)	(32,094,000		)
Total stockholders’ deficit	(563,000		)	(136,000		)
	$	1,176,000		$	1,976,000

See accompanying notes to consolidated condensed financial statements

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CIMETRIX INCORPORATED AND SUBSIDIARIES

Consolidated Condensed Statements of Operations

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenues:
New software licenses	$	455,000		$	504,000		$	1,146,000		$	1,110,000
Software license updates and product support	245,000			266,000			543,000			550,000
Total software revenues	700,000			770,000			1,689,000			1,660,000
Professional services	295,000			851,000			661,000			1,517,000
Total revenues	995,000			1,621,000			2,350,000			3,177,000
Operating costs and expenses:
Cost of revenues	437,000			752,000			1,057,000			1,432,000
Sales and marketing	269,000			298,000			583,000			588,000
Research and development	230,000			249,000			482,000			506,000
General and administrative	403,000			411,000			878,000			845,000
Depreciation and amortization	54,000			113,000			108,000			226,000
Total operating costs and expenses	1,393,000			1,823,000			3,108,000			3,597,000
Loss from operations	(398,000		)	(202,000		)	(758,000		)	(420,000		)
Other income (expense):
Interest and other income	—			3,000			1,000			7,000
Interest expense	(42,000		)	(22,000		)	(62,000		)	(40,000		)
Total other expense	(42,000		)	(19,000		)	(61,000		)	(33,000		)
Loss before income taxes	(440,000		)	(221,000		)	(819,000		)	(453,000		)
Provision for income taxes	—			—			—			—
Net loss	$	(440,000	)	$	(221,000	)	$	(819,000	)	$	(453,000	)
Loss per common share:
Basic	$	(0.01	)	$	(0.00	)	$	(0.03	)	$	(0.01	)
Diluted	$	(0.01	)	$	(0.00	)	$	(0.03	)	$	(0.01	)
Weighted average number of shares outstanding:
Basic	32,007,000			31,927,000			31,967,000			31,927,000
Diluted	32,007,000			31,927,000			31,967,000			31,927,000

See accompanying notes to consolidated condensed financial statements

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CIMETRIX INCORPORATED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(819,000	)	$	(453,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	108,000			226,000
Provision for doubtful accounts	(20,000		)	—
Stock-based compensation	229,000			202,000
Stock issued for services	1,000			—
Interest expense from debt discount	—			21,000
(Increase) decrease in:
Accounts receivable	469,000			128,000
Inventories	1,000			2,000
Prepaid expenses and other current assets	5,000			12,000
Increase (decrease) in:
Accounts payable	(292,000		)	(4,000		)
Accrued expenses	(207,000		)	(16,000		)
Deferred revenue	93,000			(68,000		)
Net cash provided by (used in) operating activities	(432,000		)	50,000
Cash flows from investing activities – purchase of property and equipment	(1,000		)	(25,000		)
Cash flows from financing activities:
Proceeds from the issuance of debt	1,427,000			—
Proceeds from related party advances	140,000			—
Payments of debt	(1,251,000		)	—
Payments of related party advances	(140,000		)	—
Net cash provided by financing activities	176,000			—
Net increase (decrease) in cash and cash equivalents	(257,000		)	25,000
Cash and cash equivalents, beginning of period	339,000			313,000
Cash and cash equivalents, end of period	$	82,000		$	338,000

See accompanying notes to consolidated condensed financial statements

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CIMETRIX INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization – Cimetrix Incorporated, a Nevada corporation, and its subsidiaries (“Cimetrix” or the “Company”) are primarily engaged in the development and sale of open architecture, standards-based, computer software for controlling machine tools, robots and electronic equipment; communication products that allow communication between equipment on the factory floor and host systems; and semiconductor connectivity products that connect new semiconductor tools to each other and to host systems.

Basis of Presentation – The consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiaries, Cimetrix Europe, Inc. and Cimetrix Data Management Solutions, Inc.  All significant inter-company accounts and transactions have been eliminated in consolidation. The interim financial information of the Company as of June 30, 2008 and June 20, 2007 and for the three-month and six-month periods then ended is unaudited, and the balance sheet as of December 31, 2007 is derived from audited financial statements.  The accompanying consolidated condensed financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial statements.  Accordingly, they omit or condense footnotes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles.  The accounting policies followed for quarterly financial reporting conform with the accounting policies disclosed in Note 1 to the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  In the opinion of management, all adjustments that are necessary for a fair presentation of the financial information for the interim periods reported have been made.  All such adjustments are of a normal recurring nature.  The results of operations for the three months and six months ended June 30, 2008 are not necessarily indicative of the results that can be expected for the entire year ending December 31, 2008.  The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Reclassifications – Certain amounts in the condensed consolidated financial statements for the three-month and six-month periods ended June 30, 2007 have been reclassified to conform to the presentation used in the three-month and six-month periods ended June 30, 2008.

NOTE 2 – LIQUIDITY

Historically, the Company has incurred net losses and negative cash flows from operations.  As of June 30, 2008, the Company had an accumulated deficit of $32,913,000 and total stockholders’ deficit of $563,000.  At June 30, 2008, the Company had current assets of $726,000, including cash and cash equivalents of $82,000, and current liabilities of $1,701,000, resulting in a working capital deficiency of $975,000.  During the first six months of 2008, the Company reported a net loss of $819,000 and net cash used in operating activities of $432,000.  With the cost reductions implemented in April of 2008, the Company achieved positive cash from operations for the second quarter of 2008 of $51,000.  Management believes that its cost reduction efforts, including reduction in force as needed, together with funds available from the bank loan facility and from short-term

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related party advances, will be sufficient to fund planned operations at lower revenue levels for the next twelve months.  However, there can be no assurance that operations and operating cash flows will continue at the current levels or improve in the near future.  If the Company is unable to obtain profitable operations and positive operating cash flows sufficient to meet scheduled debt obligations, it may need to seek additional funding or be forced to scale back its development plans or to significantly reduce or terminate operations.

NOTE 3 – STOCK-BASED COMPENSATION

In May 2006, the Company’s shareholders approved the combined amendment and restatement of the Cimetrix Incorporated 1998 Incentive Stock Option Plan and the Cimetrix Incorporated Director Stock Option Plan as the Cimetrix 2006 Long-Term Incentive Plan (the “Plan”).  In addition to stock options, the Plan authorizes the grant of stock appreciation rights, restricted stock awards, and other stock unit and equity-based performance awards.

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share Based Payments.  Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests.  The stock-based compensation expense for the three-month and six-month periods ended June 30, 2008 and June 30, 2007 has been allocated to the various categories of operating costs and expenses in a manner similar to the allocation of payroll expense as follows:

	Three Months Ended June 30,
	2008		2007
Cost of revenues	$	5,000	$	6,000
Sales and marketing	42,000		25,000
Research and development	7,000		7,000
General and administrative	85,000		59,000
Total stock-based compensation expense realized and increase in net loss	$	139,000	$	97,000

	Six Months Ended June 30,
	2008		2007
Cost of revenues	$	10,000	$	10,000
Sales and marketing	65,000		50,000
Research and development	14,000		15,000
General and administrative	140,000		127,000
Total stock-based compensation expense realized and increase in net loss	$	229,000	$	202,000

There was no stock compensation expense capitalized during the three-month and six-month periods ended June 30, 2008 and June 30, 2007.

During the six months ended June 30, 2008, options to purchase 735,000 shares of the Company’s common stock were issued to the Company’s employees, with a weighted average exercise price of $0.16 per share.  The Company estimated the grant-date fair value of these options using the Black-Scholes option pricing model using the following assumptions:

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Expected dividend yield	0.00	%
Expected stock price volatility	67.87	%
Risk free interest rate	2.92	%
Expected life of options	6 years

The following table summarizes the stock option activity during the six months ended June 30, 2008:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contract Term	Aggregate Intrinsic Value
Outstanding at December 31, 2007	4,252,000		$	0.50
Granted	735,000		0.16
Exercised	—		—
Expired	(1,134,000	)	0.75
Forfeited	(14,000	)	0.26
Outstanding at June 30, 2008	3,839,000		0.37		3.72	$	—
Options vested and exercisable at June 30, 2008	2,244,792		0. 43		2.46	$	—

Based on the Company’s closing stock price of $0.08 as of June 30, 2008, there were no outstanding in-the-money options, and, consequently, no intrinsic value to the holders of such options.

During the six months ended June 30, 2008, restricted stock awards for a total of 514,792 shares of the Company’s common stock were approved, with a vesting period of three to twelve months.

As of June 30, 2008, the total future compensation cost related to non-vested stock-based awards not yet recognized in the condensed consolidated statements of operations was $313,000.

NOTE 4 – EARNINGS (LOSS) PER SHARE

The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period.  The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of dilutive stock options and warrants outstanding using the treasury stock method and the average market price per share during the period.

A reconciliation of the number of shares used in the computation of the Company’s basic and diluted earnings per common share is as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
Weighted average number of common shares outstanding	32,007,000	31,927,000	31,967,000	31,927,000
Dilutive effect of:
Stock options and restricted stock awards	—	—	—	—
Warrants	—	—	—	—
Weighted average number of common shares outstanding, assuming dilution	32,007,000	31,927,000	31,967,000	31,927,000

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No stock options, restricted stock awards and warrants are included in the computation of weighted average number of shares because the effect would be antidilutive. At June 30, 2008, the Company had outstanding options, warrants and restricted stock awards to purchase a total of 4,589,181 common shares of the Company that could have a future dilutive effect on the calculation of earnings per share.

NOTE 5 – NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

The Company’s notes payable and capital lease obligations consisted of the following:

Related Party:	June 30, 2008		December 31, 2007
Senior Notes, unsecured, with interest at 8% payable semiannually on April 1 and October 1, 2007 and 2008, maturing September 30, 2008, payable to officers, employees, or their affiliates	$	163,000	$	163,000

Other:	June 30, 2008		December 31, 2007
Senior Notes, unsecured, with interest at 8% payable semiannually on April 1 and October 1, 2007 and 2008, maturing September 30, 2008	$	308,000	$	308,000
Bank loan, secured by accounts receivable with interest at the prime rate plus 1.5% (6.5% at June 30, 2008) plus a monthly collateral handling fee of .375%	407,000		225,000
Installment notes payable to financing company, payable in monthly payments totaling $1,901, including interest at 24.49%, from March 2008 through February 2011	44,000		48,000
Capital lease payable to financing company, payable in monthly payments totaling $426, including interest at 4.0%, from March 2008 through February 2011	13,000		—
Total	772,000		581,000
Less current portion	734,000		543,000
Long-term portion	$	38,000	$	38,000

At June 30, 2008, there were warrants issued to the Senior Note holders to purchase a total of 266,250 common shares of the Company at an exercise price of $0.35 per share. The warrants expire on September 30, 2008.

The Company and Silicon Valley Bank (the “Bank”) previously entered into a Loan and Security Agreement, effective as of December 26, 2007. The Company and the Bank entered into an Amended and Restated Loan and Security Agreement dated April 9, 2008 (the “Agreement”) to amend and restate in its entirety, without novation, the original agreement of December 26, 2007.

Subject to the terms of the Agreement, the Company may request that the Bank finance qualified accounts receivable (“Eligible Accounts”, and, after an advance is made, “Financed Receivables”) by extending credit to the Company in an amount equal to 80%, of the Financed Receivable. The Bank may, in its sole discretion, change the percentage of the advance rate for a particular Financed Receivable on a case by case basis.

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Subject to the terms of the Agreement, the Company may also request that the Bank finance Eligible Accounts due from non-U.S. account debtors pursuant to the Agreement and an EX-IM Loan Agreement. The Bank may, in its sole discretion in each instance, finance such foreign accounts by extending credit to the Company in an amount equal to 90%, of the foreign Financed Receivable. The Bank may, in its sole discretion, change the percentage of the advance rate on a case by case basis.

The aggregate face amount Financed Receivables may not exceed One Million Two Hundred Fifty Dollars ($1,250,000), including a maximum of Nine Hundred Fifty Thousand Dollars ($950,000) non-U.S. Financed Receivables. Advances under the Agreement are collateralized by substantially all operating assets of the Company. The Agreement terminates on December 25, 2008.

The Company will pay a finance charge equal to the greater of either (i) the prime rate plus one and one-half percent (1.50%), or (ii) 6.5% at June 30, 2008, multiplied by the face amount of the Financed Receivables. There is also a collateral handling fee of .375% per month of the face amount of the Financed Receivables. In the event of a default, both of these rates are increased.

The Company will repay each advance on the earliest of: (a) the date on which payment is received on the Financed Receivable, (b) the date on which the Financed Receivable is no longer an Eligible Account, (c) the date on which any Adjustment is asserted to the Financed Receivable (but only to the extent of the Adjustment if the Financed Receivable remains otherwise an Eligible Account), (d) the date on which there is a breach of any warranty or representation set forth in the Agreement, or (e) the maturity date of the Agreement of December 25, 2008. Each payment will also include all accrued finance charges and collateral handling fees with respect to such Advance and all other amounts then due and payable in accordance with the Agreement.

The Agreement eliminated financial covenants that were in the original agreement dated December 26, 2007 and under which the Company was previously in default.

The Company, without the Bank’s consent, may not:

·Convey, sell, convey, transfer or otherwise dispose of its business or property other than in the ordinary course;

·Engage in any new line of business, permit a change in control or change its jurisdiction of formation;

·Merge or consolidate with another entity or acquire all of the capital stock or property of another entity;

·Create, incur, assume or be liable for any new indebtedness other than permitted indebtedness as defined in the Agreement;

·Create, incur, allow or suffer any lien on its property, or assign any right to receive income;

·Maintain any other collateral account;

·Pay any dividends or make any distributions or payments or redeem, retire or purchase any capital stock, or make other than certain defined investments;

·Directly or indirectly enter into any material transaction with any affiliate, except for transactions that are in the ordinary course of business;

·Make any payment on subordinated debt or amend any provision in any document relating to subordinated debt;

·Become an “investment company” or a company controlled by an “investment company” under the Investment Company Act of 1940.

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NOTE 6 – COMMON STOCK

In June 2008, the Company issued 900,862 shares of its restricted common stock to officers and directors in payment of an obligation of $270,000 for vested restricted stock awards.

NOTE 7 – RELATED PARTY TRANSACTIONS

During the three-month and six-month periods ended June 30, 2008 and June 30, 2007, the Company had the following revenues from two customers that are also shareholders of the Company:

	Three Months Ended June 30				Six Months Ended June 30
	2008		2007		2008		2007
New software licenses	$	3,000	$	28,000	$	26,000	$	98,000
Software license updates and product support	23,000		13,000		43,000		18,000
Total software revenues	$	26,000	$	41,000	$	69,000	$	116,000

The Company had accounts receivable from these two customers totaling $19,000 and $8,000 at June 30, 2008 and December 31, 2007, respectively.

NOTE 8 – MAJOR CUSTOMERS

During the three months ended June 30, 2008, one customer accounted for 12% of the Company’s total revenues. During the three months ended June 30, 2007, one customer accounted for 20% of the Company’s total revenues. During the six months ended June 30, 2008, no customer accounted for 10% or more of the Company’s total revenues. During the six months ended June 30, 2007, one customer accounted for 16% of the Company’s total revenues.

NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. The statement establishes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not believe the implementation of this statement will have any impact on its financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, or the Company’s fiscal year beginning January 1, 2009, with early application encouraged. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company does not believe

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the implementation of this pronouncement will have a material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. This statement replaces SFAS No. 141, Business Combinations and applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree), including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. This statement establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financials statements to evaluate the nature and financial effects of the business combination. This statement will be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, or the Company’s fiscal year beginning January 1, 2009. Earlier adoption is prohibited. The Company is currently unable to determine what impact the future application of this pronouncement may have on its consolidated financial statements.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements. This statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, and amends Accounting Research Bulletin (“ARB”) 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141 (revised 2007). This statement will be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, or the Company’s fiscal year beginning January 1, 2009. Earlier adoption is prohibited. The Company is currently unable to determine what impact the future application of this pronouncement may have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities applies to all entities with available-for-sale and trading securities. The Company adopted SFAS No. 159 on January 1, 2008, with no material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding financial instruments in one of the categories, including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, which delays by one year the effective date of SFAS No. 157 for certain types of non-financial assets and non-financial liabilities. As a result, SFAS No. 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007, or the Company’s fiscal year beginning January 1, 2008, for financial assets and liabilities carried at fair value on a recurring basis, and on January 1, 2009, for non-recurring non-financial assets and liabilities that are recognized or disclosed at fair value. The Company adopted SFAS No. 157 on January 1, 2008 for financial assets and liabilities carried at fair value on a recurring basis, with no material impact on its consolidated financial statements. The Company is currently unable to determine what impact the application of SFAS No. 157 on January 1, 2009 for non-recurring non-financial assets and liabilities that are recognized or disclosed at fair value will have on its consolidated financial statements.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following is a brief discussion and explanation of significant financial data, which is presented to help the reader understand the results of the Company’s financial performance for the three-month and six-month periods ended June 30, 2008 and June 30, 2007 and the Company’s financial position at June 30, 2008.  The information includes discussions of sales, expenses, capital resources and other significant financial items.

This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company��s Annual Report on Form 10-K for the year ended December 31, 2007.  The ensuing discussion and analysis contains both statements of historical fact and forward-looking statements.  Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, generally are identified by the words “expects,” “believes,” “anticipates” or words of similar import.  Examples of forward-looking statements include:  (a) projections regarding sales, revenue, liquidity, capital expenditures and other financial items; (b) statements of the plans, beliefs and objectives of the Company or its management; (c) statements of future economic performance; and (d) assumptions underlying statements regarding the Company or its business.  Forward-looking statements are subject to factors and uncertainties that could cause actual results to differ materially from the forward-looking statements, including, but not limited to, those factors and uncertainties described below under “Liquidity and Capital Resources,” “Factors Affecting Future Results” and “Risk Factors,” and those factors set forth under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Cimetrix is a software company that designs, develops, markets and supports factory automation solutions worldwide.  The Company offers software products and professional services tailored to meet the needs of equipment suppliers in the areas of advanced motion control, general purpose equipment connectivity, and specialized connectivity for 300mm semiconductor wafer fabrication facilities.  Revenues are derived from the sales of software and services.  Software includes the initial sale of software development kits, the ongoing runtime licenses that equipment suppliers purchase for each machine shipped with Cimetrix software and annual contracts for software license updates and product support.  Services include the sale of professional services that provide customers with software solutions typically incorporating Cimetrix software products.  While Cimetrix products are installed in a wide range of industries, the Company has focused over the past several years on the global semiconductor and electronics industries.

Critical Accounting Policies

Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon financial statements which have been prepared in accordance with U. S. generally accepted accounting principles.  The following accounting policies significantly affect the way the financial statements are prepared.

Revenue Recognition

The Company derives revenues from two primary sources, software and professional services.  Software revenues are reported in two categories, the sale of new software licenses and software license updates and product support.  The Company has “off-the-shelf” software packages in the machine control and communications product lines.  Machine control products include items such as CODE 6.0, CIMControl, and CIMulation.  Communications products include items such as CIM300, CIMConnect and CIMPortal. New software licenses include the sale of software development kits as well as the

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runtime license fees associated with deployment of the Company’s software products.  Software license updates and product support are typically annual contracts with customers that are paid in advance, which provides the customer access to new software releases, maintenance releases, patches and technical support personnel.  Professional service sales are derived from the sale of services to design, develop and implement custom software applications.

Before the Company recognizes revenue, the following criteria must be met:

1)	Evidence of a financial arrangement or agreement must exist between the Company and its customer. Purchase orders and signed OEM contracts are two examples of items accepted by the Company to meet this criterion.
2)	Delivery of the products or services must have occurred. The Company treats either physical or electronic delivery as having met this requirement. It is the policy of the Company to provide its customers a 30-day right to return. However, because the amount of returns has been insignificant, the Company recognizes revenue immediately upon the shipment of the product. If the number of returns were to increase, the Company would establish a reserve based on a percentage of sales to account for any such returns.
3)	The price of the products or services is fixed and measurable.
4)	Collectability of the sale is reasonably assured and receipt is probable. Collectability of a sale is determined on a customer-by-customer basis. Typically the Company sells to large corporations which have demonstrated an ability to pay. If it is determined that a customer may not have the ability to pay, revenue is deferred until the payment is collected.

The software component of the Company’s products is an integral part of its functionality.  As such, the Company applies the provisions of the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition as modified by SOP 98-9.

The Company’s products are fully functional at the time of shipment.  The software components of the Company’s products do not require significant production, modification or customization.  As such, revenue from product sales is recognized upon shipment provided that the criteria outlined above are met.

Revenue related to services is recognized as services are performed if there is not an extended contract related to such services.  If the services are provided pursuant to a contract that extends over a period of time, the revenue from services is recorded ratably over the contract period, generally using the percentage of completion method.  When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is made in the period in which the loss becomes evident.

If a sale involves a bundled package of new software licenses, software license updates and product support, and professional services, and the Company has vendor specific objective evidence of fair value among arrangement elements in accordance with SOP 97-2, then revenue is first allocated to software license updates and product support and professional service obligations at fair market value, and the remaining amount is applied to new software license revenue.  Assuming all of the above criteria have been met, revenue from the new software license portion of the package is recognized upon shipment.  Revenue from material software license updates and product support contracts is recognized ratably over the term of the contract, which is generally 12 months.  Revenue from professional services is recognized as services are performed.  Standard payment terms for sales are net 30 days for sales in the United States and net 45 to 60 days for foreign customers.  On occasion, extended payment terms will be offered.  If the Company provides payment terms greater than 90 days and collection is not reasonably assured, then revenues are generally recognized as payments are received.

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In the event that the Company does not have vendor specific objective evidence of fair value among arrangement elements in a bundled package of products and services, the Company reports the revenue in a single revenue line presentation in the consolidated statements of operations in accordance with SOP 97-2.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective application method.  Under this transition method, the Company recorded compensation expense of $139,000 and $97,000 on a straight-line basis for the three-month periods ended June 30, 2008 and 2007, and $229,000 and $202,000 for the six month periods ended June 30, 2008 and 2007 for: (a) the vesting of options granted prior to January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and previously presented in the pro-forma footnote disclosures), and (b) stock-based awards granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R)).

The stock-based compensation expense has been allocated to the various categories of costs and expenses in a manner similar to the allocation of payroll expense.  There was no stock compensation expense capitalized during the three-month and six-month periods ended June 30, 2008 and 2007.  During the six months ended June 30, 2008, options to purchase 735,000 shares of the Company’s common stock were issued to the Company’s employees, with a weighted average exercise price of $0.16 per share.  During the six months ended June 30, 2008, restricted stock awards for a total of 514,792 shares of the Company’s common stock were approved, with a vesting period of three to twelve months.

The fair value of stock options is computed using the Black-Scholes valuation model, which model utilizes inputs that are subject to change over time, and includes assumptions made by the Company with respect to the volatility of the market price of the Company’s common stock, risk-free interest rates, requisite service periods, and the assumed life and vesting of stock options and stock-based awards.  As new options or stock-based awards are granted and vest, additional non-cash compensation expense will be recorded by the Company.

Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts.  The Company offers credit terms on the sale of its products to a majority of its customers and requires no collateral from these customers.  The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for doubtful accounts based upon historical collection experience and expected collectability of all accounts receivable.  The Company’s allowance for doubtful accounts, which is determined based on historical experience and a specific review of customer balances, was $34,000 and $54,000 as of June 30, 2008 and December 31, 2007, respectively.  Trade receivables are written off when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded as income when received.

Impairment of Long-Lived Assets

The Company periodically reviews its long-lived assets, including definite-lived intangible assets, for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value.  In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset.

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Income Taxes

As part of the process of preparing consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates.  This process involves estimating the Company’s actual current income tax exposure together with assessing temporary differences resulting from differing treatment of items for income tax and financial accounting purposes.  These temporary differences result in deferred tax assets and liabilities, the net amount of which is included in the Company’s consolidated balance sheet.  When appropriate, the Company records a valuation allowance to reduce its deferred tax assets to the amount that the Company believes is more likely than not to be realized.  Key assumptions used in estimating a valuation allowance include potential future taxable income, projected income tax rates, expiration dates of net operating loss and tax credit carry forwards, and ongoing prudent and feasible tax planning strategies.  At June 30, 2008, the Company had fully reduced its net deferred tax assets by recording a valuation allowance.  If the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, an adjustment to reduce the valuation allowance would increase income in the period such determination was made.

On January 1, 2007, the Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (FIN 48).  FIN 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.  If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.  At June 30, 2008, the Company has not identified any material uncertain tax positions requiring recognition in its consolidated financial statements.  The Company classifies interest and penalties arising from the underpayment of income taxes in its consolidated statements of operations under general and administrative expenses.  As of June 30, 2008, the Company had no accrued interest or penalties related to uncertain tax positions.

Operations Review

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Net sales	100	%	100	%	100	%	100	%
Operating costs and expenses:
Cost of revenues	44		47		45		45
Sales and marketing	27		19		25		18
Research and development	23		15		20		16
General and administrative	41		25		37		27
Depreciation and amortization	5		7		5		7
Total operating costs and expenses	140		113		132		113
Loss from operations	(40	)	(13	)	(32	)	(13	)
Other expense, net	(4	)	(1	)	(3	)	(1	)
Net loss	(44	)%	(14	)%	(35	)%	(14	)%

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The Company reported a net loss of $440,000 for the three months ended June 30, 2008, compared to a net loss of $221,000 for the three months ended June 30, 2007. For the six months ended June 30, 2008, the Company reported a net loss of $819,000, compared to a net loss of $453,000 for the six months ended June 30, 2007.  The net loss for all periods includes significant non-cash stock-based compensation expense and non-cash depreciation and amortization expense.  For the three-month periods ended June 30, 2008 and June 30, 2007, stock-based compensation expense was $139,000 and $97,000, respectively, and depreciation and amortization expense was $54,000 and $113,000, respectively.  For the six-month periods ended June 30, 2008 and June 30, 2007, stock-based compensation expense was $229,000 and $202,000, respectively, and depreciation and amortization expense was $108,000 and $226,000, respectively.

Net cash used in operating activities was $432,000 for the six months ended June 30, 2008, compared to net cash provided by operating activities of $50,000 for the six months ended June 30, 2007.  However, net cash used in operating activities in the three months ended March 31, 2008 was $483,000, higher than the cash used in operating activities for the six months ended June 30, 2008.  With the cost reductions implemented in April of 2008, the Company achieved positive cash from operations for the second quarter of 2008 of $51,000, reducing the total cash used in operating activities for the six-month period.

Results of Operations

Revenues

The following table summarizes revenues (including related party revenues) by category and as a percent of total revenues:

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2008				2007				2008				2007
New software licenses	$	455,000	46	%	$	504,000	32	%	$	1,146,000	49	%	$	1,110,000	36	%
Software license updates andproduct support	245,000		25	%	266,000		16	%	543,000		23	%	550,000		17	%
Total software revenues	700,000		71	%	770,000		48	%	1,689,000		72	%	1,660,000		53	%
Professional services	295,000		29	%	851,000		52	%	661,000		28	%	1,517,000		47	%
Total revenues	$	995,000	100	%	$	1,621,000	100	%	$	2,350,000	100	%	$	3,177,000	100	%

Total revenues decreased by $626,000, or 39%, to $995,000 for the three months ended June 30, 2008, from $1,621,000 for the three months ended June 30, 2007.  For the six months ended June 30, 2008, total revenues decreased by $827,000, or 26% to $2,350,000 from $3,177,000 for the six months ended June 30, 2007.  Total software revenues for the six months ended June 30, 2008 increased 2% year-over-year due to modest increases in new software licenses revenues.  The mid-year edition of the SEMI Capital Equipment Forecast issued in July 2008 during SEMICON West predicts that the equipment market will decline 20 percent in 2008, but will experience a rebound with 13 percent growth in 2009.  The most recent Semiconductor Industry Association reports on chip sales for March and April show that the three-month moving average of chip sales grew by 3.5 percent and zero, respectively.  This is near the long medium term average for these two months, which is a big improvement over the industry’s recent performance-in which the growth of chip sales has under- performed the seasonal average for the past several months.  If the growth of chip sales remains at average levels, or exceeds the average in May and June, George Burns from Strategic Marketing Associates expects a recovery in capital spending by the end of the third quarter of 2008, and growth in capital spending by as much as 20 percent in 2009.

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Total software revenues decreased to $700,000 for the three months ended June 30, 2008, as compared to $770,000 for the three months ended June 30, 2007, but were slightly higher at $1,689,000 for the six months ended June 30, 2008 as compared to $1,660,000 for the six months ended June 30, 2007.  Cimetrix was able to achieve an increase in software revenues on a year-to-date basis as a result of the steady increase in new customers gained over the past several years that have started to ship machines using Cimetrix software.  The mix of revenue categories is subject to change on a quarter-to-quarter basis, and it is difficult to predict the timing and probability of “design win” opportunities.  Due to the industry slowdown and reluctance to initiate new projects, Cimetrix did not gain any significant “design win” during the second quarter of 2008.  The decrease in professional services revenue in the current year three-month and six-month periods compared to the same periods last year can be attributed primarily to the general industry slowdown and the delays of several new projects until market conditions improve.

Cost of Revenues

The Company’s cost of revenues as a percentage of total revenues for the three months ended June 30, 2008 was 44%, compared to 47% for the three months ended June 30, 2007.  Cost of revenues decreased $315,000, or 42%, to $437,000 for the three months ended June 30, 2008, from $752,000 for the three months ended June 30, 2007.  This decrease was due primarily to lower professional services revenue, which revenue has higher labor and other costs of revenues than software revenues.  However, the costs of software revenues increased as the number of customer support incidents increased in the current year as a number of equipment supplier customers commissioned new equipment to production facilities.  The Company’s cost of revenues as a percentage of total revenues for the six months ended June 30, 2008 was 45%, compared to 45% for the six months ended June 30, 2007.  Cost of revenues decreased $375,000, or 26%, to $1,057,000 for the six months ended June 30, 2008, from $1,432,000 for the six months ended June 30, 2007. Cost of revenues as a percentage of total revenues will vary from period to period depending on the mix of software and professional service revenues, the type of service projects completed, the pricing strategy for the projects, the extent of utilization of outside resources, and other factors.

Sales and Marketing

Sales and marketing expenses decreased $29,000, or 10%, to $269,000 during the three months ended June 30, 2008, from $298,000 during the three months ended June 30, 2007.  Sales and marketing expenses increased to 27% of total revenues for the three month ended June 30, 2008 as compared to 19% of total revenues in the prior year period, primarily because of the decrease in revenues.  During the six months ended June 30, 2008, sales and marketing expenses decreased $5,000, or 1%, to $583,000 from $588,000 during the six months ended June 30, 2007.  Sales and marketing expenses reflect the direct payroll and related travel expenses of the Company’s sales and marketing staff, the development of product brochures and marketing materials, costs associated with press releases, and costs related to the Company’s representation at industry trade shows.

Research and Development

Research and development expenses decreased $19,000, or 8%, to $230,000 during the three months ended June 30, 2008, from $249,000 during the three months ended June 30, 2007.  During the six months ended June 30, 2008, research and development expenses decreased $24,000, or 5%, to $482,000 from $506,000 during the six months ended June 30, 2007.  Research and development expenses include only direct costs for wages, benefits, materials, and education of technical personnel.  All indirect costs such as rents, utilities, depreciation and amortization are included in general and administrative expenses, as discussed below.

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General and Administrative

General and administrative expenses decreased $8,000, or 2%, to $403,000 in the three months ended June 30, 2008, from $411,000 in the three months ended June 30, 2007.  During the six months ended June 30, 2008, general and administrative expenses increased $33,000, or 4%, to $878,000 from $845,000 during the six months ended June 30, 2007.  General and administrative expenses include all direct costs for administrative and accounting personnel, and all rents and utilities for maintaining Company offices.  The increase in general and administrative expenses in the current year is attributable to professional fees and services associated with the new loan facility, additional staff to support the Sarbanes-Oxley internal control activities, and increased stock-based compensation expense.

Depreciation and Amortization

Depreciation and amortization expense decreased $59,000, or 52%, to $54,000 in the three months ended June 30, 2008, from $113,000 in the three months ended June 30, 2007.  During the six months ended June 30, 2008, depreciation and amortization decreased $118,000, or 52%, to $108,000 from $226,000 in the six months ended June 30, 2007.  Certain of the intangible assets associated with the EFS Solutions acquisition in October 2005 became fully amortized in 2007, resulting in a decrease in depreciation and amortization expense in the current year.

Other Income (Expense)

Interest and other income for the three months ended June 30, 2008 decreased by $3,000, to $0, from $3,000 for the three months ended June 30, 2007.  Similarly, interest and other income for the six months ended June 30, 2008 decreased by $6,000, to $1,000, from $7,000 for the six months ended June 30, 2007.  The decrease in interest income resulted from lower levels of cash reserves during the current year.

Interest expense for the three months ended June 30, 2008 increased by $20,000, to $42,000, from $22,000 for the three months ended June 30, 2007.  Similarly, interest expense for the six months ended June 30, 2008 increased by $22,000 to $62,000, from $40,000 for the six months ended June 30, 2007.  The increase resulted from the increase borrowings from the new loan facility, partially offset by the decrease in the current year in the amortization of the discount recorded in connection with the Company’s Senior Notes, which discount is a non-cash charge that is accreted and included in interest expense.

Liquidity and Capital Resources

At June 30, 2008, the Company had current assets of $726,000, including cash and cash equivalents of $82,000, and current liabilities of $1,701,000, resulting in a working capital deficiency of $975,000.  Excluding deferred revenue of $421,000, which requires the Company to provide services and support but does not represent a scheduled obligation requiring the outlay of Company funds, the Company’s current liabilities exceeded current assets by $554,000 at June 30, 2008.  As further discussed below, current liabilities also include notes payable to related parties of $163,000.

As of June 30, 2008, the Company had notes payable and long-term debt totaling $935,000, all but $38,000 of which is a current liability, comprised of the following:

8% Senior Notes due September 30, 2008	$	471,000
Secured bank loan due December 25, 2008	407,000
Other	57,000
Total	$	935,000

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Included in the Senior Notes Payable at June 30, 2008, are Senior Notes outstanding of $163,000 to officers, employees or their affiliates.

The Company and Silicon Valley Bank (the “Bank”) previously entered into a Loan and Security Agreement, effective as of December 26, 2007.  The Company and the Bank entered into an Amended and Restated Loan and Security Agreement dated April 9, 2008 (the “Agreement”) to amend and restate in its entirety, without novation, the original agreement of December 26, 2007.

Subject to the terms of the Agreement, the Company may request that the Bank finance qualified accounts receivable (“Eligible Accounts”, and, after an advance is made, “Financed Receivables”) by extending credit to the Company in an amount equal to 80%, of the Financed Receivable.  The Bank may, in its sole discretion, change the percentage of the advance rate for a particular Financed Receivable on a case by case basis.

Subject to the terms of the Agreement, the Company may also request that the Bank finance Eligible Accounts due from non-U.S. account debtors pursuant to the Agreement and an EX-IM Loan Agreement.  The Bank may, in its sole discretion in each instance, finance such foreign accounts by extending credit to the Company in an amount equal to 90%, of the foreign Financed Receivable.  The Bank may, in its sole discretion, change the percentage of the advance rate on a case by case basis.

The aggregate face amount Financed Receivables may not exceed One Million Two Hundred Fifty Dollars ($1,250,000), including a maximum of Nine Hundred Fifty Thousand Dollars ($950,000) non-U.S. Financed Receivables.  Advances under the Agreement are collateralized by substantially all operating assets of the Company.  The Agreement terminates on December 25, 2008.

The Company will pay a finance charge equal to the greater of either (i) the prime rate plus one and one-half percent (1.50%), or (ii) 6.5% at June 30, 2008, multiplied by the face amount of the Financed Receivables.   There is also a collateral handling fee of ..375% per month of the face amount of the Financed Receivables.   In the event of a default, both of these rates are increased.

The Company will repay each advance on the earliest of: (a) the date on which payment is received on the Financed Receivable, (b) the date on which the Financed Receivable is no longer an Eligible Account, (c) the date on which any Adjustment is asserted to the Financed Receivable (but only to the extent of the Adjustment if the Financed Receivable otherwise remains an Eligible Account), (d) the date on which there is a breach of any warranty or representation set forth in the Agreement, or (e) the maturity date of the Agreement of December 25, 2008. Each payment will also include all accrued finance charges and collateral handling fees with respect to such Advance and all other amounts then due and payable in accordance with the Agreement.

The Agreement eliminated financial covenants that were in the original agreement dated December 26, 2007 and under which the Company was previously in default.

The Company, without the Bank’s consent, may not:

·Convey, sell, convey, transfer or otherwise dispose of its business or property other than in the ordinary course;

·Engage in any new line of business, permit a change in control or change its jurisdiction of formation;

·Merge or consolidate with another entity or acquire all of the capital stock or property of another entity;

·Create, incur, assume or be liable for any new indebtedness other than permitted indebtedness as defined in the Agreement;

·Create, incur, allow or suffer any lien on its property, or assign any right to receive income;

·Maintain any other collateral account;

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·Pay any dividends or make any distributions or payments or redeem, retire or purchase any capital stock, or make other than certain defined investments;

·Directly or indirectly enter into any material transaction with any affiliate, except for transactions that are in the ordinary course of business;

·Make any payment on subordinated debt or amend any provision in any document relating to subordinated debt;

·Become an “investment company” or a company controlled by an “investment company” under the Investment Company Act of 1940.

Historically, the Company has incurred net losses and negative cash flows from operations.  As of June 30, 2008, the Company had an accumulated deficit of $32,913,000, and total stockholders’ deficit of $563,000.  During the first six months of 2008, the Company reported a net loss of $819,000 and net cash used in operating activities of $432,000.  However, with the cost reductions implemented in April of 2008, including certain officers and employees taking restricted stock awards in lieu of salary, the Company achieved positive cash from operations for the second quarter of 2008 of $51,000, reducing the net cash used in operations during the first quarter of 2008 of $483,000 to $432,000 for the six months ended June 30, 2008.  Results of operations during the first six months of 2008 were negatively impacted by significant non-cash expenses, including $108,000 of depreciation and amortization, and $229,000 of stock-based compensation.  Management believes that its cost reduction efforts, including reduction in force as needed, together with funds available from the bank loan facility and from short-term related party advances, will be sufficient to fund planned operations at lower revenue levels for the next twelve months.  However, there can be no assurance that operations and operating cash flows will improve in the near future.  If the Company is unable to obtain profitable operations and positive operating cash flows sufficient to meet scheduled debt obligations, it may need to seek additional funding or be forced to scale back its development plans or to significantly reduce or terminate operations.

Net cash used in operating activities for the six months ended June 30, 2008 was $432,000, compared to net cash provided by operating activities of $50,000 for the same six-month period in 2007.  The increase in net cash used in operating activities in the current year resulted from decreased revenues, as discussed above, as well as reductions in accounts payable and accrued expenses.  As discussed above, with the cost reductions implemented in April of 2008, the Company achieved positive cash from operations for the second quarter of 2008 of $51,000.

Net cash used in investing activities, consisting of the purchase of property and equipment, during the six months ended June 30, 2008 was $1,000 compared to net cash used in investing activities for $25,000 for the same six-month period in 2007.

Net cash provided by financing activities for the six months ended June 30, 2008 was $176,000, comprised of borrowings from the bank loan of $1,427,000 and short-term related party advances of $140,000, partially offset by bank loan repayments of $1,244,000, payments of other debt of $7,000 and repayment of short-term related party advances of $140,000.  There was no cash used in or provided by financing activities for the six months ended June 30, 2007.

The Company has not been adversely affected by inflation.  Revenues from foreign customers were $1,060,000 during the six months ended June 30, 2008, representing 45% of the Company’s total revenues, compared to $1,222,000, or 38%, of total revenues during the same period in 2007.  There are potential economic risks inherent in foreign trade.  To minimize the risk from changes in foreign currency exchange rates, the Company’s export sales are transacted in United States dollars.

Factors Affecting Future Results

Total revenues for the first six months of 2008 decreased 26% compared to the first six months of 2007, primarily as a result of lower professional services revenues.  However, new software license revenues increased during this period compared to the same period last year.  Revenues from new

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software licenses include sales of software development kits and runtime revenue associated with OEM customer machine shipments.  Runtime revenue increased slightly year-over-year as new customer shipments balanced the overall decline in the industry capital equipment shipments.  Sales of software development kits are difficult for the Company to forecast, as the Company is highly dependent on the timing of the decision of equipment suppliers to initiate a new machine development program and to utilize the Company’s products.  While the Company believes it continues to win the majority of the available software development kit opportunities for its products, it appears that fewer companies are initiating new programs for semiconductor 300mm capital equipment, which has presented fewer opportunities for the Company.  In addition, there is increased price pressure as some of the Company’s competitors have lowered their prices in an effort to more effectively compete with the Company.

The Company continues to focus on incrementally expanding its customer base and product line in order to increase revenues.  As stated earlier, industry analysts have forecast a decline in semiconductor capital equipment spending by 20% in 2008.  This will affect the Company as general machine shipments will be lower year-over-year, and many equipment suppliers customers will “push out” new projects.

The Company has implemented a cost reduction program, including a reduction in force, to bring expenses in-line with the anticipated slowdown in revenues while it awaits the expected upturn in 2009.  As part of the effort to preserve operating cash, three members of senior management agreed to a 50% reduction in base pay during the months of May, June and July 2008.  The board of directors of the Company approved individual grants of restricted stock to the executives to compensate them for voluntarily reducing their salary.  These cost reduction efforts have had positive results, as the Company had net cash provided by operating activities of $51,000 during the second quarter of 2008.

The Company has been investing in its new CIMPortal product line, which meets the new SEMI Standards for EDA (Interface A).  While this new standard has been promulgated by SEMI, it is not yet a common requirement by end users in the marketplace.  The timing of the widespread adoption of this standard by the semiconductor industry will directly affect the market opportunities for the Company’s CIMPortal product line.  The Company believes that if the new SEMI Standards for EDA begin to obtain market acceptance, the number of software development kit opportunities will increase along with the resulting runtime license revenue.

The Company has also been investing in pursuing the Japanese market for its products with its new distributor, CIM, Inc.  While these efforts have led to some increased sales in Japan, they have not yet resulted in an increase in revenues sufficient to offset the additional costs incurred by the Company.

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

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

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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A significant portion of the Company’s cash equivalents and short-term investments bear variable interest rates that are adjusted to market conditions.  Changes in market rates will affect interest earned and potentially the market value of the principal of these instruments.  The Company does not utilize derivative instruments to offset the exposure to interest rate fluctuations.  Significant changes in interest rates may have a material impact on the Company’s investment income, but likely will not have a material impact on the Company’s consolidated results of operations.

The Company has significant sales to foreign customers and is therefore subject to the effects of changes in foreign currency exchange rates may have on demand for its products and services.  The Company does not utilize derivative instruments to offset the exposure to changes in foreign currency exchange rates.  To minimize foreign exchange risk, the Company’s export sales are transacted in United States dollars.

ITEM 4T.  CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2008.  Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that the disclosure controls and procedures employed at the Company are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

(b) Changes in internal controls

During the most recent fiscal quarter covered by this report, and since that date there has been no change in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)  that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Company is not currently involved with any pending litigation.

ITEM 1A.  RISK FACTORS

The Company has disclosed risk factors in its Annual Report on Form 10-K for the year ended December 31, 2007 which could materially affect its business, financial condition or future results of operations.  The risk factor discussed below updates these risk factors and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.

The Company experienced increases in its operating loss and net cash used in operating activities during the six months ended June 30, 2008, which negatively impacted its liquidity.

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As of June 30, 2008, the Company had an accumulated deficit of $32,913,000, and total stockholders’ deficit of $563,000.  At June 30, 2008, the Company had current assets of $726,000, including cash and cash equivalents of $82,000, and current liabilities of $1,701,000, resulting in a working capital deficiency of $975,000.  During the first six months of 2008, the Company reported a net loss of $819,000 and net cash used in operating activities of $432,000.  The Company achieved positive cash from operations for the second quarter of 2008 of $51,000.  There can be no assurance that operations and operating cash flows will continue at the current levels or improve in the near future.  If the Company is unable to achieve operating cash flows sufficient to permit it to meet its obligations, it may need to seek additional funding or be forced to scale back its development plans or to significantly reduce or terminate operations.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In June 2008, the Company issued 900,862 shares of its restricted common stock to officers and directors in payment of accrued expenses of $270,000 for vested restricted stock awards.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter ended June 30, 2008.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

Exhibit No.	Description
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
99.1	Press Release dated August 14, 2008*

 * Exhibits filed with this report

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SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

REGISTRANT

CIMETRIX INCORPORATED

Dated: August 14, 2008

By:	/S/ Robert H. Reback
	Robert H. Reback
	President and Chief Executive Officer
	(Principal Executive Officer)
By:	/S/ Dennis P. Gauger
	Dennis P. Gauger
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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