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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 September 30, 2010

OR

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: 000-15760

Hardinge Inc.

(Exact name of Registrant as specified in its charter)

Hardinge Inc.

One Hardinge Drive

Elmira, NY 14902

(Address of principal executive offices)  (Zip code)

(607) 734-2281

(Registrant’s telephone number including area code)

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 of 1934 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 check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 in the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined by Exchange Act Rule 12b-2).  Yes o No x

As of September 30, 2010 there were 11,607,289 shares of Common Stock of the registrant outstanding.

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HARDINGE INC. AND SUBSIDIARIES

INDEX

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PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

HARDINGE INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands Except Share and Per Share Data)

See accompanying notes

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HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In Thousands Except Per Share Data)

See accompanying notes

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HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands)

See accompanying notes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2010

NOTE 1—BASIS OF PRESENTATION

In these notes, the terms “Hardinge,” “Company,” “we,” “us,” or “our” mean Hardinge Inc. and its predecessors together with its subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month and the nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  We operate in only one business segment — industrial machine tools.

The consolidated balance sheet at December 31, 2009 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Certain amounts in the 2009 consolidated financial statements have been reclassified to conform to the September 30, 2010 presentation.

NOTE 2 — SIGNIFICANT RECENT EVENTS

Unsolicited Tender Offer by Industrias Romi S.A.

On March 30, 2010, Industrias Romi S.A. (“Romi”), through a wholly-owned subsidiary, commenced an unsolicited tender offer to acquire the outstanding Common Shares of Stock of Hardinge Inc. for $8.00 per share, subject to a number of terms and conditions contained in the tender offer documents filed by Romi with the SEC (“Romi’s Offer”).  Hardinge had previously received on February 4, 2010 an unsolicited acquisition proposal from Romi at the same price.  On May 10, 2010, Romi increased their offer to $10.00 per share (“Romi’s Amended Offer”).  After multiple extensions, on July 15, 2010 Romi announced the expiration of their tender offer to acquire all of the outstanding shares of Hardinge and did not further extend the offer.  No shares of Hardinge stock were purchased pursuant to the offer, and Romi indicated that all shares of Hardinge previously tendered and not withdrawn were returned.

As noted in the Company’s Schedule 14D-9 filings with the SEC, our Board unanimously determined that Romi’s Offer and Romi’s Amended Offer were not in the best interests of the Company and the Company’s shareholders and recommended that Company shareholders reject Romi’s Offers and not tender their shares. The Schedule 14D-9 and the amendments thereto include a complete discussion of the reasons and other material factors contributing to the Board of Director’s recommendations.

Total 2010 year to date costs incurred for professional services and expenses related to this unsolicited tender offer initiated by Romi was $3.5 million.

Credit Facilities

On July 12, 2010, our Taiwan subsidiary, Hardinge Machine Tools B.V., Taiwan Branch, entered into a new unsecured credit facility replacing its existing $5.0 million facility. The new facility provides a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 2 — SIGNIFICANT RECENT EVENTS (continued)

Credit Facilities (continued)

$10.0 million facility for working capital purposes and expires on May 31, 2011. Interest is charged at the bank’s current base rate of 1.6% subject to change by the bank based on market conditions. The new facility carries no commitment fees on unused funds.

On August 10, 2010, Kellenberger amended one of its credit agreements with a bank. The amendment increases the total facility from CHF 7.0 million to CHF 9.0 million, the entire amount of which is available for guarantees, documentary credit, and margin cover for foreign exchange trades.  The amendment also increases the portion of the facility that can be used for working capital from CHF 3.0 million to CHF 5.0 million. The amendment increases the bank’s security in Kellenberger’s real estate in Biel Switzerland from CHF 3.0 million to CHF 5.0 million.

Assets Held for Sale

During 2009, as part of restructuring our North American manufacturing operations, we identified certain assets that would no longer be utilized in our manufacturing operations and made them available for sale.  In September of 2010, the Company conducted an auction to sell these and other identified assets. Total proceeds from the sale of these assets were $1.2 million. The Company recognized a gain of $0.8 million on this sale which is included in other income in the statement of operations.

NOTE 3—INVENTORIES

Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market.  Elements of cost include materials, labor and overhead and are as follows:

We assess the valuation of our inventories and reduce the carrying value of those inventories that are obsolete or in excess of our forecasted usage to their estimated net realizable value.  We estimate the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand, and market requirements.  We also review the carrying value of our inventory compared to the estimated selling price less costs to sell and adjust our inventory carrying value accordingly. Reductions to the carrying value of inventories are recorded in cost of goods sold. If future demand for our products is less favorable than our forecasts, inventories may need to be reduced, which would result in additional expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 4—PROPERTY, PLANT AND EQUIPMENT

Components of property, plant and equipment at September 30, 2010 and December 31, 2009 consisted of the following:

During 2009, as part of restructuring our North American manufacturing operations, we ceased manufacturing operations involved in the non-critical parts production in our Elmira, NY facility. In conjunction with this action, we identified certain property, plant and equipment with an acquisition cost of $22.9 million and net book value of $0.8 million that would no longer be utilized in our manufacturing operations and made them available for sale.  These assets were recorded on the balance sheet at $0.2 million as of December 31, 2009 based on the lower of the assets’ carrying value or fair value less estimated costs to sell, with a related impairment charge of $0.6 million.

In September of 2010, we changed our plan to sell some of these assets identified in December 2009.  In conjunction with this change in plan, we have reclassified these assets from “held for sale” to “held and used.” The assets reclassified to “held and used” had an original acquisition cost of $4.7 million and a net book value of $0.05 million at September 30, 2010. Upon returning these assets to “held and used,” we measured them at the lower of their (a) carrying amount before they were classified as “held for sale,” adjusted by any depreciation expense or impairment losses that would have been recognized had the assets continuously been classified as “held for sale” or (b) fair value at the date of the subsequent decision not to sell, which resulted in a recovery of $0.03 million.

NOTE 5—INTANGIBLE ASSETS

Intangible assets with indefinite lives are not amortized, but rather reviewed at least annually for impairment or reviewed for impairment between annual tests if an event occurs or circumstances change that more likely than not would indicate the carrying amount may be impaired. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment.

Nonamortizable intangible assets include $7.0 million representing the value of the name, trademarks and copyrights associated with the former worldwide operations of Bridgeport.  We use the Bridgeport brand name on all of our machining center lines, therefore, the asset has been determined to have an indefinite useful life. These assets are reviewed annually for impairment.

Amortizable intangible assets of $3.6 million include the Bridgeport technical information, Jones & Shipman trade name, patents, distribution agreements, customer lists, and other items. These assets are tested for impairment when indicators of impairment are present. The estimated useful lives of these intangible assets range from five to ten years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 6—INCOME TAXES

We continue to maintain a full valuation allowance on the tax benefits of our U.S., U.K., German, Canadian and Dutch net deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.

Each quarter, we estimate our full year tax rate for jurisdictions not subject to valuation allowances based upon our most recent forecast of full year anticipated results and adjust year to date tax expense to reflect our full year anticipated tax rate.  The effective tax rate was 866.1% and 14.7% for the three and nine months ended September 30, 2010, respectively.  The anticipated full year tax rate has been affected by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded.

The tax years 2007 to 2009 remain open to examination by United States taxing authorities, and for our other major jurisdictions (Switzerland, UK, Taiwan, Germany, Canada, and China), the tax years 2004 to 2009 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.

At September 30, 2010 and December 31, 2009, we had a $2.1 million and $2.4 million liability recorded for uncertain income tax positions, respectively, both of which included interest and penalties of $0.7 million. If recognized, the uncertain tax benefits, with related penalties and interest at September 30, 2010 and December 31, 2009, would be recorded as a benefit to income tax expense on the Consolidated Statement of Operations.

During the quarter ended March 31, 2010, we recognized the settlement of an uncertain tax position at one of our foreign subsidiaries, and recorded a benefit to the tax provision of $0.1 million.

During the quarter ended June 30, 2010, we determined, based on guidance issued by foreign tax authorities, that it is more likely than not that $0.5 million of our liability for uncertain tax positions should be reversed. In addition, the corporate tax rate in Taiwan was reduced, and as a result we reduced our net deferred tax assets there by $0.1 million.

During the quarter ended September 30, 2010, we increased the liability for uncertain tax positions at one of our foreign subsidiaries, and recorded a charge to the tax provision of $0.4 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 7—WARRANTIES

We offer warranties for our products.  The specific terms and conditions of those warranties vary depending upon the product sold and the country in which we sold the product.  We generally provide a basic limited warranty, including parts and labor for a period of up to one year.  We estimate the costs that may be incurred under the basic limited warranty, based largely upon actual warranty repair cost history, and record a liability for such costs in the month that product revenue is recognized. The resulting accrual balance is reviewed during the year. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim.

We also sell extended warranties for some of our products.  These extended warranties usually cover a 12-24 month period that begins up to 12 months after time of sale.  Revenues for these extended warranties are recognized monthly as a portion of the warranty expires.

These liabilities are reported as accrued expenses on our consolidated balance sheet.

A reconciliation of the changes in our product warranty accrual during the three and nine month periods ended September 30, 2010 and 2009 is as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 8—PENSION AND POST RETIREMENT PLANS

A summary of the components of net periodic pension costs for our consolidated Company for the three and nine months ended September 30, 2010 and 2009 is presented below:

A summary of the components of net postretirement benefits costs for our consolidated Company for the three and nine months ended September 30, 2010 and 2009 is presented below:

The expected contributions to be paid during the year ending December 31, 2010 to the domestic defined benefit plans are $0.6 million.  Contributions to the domestic plans as of September 30, 2010 and 2009 were $0.3 million and $1.8 million, respectively. The Company also provides defined benefit pension plans or defined contribution pension plans for some of its foreign subsidiaries.  The expected contributions to be paid during the year ending December 31, 2010 to the foreign defined benefit plans are $2.2 million.  For each of the Company’s foreign plans, contributions are made on a monthly or quarterly basis and are determined by applicable governmental regulations.  As of September 30, 2010 and 2009, $1.5 million and $1.8 million of contributions have been made to the foreign plans, respectively. Each of the foreign plans requires employee and employer contributions, except for Taiwan, to which only employer contributions are made.

Effective June 15, 2009, the Company suspended future accrual of benefits under its U.S. defined benefit pension plan (which was closed to new participants in 2004) and also suspended Company contributions to the 401(k) program as of the same date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 8—PENSION AND POST RETIREMENT PLANS (continued)

Effective September 30, 2010, the Company froze benefit accruals under the defined benefit pension plan at its UK based subsidiary, Hardinge Machine Tools, Ltd.  The impact of the plan curtailment was not material. Employees impacted by this action are eligible to participate in Hardinge Machine Tools, Ltd defined contribution retirement plan which, for this group, will provide for matching contributions up to 8% of an employee’s salary.

NOTE 9— DERIVATIVE FINANCIAL INSTRUMENTS

 We principally use derivative financial instruments to manage foreign exchange risk related to foreign operations and foreign currency transactions. We enter into derivative financial instruments with a number of major financial institutions to minimize foreign exchange risk. These derivatives do not qualify for hedge accounting treatment. We have foreign currency exposure on receivables and payables that are denominated in a foreign currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in the statement of operations. To minimize foreign currency exposure, we have foreign currency forwards with notional amounts of approximately $24.3 million and $12.4 million at September 30, 2010 and December 31, 2009, respectively.

The foreign currency forwards are recorded in the balance sheet at fair value and resulting gains or losses are recorded in the statements of operations, generally offsetting the gains or losses from the adjustments on the foreign currency denominated transactions and revaluation of the foreign currency denominated assets and liabilities. At September 30, 2010, the fair value of the foreign currency forwards was a $0.05 million asset, which was included in prepaid expenses and the liability which was included in accrued expenses was not material. At December 31, 2009, the fair value of the foreign currency forwards was a $0.06 million asset, which was included in prepaid expenses and a $0.03 million liability which was included in accrued expenses. The (gain) recognized for derivative instruments in the statement of operations for the three and nine month periods ended September 30, 2010 of ($0.36) million and ($0.04) million, respectively, was included in other (income) expense. The (gain) loss recognized for derivative instruments in the statement of operations for the three and nine month periods ended September 30, 2009 of ($0.03) million and $0.37 million, respectively, was included in other (income) expense.

NOTE 10—FAIR VALUE

  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. We are using the following fair value hierarchy definition:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Observable inputs other than quoted prices in active markets for similar assets and liabilities.

Level 3 — Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 10—FAIR VALUE (continued)

The following table presents the fair values and classification of our financial assets and liabilities measured on a recurring basis:

Foreign currency derivative assets and liabilities are valued by reference to similar financial instruments, adjusted for credit risk, restrictions and other terms specific to the contracts. We have elected not to measure any additional financial instruments and other items at fair value.

The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments.  At September 30, 2010 and December 31, 2009, the carrying value of notes receivable approximated their fair value.  The fair value of our variable interest rate debt is approximately equal to its carrying value, as the underlying interest rate is variable.  In conjunction with the Jones & Shipman asset acquisition, trade names and other intangible assets of £0.2 million (approximately $0.3 million) are valued using an income approach (level 3). Other than the Jones & Shipman intangible assets, we did not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities.

NOTE 11—COMMITMENTS AND CONTINGENCIES

Our operations are subject to extensive federal and state legislation and regulation relating to environmental matters.

Certain environmental laws can impose joint and several liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal.  Activities at properties we own or previously owned and on adjacent areas have resulted in environmental impacts.

In particular, our Elmira, New York manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of hazardous waste sites designated for cleanup by the United States Environmental Protection Agency (“EPA”) because of groundwater contamination.  The Kentucky Avenue Wellfield Site (the “Site”) encompasses an area which includes sections of the Town of Horseheads and the Village of Elmira Heights in Chemung County, New York. In February 2006, we received a Special Notice Concerning a Remedial Investigation/Feasibility Study (“RI/FS”) for the Koppers Pond (the “Pond”) portion of the Site.  The EPA documented the release and threatened release of hazardous substances into the environment at the Site, including releases into and in the vicinity of the Pond.  The hazardous substances, including metals and polychlorinated biphenyls, have been detected in sediments in the Pond.

A substantial portion of the Pond is located on our property.  Hardinge, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation, and Toshiba America, Inc., the Potentially Responsible Parties (the”PRPs”) have agreed to voluntarily

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 11—COMMITMENTS AND CONTINGENCIES (continued)

participate in the Remedial Investigation and Feasibility Study (“RI/FS”) by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006.  On September 29, 2006, the Director of Emergency and Remedial Response Division of the U.S. Environmental Protection Agency, Region II, approved and executed the Agreement on behalf of the EPA.  The PRPs also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis.  The cost of the RI/FS was estimated to be approximately $0.84 million. We estimated our portion of the study to be $0.12 million for which we established a reserve of $0.13 million. As of September 30, 2010, we have incurred total expenses of $0.12 million with respect to the study and other activities relating to the Site, thus the remaining reserve balance at September 30, 2010 was $0.01 million.

The PRPs developed a Draft RI/FS with their consultants and, following EPA comments, submitted a Revised RI/FS on December 6, 2007. In May 2008, the EPA approved the RI/FS Work Plan.  The PRPs commenced field work in the spring of 2008 and submitted a Draft Site Characterization Report to EPA in the fall.  The PRPs currently are performing Risk Assessments in accordance with the Remedial Investigation portion of the RI/FS.

Until receipt of this Special Notice, Hardinge had never been named as a PRP at the Site nor had we received any requests for information from the EPA concerning the site.  Environmental sampling on our property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and sediment contamination in the Pond and found no evidence that our operations or property have or are contributing to the contamination.  Other than as described above, we have not established a reserve for any potential costs relating to this Site, as it is too early in the process to determine our responsibility as well as to estimate any potential costs to remediate.  We have notified all appropriate insurance carriers and are actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.

Although we believe, based upon information currently available, that, except as described in the preceding paragraphs, we will not have material liabilities for environmental remediation, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in material liabilities to Hardinge.

During 2008 and 2009, the Company offered a Voluntary Early Retirement Program (VERP) to employees whose sum of current age and length of service equaled 94. The VERP covers post-retirement health care costs for 60 months or until Medicare coverage begins, whichever occurs first.  The Company also incurred various restructuring related charges in 2009 due to workforce reductions in Europe, the closure of our Exeter England facility, and the reduction in our U.S. workforce due the strategic changes within the Elmira, NY manufacturing facility. During the three and nine month period ended September 30, 2010, respectively, we utilized $0.2 million and $1.9 million of the restructuring reserves. At September 30, 2010, the remaining liability on our balance sheet associated with all of these restructuring related charges was $1.2 million. The VERP, which is the post-retirement health care benefit, is $1.1 million of this liability and will be relieved through April 2014. The remaining $0.1 million liability is severance related and will be paid out during the balance of 2010.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 12—STOCK-BASED COMPENSATION

 All of our equity-based payments to employees, including grants of employee stock options are recognized in our statement of operations based on the grant date fair value of the award.

We did not issue any new stock options during the first nine months of 2010 or 2009. Expense related to stock options was not material for the three months and nine months ended September 30, 2010 and 2009.   For restricted stock awards issued, the cost is equal to the fair value of the award at the date of grant and compensation expense is recognized for those awards over the requisite service period of the grant.  A summary of the restricted stock activity under the Incentive Stock Plan for the three month and nine month period ended September 30, 2010 and 2009 is as follows:

The fair value of the restricted stock shares/units awarded in the nine months ended September 30, 2010 and 2009 was $0.4 million and $0.1 million, respectively. Total share-based compensation expense relating to restricted stock for the three months and nine months ended September 30, 2010 was $0.1 million and $0.4 million, respectively. Total share-based compensation expense relating to restricted stock for the three months and nine months ended September 30, 2009 was $0.1 million and $0.3 million, respectively. At September 30, 2010, the compensation cost not yet recognized on these shares was $1.0 million, which will be amortized over a weighted average term of 1.7 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 13—EARNINGS PER SHARE

We calculate earnings per share using the two-class method. Basic earnings per common share is computed by dividing net (loss) income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Net (loss) income applicable to common shareholders represents net (loss) income reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive stock options.

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the earnings allocation in the earnings per share calculation under the two-class method. Recipients of restricted stock are entitled to receive non-forfeitable dividends during the vesting period, therefore, meeting the definition of a participating security.

The computation of earnings per share is as follows:

There is no dilutive effect of the restrictive stock and stock options for the three months and the nine months ended September 30, 2010 and 2009 since the impact would be anti-dilutive. 161,419 and 141,380 shares would have been included in the diluted earnings per share calculations for the three and nine months ended September 30, 2010, respectively, had the impact of including these diluted securities not been anti-dilutive. 65,441 and 46,199 shares would have been included in the diluted earnings per share calculations for the three and nine months ended September 30, 2009, respectively, had the impact of including these diluted securities not been anti-dilutive. All restricted shares are subject to forfeiture and restrictions on transfer. Unconditional vesting occurs upon the completion of a specified period ranging from three to eight years from the date of grant. Stock options vest over a three year period and are exercisable over ten years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 14—REPORTING COMPREHENSIVE INCOME (LOSS)

The components of Other Comprehensive Income (Loss) for the three months and nine months ended September 30, 2010 and 2009 are as follows:

Accumulated balances of the components of Other Comprehensive Income (Loss) consisted of the following at September 30, 2010 and December 31, 2009:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 15—ACQUISITION OF THE ASSETS OF JONES AND SHIPMAN

On April 7, 2010, Kellenberger & Co. AG (Kellenberger), an indirect wholly owned subsidiary of Hardinge Inc. completed the acquisition of certain assets of Jones and Shipman Precision Limited (“J&S”), a UK based manufacturer of grinding and super-abrasive machines and machining systems, for £2.0 million ($3.0 million equivalent) from Precision Technologies Group Limited. In conjunction with this asset acquisition, Kellenberger established Jones & Shipman Grinding Limited, a new UK based wholly owned subsidiary. The results of operations of this acquisition have been included in the consolidated financial statements from the date of acquisition. The Company expensed acquisition related costs of $0.3 million during the nine months ended September 30, 2010 and recorded it in SG&A expense on the Consolidated Statement of Operations.

The acquisition agreement contains provisions for a contingent purchase price payment based on sales through March 31, 2014.  The contingent purchase price payment is 5.42% of sales in excess of £36.4 million (approximately $54.5 million), with a maximum payment of £0.3 million (approximately $0.45 million).  Based on the company’s current forecasted revenue over this period, the fair value of this contingent purchase price is £0.2 (approximately $0.3 million).  This contingent liability is recorded on the balance sheet within accrued expenses.

The following table summarizes the allocation of the preliminary purchase price to the fair value of the assets acquired and liabilities assumed on the date of acquisition:

The assets acquired and liabilities assumed are measured at fair value.  Acquired inventory is valued based on one of the following methods:  for acquired finished goods inventory, the value is based on the expected sales price less an allowance for direct selling costs and profits thereon; for acquired work in process the value is based on the expected sales price less an allowance for costs to complete the manufacturing process, direct selling costs and profits thereon; and for acquired raw materials, the value is based on the on current market price. Acquired property, plant and equipment are valued based upon our estimate of replacement cost less an allowance for age and condition at the time of acquisition. The weighted average life of these intangible assets is 6.6 years.  Other assets, accounts payable, accrued expenses and other liabilities are expected to be settled at face value; therefore face value is assumed to approximate fair value.  The fair value of the net assets acquired exceeded the purchase price; accordingly, a gain of £0.4 million (approximately $0.6 million) was recorded during the second quarter of 2010 within other expense (income) in the Consolidated Statement of Operations. The Company continues to finalize the purchase price allocation. There were no significant changes or measurement period adjustments during the third quarter of 2010.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

NOTE 16—NEW ACCOUNTING STANDARDS

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-13, Revenue Recognition ASC Topic 605: Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than existing guidance. ASU 2009-13 is required to be applied prospectively to new or materially modified revenue arrangements in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We do not expect adoption of this standard to have a material impact on our consolidated results of operations and financial condition.

In January 2010, the FASB issued an amendment to ASC Topic 820 Fair Value Measurements and Disclosures. The amendment requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We have applied the new disclosure requirements as of January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. Other than requiring additional disclosures, adoption of this new guidance did not and will not have a material impact on our consolidated financial statements.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview.  The following Management’s Discussion and Analysis (“MD&A”) is written to help the reader understand our Company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed financial statements, the accompanying condensed financial statement notes (“Notes”) appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2009.

Our primary business is designing, manufacturing, and distributing high-precision computer controlled metal-cutting turning, grinding and milling machines and related accessories. We are geographically diversified with manufacturing facilities in Switzerland, Taiwan, United States, China, and United Kingdom, and with sales to most industrialized countries.  Approximately 70% of our 2009 sales were to customers outside of North America, 69% of our 2009 products sold were manufactured outside of North America, and 66% of our employees in 2009 were located outside of North America.

Our machine products are considered to be capital goods and are part of what has historically been a highly cyclical industry. Our management believes that a key performance indicator is our order level as compared to industry measures of market activity levels.

While general economic conditions around the world appear to be improving, the global economic recession, which began in 2008, continues to have an impact on industries in several of the regions in which we conduct business. The reduced availability of credit continues to impact our customers’ ability to obtain financing.  As a result, we continue to experience lower levels of incoming orders and related sales activity in several regions in which we conduct business.  While Europe and North America are showing some signs of recovery, order levels are currently running at about 50% of early 2008. Excluding the large order from a supplier in the consumer electronic industry, order volumes in the Asia and Other market have returned to early 2008 levels, as those economies rebound to normalized levels.

The U.S. market activity metric most closely watched by our management has been metal-cutting machine orders as reported by the Association of Manufacturing Technology (AMT), the primary industry group for U.S. machine tool manufacturers, and machine tool consumption in the Metalworking Insiders Report published annually by Gardner Publications. Other closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that might purchase our products.  One such measurement is the PMI (formerly called the Purchasing Manager’s Index), as reported by the Institute for Supply Management.  Another measurement is capacity utilization of U.S. manufacturing plants, as reported by the Federal Reserve Board. Similar information regarding machine tool consumption in foreign countries is published in various trade journals.

Non-machine sales, which include collets, accessories, repair parts, and service revenue, have typically accounted for approximately 26% of overall sales and are an important part of our business, especially in the U.S. where Hardinge has an installed base of thousands of machines.  Sales of these products do not vary on a year-to-year basis as significantly as capital goods, but demand does typically track the direction of the related machine metrics.

Other key performance indicators are geographic distribution of net sales and orders, gross profit as a percent of net sales, income from operations, working capital changes, and debt level trends. In an industry where constant product technology development has led to an average model life of three- to- five years, effectiveness of technological innovation and development of new products are also key performance indicators.

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We are exposed to financial market risk resulting from changes in interest and foreign currency rates. The current global recessionary conditions and related disruptions within the financial markets have also increased our exposure to the possible liquidity and credit risks of our counterparties.

We believe we have sufficient liquidity to fund our foreseeable business needs, including cash and cash equivalents, cash flows from operations, and our bank financing arrangements.

We monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal. Our cash and cash equivalents are diversified among counterparties to minimize exposure to any one of these entities.

We are also subject to credit risks relating to the ability of counterparties of hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and nonperformance has been considered in the fair value measurements of our foreign currency forward exchange contracts.

We also expect that some of our customers and vendors may experience difficulty in maintaining the liquidity required to buy inventory or raw materials. We continue to monitor our customers’ financial condition in order to mitigate our accounts receivable collectability risks.

Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now largely manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan which causes the worldwide valuation of the Japanese Yen, Euro, Swiss Franc, South Korean Won, and New Taiwanese Dollar to be central to competitive pricing in all of our markets.  Also, we translate the results of our Swiss, Taiwanese, Chinese, British, German, Dutch and Canadian subsidiaries into U.S. Dollars for consolidation and reporting purposes.  Period- to- period changes in the exchange rate between their local currency and the U.S. Dollar may affect comparative data significantly.  We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.

In June 2010, our Swiss subsidiary, L. Kellenbergrer & Co. AG (“Kellenberger”) entered into a new working capital credit facility with a bank to provide up to CHF 6.0 million ($6.1 million equivalent) which can be used as a limit for cash credits in the form of fixed advances in CHF and/or in any other freely convertible foreign currencies with maximum terms of up to 36 months.  The interest rate, which is currently LIBOR plus 1.5% for a 90 day borrowing, is determined by the bank based on prevailing money and capital market conditions and the bank’s risk assessment of Kellenberger. The credit facility is secured by the real property owned by Kellenberger.  This new facility replaced a CHF 5.0 million ($5.1 million equivalent) credit facility with substantially the same terms.

In July 2010, our Taiwan subsidiary, Hardinge Machine Tools B.V., Taiwan Branch entered into a new unsecured credit facility replacing its existing $5.0 million facility. This new credit facility provides a $10.0 million facility for working capital purposes and expires on May 31, 2011.  Interest is charged at the bank’s current base rate of 1.6% subject to change by the bank based on market conditions. This new credit facility carries no commitment fees on unused funds.

In August 2010, Kellenberger amended its Master Credit Agreement with a bank. The amendment increases the total facility from CHF 7.0 million to CHF 9.0 million, the entire amount of which is available for guarantees, documentary credit, and margin cover for foreign exchange trades.  The amendment also increases the portion of the facility that can be used for working capital from CHF 3.0 million to CHF 5.0 million. The amendment increases the bank’s security in Kellenberger’s real estate in Biel Switzerland from CHF 3.0 million to CHF 5.0 million.

Refer to Liquidity and Capital Resources for further details on the Company’s credit facilities.

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Results of Operations

Summarized selected financial data for the three months and nine months ended September 30, 2010 and 2009: