Table of Contents





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|SECURITIES AND EXCHANGE COMMISSION
|WASHINGTON, D.C. 20549            

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| |           | 
| |           | 
| | FORM 10-K | 
| |           | 
| |           | 

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|------------------------------------------------------------------------------------------------------------------------------------- |  | 
|xANNUAL

REPORT PURSUANT TO SECTION 13 or
 15(d) of the Securities Exchange
 Act of 1934 for the Year Ended December 31, 2010.       
|                                                                                                                                     
|oTRANSITION PURSUANT TO SECTION 13 or 15(d)
 of the Securities Exchange
 Act of 1934 for the transition period from ______ to ______.
|                                                                                                                                     
|COMMISSION FILE NO. (0-16577)                                                                                                        
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|CYBEROPTICS
 CORPORATION                                                                                                             
|(Exact
 name of registrant as specified in its charter)                                                                              

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|--------------------------------------------------------------- |  | ------------------------------------- | 
|Minnesota                                                       |  | 41-1472057                            | 
|(State or other jurisdiction of
 incorporation or organization) |  | (I.R.S. Employer
 Identification No.) | 
|                                                                |  |                                       | 
|5900 Golden Hills Drive
 MINNEAPOLIS, MINNESOTA                 |  | 55416                                 | 
|(Address of principal executive offices)                        |  | (Zip Code)                            | 

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|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|(763) 542-5000                                                                                                                                                    
|(Registrants
 telephone number, including area code)                                                                                                             
|                                                                                                                                                                  
|Securities registered pursuant to Section

12(b) of the
 Exchange Act: Title of each class: Common Stock, no par value 
 Name of Exchange: NASDAQ Stock Market LLC
|                                                                                                                                                                  
|Securities registered pursuant to Section

12(g) of the
 Exchange Act: None                                                                                       
|                                                                                                                                                                  
|                                                                                                                                                                   |  | 

|                                                                                                                                                                                                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate by check mark if
 the registrant is a well-known seasoned issuer, as defined in Rule 405 of

the
 Securities Act.                                                                                                                                                                                                                                                                    
|YES  o  NO  x                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                              
|Indicate by check mark if
 the registrant is not required to file reports pursuant to Section 13 or
 Section 15(d) of the Act.                                                                                                                                                                                                                                                                
|YES  o  NO  x                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                              
|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 on its
 corporate Web site, if any, every Interactive Data File required to be
 submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405

of
 this chapter) 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 if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K

(§
229.405 of this chapter) is not contained herein, and will not be contained,

to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  x

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|------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------- | ------------------------- | -----------------------------
|Indicate by check mark
 whether the registrant is a large accelerated filer, an accelerated filer,

a
 non-accelerated filer, or a smaller reporting company
|Large accelerated
 filer  o                                                                                                                                  | Accelerated
 filer  o | Non-accelerated
 filer  o | Smaller Reporting
 Company  x
|                                                                                                                                                             |                       |                           |                              
|Indicate by checkmark
 whether the registrant is a shell company (as defined in Rule 12b-2 of the
 Exchange Act).                                           
|YES  o  NO  x                                                                                                                                               

State
the aggregate market value of the voting and non-voting common equity held

by
non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as

of
the last business day of the registrants most recently completed

second fiscal
quarter: $65,698,809.

As
of February 28, 2011, there were 6,891,350 shares of the registrants

Common
Stock, no par value, issued and outstanding.

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|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|DOCUMENTS
 INCORPORATED BY REFERENCE:                                                                                                                                                                                             
|The
 responses to Part III items 10, 11, 12, 13 and 14 herein are incorporated

by
 reference to certain information in the Companys definitive Proxy

Statement
 for its Annual Meeting of Shareholders to be held May 23, 2011.





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|                                            
|--------------------------------------------
|CYBEROPTICS
 CORPORATION                    
|FORM 10-K                                   
|For
 the Fiscal Year Ended December 31, 2010

|                  |  |                                                                                                                |  |   
|----------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --
|TABLE OF CONTENTS
|PART
 I           |  |                                                                                                                |  |   
|ITEM 1.           |  | DESCRIPTION
 OF BUSINESS                                                                                       |  | 3 
|ITEM 1A.          |  | RISK
 FACTORS                                                                                                  |  | 13
|ITEM 2.           |  | PROPERTIES                                                                                                     |  | 16
|ITEM 3.           |  | LEGAL
 PROCEEDINGS                                                                                             |  | 16
|ITEM 4.           |  | REMOVED
 AND RESERVED                                                                                          |  | 16
|                  |  |                                                                                                                |  |   
|PART
 II          |  |                                                                                                                |  |   
|ITEM 5.           |  | MARKET
 FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
 PURCHASES OF EQUITY SECURITIES |  | 17
|ITEM 6.           |  | SELECTED
 FINANCIAL DATA (Not Applicable)                                                                      |  | 17
|ITEM 7.           |  | MANAGEMENTS
 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS                        |  | 18
|ITEM 8.           |  | FINANCIAL
 STATEMENTS AND SUPPLEMENTARY DATA                                                                   |  | 29
|ITEM 9.           |  | CHANGES
 IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURE                         |  | 54
|ITEM 9A.          |  | CONTROLS
 AND PROCEDURES                                                                                       |  | 54
|ITEM 9B.          |  | OTHER
 INFORMATION                                                                                             |  | 54
|                  |  |                                                                                                                |  |   
|PART
 III         |  |                                                                                                                |  |   
|ITEM 10.          |  | DIRECTORS,
 EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE MATTERS                                                |  | 55
|ITEM 11.          |  | EXECUTIVE
 COMPENSATION                                                                                        |  | 55
|ITEM 12.          |  | SECURITY
 OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED

STOCKHOLDER
 MATTERS              |  | 55
|ITEM 13.          |  | CERTAIN
 RELATIONSHIPS AND RELATED TRANSACTIONS, AND

DIRECTOR INDEPENDENCE                                    |  | 55
|ITEM 14.          |  | PRINCIPAL
 ACCOUNTANT FEES AND SERVICES                                                                        |  | 55
|                  |  |                                                                                                                |  |   
|PART
 IV          |  |                                                                                                                |  |   
|ITEM 15.          |  | EXHIBITS
 AND FINANCIAL STATEMENT SCHEDULES                                                                    |  | 55
|                  |  |                                                                                                                |  |   
|                  |  | SIGNATURES                                                                                                     |  | 58

2

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Table of Contents

PART

I.

ITEM 1. DESCRIPTION OF

BUSINESS

Background

CyberOptics®
Corporation was founded in 1984 to commercialize technology for non-contact
three-dimensional sensing. Our headquarters are located at 5900 Golden Hills
Drive in Golden Valley, Minnesota. Our website address is

www.cyberoptics.com.
You can access, free of charge, our filings with the Securities and Exchange
Commission, including our annual report on Form 10-K, our quarterly reports

on
Form 10-Q, current reports on Form 8-K and any other amendments to those
reports, at our website, or at the Commissions website at www.sec.gov. Proxy
materials for our upcoming 2011 annual shareholders meeting to be held on

May
23, 2011 may be accessed electronically via the internet at the following
address: http://www.idelivercommunications.com/proxy/cybe.

We
are a leading global supplier of optical process control sensors and

inspection
systems that are used to control the manufacturing process and to ensure the
quality of electronic circuit boards manufactured by our customers using
surface mount technology (SMT). We also manufacture and sell sensors that
assist with yield improvement during semiconductor and photovoltaic (solar)
cell fabrication. Our products assist the global SMT industry in meeting the
rigorous quality demands for printed circuit board assembly and the global
photovoltaic cell and semiconductor fabrication industries with their

rigorous
quality requirements. Using a variety of proprietary technologies such as
lasers, optics and machine vision, combined with software, electronics and
mechanical design, our products enable manufacturers to increase production
volume, product yields and quality by measuring the characteristics and
placement of components and other properties both during and after the
manufacturing process.

Our
business is organized into two operating segments. Our Electronic Assembly
segment designs, manufactures and sells alignment and embedded inspection
sensors and stand-alone inspection systems for the electronic assembly and
photovoltaic cell equipment markets. Our Semiconductor segment designs,
manufactures and sells optical and other process control sensors and related
equipment for the semiconductor capital equipment market.

Most
of our products (89% of revenue in 2010) are developed and sold for use in

SMT
electronic circuit board assembly or with equipment used in SMT electronic
circuit board assembly or photovoltaic cell manufacturing as part of our
Electronic Assembly segment. We sell products in these markets both as

sensor
components that are incorporated into products manufactured by other

companies
for sale to circuit board assembly and photovoltaic cell manufacturing

companies,
and as complete stand-alone systems that are sold directly to

circuit board
assembly companies.

Our
alignment sensor products are sold to manufacturers of pick-and-place

machines
to align electronic surface mount components during placement on the circuit
board and to solder paste screen printer companies to align stencils with
circuit boards. We also sell alignment sensors to a manufacturer of
photovoltaic cell equipment to perform accurate high-speed wafer alignment
measurements within the wafer print nest.

Our
stand-alone inspection system products are sold to original design
manufacturers and other companies with surface mount assembly lines, to

control
quality as in-line systems. These stand-alone system products are used by

manufacturers
of circuit boards to measure screen printed solder paste, to inspect circuit
boards and components after component placement, to confirm proper placement
after full assembly of circuit boards and to inspect solder joints on

printed
circuit boards. Our embedded inspection sensors are sold to manufacturers of
pick-and-place machines and solder paste screen printers for integration

into
their equipment and offer some, but not all, of the inspection functionality

of
our stand-alone inspection systems. Manufacturers of DRAM and Flash memory

also
use our stand alone system products to inspect assembly of their memory
modules.

Our
Semiconductor segment develops and sells products that assist with yield
improvement in semiconductor fabrication, and for use with the robotic
equipment that handles semiconductor wafers during the semiconductor
fabrication process. In addition, we sell frame grabber products for general
industrial applications. Semiconductor products were 11% of total revenues

in 2010.

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Table of Contents

Market ConditionsRecent Developments

of the Business

Our
operations are heavily influenced by market conditions in worldwide

electronics
markets, and particularly in the SMT electronic assembly segment of these
markets. Historically, these markets have been very cyclical, with periods

of
strong growth followed by periods of excess capacity and reduced levels of
capital spending.

Our
results were favorably impacted in 2006 and 2007 as the worldwide demand for
cell phones, smart phones, laptops and other consumer electronics remained
strong, driving the need for increased production of printed circuit boards

and
memory modules, and thereby increasing demand for our electronic assembly

and
semiconductor products. After peaking in the third quarter of 2007, our

revenue
declined sequentially each quarter through the first quarter of 2009, as our
results were negatively impacted by reduced levels of capital spending for
electronics manufacturing capacity brought about by the deepening weakness

in
the global economy. New orders dropped off sharply late in the fourth

quarter
of 2008 as the global economy fell into a severe recession, and our
results for 2009 were adversely affected by the ongoing weakness in the

global
electronics market.

Even
before the recession, we worked to improve the efficiencies of our

operations. In
February 2008, we commenced plans to move a significant portion of our
systems-related product development and final assembly and integration to
Singapore. The transition of these functions to Singapore was substantially
complete by the end of the first quarter of 2009 and has resulted in lower
costs and a more focused R&D effort. Further, we consolidated

manufacturing
operations for our semiconductor products into our Minneapolis, Minnesota
headquarters facility. Implementation of these actions to improve the
efficiency of our operations has not impacted any of our strategic growth
programs.

We
believe that continued and timely development of new products and

enhancements
to existing products is essential to growing our position in the market. We
commit substantial resources to research and development efforts, which play

a
critical role in maintaining and advancing our position as a leading

provider
of optical sensors and systems. During the past several years, research and
development efforts have been focused on a number of development activities
that are critical to our future growth and success, including the

following:

| |   |                                                                                                                                                                                                                                                                         | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | Our
 stand-alone next generation SE500 solder paste inspection system and our

new
 next generation QX500 automated optical inspection (AOI) system.                                                                                                                    | 
| |   |                                                                                                                                                                                                                                                                         | 
| |  | A new mid-range SE350 solder
 paste inspection system based on the 3D inspection technology used in the
 SE500. The SE350 is a lower cost system for customers that do not require

the
 full inspection functionality of the SE500.                                    | 
| |   |                                                                                                                                                                                                                                                                         | 
| |  | Our
 common hardware platforms and sensor technology utilized in both our new
 QX500 automated optical inspection (AOI) system and a new embedded

inspection
 solution we have developed for DEK offering 100% 2D solder paste inspection
 with no cycle time penalty. | 
| |   |                                                                                                                                                                                                                                                                         | 
| |  | Our
 Embedded Process Verification (EPV®) technology.                                                                                                                                                                                                                   | 
| |   |                                                                                                                                                                                                                                                                         | 
| |  | A new
 solar wafer alignment camera capable of performing accurate high-speed
 alignment measurements within the wafer print nest, including traditional
 wafer edge alignment of both monocrystalline and polycrystalline wafer
 materials.                            | 
| |   |                                                                                                                                                                                                                                                                         | 
| |  | Continued
 investment in our highly profitable WaferSense line of products.                                                                                                                                                                                            | 

The
global electronics market strengthened significantly in 2010. We experienced
particularly strong demand in the second quarter of 2010, as pent-up demand

and
an improving economy led to significantly increased sales of alignment

sensors
and our stand-alone solder paste inspection and AOI systems. Sales of

sensors
continued at these strong levels throughout the remainder of 2010, while
systems sales moderated to more normal levels.

We
believe that improving market conditions, the efficiencies in operations we
have implemented, and the new products we have introduced and anticipate
introducing in the next year, will generate significant sales and
improved margins, and will allow us to address the various price points

desired
by our customers within the electronic assembly market. We also believe the
greater efficiencies we are realizing through our strategic repositioning in
Asia, will lead to improved operating results in 2011 and future periods.

For the year ending December 31, 2011, we
are forecasting net income of $.60-$.70 per share on revenue of $60-$65
million. Nevertheless, our ability to achieve our forecast and to
implement our strategy effectively is subject to numerous uncertainties and
risks, including the risks identified in Item 1A of this Annual Report on

Form
10-K. We cannot assure you that our efforts will be successful.

4

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Table of Contents

Objective

Our
objective is to develop monitoring and process control solutions that

improve
the quality and efficiency of our customers manufacturing operations. We

intend
to build upon our innovative products in systems for solder paste

inspection,
automated optical inspection and component alignment, with new sensing

products
that will be embedded inside SMT production equipment. We eventually intend

to
tie these products together as a full-line process control solution. We

believe
our new embedded process verification (EPV) sensor and strobe inspection

module
(SIM) will eventually gain acceptance among manufacturers of pick-and-place
machines and solder paste screen printers as a further enhancement to
inspection and control. Our research and development efforts are creating

new
inspection technologies for both OEM and end user markets which we believe

will
lower the cost of inspection and provide faster production through-put

speeds,
better ease of use, and improved resolution for inspecting progressively
smaller electronic components. In addition, we expect that our research and
development efforts will have applicability to new markets, including
photovoltaic (solar) cell manufacturing and printed electronics, among
others.

During
the last several years, our Semiconductor segment continued to invest in our
WaferSense  product line, a family of wireless, wafer-like precision
measurement tools for in-situ setup, calibration and process optimization in
semiconductor processing equipment. Our first WaferSense product, the

Automatic
Leveling Sensor (ALS) was introduced late in 2004. Since that time, we have
introduced several new additions to the WaferSense family of products,
including gapping, teaching and vibration sensors that improve up-time and
yield for semiconductor manufacturers. Currently we are working on the

newest
addition to the product line, a particle sensor.

OPERATIONS AND PRODUCTS

We
develop, manufacture and sell intelligent, non-contact sensors and systems

for
process control and inspection. Our products are used primarily in the SMT
electronic assembly, semiconductor and photovoltaic cell fabrication

industries
and enable manufacturers to increase operating efficiencies, product yields

and
quality. In addition to proprietary hardware designs that combine precision
optics, various light sources and multiple detectors, our products

incorporate
software that controls the hardware and filters and converts raw data into
application specific information. Our product offerings are sold both to
original equipment manufacturers that supply the SMT and photovoltaic cell
fabrication industries and to end-user customers who use our SMT systems and
WaferSense products directly for process and quality control in the circuit
board manufacturing and semiconductor fabrication processes.

SMT Electronic Assembly Alignment

Sensors

Our
SMT electronic assembly alignment sensors product line, which has generated

the
largest component of our sales during the past ten years, is a family of
alignment sensors that are customized and incorporated into the equipment
manufactured by our customers for use in SMT circuit board assembly. We work
closely with our original equipment manufacturer customers to integrate

sensors
into their equipment.

Sales
of these products, including service repairs, to Juki Corporation accounted

for
approximately 21% of our revenue in 2010 and 8% of our revenue in 2009.

Sales
of these products, including service repairs, to Assembleon B.V. accounted

for
approximately 14% of our revenue in 2010 and 16% of our revenue in 2009.
Accordingly, revenues and operations are currently heavily influenced by the
level of purchases from these two customers and by the cyclical nature of

the
SMT production industry.

LaserAlign.Our LaserAlign sensor family has accounted
for the vast majority of sales in the SMT electronic assembly alignment

sensors
product line. These sensors are sold for incorporation into component

placement
machines used in the SMT production lines that are manufactured by a number

of
different OEM customers.

The
LaserAlign family of products aligns extremely small surface mount

components,
known as chip capacitors and resistors, during transport on a pick-and-place
machine prior to placement on a circuit board. LaserAlign sensors are
incorporated into the placement heads of component placement machines to

ensure
accurate component placement at high production speeds. Various high-speed
component placement machines use between one and twenty LaserAlign sensors

per
machine. LaserAlign integrates an intelligent sensor, composed of a laser,
optics and detectors with a microprocessor and software for making specific
measurements. LaserAlign enables quick and accurate alignment of each

component
as it is being transported by the pick-and-place arm for surface mount
assembly. Using non-contact technology, LaserAlign facilitates orientation

and
placement of components at higher speeds than can be achieved using
conventional mechanical or machine vision component centering systems.

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Table of Contents

The
LaserAlign sensor is offered in several different configurations to satisfy the
requirements of the different machines on which it is used. The latest version
of the LaserAlign sensor technology was introduced in 2006 in a 5th
generation sensor for Juki Corporation. Revenue from new product shipments of
LaserAlign sensors has been a principal contributor to revenue during the past
five years and accounted for 27% of our revenue in 2010 and 13% in 2009.

BoardAlign
Camera (BA Camera).The BA Camera, which is
incorporated directly into the placement head of component placement machines,
identifies fiducial markings on a circuit board and aligns the board in the
component placement machine prior to component placement. The BA Camera was introduced
in a sensor for Assembleon B.V. during 2003 and is incorporated into the latest
version of Assembleons component placement machine. Revenue from shipments of
BA Camera sensors to Assembleon B.V. accounted for 7% of our revenue in 2010
and 6% in 2009.

InPrinter
Inspection Camera.The InPrinter Inspection
Camera, which is mounted directly in screen printers manufactured by DEK
International GmbH, identifies fiducial markings on a circuit board to ensure
accurate board registration prior to placement of solder paste, as well as to
provide an upgraded capability for 2D solder paste and stencil inspection. The
Inprinter Inspection Camera was introduced for DEK International GmbH during
the third quarter of 2005. Revenue from shipments of the InPrinter Inspection
Camera accounted for 5% of our revenue in 2010 and 5% in 2009.

Photovoltaic Cell Alignment Sensors

Solar
Wafer Alignment Camera.The Solar Wafer Alignment
Camera performs accurate high-speed alignment measurements within the wafer
print nest and can align a broad range of wafer technologies, including
selective emitter, metal wrap-through, and print-on-print. This camera also has
the ability to perform traditional wafer edge alignment of both monocrystalline
and polycrystalline wafer materials. The Solar Wafer Alignment Camera was
introduced for DEK International GmbH during the first quarter of 2010. Revenue
from shipments of the Solar Wafer Alignment Camera accounted for 3% of our
revenue in 2010.

Embedded Inspection Solutions

Embedded
Process Verification.Juki Corporation, our
largest LaserAlign customer, has incorporated our embedded process
verification, or EPV, inspection technology into its KE-2070 robotic assembly
platform. Equipped with our EPV inspection technology, the KE-2070 is the
industrys first robotic assembly machine capable of inspecting for the
presence or absence of electronic components on SMT circuit boards immediately
following their placement. With EPV inspection technology, Jukis KE-2070
platform is the only system in the world that can visualize feeder action
during the electronic component placement process with images of both component
pick and placement and movie mode. EPV technology also provides line engineers
with a tool for root cause failure analysis during the assembly process to
improve circuit board yields and minimize costly rework or scrap. Our EPV
technology is comprised of six ultra small cameras mounted on a placement head
for on-the-fly imaging with no cycle time penalty for the inspection process.
The resulting inspection for missing components on the SMT circuit board
operates at the full placement speed of the KE-2070. The JUKI KE-2070 platform
also will continue to deploy CyberOptics LaserAlignâ
component placement sensors to ensure that electronic components placed on the
circuit board are properly aligned and positioned. We anticipate that a new
version of EPV for the KE-2080 Juki platform will be introduced in the first
half of 2011.

2D
Embedded Solder Paste Inspection. We are
completing integration of our strobe inspection module or (SIM) into DEKs
solder paste screen printer. Equipped with this module, which will be offered
as an option, DEK systems will be able to improve yields and productivity by
allowing solder paste screen printing concurrently with high-speed, 100% two
dimensional inspection that does not decrease line or printer speed. Initial
shipments of DEK screen printers with embedded inspection are anticipated later
in 2011.

3D
Embedded Solder Paste Inspection. We have
integrated our industry leading SE500 3D solder paste inspection technology
directly into a solder paste screen printer manufactured by Milara Corporation.
Milara systems equipped with our SE500 inspection technology, which will be
offered as an option, will be able to improve yields and productivity by
allowing solder paste screen printing concurrently with high-speed, 100% three
dimensional inspection that does not decrease line or printer speed.

6

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Table of Contents

SMT Stand-alone Inspection Systems Products

Our
SMT inspection systems product line consists of stand-alone measurement and
inspection systems used in the SMT electronic assembly industry for process
control and inspection. These systems are sold directly to end-user
manufacturing customers that use them in a production line or along-side a
production line to maintain process and quality control. Our products
incorporate proprietary sensors as well as substantial, off the shelf,
translation or robotics hardware and complete computer systems or processors with
internally developed software.

Solder
Paste Inspection (SPI) Products

We
began selling in-line solder paste measurement machines with the introduction
of the SE300 in March 2000. During 2005, we introduced the SE 300 Ultra, an
enhanced version of our SE 300 product that offered faster inspection speeds, a
conveyor that can accommodate a greater range of board sizes than the earlier
generation SE 300, flexible conveyor options and additional defect review
options in run-time software. More recently, we have introduced next generation
machines that we believe are not only extremely competitive, but improve our
margins.

SE500.In 2009, we introduced our next-generation SE500
solder paste inspection system. Based on a new cost-reduced platform, we
believe the SE500 offers the best combination of inspection speed and accuracy
available in the market. The SE500 is an in-line system that measures in three
dimensions (3D) the amount of solder paste applied to the circuit board after the
first step of the SMT assembly process. Because of the small size of the
components that must be placed on each pad of solder paste and the density of
components placed on the circuit board, a significant amount of SMT assembly
problems are related to the quality of solder paste deposition. Misplaced
solder paste or excess or inadequate amounts of paste can lead to improper
connections or bridges between leads causing an entire circuit board to
malfunction. The SE500 inspects the height, area and volume of 100% of a
circuit board at production line speeds and with resolution that allows it to
measure the smallest chip scale packages and micro ball array component sites.
The SE500 can be integrated into most SMT production lines, providing real time
quality control immediately after a printed circuit board leaves the screen
printer and before component placement commences. We have also recently
introduced versions of the SE500 capable of accommodating large board sizes and
dual lane production lines.

SE350.In 2010, we introduced a new lower-cost SPI
system, based on our industry leading 3D inspection technology, at a lower
price point for a different segment of the inspection market; those customers
requiring a solder paste inspection capability, but not the full functionality
and superior measurement performance of our SE500 product. As our first
mid-range offering, we see significant potential for the SE350 as a vehicle for
expanding our served market. We also see potential for the SE350 to expand our
market through sales to those companies who currently deploy no form of solder
paste inspection.

SE500
OEM Sensors.Late in 2010, we signed an agreement
with a new OEM partner under which our industry leading SE500 inspection sensor
will be integrated in our partners solder paste inspection systems. Initial
shipments of our OEM partners solder paste inspection system incorporating our
SE500 sensor are expected in 2011.

Revenues
from shipments of our SE500, SE350 and SE 300 Ultra products accounted for 29%
of our revenue in 2010 and 30% of our revenue in 2009.

Automated
Optical Inspection Products.

We
introduced the Flex series of in-line Automated Optical Inspection (AOI)
products in the fourth quarter of 2000. These products inspect circuit boards
after component placement to determine whether all components are present and
have been placed correctly and can also be used to measure the quality of
solder joints after the reflow oven. We introduced the latest version of the
Flex series, the Flex Ultra HR, in 2007. The Flex Ultra HR, which we continue
to sell, utilizes high-resolution color cameras and is capable of inspecting
down to 0105 components with 5.0 megapixel camera technology.

QX500.
We introduced our next-generation QX500 Automated Optical Inspection (AOI)
system in the second quarter of 2010. The QX500 is designed to inspect the
placement of the smallest components on circuit boards and features a cost
reduced design that uses our strobe inspection module (SIM) sensor technology
and next-generation common hardware platform. The QX500 features the fastest
AOI inspection times currently available in the market and also utilizes our
unique SAM
software technology which offers an industry leading level of low false call
performance. In 2011 we anticipate introducing additional versions of the QX500
accommodating dual production lanes and capable of inspecting larger circuit
board sizes. In 2011, we also anticipate introducing a new tabletop AOI system
for off-line inspection based on our SIM sensor technology.

Revenues
from shipments of our QX500 and Flex Ultra AOI products accounted for 13% of
our revenue in 2010 and 21% of our revenue in 2009.

7

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Table of Contents

Semiconductor Products

Our
principal semiconductor products, the WaferSense family of products, are a
series of wireless sensors that provide measurements of critical factors in the
semiconductor fabrication process. Other semiconductor products include sensors
that inspect the presence and orientation of semiconductor wafers in cassettes
and FOUPS during the fabrication process, and frame grabber and machine vision
subsystems. We sell our semiconductor products to both original equipment
manufacturers and to end-user customers through a network of distributors.
Sales of our semiconductor products constituted 11% of our revenue in 2010 and
12% of revenue in 2009.

WaferSense
Sensors.Our
WaferSense family of sensors are intended to go where wafers go in
semiconductor fabrication and provide measurements of critical factors that are
currently impossible or extremely difficult to obtain without powering down the
fabrication process equipment. Because the user is not required to break down
semiconductor fabrication equipment when using our WaferSense products, we
believe significant time is saved and accuracy is increased compared to the
manual techniques currently used by many customers when checking the process
parameters measured by our WaferSense products. As a result, up-time,
through-put and process yield for semiconductor fabrication equipment is
improved.

We
introduced our first WaferSense product in late 2004 and have since continued to add
new products to the WaferSense family. The automatic leveling sensor (ALS) is a
wireless, vacuum-compatible sensor that can be placed in cassettes, FOUPS, on
end effectors, aligners, in load locks and process chambers used in
semiconductor fabrication to ensure that all stations are level and coplanar.
The automatic gapping sensor (AGS) is a gapping tool that measures the gap in
three places between the shower head and pedestal in semiconductor process
equipment. The automatic teaching sensor (ATS), measures X-Y-Z offset from
robotic transfers of wafers to the pedestal in semiconductor process equipment.
The amount of gap and offset after robotic transfer of wafers to the shower
pedestal can affect film thickness and uniformity when material is deposited on
semiconductor wafers, impacting quality and product yields. The automatic
vibration sensor (AVS) measures X-Y-Z acceleration for shock and vibration,
which can generate wafer particles, scratches or wafer breakage, thereby
reducing yield. The automatic particle sensor (APS), to be introduced later in
2011, allows engineers to efficiently detect and classify particles and their
exact sources in a process as wafers are transferred, slit valves actuate and
chambers are cycled, pumped down and purged. APS is compatible with front-ends,
coater/developer tracks, deposition and etch equipment.

Wafer
Mapping and Alignment Sensors.We manufacture and
sell laser based reflective sensors that improve the performance of robotic
wafer handling equipment. During the fabrication process, semiconductor wafers
are stored in slotted cassettes during transport to various fabrication tools.
Robotic equipment removes the wafers from the cassettes and inserts them into a
fabrication tool. Our wafer mapping sensors inspect for the presence of wafers
in the cassettes and determine if the wafer is properly present and located in
the cassette.

Frame
Grabber Products and Machine Vision Subsystems.Frame
grabber products are a machine vision component that captures, digitizes, and
stores video images. These products are currently sold into a broad array of
applications in a number of different industries, with an emphasis on
semiconductor customers. We offer both digital and analog versions of frame
grabbers under the Imagenation brand.

Markets and Customers

We
sell the vast majority of our products into the electronics and photovoltaic
cell manufacturing markets (89% of total revenue in 2010 came from our
Electronic Assembly segment). The value of automation is high in these markets
because the products produced have high unit costs and are manufactured at
speeds too high for effective human intervention. Moreover, the trend toward
smaller electronic devices with higher circuit densities, smaller circuit paths
and extremely small components requires manufacturing and testing equipment
capable of extremely accurate alignment and multidimensional measurement such
as achieved using non-contact optical sensors. Customers in these industries
also employ knowledgeable engineers who are competent with computer-related
equipment. Our alignment sensors and embedded inspection products are sold to
OEMs serving the SMT circuit board assembly market and our stand-alone solder
paste and automated optical inspection (AOI) systems are sold to end-user
electronic assembly manufacturers in this market. Our Solar Wafer Alignment
camera is sold to DEK on an OEM basis for use in their photovoltaic cell
manufacturing equipment.

We
sell our semiconductor products into the semiconductor capital equipment market
for use in the fabrication of semiconductor devices. This market has many of
the same characteristics as the SMT electronics assembly market and requires
non-contact optical measurement tools that enable the production of more
complex, higher density and smaller semiconductor devices. Our WaferSense
family of precision measurement tools for process optimization in semiconductor
processing equipment is sold directly to semiconductor fabrication facilities
for use by process and equipment engineers during the production of
semiconductor wafers. We sell our wafer mapping and alignment sensors to
manufacturers of equipment that transport wafers during the semiconductor
manufacturing (front-end fabrication) process.

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Table of Contents

A
large proportion of our stand-alone inspection system sales are originating in
the low cost geographies of Asia where a significant portion of the new
worldwide production capacity for circuit board assembly has been added. In
order to bring our development and final assembly and integration for our
stand-alone inspection systems products closer to the markets in Asia where the
majority of our sales occur, to reduce cost, and to free development personnel
at our home office in Minneapolis to focus on sensor technology development, we
initiated a plan in 2008 to transition a portion of our development, and all
final assembly and integration operations for our stand-alone systems products,
to Singapore. This transition was substantially complete by the end of the
first quarter of 2009. We previously established sales offices in Singapore in
2001 and China in 2004 to serve the growing market for manufacturing production
equipment in Asia and to increase the percentage of worldwide production lines
that use inspection in their production process to improve production yields
and reduce cost.

We
sell our products worldwide to many of the leading manufacturers of electronic
circuit board assembly equipment, manufacturers of semiconductor DRAM memory,
semiconductor capital equipment manufacturers and end-user electronic assembly
manufacturers, including Asian original design manufacturers (ODMs) and
electronic manufacturing service providers (EMSs), who manufacture cell
phones, smart phones, notebook computers and server boards, among other
electronic devices. We manufacture our alignment sensors, embedded inspection
solutions, the sensors used in our stand-alone inspection systems and all of
our semiconductor products in our Minneapolis, Minnesota headquarters facility.
All final assembly and integration for our stand-alone system products takes
place in our Singapore facility.

Export
sales represent a large percentage of our total sales because the majority of
new worldwide electronics and semiconductor capacity is being added outside the
United States. In addition, a significant portion of our export sales to Europe
are electronic assembly alignment sensors that ultimately are sold by our OEM
customer into Asia.

The
following table sets forth the percentage of total sales revenue represented by
total export sales (sales for delivery to countries other than the United
States, including sales delivered through distributors) by location during the
past two years:

|                        |  |              |   |      |    |   | 
|----------------------- |  | ------------ | - | ---- | -- | - | 
|                        |  | December 31, |  
|                        |  | 2010         |   | 2009 |   
|                       
|Asia                    |  | 55           | % |      | 37 | % | 
|                       
|Europe                  |  | 27           | % |      | 33 | % | 
|                       
|Other export
 sales (1) |  | 4            | % |      | 8  | % | 

(1) Includes
 export sales in the Americas, primarily export sales to Canada, Mexico and
 Latin America.

See
Note 12 to our Consolidated Financial Statements contained in item 8 of this
Form 10-K. Virtually all export sales are negotiated, invoiced and paid in U.S.
dollars. Accordingly, although changes in exchange rates do not affect revenue
and income per unit, they can influence the willingness of customers to
purchase units.

Sales and Marketing

Our
electronic assembly and photovoltaic cell alignment sensors are sold to large
OEM customers by direct sales staff located in Minnesota. Our stand-alone
system products are primarily sold through independent representatives and
distributors managed by direct sales personnel located in Singapore, as well as
in the UK, U.S. and China. We have agreements with 46 independent
representatives and distributors who focus on sales and service of our
stand-alone system products to end-user customers. These agreements cover North
and South America (17), Europe (15) and China and the rest of Asia (14).

We
have established a worldwide sales representative organization for our
WaferSense semiconductor products. We currently have agreements in place or in
process with sales representatives in the U.S. (3), Europe (3) and the Pacific
Rim (7). Our wafer mapping semiconductor products are sold to large OEM
customers by a direct sales staff located in Oregon. We sell our semiconductor
frame grabber products through direct sales staff located in Portland, Oregon,
and through 13 sales representatives located throughout the world. These
representatives are not under contract, but are authorized to sell frame
grabber products and in many cases act as system integrators for our products.

We
market our products through appearances at industry trade shows, advertising in
industry journals, articles published in industry and technical journals and on
the Internet. In addition, we have strategic relationships with certain key
customers that serve as highly visible references.

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Backlog

Our
products are typically shipped two weeks to two months after the receipt of an
order. Product backlog was $7.2 million on December 31, 2010, compared to $7.1
million on December 31, 2009. Backlog at December 31, 2010 totaling $6.4
million is deliverable in the first quarter of 2011. Sales of some stand-alone
surface mount technology (SMT) inspection systems products may require customer
acceptance due to performance or other acceptance criteria included in the
terms of sale. For these SMT product sales, revenue is recognized at the time
of customer acceptance. Although our business is generally not of a highly
seasonal nature, sales may vary based on the capital procurement practices in
the electronics, photovoltaic cell manufacturing and semiconductor industries.
For example, production capacity expansion for anticipated holiday or back to
school demands can result in higher levels of sales in our second and third
quarters. However, we are not able to quantify with any level of precision, the
impact of these events on our sales in any given quarterly period. Our
scheduled backlog at any time may vary significantly based on the timing of
orders from OEM customers. Accordingly, backlog may not be an accurate
indicator of performance in the future.

Research and Development

We
differentiate our products primarily on the basis of customer benefits afforded
by the use of clever and proprietary technology and on our ability to combine
several different technical disciplines to address industry and customer needs.
CyberOptics was founded by research scientists and has retained relationships
with academic institutions to ensure that the most current information on
technological developments is obtained. In addition, we actively seek ongoing
strategic customer relationships with leading product innovators in our served
markets and actively investigate the needs of, and seek input from, these
customers to identify opportunities to improve manufacturing processes. Our
engineers have frequent interactions with our customers to ensure adoption of
current technologies. In some instances, we receive funding from these
customers through development contracts that provide the customer with an
exclusive selling period but allow us to retain technology and distribution
rights.

We
believe that continued and timely development of new products and enhancements
to existing products is essential to maintaining our position in the market. As
a technology based company, we commit substantial resources to research and
development efforts, which play a critical role in maintaining and advancing
our position as a leading provider of optical sensors and systems. During the
past several years, research and development efforts have been focused on a
number of development activities critical to our future growth and success,
including the following:

| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our stand-alone next generation SE500
 solder paste inspection system and our new next generation QX500 automated
 optical inspection (AOI) system.                                                                                                                   
| |   |                                                                                                                                                                                                                                                                       
| |  | A new mid-range SE350 solder paste inspection
 system based on the 3D inspection technology used in the SE500. The SE350 is
 a lower cost system for customers that do not require the full inspection
 functionality of the SE500.                                   
| |   |                                                                                                                                                                                                                                                                       
| |  | Our common
 hardware platforms and sensor technology utilized in both our new QX500
 automated optical inspection (AOI) system and a new embedded inspection
 solution we have developed for DEK offering 100% 2D solder paste inspection
 with no cycle time penalty.
| |   |                                                                                                                                                                                                                                                                       
| |  | Our Embedded
 Process Verification (EPV®) technology.                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                       
| |  | A new solar wafer alignment camera capable
 of performing accurate high-speed alignment measurements within the wafer
 print nest, including traditional wafer edge alignment of both
 monocrystalline and polycrystalline wafer materials.                           
| |   |                                                                                                                                                                                                                                                                       
| |  | Continued investment in our highly
 profitable WaferSense line of products.                                                                                                                                                                                          

Research
and development expenses were $7.4 million in 2010 and $7.1 million in 2009.
These amounts represented 13% of revenues in 2010 and 26% of revenues in 2009.
Research and development expenses consist primarily of salaries, project
materials, contract labor and other costs associated with ongoing product
development and enhancement efforts. Research and development resource
utilization is centrally managed based on market opportunities and the status
of individual projects. We expect research and development expenses to increase
in 2011 as we continue to focus on new products, including new stand-alone
inspection offerings based on our industry leading 3D solder paste inspection
technology and 2D inspection technology based on our strobe inspection module
(SIM), new embedded inspection solutions for both solder paste and automated
optical inspection and new WaferSense products.

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Manufacturing

Much
of our product manufacturing, which is primarily circuit board manufacturing,
lens manufacturing and metal parts production, is contracted with outside
suppliers. Our production personnel inspect incoming parts, perform final
assembly, calibrate and perform final quality control testing of finished
products. Our products are not well suited for the large production runs that
would justify the capital investment necessary for complete internal
manufacturing.

Our
electronic assembly and photovoltaic cell alignment sensor products and our
semiconductor products are assembled at our Minneapolis, Minnesota headquarters
facility. Our stand-alone SMT inspection systems products are assembled in
Singapore. Prior to the second quarter of 2009, all of our stand-alone SMT
system products had been assembled at our Minneapolis, Minnesota headquarters
facility and prior to the third quarter of 2009, all of our semiconductor
products had been assembled at our Portland, Oregon facility.

A
variety of components used in our products are available only from single
sources and involve relatively long order cycles, in some cases over one year.
We believe we have identified alternative assembly contractors for most of our
subassemblies. Use of those alternative contractors could require substantial
rework of the product designs, resulting in periods during which we could not
satisfy customer orders. An actual change in such contractors would likely
require a period of training and testing. Accordingly, an interruption in a
supply relationship or the production capacity of one or more of such
contractors could result in the inability to deliver one or more products for a
period of several months. To help prevent delays in the shipment of our
products, we maintain in inventory, or on scheduled delivery from suppliers,
what we believe to be a sufficient amount of certain components based on
forecasted demand (forecast extends a minimum of 6 months).

Competition

Although
we believe that our products offer unique capabilities, competitors offer
technologies and systems that perform some of the visual inspection and
alignment functions performed by our products. We face competition from a
number of companies in the machine vision, image processing and inspection systems
market, some of which are larger and have greater financial resources.

Our
electronic assembly sensor products face competition in the market for
alignment and inspection on component placement machines primarily from
manufacturers of vision (camera and software based) systems. Potential
competitors in these markets include Cognex Corporation and Electro Scientific
Industries, Inc. We compete in this market based on our ability to custom
design products with stringent physical form requirements, speed, flexibility,
cost and ease of control. In addition, our products compete with systems
developed by OEMs using their own design staff for incorporation into their
products. Our electronic assembly alignment sensor products have historically
competed favorably on the basis of these factors, and particularly on the basis
of speed and product cost. We believe our sensor products are also better
suited to align the smaller electronic component sizes currently available in
the market. Nevertheless, advances in terms of speed by vision systems have
reduced some of the advantages of our products in some configurations. We have
introduced newer configurations that we believe allow our alignment sensors,
and the component placement machines in which they are incorporated, to compete
favorably based on the speed and accuracy of their performance, as well as
their price.

The
primary competition for sales of our next generation SE500 and SE350 solder
paste inspection systems has been from Asian based companies such as KohYoung
Technology (Korea), Parmi (Korea) and Test Research, Inc. (Taiwan). We believe
the SE500 and SE350 compete favorably against these competitive products on the
basis of performance, reliability and price. The SE500 offers the best
combination of speed and inspection accuracy currently available on the market.
The
SE350 is a lower cost mid-range 3D inspection system for customers that do not
require the full inspection functionality of the SE500.

Our
automated optical inspection (AOI) system products (Flex Ultra HR and QX500 )
face competition from a large number of AOI companies, the most significant
being MirTec, Ltd. (Korea), Viscom (Germany), Saki Corporation (Japan) and
Omron, Ltd. (Japan). We believe that the technology used in the Flex Ultra and
QX500 is differentiated from the competition and that these products compete
effectively in this market based on measurement accuracy, cost, ease of use at
rapid production line speeds and the low rate of false calls.

The
electronics manufacturing market has become increasingly competitive and
concentrated in large Asian based original design manufacturers and global
electronic manufacturing service contract manufacturers, resulting in the ability
on their part to drive more competition into the market and command more
favorable terms when purchasing from suppliers, including capital equipment
suppliers like CyberOptics. Due to the increased level of competition, we have
been required to decrease the price of our solder paste and automated optical
inspection (AOI) systems in some markets. These same pricing pressures also
impact our OEM customers for our alignment sensors, who in turn ask us to
design newer products at a lower price point to allow them to remain competitive
in the marketplace. We respond to these pricing pressures through continuous
investment in research and development of cost reduced products with new
features and enhancements that command better pricing in the market.

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We
believe our WaferSense products are unique to the marketplace and primarily
face competition from the manual techniques currently used by most customers to
monitor their semiconductor fabrication equipment. Because the user is not
required to break down semiconductor fabrication equipment, or pressurize a
vacuum chamber, we believe that our WaferSense products will save significant
time and increase measurement accuracy over the manual techniques currently
used by customers and will improve equipment up-time, through-put and process
yield.

Our
other semiconductor products face competition in the wafer mapping and
alignment market primarily from manufacturers of through-beam sensors developed
by our customers using inexpensive sensors from general industrial market
suppliers like Banner Engineering Corporation, Omron, Ltd (Japan) and Keyence,
Ltd (Japan). We believe that our sensors compete favorably in this market based
on performance and the unique advantages of the reflective mode of operations.

Although
we believe our current products offer several advantages in terms of price and
suitability for specific applications and although we have attempted to protect
the proprietary nature of such products, it is possible that any of our
products could be duplicated by other companies in the same general market.

Employees

As
of December 31, 2010, we had 181 full-time employees worldwide, including 38 in
sales, marketing and customer support, 62 in manufacturing, purchasing and
production engineering, 57 in research and development and 24 in finance,
administration and information services. Of these employees, 98 are located at
our corporate headquarters in Minneapolis and 83 are located in other offices
(7 in the UK, 12 in Oregon, 55 in Singapore, 8 in China and 1 in Japan). All of
our employees located in Oregon work in our Semiconductor business. To date, we
have been successful in attracting and retaining qualified technical personnel,
although there can be no assurance that this success will continue. None of our
employees are covered by collective bargaining agreements or are members of a
union.

Proprietary Protection

We
rely on the technical expertise and know-how of our personnel and trade secret
protection, as well as on patents, to maintain our competitive position. We
attempt to protect intellectual property by restricting access to proprietary
methods by a combination of technical and internal security measures. In
addition, we make use of non-disclosure agreements with customers, consultants,
suppliers and employees. Nevertheless, there can be no assurance that any of
the above measures will be adequate to protect our proprietary technology.

We
hold 85 patents (58 U.S. and 27 foreign) on a number of technologies, including those used in
LaserAlign, our embedded inspection technology including our strobe inspection
module (SIM), our stand-alone inspection systems and other products. Some of
the patents relate to equipment such as pick-and-place machines, into which our
products are integrated. In addition, we have 79 pending patents (21 U.S.
and 58 foreign). We protect the
proprietary nature of our software primarily through copyright and license
agreements, but also through close integration with our hardware offerings. We
utilize 11 registered trademarks (6 U.S. and 5 foreign) and have 2 trademark
registrations pending. We also have 7domain
names and several common law trademarks. It is our policy to protect the
proprietary nature of our new product developments whenever they are likely to
become significant sources of revenue. No guarantee can be given that we will
be able to obtain patent or other protection for other products.

As
the number of our products increases and the functionality of those products
expands, we may become increasingly subject to attempts to duplicate our
proprietary technology and to infringement claims. In addition, although we do
not believe that any of our products infringe the rights of others, there can
be no assurance that third parties will not assert infringement claims in the
future or that any such assertion will not require us to enter into a royalty
arrangement or result in litigation.

Government Regulation

Many
of our products contain lasers. Products containing lasers are classified as
either Class I, Class II or Class IIIb Laser Products under applicable rules
and regulations of the Center for Devices and Radiological Health (CDRH) of the
Food and Drug Administration. Such regulations generally require a self-certification
procedure pursuant to which a manufacturer must file with the CDRH with respect
to each product incorporating a laser device, periodic reporting of sales and
purchases and compliance with product labeling standards. Our lasers are generally
not harmful to human tissue, but could result in injury if directed into the
eyes of an individual or otherwise misused. We are not aware of any incident
involving injury or a claim of injury from our laser devices and believe that
our sensors and sensor systems comply with all applicable laws for the
manufacture of laser devices.

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ITEM 1A. RISK FACTORS

Our
operations are subject to a number of risks and uncertainties that may affect
our financial results, our accounting, and the accuracy of the forward looking
statements we make in this Form 10-K. We make statements regarding anticipated
product introductions and performance, changes in markets, customers and
customer order rates, expenditures in research and development, growth in
revenue and improvement in profits, taxation levels, the effects of pricing,
and competition, all of which represent our expectations and beliefs about
future events. Our actual results may vary from these expectations because of a
number of factors that affect our business, the most important of which include
the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our business has been and will continue to be significantly impacted
 by the global economy, and the current uncertainty in the outlook for the
 global economy makes it more likely that our actual results will differ
 materially from expectations. In 2009, the world
 economy experienced the worst economic recession since the great depression
 of the 1930s. The severe economic conditions were brought about by extreme
 disruptions in global credit and financial markets including severely
 diminished liquidity and credit availability, declines in consumer
 confidence, declines in economic growth, increases in unemployment rates, and
 uncertainty about economic stability. Although the world economy has started
 to recover, there can be no assurance as to the length and strength of the
 recovery, that it will continue or that the economy will not slide back into
 another period of recession. These economic uncertainties affect businesses
 such as ours in a number of ways, making it difficult to accurately forecast
 and plan our future business activities. Any tightening of credit in
 financial markets may lead consumers and businesses to postpone spending,
 which may cause our customers to cancel, decrease or delay their existing and
 future orders with us. In addition, financial difficulties experienced by our
 suppliers or distributors could result in product delays, increased accounts
 receivable defaults and inventory challenges. The original equipment manufacturers
 to which we sell our sensors supply SMT manufacturers, and those
 manufacturers, as well as the circuit board manufacturers that purchase our
 SMT systems products directly, are largely dependent on continued demand for
 consumer and commercial electronics, including cell phones, smart phones and
 computers. Demand for electronics is a function of the health of the
 economies in the United States and around the world. Our results would be
 adversely affected in the future, when or if these economies move into
 periods of recession, thereby negatively impacting the demand for overall
 electronics and adversely affecting demand for our products.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Sales to our two largest customers have historically constituted a
 significant portion of our revenue and loss of either of these customers, or
 a decline in the customers business, would have a materially adverse impact
 on our results of operation. Sales to our two
 largest customers constituted 35% of our total revenue in 2010 and 24% of our
 total revenue in 2009. We believe our relationships with these customers are
 good and we continue to pursue joint development projects with them. However,
 like most suppliers to the electronics manufacturing markets, their
 businesses were adversely impacted by the global economic downturn, and would
 most likely again be impacted in the future when or if the global economy
 moves into a recessionary period. If the order rates of these customers are
 negatively impacted by global economic events beyond their control or if they
 are unsuccessful in selling the products into which our sensors are
 incorporated, or if they design their products to function without our
 sensors, purchase sensors from other suppliers, or otherwise terminate their
 relationship with us, our long-term results of operations would be
 significantly adversely affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Our forecasts for sales and net income are dependent, in part, on
 sales of our Solar Wafer Alignment camera. Sales of
 this product are dependent upon the ability of DEK to sell the photovoltaic
 cell equipment on which it is used, which is in turn dependent upon the solar
 energy market. Solar energy is currently not as economical as other more
 conventional energy sources, including those based on fossil fuels and its
 use is dependent upon significant government subsidies in many markets. Our
 future revenue from this product may be impacted if government subsidies for
 solar energy are reduced or eliminated, if DEKs equipment is uncompetitive,
 or if the technology related to solar energy does not continue to advance and
 become competitive with other more conventional sources of energy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | The market for capital equipment for the electronics industry in
 which we operate is cyclical and we cannot predict with precision when market
 downturns will occur.We operate in a very cyclical
 marketthe electronics capital equipment market--that periodically adjusts
 independent of global economic conditions. We have been unable to predict
 with accuracy the timing or magnitude of periodic downturns in this market.
 These downturns, particularly the severe downturns in electronics production
 markets from 2001 through 2003, and from 2008 through 2009, have severely
 affected our operations and generated several years of unprofitable
 operations. We often have difficulty determining the duration or severity of
 any downturn in our markets, the strength of subsequent recovery and the
 long-term impact that it may have on our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | World events beyond our control may affect our operations.Our
 operations and markets could be negatively affected by world events that
 effect economies and commerce in countries, such as China, Singapore and
 Japan, in which we do business. Natural disasters, such as the SARS outbreak,
 have affected travel patterns and accessibility in these countries in the
 past and other natural occurrences, such as a bird flu outbreak, could affect
 the business we do in these countries in the future. Further, these countries
 may be affected by economic forces that are different from the forces that
 affect the United States and change the amount of business we conduct.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | We are dependent upon a single product line in our systems business
 for approximately a quarter of our revenue.During
 2010, approximately 29% of our total revenue was generated by sales of
 stand-alone SE 300 Ultra, SE350 and SE500 SMT solder paste inspection
 systems. Sales of these products have been subject to increasing competition
 in world markets, particularly in Asia, negatively impacting sales prices for
 our products. If we are not successful in continuing to sell and
 differentiate this product line relative to our competition, our results of
 operations would be negatively affected.                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | We generate more than three quarters of our revenue (approximately
 86% in 2010) from export sales that are subject to risks of international
 operations. Our export sales are subject to many of
 the risks of international operations including:                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |  |   |                                                                                                                                                         
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | currency
 controls and fluctuations in currency exchange rates;                                                                                         
| |  |  | changes in
 local market business requirements and increased cost and development time
 required to modify and translate our products for local markets;
| |  |  | inability to
 recruit qualified personnel in a specific country or region;                                                                              
| |  |  | difficulty
 in establishing and maintaining relationships with local vendors;                                                                           
| |  |  | differing
 foreign technical standards;                                                                                                                 
| |  |  | differing
 regulatory requirements;                                                                                                                     
| |  |  | export
 restrictions and controls, tariffs and other trade barriers;                                                                                    
| |  |  | difficulties
 in staffing and managing international operations;                                                                                        
| |  |  | reduced
 protection for intellectual property rights;                                                                                                   
| |  |  | changes in
 political and economic conditions;                                                                                                          
| |  |  | seasonal
 reductions in business activity;                                                                                                              
| |  |  | potentially
 adverse tax assessments; and                                                                                                               
| |  |  | terrorism,
 disease, or other events that may affect local economies and access.                                                                        

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | We conduct product development and final assembly and integration for
 our stand-alone systems products in Singapore where we have less immediate
 control over operations.Our Singapore development and
 manufacturing operations present a number of risks related to the retention
 of personnel, management of development and final assembly and integration
 control over administrative, final assembly and integration and business
 processes, regulatory and legal issues we may encounter and other matters
 relating to foreign operations. We cannot be certain that we will be able to
 retain software development and management personnel in Singapore at
 attractive rates. Although most components for our systems products are more
 readily available in Singapore, some of the hardware components used in our
 systems products necessary for manufacture in Singapore may be difficult to
 import at efficient rates. Our financial performance, ability to serve our
 customers and manufacture products could be negatively impacted if we are
 unable to retain our Singapore based employees, or if it costs more than
 expected to retain these employees or hire experienced employees in a timely
 manner, or if we are unable to locate suitable sources of supply for our
 products manufactured in Asia.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | We price our products in US dollars, and as a result, our products
 may have difficulty competing in periods of increasing strength of the
 dollar. Virtually all of our international export
 sales are negotiated, invoiced and paid in U.S. dollars, and accordingly,
 currency fluctuations do not affect our revenue per unit. However,
 significant fluctuations in the value of the U.S. dollar relative to other
 currencies could have an impact on the price competitiveness of our products
 relative to foreign competitors, which could impact the willingness of
 customers to purchase our products and have an impact on our results of
 operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Because of
our significant operations in Singapore, our costs are negatively impacted
when the U.S. dollar weakens relative to the Singapore dollar. A significant
portion of our cost of goods, research and development and sales and
marketing costs are denominated in the Singapore dollar. In addition, other
sales and marketing costs are denominated in British Pounds Sterling and the
Chinese Yuan, resulting from our sales offices located in the UK and China.
Our costs will increase, and our results will be negatively impacted in
future periods, when the U.S. dollar weakens relative to the currencies of
these countries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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Table of Contents

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our products could become obsolete. Our
 current products, as well as the products we have under development, are
 designed to operate with the technology we believe currently exists or may
 exist for electronic components, printed circuit boards and memory modules.
 The technology for these components changes rapidly and, because it takes
 considerable time to develop new products, we must anticipate technological
 developments in order to effectively compete. Further, because we do not have
 unlimited development resources, we might choose to forgo the pursuit of what
 becomes a leading technology and devote our resources to technology that is
 less successful. If we incorrectly anticipate technology developments, or
 have inadequate resources to develop our products to deal with changes in
 technology, our products could become obsolete.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | We compete
 in the electronics assembly alignment sensor market with larger companies. Our electronic assembly alignment sensor
 products compete with products made by larger machine vision companies, other
 optical sensor companies, and by solutions internally developed by our
 customers. Advances in machine vision technology in recent years have
 eliminated some, but not all, of the features that have differentiated our
 products from some of these competitors, and advances in other technologies
 could eliminate other advantages.                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | The market
 for surface mount capital equipment has become very price competitive.The electronics capital equipment market for
 surface mount technologies is becoming more mature, resulting in increased
 price pressure on suppliers of equipment. Consequently, our electronic
 assembly stand-alone system and alignment sensor products have become subject
 to increased levels of price competition and competition from other suppliers
 and technologies, including suppliers in Asia who have specifically designed
 their products to compete favorably against our products.                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Our
 stand-alone system products carry lower margins.We use a different distribution network to
 sell our stand-alone end-user systems products, and generate lower margins
 from these products, than the distribution system and margins from our
 electronic assembly alignment sensors and semiconductor products. Our profit
 margins may be negatively affected to the extent our stand-alone end-user
 systems products constitute a larger portion of our business.                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | We are
 exposed to credit risk through sales to our OEM customers and distributors of
 our stand-alone system products.We sell our products through three key OEM customers, and usually have
 significant credit exposure with respect to these customers. In addition, we
 sell our stand-alone inspection systems products through a network of
 international distributors. These distributors tend to be smaller in size
 with limited financial resources and access to capital. Although these
 distributors do not hold our products in inventory for re-sale, we are exposed
 to credit risk and would incur losses if they are unable to pay for the
 products they have purchased from us.                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Competitors
 in Asia may be able to compete favorably with us based on lower production
 and employee costs.
 We compete with large multinational systems companies in sales of stand-alone
 end-user systems products, many of which are able to take advantage of
 greater financial resources and larger sales distribution networks. We also
 compete with new Asian based suppliers of stand-alone end-user systems
 products, many of which may have lower overall production and employee costs
 and are willing to offer their products at lower selling prices to customers.                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | We are
 dependent upon outside suppliers for components of our products, and delays
 in or unavailability of those components would adversely affect our results. We use outside contractors to manufacture
 the components used in many of our products and some of the components we
 order require significant lead times that could affect our ability to sell
 our products if not available. In addition, if these components do not meet
 stringent quality requirements or become subject to obsolescence, there could
 be delays in product availability, and we could be required to make
 significant investments in designing replacement components.                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Our growth
 has been dependent on technical innovation, some of which was generated by
 our founder, and our growth could be impacted if we are unable to innovate in
 the future. Although
 our results are cyclical, our longer-term growth has been in the past, and we
 anticipate will be in the future, dependent upon our ability to introduce new
 and innovative products. Many of our product innovations were generated by
 our founder, Dr. Steven K. Case, who died in June 2009. Although we have
 devoted and continue to devote significant resources to research and
 development to support this innovation and believe we have talented
 scientists who have and will continue to develop significant new inventions,
 if we fail to create significant new product innovations, our market position
 would be negatively impacted.                              

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
 absence of significant market liquidity in our common stock could impact the
 ability of our shareholders to purchase and sell larger blocks, the
 attractiveness of our stock to institutional shareholders, and the market
 value  of our common stock.There were 6,891,350
 shares of our common stock outstanding as of February 28, 2011. Although our
 common stock is traded in the NASDAQ Global Market, in part because of the
 number of shares we have outstanding and available for trading, the daily
 trading volume in our stock is low, averaging less than 10,000 shares per
 day. Shareholders wishing to purchase or sell larger blocks of stock may not
 be able to do so quickly, and disposal by any shareholder of a significant
 block of stock could adversely affect the sale price in the marketplace.
 Further, institutional investors often have policies against investment in
 stock that is illiquid, and many institutional investors may elect not to
 purchase or hold our stock because of the inability to dispose of it. The
 reduced institutional interest, as well as the lack of current evaluations by
 securities analysts, has had and can be expected to continue to have a
 further adverse impact on the market price and liquidity of our common stock.

ITEM 2. PROPERTIES

We
lease a 60,217 square foot mixed office and warehouse facility built to our
specifications in Golden Valley, Minnesota, which functions as our corporate
headquarters and primary manufacturing facility for our sensor products,
including the sensors used in our stand-alone systems products and our
semiconductor products. We are close to finalizing a lease amendment for this
facility that will become effective upon the June 30, 2011 expiration of the
existing lease. The amendment provides that we will lease approximately 50,762
square feet of the current facility, commencing on July 1, 2011 and continuing
through December 31, 2018.

We
lease a 20,000 square foot mixed office and warehouse facility in Singapore
that serves as a sales, development and final assembly and integration facility
for our stand-alone systems products. The lease for our facility in Singapore
expires in July 2013. As of December 31, 2010, we also have operating leases in
Oregon (for our semiconductor products), the United Kingdom, and China, which
expire in December 2012, June 2011 and August 2011, respectively. We believe
that our leased facilities are adequate for our anticipated needs for the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

We are not currently subject
to any material pending or threatened legal proceedings.

ITEM 4. REMOVED AND RESERVED

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Table of Contents

PART II.

|        |                                                                                                             
|------- | ------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

Our
common stock is traded on the Nasdaq Global Market. The following table sets
forth, for the fiscal periods indicated, the high and low sales prices for our
common stock as reported by the Nasdaq Global Market. These prices do not
reflect adjustments for retail markups, markdowns or commissions.

|        |  |  |  |  |      |       |      |   |      |  |     |      |  |   |      | 
|------- |  |  |  |  | ---- | ----- | ---- | - | ---- |  | --- | ---- |  | - | ---- | 
|Quarter |  |  |  |  | 2010 |       | 2009 |  
|        |  |  |  |  | High |       | Low  |   | High |  | Low |     
|       
|First   |  |  |  |  | $    | 9.34  |      | $ | 6.32 |  | $   | 6.00 |  | $ | 4.00 | 
|Second  |  |  |  |  | $    | 11.96 |      | $ | 8.60 |  | $   | 5.90 |  | $ | 4.23 | 
|Third   |  |  |  |  | $    | 10.19 |      | $ | 8.11 |  | $   | 7.06 |  | $ | 4.98 | 
|Fourth  |  |  |  |  | $    | 9.80  |      | $ | 6.65 |  | $   | 7.45 |  | $ | 4.95 | 

As
of February 28, 2011, there were approximately 200 holders of record of common
stock and approximately 3,000 beneficial holders. We have never paid a dividend
on our common stock. Dividends are payable at the discretion of the Board of
Directors out of funds legally available. Our board has no current intention of
paying dividends.

Equity Compensation Plan Information

The
following table describes shares of our common stock that are available on
December 31, 2010 for purchase under outstanding stock-based awards, or
reserved for issuance under stock-based awards or other rights that may be
granted in the future, under our equity compensation plans:

|                                                            |  |                                                                                                          |         |                                                                                     |   |                                                                                                                                                 |  |  |         | 
|----------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- | ------- | ----------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|Plan Category                                               |  | (a)
 Number of
 securities 
 to be issued upon 
 exercise of 
 outstanding options,
 warrants and rights |         | (b)
 Weighted-average
 exercise price of
 outstanding
 options, warrants and rights |   | (c)
 Number of securities
 remaining available for
 future issuance under
 equity compensation plans
 (excluding those reflected in column (a)) | 
|Equity compensation plans approved by security
 holders     |  |                                                                                                          |         |                                                                                     |   |                                                                                                                                                 |  |  |         | 
|1998 Stock Incentive Plan (1)                               |  |                                                                                                          | 405,782 |                                                                                     | $ | 8.21                                                                                                                                            |  |  | 242,385 | 
|Stock Option Plan for Non-Employee Directors                |  |                                                                                                          | 108,000 |                                                                                     | $ | 13.27                                                                                                                                           |  |  |        | 
|Stock Grant Plan for Non-Employee Directors                 |  |                                                                                                          | N/A     |                                                                                     |   | N/A                                                                                                                                             |  |  | 20,000  | 
|Employee Stock Purchase Plan (2)                            |  |                                                                                                          | N/A     |                                                                                     |   | N/A                                                                                                                                             |  |  | 61,344  | 
|Equity compensation plans not approved by security
 holders |  |                                                                                                          |         |                                                                                     |   |                                                                                                                                                 |  |  |         | 
|Options issued to executives and certain other              |  |                                                                                                          |         |                                                                                     |   |                                                                                                                                                 |  |  |         | 
|employees upon initial employment (3)                       |  |                                                                                                          | 50,000  |                                                                                     | $ | 11.87                                                                                                                                           |  |  |        | 
|Total                                                       |  |                                                                                                          | 563,782 |                                                                                     | $ | 9.50                                                                                                                                            |  |  | 323,729 | 

|(1) | In addition to options,
 shares may be issued in the form of restricted stock awards, performance
 awards and other stock-based awards.                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Shares are issued based on
 employees elections to participate in the plan.                                                                                                                                                                                                                       
|   
|(3) | Represent options received
 by executives and certain other employees prior to 2003 upon their initial
 employment and granted on the same terms as those options granted under
 equity compensation plans approved by security holders. None of these options
 qualify as incentive stock options.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable

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Table of Contents

|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Results of Operations for the Two Years Ended December 31,
2010:

General Overview

Our
products are sold primarily into the electronics assembly, photovoltaic (solar)
cell manufacturing, semiconductor DRAM and Flash memory, and semiconductor
fabrication capital equipment markets, where we sell products both to original
equipment manufacturers of production equipment and to end-user customers that
produce circuit boards, solar cells and semiconductor wafers and devices.
Historically these markets have been very cyclical, with periods of rapid
growth as worldwide capacity is added to support increased consumer demand for
electronic products, and new capital equipment is purchased as a result of
technology changes in electronics components, such as miniaturization, and
changing production requirements. These periods of growth have historically
been followed by periods of excess capacity and reduced capital spending.

Our
results were favorably impacted in 2006 and 2007 as the worldwide demand for
cell phones, smart phones, laptops and other consumer electronics remained
strong, driving the need for increased production of printed circuit boards and
memory modules, and thereby increasing demand for our electronic assembly and
semiconductor products. After peaking in the third quarter of 2007, our revenue
declined sequentially each quarter through the first quarter of 2009, as our
results were negatively impacted by reduced levels of capital spending for
electronics manufacturing capacity brought about by the deepening weakness in
the global economy. New orders dropped off sharply late in the fourth quarter
of 2008 as the global economy fell into a severe recession, and our results for
2009 were adversely affected by the ongoing weakness in the global electronics
market.

Even
before the recession, we worked to improve the efficiencies of our operations.
In February 2008, we commenced plans to move a significant portion of our
systems-related product development and final assembly and integration to
Singapore. The transition of these functions to Singapore was substantially
complete by the end of the first quarter of 2009 and has resulted in lower
costs and a more focused R&D effort. Further, we consolidated manufacturing
operations for our semiconductor products into our Minneapolis, Minnesota
headquarters facility. Implementation of these actions to improve the
efficiency of our operations has not impacted any of our strategic growth
programs.

We
believe that continued and timely development of new products and enhancements
to existing products is essential to growing our position in the market. We
commit substantial resources to research and development efforts, which play a
critical role in maintaining and advancing our position as a leading provider
of optical sensors and systems.

The
global electronics market strengthened significantly in 2010. We experienced
particularly strong demand in the second quarter of 2010, as pent-up demand and
an improving economy led to significantly increased sales of alignment sensors
and our stand-alone solder paste inspection and AOI systems. Sales of sensors
continued at these strong levels throughout the remainder of 2010, while
systems sales moderated to more normal levels.

We
believe that (i) improving market conditions, (ii) the efficiencies in
operations we have implemented, (iii) the new products we have introduced and
expect to introduce in the next year, which we anticipate will generate
significant sales and improved margins, and will allow us to address the
various price points desired by our customers within the electronic assembly
market and (iv) the greater efficiencies we are realizing through our strategic
repositioning in Asia, will lead to improved operating results in 2011 and
future periods.

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Table of Contents

Segment Results

Our
business consists of two operating segments, the electronic assembly and
semiconductor segments. In the electronic assembly segment we design,
manufacture and sell optical process control sensors and inspection systems for
the electronic assembly and photovoltaic (solar) cell equipment markets. In the
semiconductor segment we design, manufacture and sell optical and other process
control sensors and related equipment for the semiconductor capital equipment
market. Segment information follows:

|                                    |  |                         |        |      |   |         |   |   |         |  
|----------------------------------- |  | ----------------------- | ------ | ---- | - | ------- | - | - | ------- | -
|                                    |  | Year Ended December 31, |       
|(In thousands)                      |  | 2010                    |        | 2009 |   | 2008    |  
|                                    |  |                         |        |      |   |         |   |   |         |  
|Revenue:                            |  |                         |        |      |   |         |   |   |         |  
|Electronic assembly                 |  | $                       | 50,967 |      | $ | 23,736  |   | $ | 40,193  |  
|Semiconductor                       |  |                         | 5,984  |      |   | 3,330   |   |   | 5,259   |  
|Total                               |  | $                       | 56,951 |      | $ | 27,066  |   | $ | 45,452  |  
|                                    |  |                         |        |      |   |         |   |   |         |  
|Gross margin:                       |  |                         |        |      |   |         |   |   |         |  
|Electronic assembly                 |  | $                       | 20,757 |      | $ | 7,061   |   | $ | 15,867  |  
|Semiconductor                       |  |                         | 4,205  |      |   | 2,144   |   |   | 3,198   |  
|Total                               |  | $                       | 24,962 |      | $ | 9,205   |   | $ | 19,065  |  
|                                    |  |                         |        |      |   |         |   |   |         |  
|Operating expense:                  |  |                         |        |      |   |         |   |   |         |  
|Electronic assembly                 |  | $                       | 18,643 |      | $ | 17,772  |   | $ | 26,206  |  
|Semiconductor                       |  |                         | 2,658  |      |   | 2,668   |   |   | 3,322   |  
|Total                               |  | $                       | 21,301 |      | $ | 20,440  |   | $ | 29,528  |  
|                                    |  |                         |        |      |   |         |   |   |         |  
|Income (loss) from operations:      |  |                         |        |      |   |         |   |   |         |  
|Electronic assembly                 |  | $                       | 2,114  |      | $ | (10,711 | ) | $ | (10,339 | )
|Semiconductor                       |  |                         | 1,547  |      |   | (524    | ) |   | (124    | )
|Total income (loss) from operations |  | $                       | 3,661  |      | $ | (11,235 | ) | $ | (10,463 | )
|Interest income and other           |  |                         | 268    |      |   | 539     |   |   | 1,193   |  
|Income (loss) before income taxes   |  | $                       | 3,929  |      | $ | (10,696 | ) | $ | (9,270  | )

Revenues

Our
revenues increased by 110% to $57.0 million in 2010 from $27.1 million in 2009
and decreased by 40% in 2009 from $45.5 million in 2008. The following table
sets forth, for the years indicated, revenues by product line (in thousands):

|                          |  |      |        |      |   |        |  |   |        | 
|------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                          |  | 2010 |        | 2009 |   | 2008   | 
|Electronic Assembly       |  |      |        |      |   |        |  |   |        | 
|Alignment Sensors         |  | $    | 25,537 |      | $ | 8,428  |  | $ | 20,250 | 
|SMT Inspection Systems    |  |      | 25,430 |      |   | 15,308 |  |   | 19,943 | 
|Total Electronic Assembly |  |      | 50,967 |      |   | 23,736 |  |   | 40,193 | 
|Semiconductor             |  |      | 5,984  |      |   | 3,330  |  |   | 5,259  | 
|Total                     |  | $    | 56,951 |      | $ | 27,066 |  | $ | 45,452 | 

Electronic
Assembly

Revenue
from sales of our alignment sensors increased by 203% to $25.5 million in 2010,
up from $8.4 million in 2009. Revenue from sales of our stand-alone SMT
inspection systems products increased
by 66% or $10.1 million to $25.4 million in 2010, up from $15.3 million in
2009. Revenue from sales of alignment sensors decreased by $11.8 million or 58%
in 2009, down from $20.2 million in 2008. Revenue from sales of our SMT
inspection systems products decreased by $4.6 million or 23% in 2009, down from
$19.9 million in 2008.

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Table of Contents

The
global recession caused severe weakness and disruption in our electronics
markets starting late in 2008 and throughout all of 2009, resulting in very low
levels of revenue in 2009 from both our alignment sensors and stand-alone SMT
inspection systems products. The global electronics market strengthened in
2010, returning to more normalized levels of equipment purchases and production
capacity additions. We believe that improved market conditions, combined with
favorable market acceptance of the new products we have recently introduced,
resulted in the higher revenue levels in 2010 compared to the same periods of
2009. Our revenue in 2010 benefited from initial shipment of solar wafer
alignment cameras to DEK, an equipment manufacturer for the photovoltaic cell
market.

In
addition to continued sales of our SE500 solder paste inspection (SPI) system,
we recorded solid sales of our new SE350 SPI system that was introduced in the
first quarter of 2010, and our new QX500 automated optical inspection (AOI)
system that was introduced in the second quarter of 2010. Sales of our SE500, SE350
and SE 300 Ultra solder paste inspection systems increased by over 100% to
$16.4 million in 2010 from $8.1 million in 2009. Our sales of QX500 and Flex
Ultra AOI system products increased by 26% to $7.2 million in 2010, up from
$5.7 million in 2009. Sales of our inspection system products were negatively
impacted in 2009 by the severe global economic recession. Sales of our SE 300
Ultra and SE500 solder paste inspection systems decreased by $3.0 million or
27% in 2009 to $8.1 million, while sales of our Flex AOI systems decreased by
$1.2 million or 17% in 2009 to $5.7 million.

We
believe that ongoing introduction of new system products, including those
accommodating dual production lanes, bigger circuit boards and addressing
different tiers of the market, will strengthen our competitive position in the
inspection market. Unlike revenue from our alignment sensors, which is closely
tied to the need for added production capacity for printed circuit boards, a
portion of our stand-alone SMT systems revenue is derived from the retro-fit of
existing production lines as companies seek to improve their production yields,
thereby reducing manufacturing costs.

We
believe that these new products, and technology trends toward smaller
components and increased production speeds, will contribute to increased demand
and higher revenue in 2011.

Export
revenue from alignment sensors and SMT inspection systems totaled $46.7 million
or 92% of electronic assembly revenue in 2010, compared to $20.2 million or 85%
of electronic assembly revenue in 2009. Sales to international customers
continue to be significant, as manufacturing of electronic components has
migrated offshore, particularly to China and other areas of Asia.

Semiconductor

Revenues
from sales of our semiconductor products increased by 80% to $6.0 million in
2010, up from $3.3 million in 2009. The increase in revenue in 2010 was due to
improving conditions in the market for semiconductor fabrication equipment
resulting from the better economic environment, coupled with favorable market
acceptance of our new WaferSense products. Revenues from sales of our
semiconductor products decreased by 37% or $1.9 million in 2009 to $3.3
million, down from $5.3 million in 2008. The decrease in revenue in 2009 was
due to the recession, difficult conditions in the market for semiconductor
fabrication equipment and declining revenue from our older wafer mapper and
frame grabber products.

We
anticipate that future growth in our semiconductor revenues, exclusive of
changes related to capital procurement cycles will come from our new
WaferSense products, a family of wireless, wafer-like precision measurement
tools for in-situ setup, calibration and process optimization in semiconductor
processing equipment. We have introduced a number of new WaferSense products
in recent years, including various leveling, gapping, teaching and vibration
sensors. We anticipate formal introduction of our new particle sensor in the
first half of 2011. WaferSense revenue increased by over 100% to $3.4 million
in 2010 from $1.6 million in 2009, after remaining virtually unchanged in 2009
compared to 2008.

Export
revenue from semiconductor products totaled $2.1 million or 35% of revenue in 2010,
compared to $1.0 million or 30% of revenue in 2009 and $2.4 million or 46% of
semiconductor revenue in 2008. The increase in the percentage of sales coming
from exports for our semiconductor products in 2010 reflects proportionately
higher WaferSense revenue, as these products tend to have a higher
concentration of international sales. The percentage of sales coming from
international markets decreased in 2009 due to a large proportional decrease in
sales of frame grabber products, which tend to generate significant
international sales.

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Cost of Revenue and Gross Margin

Electronic
Assembly

Cost
of revenue for our electronic assembly segment increased by 81% to $30.2
million in 2010, after decreasing 31% to $16.7 million in 2009, from $24.3
million in 2008. The increase in cost of revenue in 2010 was due to the
significantly higher sales in 2010, while the decrease in cost of revenue in
2009 was due to the significantly lower sales in 2009 compared to 2008. Cost of
revenue items fluctuating with the level of sales include raw materials, direct
labor and some factory overhead costs.

Gross
margin as a percentage of electronic assembly sales was 41% in 2010, compared
to 30% in 2009 and 39% in 2008. The improvement in gross margin percentage in
2010 was due to significantly increased sales of higher margin alignment
sensors, better manufacturing leverage resulting from substantially higher
production volumes over which to spread fixed manufacturing overhead costs, the
favorable impact of cost reduction programs and our new cost reduced SMT
inspection system products. Our next generation SE500 and new mid-range SE350
solder paste inspection systems, and our new QX500 automated optical inspection
(AOI) system are significantly cost reduced when compared to our earlier
generation inspection system products.

The electronic assembly market is highly price competitive, resulting in
continual pressure on our gross margins. We compensate for pricing pressure by
introducing new products with more features and improved performance and
through manufacturing cost reduction programs. For example, we believe our
next-generation SE500 and SE350 solder paste inspection systems and QX500
automated optical inspection (AOI) system combines a reduction in cost with
enhanced performance. Other recently introduced products including our solar
wafer alignment camera, embedded process verification (EPV) technology and the
embedded solder paste inspection solution we developed for DEK, have more
favorable margins than our existing products.

The
reduction in gross margin percentage in 2009 compared to 2008 was due to
significantly lower sales of higher margin alignment sensors, substantially
lower production volumes over which to spread fixed manufacturing overhead
costs, continued competitive pricing pressure for our products, particularly
older generation versions that are being replaced, and the overall impact of
the global recession.

Semiconductor

Cost
of revenue for our semiconductor segment increased by 50% to $1.8 million in
2010, after decreasing by 43% to $1.2 million in 2009, from $2.1 million in
2008. The increase in cost of revenue in 2010 was due to the significantly
higher sales in 2010, while the decrease in cost of revenue in 2009 was due to
the significantly lower sales in 2009 compared to 2008.

Gross
margin as a percentage of semiconductor sales was 70% in 2010, compared to 64%
in 2009 and 61% in 2008. Gross margin as a percentage of semiconductor sales
improved in 2010 and 2009 due to the cost benefit from consolidation of
manufacturing for our semiconductor products into our Minneapolis, Minnesota
headquarters, increased sales of higher margin WaferSense products and from
improved manufacturing leverage, resulting from higher production volumes over
which to spread fixed manufacturing overhead costs.

Operating Expenses

We
believe continued investment in research and development of new products,
coupled with continued investment in and development of our sales channel is
critical to future growth and profitability. We historically have maintained
research and development and sales and marketing expenses at relatively high
levels, even during periods of recession and downturn in our electronic
assembly and semiconductor capital equipment markets, as we continue to fund
development of important new products, and continue to invest in our sales
channels and develop new sales territories.

In
February 2008, we announced plans to move to Singapore a significant portion of
our systems-related product development and final assembly and integration. The
transition of systems-related product development to Singapore was
substantially complete by the end of the fourth quarter of 2008 and the
transition of final assembly and integration for our system products was
substantially complete by the end of the first quarter of 2009. The realignment
of our systems-related product development and final assembly and integration
to Singapore has resulted in lower costs and a more focused development effort.

In
response to the significant weakness in our markets and the global economy we
reduced our research and development, selling, general and administrative
workforce by approximately 20 employees from the start of the fourth quarter of
2008 through the end of the second quarter of 2009. Other cost saving measures
implemented in 2009 include salary reductions and reduced spending for
non-labor costs such as travel, supplies and the like. These cost saving
measures, combined with savings from our transition to Singapore, provided
significant annual expense savings. Implementation of the cost reduction
actions discussed above had no impact on any of our strategic growth programs;
work on our common hardware platforms for inspection, next generation
inspection technologies, or pursuit of new OEM contracts.

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Due
to the improving economy, we elected to restore salary levels for our employees
to pre-reduction levels in 2010. We have also added headcount, including
temporary labor, since January 1, 2010 and anticipate that there will be other
headcount additions, and costs will increase as business activity picks up and
revenue returns to pre-recession levels. However, many of the cost savings
measures that were put in place during 2008 and 2009 will continue to provide
meaningful savings for the foreseeable future.

Electronic
Assembly

Research
and development expenses for our electronic assembly segment were $6.3 million
or 12% of revenue in 2010, $6.0 million or 25% of revenue in 2009 and $8.8
million or 22% of revenue in 2008. The 5% increase in research and development
expenses in 2010 compared to 2009 was due to the restoration of pay for our employees
to levels prior to the pay cut in 2009, higher costs for proto-type materials
related to new product development and the addition of several new employees to
assist with ongoing development efforts. The 31% decrease in research and
development expenses in 2009 compared to 2008 resulted from a more focused and
efficient research and development effort due to transition of systems related
research and development to Singapore, as well as transition costs incurred in
2008. Throughout most of 2008, we maintained our Minneapolis-based systems
development team while we trained our new Singapore based team, resulting in
extra costs for wages, training, travel, and other costs, during the initial
start-up and training period. Singapore transition costs classified as research
and development expense in 2008 were $879,000. No transition costs were
incurred in 2009. In addition, the cost reduction actions implemented in
November 2008 and February 2009 contributed to the lower level of spending in
2009. We expect research and development expenses to increase in 2011 as we
continue to focus on new products, including new stand-alone inspection
offerings based on our industry leading 3D solder paste inspection technology,
2D inspection technology based on our strobe inspection module (SIM), and new
embedded inspection solutions for both solder paste and automated optical
inspection.

Selling,
general and administrative expenses for our electronic assembly segment were
$12.3 million or 24% of revenue in 2010, compared to $11.4 million or 48% of
revenue in 2009 and $12.7 million or 32% of revenue in 2008. The increase in
selling, general and administrative expenses in 2010 reflect higher sales and
marketing costs, including commissions for third party sales representatives
resulting from higher levels of SMT inspection system sales, higher incentive
compensation costs due, in part, to our improved financial performance,
partially offset by lower expense for doubtful accounts. Selling, general and
administrative expenses for 2009 include an $800,000 provision for doubtful
accounts related to a key distributor of our SMT inspection systems products.
The distributor remains in business, and is committed to paying us the amount
owed. The increase in the provision for doubtful accounts in 2009 was more than
offset by reductions in expense from our cost savings measures, reductions in
travel costs, lower commissions for third party sales representatives resulting
from the lower level of SMT inspection systems sales in 2009 compared to 2008
and lower foreign sales office expenses resulting from favorable foreign
exchange rates.

Semiconductor

Research
and development expenses for our semiconductor segment were $1.1 million or 18%
of revenue in 2010, $1.1 million or 33% of revenue in 2009, and $1.7 million or
31% of revenue in 2008. The decline in research and development expenses in
2009 resulted from the cost reduction actions that were implemented in November
2008 and February 2009, offset in part by a small increase in expense for
abandoned patents. Research and development for our semiconductor products
remain focused on our WaferSense family of precision measurement tools,
including new automated leveling, gapping, teaching, vibration and particle
sensors to assist with process optimization and yield improvement in the
semiconductor fabrication process.

Selling,
general and administrative expenses for our semiconductor segment were $1.5
million or 25% of revenue in 2010, $1.4 million or 41% of revenue in 2009 and
$1.5 million or 29% of revenue in 2008. The increase in 2010 reflects higher
third party commission payments attributable to the higher level of sales. The
decrease in selling, general and administrative expense in 2009 compared to
2008 was due to lower salary and consulting costs, and lower sales commissions
resulting from the reduced level of revenue.

Severance, Recruitment and Singapore Transition

The
transition of a significant portion of development and final assembly and
integration for our systems products to Singapore was substantially complete by
the end of the first quarter of 2009. Severance costs incurred in connection
with the February 2008 decision to move our systems related product development
and final assembly and integration to Singapore related entirely to our
electronic assembly segment and totaled $48,000 in 2009.

In
February 2009, we further reduced our workforce by 24 positions in response to
the weakening global economy, our transition to Singapore and our decision to
consolidate manufacturing for our semiconductor products in our Minneapolis
facility. Severance costs incurred in connection with the February 2009
workforce reduction totaled $315,000 in 2009, of which $201,000 related to our
electronic assembly segment and $114,000 related to our semiconductor segment.

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All
of the severance costs related to the Singapore transition, and the February
2009 workforce reduction have been classified as severance in our statement of
operations. All of the aforementioned severance costs incurred in 2009 were
paid prior to December 31, 2009. No severance costs were incurred 2010.

Interest Income and Other

Interest
income and other includes interest earned on investments, realized gains and
losses from sales of investments and gains and losses associated with foreign
currency transactions.

Interest
income and other decreased in 2010 and 2009 due to lower rates of interest
earned on invested funds and lower invested balances of cash and marketable
securities resulting from significant repurchases of our common stock in 2008
totaling $20.9 million. We incurred foreign currency transaction gains, net of
underlying currency hedges of $106,000 in 2010, compared to foreign currency
transaction losses, net of underlying currency hedges, of $92,000 in 2009 and
$176,000 in 2008.

Income Taxes

We
recorded income tax expense of $794,000 in 2010, reflecting an effective tax
rate of 20%, compared to an income tax benefit of $3.9 million in 2009,
reflecting an effective income tax benefit rate of 36%.

Our
effective tax rate for 2010 reflects the benefit of having a significant
portion of our operations in Singapore where corporate income tax rates are
substantially lower than the United States. Lower tax rates in foreign
jurisdictions favorably impacted our 2010 income tax rate by 11.5%. Other items
favorably impacting our income tax rate in 2010 include small benefits from
federal and state research and experimentation (R&D) tax credits.

Our
effective tax rate for 2009 was favorably impacted by 5.2% or $551,000 from
settlement of Internal Revenue Service audits of our 2006 and 2007 federal
income tax returns, including both the impact of settlement payments and
reversal of a portion of our reserve for income taxes. Other items impacting
our effective rate in 2009 include a small benefit from the research and
experimentation (R&D) tax credit, offset by higher tax expense in foreign
tax jurisdictions with tax rates differing from the U.S federal statutory rate.

We
file income tax returns in the U.S. federal jurisdiction, and various state and
foreign jurisdictions. During 2009, the Internal Revenue Service completed
audits of our 2006 and 2007 federal income tax returns. Our settlement with the
Internal Revenue Service did not have a material impact on our financial
condition. We are no longer subject to state and local income tax examinations
by tax authorities for years before 2007.

Due
to the carryback of our 2009 federal taxable loss to taxable years 2004 - 2006,
the Internal Revenue Service could potentially examine our federal income tax
returns for those years. The statute of limitations for examination of these
returns had previously expired. We received federal income tax refunds in 2010
of approximately $2.4 million from carry-back of our 2009 federal taxable loss.

Liquidity and Capital Resources

Our
cash and cash equivalents increased by $4.3 million during 2010 due to proceeds
from maturities and sales of marketable securities, net of purchases of $3.6
million, cash provided by operating activities of $1.8 million, proceeds from
exercise of stock options and issuance of common stock under our employee stock
purchase plan of $207,000, offset in part by capital expenditures of $1.3
million. Our cash and cash equivalents fluctuate in part because of maturities
of marketable securities, and investment of cash balances in marketable
securities, or from other sources of cash, in addition to marketable
securities. Accordingly, we believe the combined balances of cash and
marketable securities provide a more reliable indication of our available
liquidity. Combined balances of cash and marketable securities increased
slightly to $22.1 million as of December 31, 2010, up from $21.9 million as of
December 31, 2009.

Operating
activities generated $1.8 million of cash in 2010. Cash provided by operations
included net income of $3.1 million, which included non-cash expenses totaling
$2.8 million for depreciation and amortization, provision for doubtful accounts,
deferred taxes, non-cash gains and losses from foreign currency transactions
and stock compensation costs.

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Changes
in operating assets and liabilities using cash included increases in accounts
receivable of $2.9 million and inventories of $6.6 million. Changes in
operating assets and liabilities providing cash included increases in accounts
payable of $1.5 million, accrued expenses and other liabilities of $1.1
million, advance customer payments of $495,000 and decreases in income tax
refunds receivable of $2.1 million. The increase in accounts receivable and
advance customer payments was due to higher sales levels in the fourth quarter
of 2010, compared to the fourth quarter of 2009. Inventories were higher due to
increased material purchases to support the higher level of sales expected in
the second half of 2010 and early in 2011. The increase in accounts payable
resulted from increased material purchases and a conscious effort on our part
to extend the timing of vendor payments. Accrued expenses and other liabilities
increased due to higher warranty, commission and incentive compensation
accruals, resulting from higher sales levels and improved operating results.
Income tax refunds receivable decreased due to receipt of our anticipated tax
refund resulting from carryback of our 2009 net operating loss to prior
periods.

We
used $6.5 million of cash for operating activities in 2009. Cash used for
operations included our net loss of $6.8 million, which included non-cash expenses
totaling $3.0 million for depreciation and amortization, provision for doubtful
accounts, deferred taxes, non-cash gains and losses from foreign currency
transactions, gain and loss activity from marketable securities and stock
compensation expenses. Changes in operating assets and liabilities using cash
included increases in accounts receivable of $2.3 million and income tax
refunds receivable of $901,000 and decreases in accrued expenses of $2.2
million. Changes in operating assets and liabilities providing cash included
decreases in inventories of $1.7 million and increases in accounts payable of
$857,000. The increase in accounts receivable was due to higher sales levels in
the fourth quarter of 2009, compared to the fourth quarter of 2008. Income tax
refunds receivable were higher due to anticipated income tax refunds resulting
from carry-back of our 2009 taxable loss to earlier periods. The decrease in
accrued expenses resulted from lower levels of income tax reserves resulting
from settlement of Internal Revenue Service audits of our 2006 and 2007 federal
income tax returns, lower warranty accruals resulting from the lower level of
sales in 2009 and payment of accrued severance. Inventories were lower due to
reduced material purchases in response to sharply lower sales levels early in
2009 and the increase in sales in the latter half of the year. Accounts payable
were higher due to the timing of inventory purchases and a conscious effort on
our part to extend the timing of vendor payments.

Investing
activities provided $2.3 million of cash in 2010 compared to providing $6.0
million of cash in 2009. Changes in the level of investment in marketable
securities, resulting from the purchases, sales and maturities of those
securities generated $3.6 million of cash in 2010 and $7.0 million of cash in
2009.We
used $1.3 million of cash in 2010 and $1.0 million of cash in 2009 for the
purchase of fixed assets and capitalized patent costs.

Financing
activities provided $207,000 of cash in 2010 compared to providing $167,000 of
cash in 2009, all from the exercise of employee stock options and issuance of
common stock under our Employee Stock Purchase Plan.

At
December 31, 2010, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of establishing off-balance sheet arrangements or
other contractually narrow or limited purposes. We do not believe we are
exposed to any financing, liquidity, market or credit risk that could arise if
we had engaged in such relationships.

Except
for our obligations under facilities leases and purchase contracts, we had no
material commitments for expenditures as of December 31, 2010. Purchase
commitments for inventory can vary based on the volume of revenue and resulting
inventory requirements. While there were no material commitments, we evaluate
investment opportunities that come to our attention and could make a
significant commitment in the future.

The following
summarizes our contractual obligations at December 31, 2010, and the effect
such obligations are expected to have on our liquidity and cash flow in future
periods.

|                                            |  |       |        |                    |   |             |  |               |       |  |   |   | 
|------------------------------------------- |  | ----- | ------ | ------------------ | - | ----------- |  | ------------- | ----- |  | - | - | 
|December
 31, 2010 (in 000s)               |  | Total |        | Less Than 
 1 Year |   | 1  4 Years |  | After 4 Years |      
|                                            |  |       |        |                    |   |             |  |               |       |  |   |   | 
|Contractual Obligations:                    |  |       |        |                    |   |             |  |               |       |  |   |   | 
|Non-cancelable operating lease

obligations |  | $     | 1,638  |                    | $ | 982         |  | $             | 656   |  | $ |  | 
|Purchase obligations                        |  |       | 12,791 |                    |   | 12,791      |  |               |      |  |   |  | 
|Reserve for income taxes                    |  |       | 686    |                    |   |            |  |               | 686   |  |   |  | 
|Total contractual

cash obligations         |  | $     | 15,115 |                    | $ | 13,773      |  | $             | 1,342 |  | $ |  | 

We
lease a 60,217 square foot mixed office and warehouse facility built to our
specifications in Golden Valley, Minnesota, which functions as our corporate
headquarters and primary manufacturing facility for our sensor products,
including the sensors used in our stand-alone systems products and our semiconductor
products. We are close to finalizing a lease amendment for this facility that
will become effective upon the June 30, 2011 expiration of the existing lease.
The amendment provides that we will lease approximately 50,762 square feet of
the current facility, commencing on July 1, 2011 and continuing through
December 31, 2018. Future minimum lease payments due under the lease amendment
from July 1, 2011 through December 31, 2018 are approximately $5.1 million.

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Purchase
obligations are defined as agreements to purchase goods or services that are
enforceable and legally binding. Included in the purchase obligations category
above are obligations related to purchase orders for inventory purchases under
our standard terms and conditions and under negotiated agreements with vendors
and utilities. We expect to receive consideration (products or services) for
these purchase obligations. The purchase obligation amounts do not represent
all anticipated purchases in the future, but represent only those items for
which we are contractually obligated. The majority of our products and services
are purchased as needed, with no contractual commitment. Consequently, these
amounts will not provide a reliable indicator of our expected future cash outflows
on a stand-alone basis.

Our
cash, cash equivalents and marketable securities totaled $22.1 million at
December 31, 2010. We believe that on-hand cash, cash equivalents and
marketable securities, coupled with anticipated future cash flow from
operations, will be adequate to fund our cash flow needs for the foreseeable
future, including contractual obligations discussed above.

Related Party Transactions

We did not
engage in any related party transactions during the three year period ended December
31, 2010.

Inflation and Foreign Currency Transactions

Changes
in our revenues have resulted primarily because of changes in the level of unit
shipments and the relative strength of the worldwide electronics and
semiconductor fabrication capital equipment markets. We believe that inflation
has not had a significant effect on our operations. Virtually all of our
international export sales are negotiated, invoiced and paid in U.S. dollars.
Accordingly, although currency fluctuations do not significantly affect our
revenue per unit, they can influence the price competitiveness of our products
and the willingness of existing and potential customers to purchase units.

A
significant portion of our cost of goods, research and development and sales
and marketing costs are denominated in Singapore dollars. In addition, other
sales and marketing costs are denominated in British Pounds Sterling and the
Chinese Yuan, resulting from our sales offices located in the UK and China. Our
costs will increase, and our results will be negatively impacted in future
periods, when the U.S. dollar weakens relative to the currencies of the foreign
countries where we have operations. Our costs in U.S. dollar terms will
decrease and our results will be favorably impacted in future periods when the
U.S. dollar strengthens relative to the currencies of those countries where we
have operations.

We
enter into foreign currency swap agreements to hedge short-term inter-company
financing transactions with our subsidiaries in the United Kingdom and
Singapore. These currency swap agreements are structured to mature near the
last day of each quarter, and are designated as cash flow hedges. At December
31, 2010, we had two open swap agreements that were purchased on that day.

Recent Accounting Developments

In
October 2009, the Financial Accounting Standards Board (FASB) amended guidance
in FASB Accounting Standards CodificationTM
(ASC) 605, Revenue Recognition,
25, Multiple-Element Arrangements, to (1) modify the separation criteria by
eliminating the criterion that requires objective and reliable evidence of fair
value for the undelivered item(s), and (2) eliminates the use of the residual
method of allocation and instead requires that arrangement consideration be
allocated, at the inception of the arrangement, to all deliverables based on
their relative selling price. The FASB also issued guidance to amend the scope
of ASC 985, Software, 605,
Revenue Recognition, to exclude arrangements with tangible products
containing both software and non-software components that function together to
deliver a products essential functionality.

Under
the amended guidance, consideration is allocated to the deliverables at
inception of an arrangement using the relative selling price method. Selling
price is determined based on a selling price hierarchy, consisting of VSOE,
third party evidence or estimated selling price. Under the amended guidance, we
determined an estimated selling price for each of the elements in our multiple
elements sales based on the selling price hierarchy and allocated consideration
to the deliverables using the relative selling price method. We have adopted
the amended guidance effective January 1, 2010. The impact of adopting the
amended guidance was not material to our recognition of revenue in 2010 and
would have been insignificant in 2009.

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In
January 2010, the FASB issued ASU No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820)  Improving Disclosures
about Fair Value Measurements (ASU No. 2010-06). ASU No. 2010-06
requires new disclosures regarding significant transfers in and out of Levels 1
and 2, as well as information about activity in Level 3 fair value
measurements, including presenting information about purchases, sales,
issuances and settlements on a gross versus a net basis in the Level 3 activity
roll forward. In addition, ASU No. 2010-06 clarifies existing disclosures
regarding input and valuation techniques, as well as the level of disaggregation
for each class of assets and liabilities. ASU No. 2010-06 is effective for
interim and annual periods beginning after December 15, 2009, except for the
disclosures pertaining to purchases, sales, issuances and settlements in the
roll forward of Level 3 activity; those disclosures are effective for interim
and annual periods beginning after December 15, 2010. Our adoption of ASU No.
2010-06 effective January 1, 2010 had no current impact on our consolidated
financial position, results of operations or cash flows.

Critical Accounting Policies and Estimates

Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates, including those related to revenue
recognition, bad debts, warranty obligations, inventory valuation, intangible
assets, and income taxes. We base these estimates on historical experience and
on various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Our actual results may differ from these estimates under
different assumptions or conditions. The estimates and judgments that we
believe have the most effect on our reported financial position and results of
operations are as follows:

Revenue
Recognition.

Revenue
from all customers, including distributors, is recognized when all significant
contractual obligations have been satisfied and collection of the resulting
receivable is reasonably assured. Generally, revenues are recognized upon
shipment under FOB shipping point terms, and include shipping and handling
costs. Estimated returns and warranty costs are recorded at the time of sale.
Sales of some surface mount technology (SMT) systems products may require
customer acceptance due to performance or other acceptance criteria included in
the terms of sale. For these SMT product sales, revenue is recognized at the
time of customer acceptance. Our multiple deliverable arrangements typically
include the sale of an SMT inspection system, installation and training, and in
some cases, an extended warranty. Revenue from installation and training and
extended warranty are recognized as the services are provided.

When
a sale involves multiple elements, revenue is allocated to each respective
element in accordance with guidance codified in Accounting Standards
Codification (ASC) Topic 605-25 Accounting
for Revenue Arrangements with Multiple Deliverables. We determined
the estimated selling price for each of the elements in our multiple element
sales based on the selling price hierarchy and allocated consideration to the
deliverables using the relative selling price method.

Prior to
January 1, 2010, we recognized revenue based on multiple element revenue
guidance which required the existence of vendor specific objective evidence of
fair value (VSOE) for the undelivered elements in an arrangement in order for
us to account for the elements separately. We utilized the residual method of
allocation to account for delivered elements.

Costs related
to products delivered are recognized in the period revenue is recognized. Cost
of goods sold consists primarily of direct labor, allocated manufacturing
overhead, raw materials and components and excludes amortization of intangible
assets.

Allowance
for Doubtful Accounts.

We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. In making the
determination of the appropriate allowance for doubtful accounts, we consider
specific accounts, historical write-offs, changes in customer relationships and
credit worthiness and concentrations of credit risk. Specific accounts
receivable are written-off once a determination is made that the account is
uncollectible. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. The allowance for doubtful accounts is $1,005,000
as of December 31, 2010 and $1,049,000 as of December 31, 2009.

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Allowance
for Warranty Expenses.

We
provide for the estimated cost of product warranties at the time revenue is
recognized. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of
component suppliers, warranty obligations are affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from our estimates, revisions to the estimated warranty
liability would be required. The allowance for warranties was $702,000 at
December 31, 2010 and $488,000 at December 31, 2009.

Reserve
for Inventory Obsolescence.

We
write down inventory for estimated obsolescence or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected, or if in the future
we decide to discontinue sales and marketing of any of our products, additional
inventory write-downs may be required. At December 31, 2010, We had a reserve
for obsolete and excess inventory of $487,000 at December 31, 2010 and $580,000
at December 31, 2009

Valuation
of Intangible and Long-Lived Assets.

We
assess the impairment of identifiable intangible assets, long lived assets and
related goodwill whenever events or changes in circumstances indicate the
carrying value may not be recoverable. In addition, goodwill is tested for
impairment annually. Factors we consider important, which could trigger an impairment
review include the following:

| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Significant
 under-performance relative to expected historical or projected future
 operating results.                                
| |   |                                                                                                                                       
| |  | Significant
 changes in the manner of our use of the acquired assets or the strategy for
 our overall business.                       
| |   |                                                                                                                                       
| |  | Significant
 negative industry or economic trends.                                                                                    
| |   |                                                                                                                                       
| |  | Significant
 decline in our stock price for a sustained period; and our market
 capitalization relative to net book value.            
| |   |                                                                                                                                       
| |  | For
 intangible assets and long-lived assets, if the carrying value of the asset
 exceeds the undiscounted cash flows from such asset.
| |   |                                                                                                                                       
| |  | For
 goodwill, if the carrying value of the asset exceeds the fair value of the
 reporting unit.                                      

When
we determine that the carrying value of intangibles, long-lived assets and
related goodwill may not be recoverable based upon the existence of one or more
of the above indicators of impairment, we measure any potential impairment
based on a projected discounted cash flow method using a discount rate that we
believe is commensurate with the risk inherent in our current business model.
Annually, we also test for impairment of goodwill for each of our reporting
units by estimating their fair value, utilizing a discounted cash flow
methodology to determine a reasonable valuation. The evaluation of asset
impairment requires us to make assumptions about future cash flows over the
life of the asset being evaluated. These assumptions require significant
judgment and actual results may differ from assumed or estimated amounts.

Our
remaining goodwill at December 31, 2010 and 2009 in the amount of $569,000
relates to our semiconductor reporting unit. Our recent analyses performed in
the fourth quarters of 2010 and 2009 indicate that this goodwill is not
impaired. However, our conclusion could change in the future, if our
assumptions about future economic conditions, revenue growth or profitability
change. Any resulting impairment charge could have a material effect on our
financial position and results of operations in the future.

Income
Taxes.

Significant
judgment is required in determining worldwide income tax expense based upon tax
laws in the various jurisdictions in which we operate. We have established
reserves for uncertain tax positions by applying the more likely than not
criteria codified in ASC Topic 740 Accounting
for Income Taxes, under which the recognition threshold is met when
an entity concludes that a tax position, based solely on its technical merits,
is more likely than not to be sustained upon examination by the relevant tax
authority. All tax positions are analyzed periodically and adjustments are made
as events occur that warrant modification, such as the completion of audits or
the expiration of statutes of limitations, which may result in future charges
or credits to income tax expense.

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

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We
currently have significant deferred tax assets as a result of temporary
differences between taxable income on our tax returns and U.S. GAAP income,
research and development tax credit carry forwards and foreign net operating
loss carry forwards. A deferred tax asset generally represents future tax
benefits to be received when temporary differences previously reported in our
financial statements become deductible for income tax purposes, or when net operating
loss carry forwards or credits are applied against future taxable income, or
when tax credit carry forwards are utilized on our tax returns. We assess the
realizability of our deferred tax assets and the need for a valuation allowance
based on the guidance provided in current financial accounting standards.

Significant
judgment is required in determining the realizability of our deferred tax
assets. The assessment of whether valuation allowances are required considers,
among other matters, the nature, frequency and severity of any current and
cumulative losses, forecasts of future profitability, the duration of statutory
carry forward periods, our experience with loss carry forwards not expiring
unused and tax planning alternatives.

In
analyzing the need for valuation allowances, we first considered our history of
cumulative losses for U.S. income tax purposes over the past three years and
also gave significant consideration to our results for U.S. income tax purposes
over the past five years, as the economic cycles in our industry have tended to
average five years in length (from peak to trough). We also considered our
forecasts of future profitability, the duration of statutory carry forward
periods and tax planning alternatives. Finally, we considered the length and
severity of the recent global economic crisis, the impact that it had on our
operating results and our expectation for rebound given recent signs of
recovery in the global economy and more specifically in our markets. After
considering all of these factors, and after considering other significant
positive evidence, we concluded that a valuation allowance with respect to
substantially all of our U.S. based deferred tax assets was not required at
December 31, 2010.

Our
results in both 2008 and 2009 were negatively impacted by the recent global
economic slowdown, and we incurred a loss in the United States in both 2008 and
2009, where most of our net deferred tax assets are recorded. We recorded a
profit in 2010. Achievement of ongoing profitability in the United States will
be a significant factor in determining our continuing ability to carry these
deferred tax assets without recording a valuation allowance. The global
electronics market has significantly strengthened. We are seeing significant
demand from manufacturers of SMT assembly equipment who purchase our alignment
sensor products, and for our stand-alone solder paste inspection and AOI
systems. We believe that these improving market conditions, the efficiencies in
operations we have implemented, and the new products we have introduced and
anticipate introducing in the next year, will lead to improved operating
results and continued profitability in future periods. If future results from
our operations are less than projected, a valuation allowance may be required
against virtually all of our deferred tax assets, which could have a material
impact on our results of operations in the period in which it is recorded.

Deferred
tax assets at December 31, 2010, include net operating loss carry forwards
incurred in the UK by CyberOptics Ltd., which was acquired in 1999. The
utilization of these net operating loss carry forwards is dependent on
CyberOptics Ltd.s ability to generate sufficient UK taxable income during the
carry forward period.

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ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS 
CYBEROPTICS CORPORATION

|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---- | - | ------ | -
|                                                                                                                                                                                          |  | As of December 31, |       
|(In thousands, except share

information)                                                                                                                                                 |  | 2010               |        | 2009 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|ASSETS                                                                                                                                                                                    |  |                    |        |      |   |        |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Cash and cash equivalents                                                                                                                                                                 |  | $                  | 8,427  |      | $ | 4,177  |  
|Marketable securities                                                                                                                                                                     |  |                    | 6,384  |      |   | 14,557 |  
|Accounts receivable, less allowance for
 doubtful accounts of $1,005 at December 31, 2010 and $1,049 at December 31,
 2009                                                                |  |                    | 11,296 |      |   | 8,389  |  
|Inventories                                                                                                                                                                               |  |                    | 14,215 |      |   | 7,745  |  
|Income tax refunds

receivable                                                                                                                                                            |  |                    | 380    |      |   | 2,499  |  
|Other current assets                                                                                                                                                                      |  |                    | 1,232  |      |   | 1,130  |  
|Deferred tax assets, net                                                                                                                                                                  |  |                    | 2,317  |      |   | 2,040  |  
|Total current

assets                                                                                                                                                                     |  |                    | 44,251 |      |   | 40,537 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Marketable securities,

long-term                                                                                                                                                         |  |                    | 7,289  |      |   | 3,145  |  
|Equipment and leasehold improvements,

net                                                                                                                                                |  |                    | 1,896  |      |   | 1,921  |  
|Intangible and other assets,

net                                                                                                                                                         |  |                    | 435    |      |   | 642    |  
|Goodwill                                                                                                                                                                                  |  |                    | 569    |      |   | 569    |  
|Other assets                                                                                                                                                                              |  |                    | 173    |      |   | 163    |  
|Deferred tax assets, net                                                                                                                                                                  |  |                    | 3,621  |      |   | 4,160  |  
|Total

assets                                                                                                                                                                             |  | $                  | 58,234 |      | $ | 51,137 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|LIABILITIES AND

STOCKHOLDERS EQUITY                                                                                                                                                     |  |                    |        |      |   |        |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Accounts payable                                                                                                                                                                          |  | $                  | 5,206  |      | $ | 3,652  |  
|Advance customer

payments                                                                                                                                                                |  |                    | 1,152  |      |   | 657    |  
|Accrued expenses                                                                                                                                                                          |  |                    | 2,873  |      |   | 1,880  |  
|Total current

liabilities                                                                                                                                                                |  |                    | 9,231  |      |   | 6,189  |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Reserve for income taxes                                                                                                                                                                  |  |                    | 686    |      |   | 546    |  
|Total

liabilities                                                                                                                                                                        |  |                    | 9,917  |      |   | 6,735  |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Commitments and contingencies (notes 9

and
 14)                                                                                                                                          |  |                    |        |      |   |        |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Stockholders

equity:                                                                                                                                                                    |  |                    |        |      |   |        |  
|Preferred stock, no

par value, 5,000,000
 shares authorized, none outstanding                                                                                                            |  |                    |       |      |   |       |  
|Common stock, no par value, 25,000,000
 shares authorized, 6,891,262 shares issued and outstanding at December 31,
 2010 and 6,828,616 shares issued and outstanding at December 31, 2009 |  |                    | 30,330 |      |   | 29,732 |  
|Accumulated other

comprehensive loss                                                                                                                                                     |  |                    | (586   | )    |   | (768   | )
|Retained

earnings                                                                                                                                                                        |  |                    | 18,573 |      |   | 15,438 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Total

stockholders equity                                                                                                                                                               |  |                    | 48,317 |      |   | 44,402 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Total liabilities and

stockholders equity                                                                                                                                               |  | $                  | 58,234 |      | $ | 51,137 |  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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CONSOLIDATED STATEMENTS OF OPERATIONS 
CYBEROPTICS CORPORATION

|                                                                      |  |                         |        |      |   |         |  
|--------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- | -
|                                                                      |  | Year ended December 31, |       
|(In thousands, except per share

amounts)                             |  | 2010                    |        | 2009 |  
|                                                                      |  |                         |        |      |   |         |  
|Revenues                                                              |  | $                       | 56,951 |      | $ | 27,066  |  
|Cost of revenues                                                      |  |                         | 31,989 |      |   | 17,861  |  
|                                                                      |  |                         |        |      |   |         |  
|Gross margin                                                          |  |                         | 24,962 |      |   | 9,205   |  
|                                                                      |  |                         |        |      |   |         |  
|Research and development

expenses                                    |  |                         | 7,354  |      |   | 7,130   |  
|Selling, general and administrative
 expenses                         |  |                         | 13,766 |      |   | 12,766  |  
|Amortization of intangibles                                           |  |                         | 181    |      |   | 181     |  
|Severance                                                             |  |                         |       |      |   | 363     |  
|                                                                      |  |                         |        |      |   |         |  
|Income (loss) from

operations                                        |  |                         | 3,661  |      |   | (11,235 | )
|                                                                      |  |                         |        |      |   |         |  
|Interest income and other                                             |  |                         | 268    |      |   | 539     |  
|                                                                      |  |                         |        |      |   |         |  
|Income (loss) before

income taxes                                    |  |                         | 3,929  |      |   | (10,696 | )
|                                                                      |  |                         |        |      |   |         |  
|Income tax provision

(benefit)                                       |  |                         | 794    |      |   | (3,880  | )
|                                                                      |  |                         |        |      |   |         |  
|Net income

(loss)                                                    |  | $                       | 3,135  |      | $ | (6,816  | )
|                                                                      |  |                         |        |      |   |         |  
|Net income (loss) per share 

Basic                                  |  | $                       | .46    |      | $ | (1.00   | )
|Net income (loss) per share 

Diluted                                |  | $                       | .45    |      | $ | (1.00   | )
|                                                                      |  |                         |        |      |   |         |  
|Weighted average shares outstanding

 Basic                          |  |                         | 6,861  |      |   | 6,793   |  
|Weighted average and common

equivalent
 shares outstanding  Diluted |  |                         | 6,907  |      |   | 6,793   |  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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CONSOLIDATED STATEMENTS OF CASH FLOWS 
CYBEROPTICS CORPORATION

|                                                                                                |  |                         |         |      |   |        |  
|----------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | -
|                                                                                                |  | Year ended December 31, |        
|(In
 thousands)                                                                                 |  | 2010                    |         | 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |  |                         |         |      |   |        |  
|Net income (loss)                                                                               |  | $                       | 3,135   |      | $ | (6,816 | )
|Adjustments to reconcile net income (loss)
 to net cash provided (used)by operating activities: |  |                         |         |      |   |        |  
|Depreciation and amortization                                                                   |  |                         | 2,263   |      |   | 2,544  |  
|Provision for doubtful accounts                                                                 |  |                         | (27     | )    |   | 827    |  
|Deferred income tax provision (benefit)                                                         |  |                         | 331     |      |   | (684   | )
|Foreign currency transaction gains                                                              |  |                         | (129    | )    |   | (137   | )
|Excess tax benefits from equity
 compensation plans                                             |  |                         | (6      | )    |   | (11    | )
|Stock compensation expense                                                                      |  |                         | 391     |      |   | 449    |  
|Realized gains on available-for-sale debt
 securities                                           |  |                         |        |      |   | (27    | )
|Changes in operating assets and
 liabilities:                                                   |  |                         |         |      |   |        |  
|Accounts receivable                                                                             |  |                         | (2,875  | )    |   | (2,265 | )
|Inventories                                                                                     |  |                         | (6,624  | )    |   | 1,700  |  
|Income tax refunds receivable                                                                   |  |                         | 2,105   |      |   | (901   | )
|Other assets                                                                                    |  |                         | 147     |      |   | 173    |  
|Accounts payable                                                                                |  |                         | 1,456   |      |   | 857    |  
|Advance customer payments                                                                       |  |                         | 495     |      |   | (27    | )
|Accrued expenses and other liabilities                                                          |  |                         | 1,100   |      |   | (2,191 | )
|                                                                                                |  |                         |         |      |   |        |  
|Net cash provided (used) by operating
 activities                                               |  |                         | 1,762   |      |   | (6,509 | )
|                                                                                                |  |                         |         |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |  |                         |         |      |   |        |  
|Proceeds from maturities of
 available-for-sale marketable securities                           |  |                         | 16,965  |      |   | 12,683 |  
|Proceeds from sales of available-for-sale
 marketable securities                                |  |                         | 3,241   |      |   | 3,363  |  
|Purchases of available-for-sale marketable
 securities                                          |  |                         | (16,572 | )    |   | (9,095 | )
|Additions to equipment and leasehold
 improvements                                              |  |                         | (1,109  | )    |   | (729   | )
|Additions to patents                                                                            |  |                         | (202    | )    |   | (272   | )
|                                                                                                |  |                         |         |      |   |        |  
|Net cash provided by investing activities                                                       |  |                         | 2,323   |      |   | 5,950  |  
|                                                                                                |  |                         |         |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |  |                         |         |      |   |        |  
|Proceeds from exercise of stock options                                                         |  |                         | 26      |      |   | 38     |  
|Excess tax benefits from equity
 compensation plans                                             |  |                         | 6       |      |   | 11     |  
|Proceeds from issuance of common stock
 under Employee Stock Purchase Plan                      |  |                         | 175     |      |   | 118    |  
|Net cash provided by financing activities                                                       |  |                         | 207     |      |   | 167    |  
|                                                                                                |  |                         |         |      |   |        |  
|Effects of exchange rate changes on cash
 and cash equivalents                                  |  |                         | (42     | )    |   | 53     |  
|                                                                                                |  |                         |         |      |   |        |  
|Net increase (decrease) in cash and cash
 equivalents                                           |  |                         | 4,250   |      |   | (339   | )
|                                                                                                |  |                         |         |      |   |        |  
|Cash and cash equivalents  beginning of
 year                                                  |  |                         | 4,177   |      |   | 4,516  |  
|                                                                                                |  |                         |         |      |   |        |  
|Cash and cash equivalents  end of year                                                         |  | $                       | 8,427   |      | $ | 4,177  |  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME 
CYBEROPTICS CORPORATION

|                                                                                                                                       |  |              |       |               |   |               |   |               |      |        |   |        |   |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ------------- | - | ------------- | - | ------------- | ---- | ------ | - | ------ | - | - | ------ | -
|                                                                                                                                       |  |              |       | Accumulated   |   |               |   |               |     
|                                                                                                                                       |  |              |       | Other         |   |               |   | Total         |     
|                                                                                                                                       |  | Common Stock |       | Comprehensive |   | Retained      |   | Stockholders |     
|(In thousands)                                                                                                                         |  | Shares       |       | Amount        |   | Income (Loss) |   | Earnings      |      | Equity |  
|BALANCE, DECEMBER 31, 2008                                                                                                             |  |              | 6,769 |               | $ | 29,156        |   | $             | (530 | )      | $ | 22,254 |   | $ | 50,880 |  
|Excess tax benefit from exercise of stock
 options, net of deferred tax shortfall related to stock options and
 restricted stock units |  |              |      |               |   | (29           | ) |               |     |        |   |       |   |   | (29    | )
|Exercise of stock options, vesting of
 restricted stock units, net of shares exchanged as payment                                      |  |              | 25    |               |   | 38            |   |               |     |        |   |       |   |   | 38     |  
|Share issuances for compensation purposes                                                                                              |  |              | 14    |               |   | 64            |   |               |     |        |   |       |   |   | 64     |  
|Stock compensation                                                                                                                     |  |              |      |               |   | 385           |   |               |     |        |   |       |   |   | 385    |  
|Issuance of common stock under Employee
 Stock Purchase Plan                                                                           |  |              | 21    |               |   | 118           |   |               |     |        |   |       |   |   | 118    |  
|Comprehensive loss:                                                                                                                    |  |              |       |               |   |               |   |               |      |        |   |        |   |   |        |  
|Market value adjustments of marketable
 securities, net of reclassification adjustment                                                 |  |              |      |               |   |              |   |               | (257 | )      |   |       |   |   | (257   | )
|Cumulative translation adjustment                                                                                                      |  |              |      |               |   |              |   |               | 19   |        |   |       |   |   | 19     |  
|Net loss                                                                                                                               |  |              |      |               |   |              |   |               |     |        |   | (6,816 | ) |   | (6,816 | )
|Total
 comprehensive loss                                                                                                              |  |              |      |               |   |              |   |               |     |        |   |       |   |   | (7,054 | )
|BALANCE, DECEMBER 31, 2009                                                                                                             |  |              | 6,829 |               | $ | 29,732        |   | $             | (768 | )      | $ | 15,438 |   | $ | 44,402 |  
|Excess tax benefit from exercise of stock
 options, net of deferred tax shortfall related to stock options and
 restricted stock units |  |              |      |               |   | 6             |   |               |     |        |   |       |   |   | 6      |  
|Exercise of stock options, vesting of
 restricted stock units, net of shares exchanged as payment                                      |  |              | 28    |               |   | 26            |   |               |     |        |   |       |   |   | 26     |  
|Share issuances for compensation purposes                                                                                              |  |              | 4     |               |   | 38            |   |               |     |        |   |       |   |   | 38     |  
|Stock compensation                                                                                                                     |  |              |      |               |   | 353           |   |               |     |        |   |       |   |   | 353    |  
|Issuance of common stock under Employee
 Stock Purchase Plan                                                                           |  |              | 30    |               |   | 175           |   |               |     |        |   |       |   |   | 175    |  
|Comprehensive income:                                                                                                                  |  |              |       |               |   |               |   |               |      |        |   |        |   |   |        |  
|Market value adjustments of marketable
 securities, net of reclassification adjustment                                                 |  |              |      |               |   |              |   |               | (121 | )      |   |       |   |   | (121   | )
|Cumulative translation adjustment                                                                                                      |  |              |      |               |   |              |   |               | 303  |        |   |       |   |   | 303    |  
|Net income                                                                                                                             |  |              |      |               |   |              |   |               |     |        |   | 3,135  |   |   | 3,135  |  
|Total comprehensive income                                                                                                             |  |              |      |               |   |              |   |               |     |        |   |       |   |   | 3,317  |  
|BALANCE, DECEMBER 31, 2010                                                                                                             |  |              | 6,891 |               | $ | 30,330        |   | $             | (586 | )      | $ | 18,573 |   | $ | 48,317 |  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
CYBEROPTICS CORPORATION

NOTE 1  BUSINESS DESCRIPTION AND SIGNIFICANT
ACCOUNTING POLICIES

Description of Business
We are a leading global supplier of optical process control sensors and
inspection systems that are used to control the manufacturing process and to
ensure the quality of electronic circuit boards manufactured by our customers
using surface mount technology (SMT). We also manufacture and sell sensors that
assist with yield improvement in the photovoltaic cell manufacturing and semiconductor
wafer fabrication process.

Principles of ConsolidationThe consolidated financial statements include the
accounts of CyberOptics Corporation and its wholly-owned subsidiaries. In these
Notes to the Consolidated Financial Statements, these companies are
collectively referred to as CyberOptics, we, us, or our. All
significant inter-company accounts and transactions have been eliminated in
consolidation.

Subsequent EventsWe evaluated subsequent events through the issuance
date of our consolidated financial statements for the period ended December 31,
2010.

Use of EstimatesThe preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.

Cash EquivalentsWe consider all highly liquid investments purchased
with an original maturity of 90 days or less to be cash equivalents. Cash and
cash equivalents consist of funds maintained in demand deposit accounts, money
market accounts, corporate debt instruments and U.S. government backed
obligations. Some cash and cash equivalent balances may exceed federally
insured limits.

Marketable SecuritiesAll marketable securities are classified as
available-for-sale and consist of U.S. government backed obligations,
certificates of deposit, corporate debt instruments, asset backed securities or
equity securities. Marketable securities are classified as short-term or
long-term in the balance sheet based on their maturity date and expectations
regarding sales.

Available-for-sale
securities are carried at fair value, with unrealized gains and losses reported
as a separate component of stockholders equity until realized, or an
other-than temporary impairment is recognized in current operations. These fair
values are primarily determined using quoted market prices. The carrying
amounts of securities, for purposes of computing unrealized gains and losses,
are determined by specific identification. The cost of securities sold is also determined
by specific identification.

We monitor the
carrying value of our investments compared to their fair value to determine
whether an other-than-temporary impairment has occurred. If a decline in fair
value is determined to be other-than-temporary, an impairment charge related to
that specific investment is recorded in current operations.

InventoriesInventories are stated at the lower of cost or market,
with cost determined using the first-in, first-out (FIFO) method. Appropriate
consideration is given to deterioration, obsolescence, and other factors in
evaluating net realizable value.

Allowance for Doubtful AccountsAllowances for doubtful accounts are maintained for
estimated losses resulting from the inability of our customers to make required
payments. In making the determination of the appropriate allowance for doubtful
accounts, we consider specific accounts, historical write-offs, changes in
customer relationships and credit worthiness and concentrations of credit risk.
Specific accounts receivable are written-off once a determination is made that
the account is uncollectible.

Equipment and Leasehold ImprovementsEquipment and leasehold improvements are stated at
cost. Significant additions or improvements extending asset lives are capitalized,
while repairs and maintenance are charged to expense as incurred. In progress
costs are capitalized with depreciation beginning when assets are placed in
service. Depreciation is recorded using the straight-line method over the
estimated useful lives of the equipment, ranging from three to ten years.
Leasehold improvements are depreciated using the straight-line method over the
shorter of the asset useful life or the underlying lease term. Gains or losses
on dispositions are included in current operations.

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Intangible AssetsIdentified intangible assets (excluding goodwill),
consisting primarily of developed technology and trademarks, are being
amortized on a straight-line basis over periods ranging from four to ten years,
based upon their estimated life. The straight-line method of amortization
reflects an appropriate allocation of the cost of intangible assets to earnings
in proportion to the economic benefits obtained by us in each reporting period.

Intangible
assets subject to amortization and other long lived assets are reviewed for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable.

GoodwillGoodwill represents the excess of purchase price over
the fair value of net assets acquired in a business combination. We evaluate
the carrying value of goodwill for our reporting units during the fourth
quarter of each year and between annual evaluations if events occur or
circumstances change that indicate goodwill might be impaired. Goodwill is
tested by comparing the fair value of each reporting unit, as determined based
on their future estimated discounted cash flows, to the carrying value for each
reporting unit.

PatentsPatents consist of legal and patent registration costs
for protection of our proprietary technology. We amortize patent costs on a
straight-line basis over a three year period, based upon their estimated life.

Revenue RecognitionRevenue from all customers, including distributors, is recognized when
all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably
assured. Generally, revenues are recognized upon shipment under FOB shipping point terms, and include shipping and handling
costs. Estimated returns and warranty costs are recorded at the time of sale. Sales of some surface mount technology (SMT)
systems products may require customer acceptance due to performance or other acceptance criteria included in the terms of
sale. For these SMT product sales, revenue is recognized at the time of customer acceptance. Our multiple deliverable
arrangements typically include the sale of an SMT inspection system, installation and training, and in some cases, an
extended warranty. Revenue from installation and training and extended warranty are recognized as the services are provided,
typically within one month of shipment in the case of installation and training. Extended warranties are typically for a
second or third year of coverage beyond the basic one year warranty included with all SMT sales.

When a sale
involves multiple elements, revenue is allocated to each respective element in
accordance with guidance codified in Accounting Standards Codification (ASC)
Topic 605-25 Accounting for Revenue
Arrangements with Multiple Deliverables.

Prior to
January 1, 2010, we recognized revenue based on multiple element revenue
guidance which required the existence of vendor specific objective evidence of
fair value (VSOE) for the undelivered elements in an arrangement in order for
us to account for the elements separately. We utilized the residual method of
allocation to account for delivered elements.

In October
2009, the Financial Accounting Standards Board (FASB) amended guidance in FASB Accounting Standards CodificationTM
(ASC) 605, Revenue Recognition,
25, Multiple-Element Arrangements, to (1) modify the separation criteria by
eliminating the criterion that requires objective and reliable evidence of fair
value for the undelivered item(s), and (2) eliminates the use of the residual
method of allocation and instead requires that arrangement consideration be
allocated, at the inception of the arrangement, to all deliverables based on
their relative selling price. The FASB also issued guidance to amend the scope
of ASC 985, Software, 605,
Revenue Recognition, to exclude arrangements with tangible products
containing both software and non-software components that function together to
deliver a products essential functionality.

Under the amended guidance, consideration is allocated to the deliverables at inception of an
arrangement using the relative selling price method. Selling price is determined based on a selling price hierarchy,
consisting of VSOE, third party evidence or estimated selling price. Under the amended guidance, we determined an estimated
selling price for each of the elements in our multiple elements sales based on the selling price hierarchy and allocated
consideration to the deliverables using the relative selling price method. Management’s best estimate of the selling
price of an SMT machine is based on the cost buildup of the product and a reasonable margin based on geographic location and
market conditions. We have adopted the amended guidance effective January 1, 2010. The impact of adopting the amended
guidance was not material to our recognition of revenue in 2010 and would have been insignificant in 2009.

Costs related
to products delivered are recognized in the period revenue is recognized. Cost
of goods sold consists primarily of direct labor, manufacturing overhead, raw
materials and components and excludes amortization of intangible assets.

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Foreign Currency TranslationFinancial position and results of operations of our
international subsidiaries are measured using local currency as their
functional currency. Assets and liabilities of these operations are translated
at the exchange rates in effect at each fiscal year-end. Statements of
operations accounts are translated at the average rates of exchange prevailing
during the year. Translation adjustments arising from the use of differing
exchange rates from period to period are included as a cumulative translation
adjustment in stockholders equity. Foreign currency transaction gains and
losses are included as a component of net income (loss).

Research and DevelopmentResearch and development (R&D) costs, including
software development, are expensed when incurred. Software development costs
are required to be expensed until the point that technological feasibility and
proven marketability of the product are established; costs otherwise
capitalizable after such point also are expensed because they are
insignificant. All other R&D costs are expensed as incurred. R&D
expenses consist primarily of salaries, project materials, contract labor and
other costs associated with ongoing product development and enhancement
efforts.

Advertising CostsWe expense all advertising costs as incurred, and the
amounts were not material for all periods presented.

Income TaxesWe account for income taxes in accordance with
guidance outlined in ASC Topic 740-10-25 Accounting
for Uncertainty in Income Taxes, as it relates to income tax
liabilities. ASC Topic 740-10-25 establishes a more likely than not (i.e., a
likelihood of occurrence greater than fifty percent) minimum threshold a tax
position is required to meet before being recognized in the financial
statements. Under ASC Topic 740-10-25, the recognition threshold is met when an
entity concludes that a tax position, based solely on its technical merits, is
more likely than not to be sustained upon examination by the relevant taxing
authority. Those tax positions failing to qualify for initial recognition are
recognized in the first interim period in which they meet the more likely than
not standard, or are resolved through negotiation or litigation with the taxing
authority, or upon expiration of the statute of limitations. De-recognition of
a tax position that was previously recognized occurs when an entity
subsequently determines that a tax position no longer meets the more likely
than not threshold of being sustained.

Under ASC
Topic 740-10-25, only the portion of the liability that is expected to be paid
within one year is classified as a current liability. As a result, liabilities
expected to be resolved without the payment of cash (e.g. resolution due to the
expiration of the statute of limitations) or are not expected to be paid within
one year are not classified as current. It is our policy to record estimated
interest and penalties as income tax expense and tax credits as a reduction in
income tax expense.

Deferred
income taxes are recorded to reflect the tax consequences in future years of
differences between the financial reporting and tax bases of assets and
liabilities. Income tax expense is the sum of the tax currently payable and the
change in the deferred tax assets and liabilities during the period, excluding
changes in deferred tax assets recorded to equity and goodwill. Valuation
allowances are established when, in the opinion of management, there is
uncertainty that some portion or all of the deferred tax assets will not be
realized. We assess the realizability of our deferred tax assets and the need
for a valuation allowance based on guidelines codified in ASC Topic 740 Accounting for Income Taxes.

Net Income (Loss) Per ShareBasic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Net income (loss) per diluted share is computed
by dividing net income (loss) by the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
consist of common shares to be issued upon exercise of stock options,
restricted stock units and from participation in our employee stock purchase
plan, as calculated using the treasury stock method. Common equivalent shares
are excluded from the calculation of net loss per diluted share due to their
anti-dilutive effect.

Fair Value of Financial InstrumentsThe carrying amounts of financial instruments such as
cash equivalents, accounts receivable, income tax refunds receivable, other
assets, accounts payable, accrued expenses and other current liabilities
approximate the related fair values due to the short-term maturities of these
instruments.

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Stock-Based CompensationAll equity-based payments to employees, including
grants of employee stock options, are required to be recognized as an expense
in our consolidated statement of operations based on the grant date fair value
of the award. Under the modified prospective method, we are required to record
equity-based compensation expense for all awards granted after the date of
adoption, and for all unvested shares granted prior to the date of adoption. We
utilize the straight-line method of expense recognition over the awards
service period for our graded vesting options. The fair value of stock options,
granted before and after adoption has been determined using the Black-Scholes
model. The compensation expense recognized for all equity based awards is net
of estimated forfeitures, which is based on historical data. We have classified
equity based compensation within our statement of operations in the same manner
as our cash based employee compensation costs. We elected to use the
alternative transition guidance known as the short-cut method to determine
our pool of windfall tax benefits at January 1, 2006.

See Note 4 to
the Consolidated Financial Statements for additional information on stock-based
compensation.

Recent Accounting DevelopmentsIn October 2009, the FASB amended guidance in FASB Accounting Standards CodificationTM
(ASC) 605, Revenue Recognition,
25, Multiple-Element Arrangements, to (1) modify the separation criteria by
eliminating the criterion that requires objective and reliable evidence of fair
value for the undelivered item(s), and (2) eliminates the use of the residual
method of allocation and instead requires that arrangement consideration be
allocated, at the inception of the arrangement, to all deliverables based on
their relative selling price. The FASB also issued guidance to amend the scope
of ASC 985, Software, 605, Revenue
Recognition, to exclude arrangements with tangible products containing both
software and non-software components that function together to deliver a
products essential functionality.

Under the
amended guidance, consideration is allocated to the deliverables at inception
of an arrangement using the relative selling price method. Selling price is
determined based on a selling price hierarchy, consisting of VSOE, third party
evidence or estimated selling price. Under the amended guidance, we determined an
estimated selling price for each of the elements in our multiple elements sales
based on the selling price hierarchy and allocated consideration to the
deliverables using the relative selling price method. We have adopted the
amended guidance effective January 1, 2010. The impact of adopting the amended
guidance was not material to our recognition of revenue in 2010 and would have
been insignificant in 2009.

In January
2010, the FASB issued ASU No. 2010-06, Fair
Value Measurements and Disclosures (Topic 820)  Improving Disclosures about
Fair Value Measurements (ASU No. 2010-06). ASU No. 2010-06
requires new disclosures regarding significant transfers in and out of Levels 1
and 2, as well as information about activity in Level 3 fair value measurements,
including presenting information about purchases, sales, issuances and
settlements on a gross versus a net basis in the Level 3 activity roll forward.
In addition, ASU No. 2010-06 clarifies existing disclosures regarding input and
valuation techniques, as well as the level of disaggregation for each class of
assets and liabilities. ASU No. 2010-06 is effective for interim and annual
periods beginning after December 15, 2009, except for the disclosures
pertaining to purchases, sales, issuances and settlements in the roll forward
of Level 3 activity; those disclosures are effective for interim and annual
periods beginning after December 15, 2010. Our adoption of ASU No. 2010-06
effective January 1, 2010 had no current impact on our consolidated financial position,
results of operations or cash flows.

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Comprehensive Income (Loss)Components of comprehensive income (loss) include net
income (loss), foreign-currency translation adjustments, unrealized gains
(losses) on available-for-sale securities and reclassification adjustments. At
December 31, 2010 and 2009, components of accumulated other comprehensive
income (loss) is as follows:

|                                                                                                        |  |                                |      |                                             |   |                                       |   |   |      |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---- | ------------------------------------------- | - | ------------------------------------- | - | - | ---- | -
|(In
 thousands)                                                                                         |  | Foreign
 Currency
 Translation |      | Net
 UnrealizedGains
 (Losses) onSecurities |   | Accumulated
 OtherComprehensive
 Loss |  
|                                                                                                       
|Balance December 31, 2008                                                                               |  | $                              | (906 | )                                           | $ | 376                                   |   | $ | (530 | )
|Unrealized losses on investments, net of
 tax of $132                                                   |  |                                |     |                                             |   | (240                                  | ) |   | (240 | )
|Reclassification adjustment for realized
 gains and impairment losses on investments, net of tax of $10 |  |                                |     |                                             |   | (17                                   | ) |   | (17  | )
|Translation adjustments                                                                                 |  |                                | 19   |                                             |   |                                      |   |   | 19   |  
|Other comprehensive income (loss)                                                                       |  |                                | 19   |                                             |   | (257                                  | ) |   | (238 | )
|                                                                                                        |  |                                |      |                                             |   |                                       |   |   |      |  
|Balance December 31, 2009                                                                               |  | $                              | (887 | )                                           | $ | 119                                   |   | $ | (768 | )
|Unrealized losses on investments, net of
 tax of $64                                                    |  |                                |     |                                             |   | (121                                  | ) |   | (121 | )
|Translation adjustments                                                                                 |  |                                | 303  |                                             |   |                                      |   |   | 303  |  
|Other comprehensive income (loss)                                                                       |  |                                | 303  |                                             |   | (121                                  | ) |   | 182  |  
|                                                                                                        |  |                                |      |                                             |   |                                       |   |   |      |  
|Balance December 31, 2010                                                                               |  | $                              | (584 | )                                           | $ | (2                                    | ) | $ | (586 | )

Net unrealized
gains (losses) on available-for-sale securities include deferred tax assets of
$1,000 at December 31, 2010 and deferred tax liabilities of $63,000 at December
31, 2009.

NOTE 2  MARKETABLE SECURITIES

Investments in
marketable securities classified as available-for-sale with a carrying amount
of $13,673,000 at December 31, 2010 and $17,702,000 at December 31, 2009
consist of the following:

|                                                       |  |                   |       |                   |   |                    |  |                 |     |   |   |       | 
|------------------------------------------------------ |  | ----------------- | ----- | ----------------- | - | ------------------ |  | --------------- | --- | - | - | ----- | 
|                                                       |  | December 31, 2010 |      
|(In
 thousands)                                        |  | Cost              |       | Unrealized
 Gains |   | Unrealized
 Losses |  | Recorded
 Basis |    
|                                                      
|U.S.
 government and agency obligations                |  | $                 | 3,178 |                   | $ | 7                  |  | $               |    |   | $ | 3,185 | 
|Corporate
 debt securities and certificates of deposit |  |                   | 3,197 |                   |   | 2                  |  |                 |    |   |   | 3,199 | 
|Marketable
 securities  short-term                    |  | $                 | 6,375 |                   | $ | 9                  |  | $               |    |   | $ | 6,384 | 
|                                                       |  |                   |       |                   |   |                    |  |                 |     |   |   |       | 
|U.S.
 government and agency obligations                |  | $                 | 4,809 |                   | $ | 17                 |  | $               | (1  | ) | $ | 4,825 | 
|Corporate
 debt securities and certificates of deposit |  |                   | 2,208 |                   |   | 4                  |  |                 | (3  | ) |   | 2,209 | 
|Asset backed
 securities                               |  |                   | 200   |                   |   | 3                  |  |                 |    |   |   | 203   | 
|Equity
 securities                                     |  |                   | 84    |                   |   |                   |  |                 | (32 | ) |   | 52    | 
|Marketable securities  long-term                      |  | $                 | 7,301 |                   | $ | 24                 |  | $               | (36 | ) | $ | 7,289 | 

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|                                                       |  |                   |        |                   |   |                    |  |                 |     |   |   |        | 
|------------------------------------------------------ |  | ----------------- | ------ | ----------------- | - | ------------------ |  | --------------- | --- | - | - | ------ | 
|                                                       |  | December 31, 2009 |       
|(In
 thousands)                                        |  | Cost              |        | Unrealized
 Gains |   | Unrealized
 Losses |  | Recorded
 Basis |    
|U.S.
 government and agency obligations                |  | $                 | 11,199 |                   | $ | 158                |  | $               |    |   | $ | 11,357 | 
|Corporate
 debt securities and certificates of deposit |  |                   | 3,180  |                   |   | 20                 |  |                 |    |   |   | 3,200  | 
|Marketable securities  short-term                     |  | $                 | 14,379 |                   | $ | 178                |  | $               |    |   | $ | 14,557 | 
|                                                       |  |                   |        |                   |   |                    |  |                 |     |   |   |        | 
|U.S.
 government and agency obligations                |  | $                 | 2,757  |                   | $ | 47                 |  | $               |    |   | $ | 2,804  | 
|Corporate
 debt securities                             |  |                   | 101    |                   |   |                   |  |                 |    |   |   | 101    | 
|Asset backed
 securities                               |  |                   | 200    |                   |   | 10                 |  |                 |    |   |   | 210    | 
|Equity
 securities                                     |  |                   | 84     |                   |   |                   |  |                 | (54 | ) |   | 30     | 
|Marketable securities  long-term                      |  | $                 | 3,142  |                   | $ | 57                 |  | $               | (54 | ) | $ | 3,145  | 

Our investment
in equity securities was in a $32,000 unrealized loss position at December 31,
2010 and a $54,000 unrealized loss position at December 31, 2009, due to weak
economic and stock market conditions. We intend to hold this security
indefinitely and expect a recovery in value as economic and market conditions
continue to improve.

Our
investments in long-term marketable debt securities all have maturities of less
than five years. At December 31, 2010, marketable debt securities valued at
$10,578,000 were in an unrealized gain position totaling $33,000. At December
31, 2010, marketable debt securities valued at $3,043,000 were in an
insignificant unrealized loss position totaling $4,000 (all had been in an
unrealized loss position for less than twelve months). At December 31, 2009,
marketable debt securities valued at $16,463,000 were in an unrealized gain position
totaling $235,000. At December 31, 2009, marketable debt securities valued at
$1,209,000 were in an insignificant unrealized loss position totaling several
hundred dollars (all had been in an unrealized loss position for less than
twelve months).

Net pre-tax
unrealized losses for marketable securities of $3,000 at December 31, 2010 and
net pre-tax unrealized gains for marketable securities of $181,000 at December
31, 2009 were recorded as a component of accumulated other comprehensive income
(loss) in stockholders equity. In 2010 we received proceeds of $3,241,000 from
the sale of marketable securities. No gain or loss was recognized on any of the
sales in 2010. In 2009, we recognized a gain of $27,000 from the sale of
marketable debt securities and received sale proceeds totaling $3,363,000.

NOTE 3  FAIR VALUE MEASUREMENTS

We determine
the fair value of our assets and liabilities based on the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value maximize the use of observable
inputs and minimize the use of unobservable inputs. We use a fair value
hierarchy with three levels of inputs, of which the first two are considered
observable and the last unobservable, to measure fair value: The fair value
hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1). The next highest priority is based
on quoted prices for similar assets or liabilities in active markets or quoted
prices for identical or similar assets or liabilities in non-active markets or
other observable inputs (Level 2). The lowest priority is given to unobservable
inputs (Level 3). The following provides information regarding fair value
measurements for our cash equivalents and marketable securities as of December
31, 2010 and 2009 according to the three-level fair value hierarchy:

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|                                                      |  |                                                    |        |                    |   |                   |  |              |        |  |   |   | 
|----------------------------------------------------- |  | -------------------------------------------------- | ------ | ------------------ | - | ----------------- |  | ------------ | ------ |  | - | - | 
|                                                      |  | Fair Value Measurements at December 31, 2010 Using |       
|                                                     
|                                                      |  |                                                    |        | Quoted Prices in   |   | Significant Other |  | Significant  |       
|                                                      |  |                                                    |        | Active Markets for |   | Observable        |  | Unobservable |       
|                                                      |  | Balance                                            |        | Identical Assets   |   | Inputs            |  | Inputs       |       
|(In thousands)                                        |  | December 31, 2010                                  |        | (Level 1)          |   | (Level 2)         |  | (Level 3)    |       
|                                                      |  |                                                    |        |                    |   |                   |  |              |        |  |   |   | 
|U.S. government and agency obligations                |  | $                                                  | 8,010  |                    |   |                  |  | $            | 8,010  |  |   |  | 
|Corporate debt securities and certificates of deposit |  |                                                    | 5,408  |                    |   |                  |  |              | 5,408  |  |   |  | 
|Asset backed securities                               |  |                                                    | 203    |                    |   |                  |  |              | 203    |  |   |  | 
|Equity securities                                     |  |                                                    | 52     |                    |   | 52                |  |              |       |  |   |  | 
|Total                                                 |  | $                                                  | 13,673 |                    | $ | 52                |  | $            | 13,621 |  | $ |  | 

|                                                      |  |                                                    |        |                    |   |                   |  |              |        |  |   |   | 
|----------------------------------------------------- |  | -------------------------------------------------- | ------ | ------------------ | - | ----------------- |  | ------------ | ------ |  | - | - | 
|                                                      |  | Fair Value Measurements at December 31, 2009 Using |       
|                                                     
|                                                      |  |                                                    |        | Quoted Prices in   |   | Significant Other |  | Significant  |       
|                                                      |  |                                                    |        | Active Markets for |   | Observable        |  | Unobservable |       
|                                                      |  | Balance                                            |        | Identical Assets   |   | Inputs            |  | Inputs       |       
|(In thousands)                                        |  | December 31, 2009                                  |        | (Level 1)          |   | (Level 2)         |  | (Level 3)    |       
|                                                      |  |                                                    |        |                    |   |                   |  |              |       
|U.S. government and agency obligations                |  | $                                                  | 14,161 |                    |   |                  |  | $            | 14,161 |  |   |  | 
|Corporate debt securities and certificates of deposit |  |                                                    | 3,301  |                    |   |                  |  |              | 3,301  |  |   |  | 
|Asset backed securities                               |  |                                                    | 210    |                    |   |                  |  |              | 210    |  |   |  | 
|Equity securities                                     |  |                                                    | 30     |                    |   | 30                |  |              |       |  |   |  | 
|Total                                                 |  | $                                                  | 17,702 |                    | $ | 30                |  | $            | 17,672 |  | $ |  | 

During the years ended December 31, 2010 and 2009 there were no significant transfers to or from the
three level hierarchy. A significant transfer is recognized when the inputs used to value a security have changed which merit
a transfer between the disclosed levels of the valuation hierarchy.

The fair value for our U.S.
government and agency obligations, corporate debt securities and certificates
of deposit and asset backed securities are determined based on valuations
provided by external investment managers who obtain them from a variety of
industry standard data providers. The fair value for our equity securities is
based on a quoted market price obtained from an active market.

The carrying amounts of
financial instruments such as cash equivalents, accounts receivable, other
assets, accounts payable, accrued expenses and other current liabilities
approximate the related fair values due to the short-term maturities of these
instruments. Non-financial assets such as equipment and leasehold improvements,
goodwill and intangible assets are subject to non-recurring fair value
measurements if they are deemed impaired. We had no re-measurements of
non-financial assets to fair value in 2010 or 2009. Our foreign currency swap
agreements are structured to mature on the last day of each quarter. The fair
value associated with these agreements is inconsequential and represents a
Level 2 measurement.

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NOTE 4  ACCOUNTING FOR STOCK BASED COMPENSATION

Share Based Compensation Information

The following is a summary of
pre-tax equity based compensation expense for the two year period ended
December 31, 2010:

|                                                          |  |      |     |      |   |     | 
|--------------------------------------------------------- |  | ---- | --- | ---- | - | --- | 
|(In
 thousands)                                           |  | 2010 |     | 2009 |  
|                                                          |  |      |     |      |   |     | 
|Pre-tax equity compensation
 expense                      |  | $    | 391 |      | $ | 449 | 
|Income tax benefits related
 to equity based compensation |  | $    | 109 |      | $ | 142 | 

Pre-tax equity compensation
expense for 2010 includes $266,000 for stock options and restricted stock
units, $87,000 for our employee stock purchase plan and $38,000 for 4,000
shares issued to board members for compensation purposes (weighted average
grant date fair value of $9.45). Pre-tax equity compensation expense for 2009
includes $323,000 for stock options and restricted stock units, $62,000 for our
employee stock purchase plan and $64,000 for 13,775 shares issued to board
members and officers for compensation purposes (weighted average grant date
fair value of $4.67).

We use historical data to
estimate pre-vesting forfeitures. At December 31, 2010, the total unrecognized
compensation cost related to non-vested equity based compensation arrangements
was $894,000 and the related weighted average period over which it is expected
to be recognized is 2.4 years. The total fair value of shares vested was $251,000
in 2010 and $274,000 in 2009.

The fair values of the
options granted to our employees were estimated on the date of grant using the
Black-Scholes model. The Black-Scholes valuation model incorporates ranges of
assumptions that are disclosed in the table below. The risk-free interest rate
is based on the United States Treasury yield curve at the time of grant with a
remaining term equal to the expected life of the awards. We estimated the
expected term for our graded vesting options, representing the length of time
in years that the options are expected to be outstanding, using the simplified
method as specified in Staff Accounting Bulletin No. 107, Valuation of
Share-Based Payment Arrangements for Public Companies. We continued to use the
simplified method in 2010 and 2009 because our historical exercise experience
is not expected to be representative of exercise patterns in the future, due to
our recent restructuring activities and employee turnover. Expected volatility
was computed based on historical fluctuations in the daily price of our common
stock.

For stock options granted
during the two year period ended December 31, 2010, we utilized the fair value
of our common stock on the date of grant and employed the following key
assumptions in computing fair value using the Black-Scholes option-pricing
model:

|                                           |  |      |             |      |  |             | 
|------------------------------------------ |  | ---- | ----------- | ---- |  | ----------- | 
|                                           |  | 2010 |             | 2009 | 
|                                          
|Risk-free interest rates                   |  |      | 1.98%-2.75% |      |  | 2.09%-2.29% | 
|Expected life in years                     |  |      | 4.75        |      |  | 4.75        | 
|Expected volatility                        |  |      | 48%-52%     |      |  | 49%-53%     | 
|Expected dividends                         |  |      | None        |      |  | None        | 
|Weighted average fair value
 on grant date |  |      | $4.20       |      |  | $2.29       | 

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Stock Options

We have two stock incentive
plans that are administered under the supervision of the Compensation Committee
of the Board of Directors which have 756,167 shares of common stock reserved in
the aggregate for issuance of options and other stock based benefits, including
restricted stock units, to employees, officers and others. Reserved shares
underlying canceled options are available for future grant under our active
plans. Options are granted at an option price per share equal to or greater
than the market value at the date of grant. Generally, options granted to
employees vest over a four-year period and expire five, seven or ten years
after the date of grant. The plans allow for option holders to tender shares of
our common stock as consideration for the option price provided that the
tendered shares have been held by the option holder at least six months. As of
December 31, 2010, there are 242,385 shares of common stock available for
future issuance under these plans. In addition, there are 50,000 shares
reserved and included in the plan summaries below that are not part of the two
stock incentive plans.

The following is a summary of
stock option activity for each of the years in the two year period ended
December 31, 2010:

|                                |  |                         |         |      |  |          |  
|------------------------------- |  | ----------------------- | ------- | ---- |  | -------- | -
|                                |  | Year ended December 31, |        
|Shares                          |  | 2010                    |         | 2009 | 
|                                |  |                         |         |      |  |          |  
|Outstanding, beginning of
 year |  |                         | 549,095 |      |  | 715,646  |  
|Granted                         |  |                         | 106,167 |      |  | 45,000   |  
|Exercised                       |  |                         | (66,500 | )    |  | (16,250  | )
|Expired                         |  |                         | (57,625 | )    |  | (143,576 | )
|Forfeited                       |  |                         |        |      |  | (51,725  | )
|Outstanding, end of year        |  |                         | 531,137 |      |  | 549,095  |  
|                               
|Exercisable                     |  |                         | 336,471 |      |  | 412,328  |  

|                                           |  |      |       |      |   |       | 
|------------------------------------------ |  | ---- | ----- | ---- | - | ----- | 
|Weighted
 average exercise price per share |  | 2010 |       | 2009 |  
|                                           |  |      |       |      |   |       | 
|Outstanding, beginning of
 year            |  | $    | 10.04 |      | $ | 10.44 | 
|Granted                                    |  | $    | 9.59  |      | $ | 5.13  | 
|Exercised                                  |  | $    | 5.97  |      | $ | 4.30  | 
|Expired                                    |  | $    | 13.47 |      | $ | 12.11 | 
|Forfeited                                  |  | $    |      |      | $ | 7.34  | 
|Outstanding, end of year                   |  | $    | 10.09 |      | $ | 10.04 | 
|                                           |  |      |       |      |   |       | 
|Exercisable                                |  | $    | 11.44 |      | $ | 11.36 | 

The intrinsic value of an
option is the amount by which the fair value of the underlying stock exceeds
its exercise price. For options outstanding at December 31, 2010, the weighted
average remaining contractual term was 4.25 years and the aggregate intrinsic
value was $519,000. For options exercisable at December 31, 2010, the weighted
average remaining contractual term was 3.27 years and the aggregate intrinsic
value was $223,000. The aggregate intrinsic value of stock options exercised
was $113,000 in 2010 and $32,000 in 2009. We received proceeds of $26,000 and
realized an income tax benefit of $6,000 from the exercise of stock options in
2010. New shares are issued for all option exercises, upon vesting of
restricted stock units, for share issuances to board members and others or for
share issuances under our Employee Stock Purchase Plan.

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Restricted Stock Units

Our 1998 Stock Incentive Plan
also permits our Compensation Committee to grant other stock-based benefits,
including restricted stock units. Restricted stock units are valued at a price
equal to the fair market value of our common stock on the date of grant,
generally vest over a four year period and entitle the holders to one share of
our common stock for each restricted unit. The weighted average grant date fair
value for each restricted stock unit was $8.69 in 2010 and $4.69 in 2009. The
aggregate fair value of outstanding restricted stock units based on the closing
share price of our common stock as of December 31, 2010 was $279,000. The
aggregate fair value of restricted stock units that vested, based on the
closing share price of our common stock on the vesting date, was $90,000 for
the year ended December 31, 2010 and $80,000 for the year ended December 31,
2009.

A summary of activity in
non-vested restricted stock units for the year ended December 31, 2010 follows:

|                                   |  |        |        |                    |   |      | 
|---------------------------------- |  | ------ | ------ | ------------------ | - | ---- | 
|                                   |  |        |        | Weighted  Average |  
|                                   |  |        |        | Grant Date Fair    |  
|Non vested
 restricted stock units |  | Shares |        | Value per Share    |  
|                                   |  |        |        |                    |   |      | 
|Non-vested at December 31,
 2009   |  |        | 22,819 |                    | $ | 6.79 | 
|Granted                            |  |        | 19,493 |                    | $ | 8.69 | 
|Vested                             |  |        | (9,667 | )                  | $ | 8.07 | 
|Forfeited                          |  |        |       |                    | $ |     | 
|Non-vested at December 31,
 2010   |  |        | 32,645 |                    | $ | 7.55 | 

Employee Stock Purchase Plan

We have an Employee Stock
Purchase Plan available to eligible U.S. employees. Under terms of the plan,
eligible employees may designate from 1% to 10% of their compensation to be
withheld through payroll deductions, up to a maximum of $6,500 in each plan
year, for the purchase of common stock at 85% of the lower of the market price
on the first or last day of the offering period. Share issuances under the
Employee Stock Purchase Plan were 30,658 for the year ended December 31, 2010
and 20,810 for the year ended December 31, 2009. As of December 31, 2010,
61,344 shares remain available for issuance under this plan.

Stock Grant Plan for Non-Employee Directors

Our Stock Grant Plan for
Non-Employee Directors provides for automatic grants of 1,000 shares of our
common stock to each of our non-employee directors upon their election or
re-election to the board of directors. The plan provides for a total of 30,000
shares of our common stock for issuance to directors and will expire on May 19,
2018. Share issuances under the Stock Grant Plan for Non-Employee Directors
were 4,000 for the year ended December 31, 2010 and 3,000 for the year ended
December 31, 2009. As of December 31, 2010, 20,000 shares remain available for
issuance under this plan. The shares issued in 2010 had a fair market value on
the date of grant equal to $38,000. The shares issued in 2009 had a fair market
value on the date of grant equal to $14,000.

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NOTE 5  NET INCOME (LOSS) PER SHARE:

Basic net income (loss) per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the period. Net income (loss) per diluted
share is computed by dividing net income (loss) by the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of common shares to be issued upon exercise of stock
options, restricted stock units and from participation in our employee stock
purchase plan, as calculated using the treasury stock method. All potentially
dilutive common equivalent shares are excluded from the calculation of net loss
per diluted share due to their anti-dilutive effect. As a result, no common
equivalent shares were included in the calculation of net loss per diluted
share for the year ended December 31, 2009. The components of net income (loss)
per basic and diluted share are as follows:

|                                             |  |                   |       |                    |  |           |  |   |       |  
|-------------------------------------------- |  | ----------------- | ----- | ------------------ |  | --------- |  | - | ----- | -
|                                             |  |                   |       | Weighted Average   |  | Per Share | 
|(In
 thousands except per share amounts)     |  | Net income (loss) |       | Shares Outstanding |  | Amount    | 
|                                             |  |                   |       |                    |  |           | 
|Year Ended
 December 31, 2010:               |  |                   |       |                    |  |           |  |   |       |  
|Basic                                        |  | $                 | 3,135 |                    |  | 6,861     |  | $ | 0.46  |  
|Dilutive effect of common
 equivalent shares |  |                   |      |                    |  | 46        |  |   | (0.01 | )
|                                             |  |                   |       |                    |  |           |  |   |       |  
|Dilutive                                     |  | $                 | 3,135 |                    |  | 6,907     |  | $ | 0.45  |  

|                                             |  |                   |        |                    |  |           |  |   |       |  
|-------------------------------------------- |  | ----------------- | ------ | ------------------ |  | --------- |  | - | ----- | -
|                                             |  |                   |        | Weighted Average   |  | Per Share | 
|(In
 thousands except per share amounts)     |  | Net income (loss) |        | Shares Outstanding |  | Amount    | 
|                                             |  |                   |        |                    |  |           | 
|Year Ended
 December 31, 2009:               |  |                   |        |                    |  |           |  |   |       |  
|Basic                                        |  | $                 | (6,816 | )                  |  | 6,793     |  | $ | (1.00 | )
|Dilutive effect of common
 equivalent shares |  |                   |       |                    |  |          |  |   |      |  
|                                             |  |                   |        |                    |  |           |  |   |       |  
|Dilutive                                     |  | $                 | (6,816 | )                  |  | 6,793     |  | $ | (1.00 | )

The calculation of diluted
net income (loss) per common share excludes 328,000 potentially dilutive shares
for the year ended December 31, 2010 and 674,000 potentially dilutive shares
for the year ended December 31, 2009, because their effect would be
anti-dilutive.

NOTE 6  OTHER FINANCIAL STATEMENT DATA

Inventories consist of the
following:

|                                   |  |              |        |      |   |       | 
|---------------------------------- |  | ------------ | ------ | ---- | - | ----- | 
|                                   |  | December 31, |       
|(In
 thousands)                    |  | 2010         |        | 2009 |  
|                                   |  |              |        |      |   |       | 
|Raw materials and purchased
 parts |  | $            | 6,895  |      | $ | 3,312 | 
|Work in process                    |  |              | 1,807  |      |   | 637   | 
|Finished goods                     |  |              | 5,513  |      |   | 3,796 | 
|                                   |  |              |        |      |   |       | 
|                                   |  | $            | 14,215 |      | $ | 7,745 | 

Equipment and Leasehold Improvements consist
of the following:

|                                           |  |              |         |      |   |         |  
|------------------------------------------ |  | ------------ | ------- | ---- | - | ------- | -
|                                           |  | December 31, |        
|(In
 thousands)                            |  | 2010         |         | 2009 |  
|                                          
|Equipment                                  |  | $            | 10,957  |      | $ | 10,881  |  
|Leasehold improvements                     |  |              | 1,514   |      |   | 1,347   |  
|                                           |  |              | 12,471  |      |   | 12,228  |  
|                                           |  |              |         |      |   |         |  
|Accumulated depreciation
 and amortization |  |              | (10,575 | )    |   | (10,307 | )
|                                           |  |              |         |      |   |         |  
|                                           |  | $            | 1,896   |      | $ | 1,921   |  

Total depreciation expense
related to equipment and leasehold improvements was $1,162,000 for the year
ended December 31, 2010 and $1,283,000 for the year ended December 31, 2009.

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Intangible and Other Assets consist of the
following:

|                     |  |                   |        |                   |   |         |   |                |     |              |   |        |  |   |        |   |   |     | 
|-------------------- |  | ----------------- | ------ | ----------------- | - | ------- | - | -------------- | --- | ------------ | - | ------ |  | - | ------ | - | - | --- | 
|                     |  | December 31, 2010 |        | December 31, 2009 |  
|                     |  | Gross Carrying    |        | Accumulated       |   |         |   | Gross Carrying |     | Accumulated  |   |        | 
|(In
 thousands)      |  | Amount            |        | Amortization      |   | Net     |   | Amount         |     | Amortization |   | Net    | 
|                     |  |                   |        |                   |   |         |   |                |     |              |   |        |  |   |        |   |   |     | 
|Developed technology |  | $                 | 7,775  |                   | $ | (7,666  | ) | $              | 109 |              | $ | 7,775  |  | $ | (7,485 | ) | $ | 290 | 
|Patents              |  |                   | 2,732  |                   |   | (2,406  | ) |                | 326 |              |   | 2,681  |  |   | (2,329 | ) |   | 352 | 
|                     |  |                   |        |                   |   |         |   |                |     |              |   |        |  |   |        |   |   |     | 
|                     |  | $                 | 10,507 |                   | $ | (10,072 | ) | $              | 435 |              | $ | 10,456 |  | $ | (9,814 | ) | $ | 642 | 

Amortization expense for the two years ended
December 31, 2010 and 2009 is as follows:

|                     |  |                         |     |      |   |     | 
|-------------------- |  | ----------------------- | --- | ---- | - | --- | 
|                     |  | Year ended December 31, |    
|(In
 thousands)      |  | 2010                    |     | 2009 |  
|                    
|Developed technology |  | $                       | 181 |      | $ | 181 | 
|Patents              |  |                         | 227 |      |   | 293 | 
|                     |  |                         |     |      |   |     | 
|                     |  | $                       | 408 |      | $ | 474 | 

As of December 31, 2010, the
weighted average remaining life of our intangible assets was approximately 0.6
years for developed technology and 2.1 years for patents. Estimated aggregate
amortization expense based on current intangibles for the next three years is
expected to be as follows: $289,000 in 2011, $113,000 in 2012 and $33,000 in
2013.

Accrued Expenses consist of
the following:

|                     |  |              |       |      |   |       | 
|-------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                     |  | December 31, |      
|(In
 thousands)      |  | 2010         |       | 2009 |  
|                     |  |              |       |      |   |       | 
|Wages and benefits   |  | $            | 1,437 |      | $ | 894   | 
|Warranty liability   |  |              | 702   |      |   | 488   | 
|Income taxes payable |  |              | 277   |      |   | 98    | 
|Other                |  |              | 457   |      |   | 400   | 
|                     |  |              |       |      |   |       | 
|                     |  | $            | 2,873 |      | $ | 1,880 | 

We provide for the estimated
cost of product warranties at the time revenue is recognized. While we engage
in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of component suppliers, warranty
obligations are affected by product failure rates, material usage and service
delivery costs incurred in correcting a product failure. Should actual product
failure rates, material usage or service delivery costs differ from our
estimates, revisions to the estimated warranty liability would be required, and
could be material. At the end of each reporting period we revise our estimated
warranty liability based on these factors.A reconciliation of the changes in
our estimated warranty liability is as follows:

|                                    |  |                         |       |      |   |      |  
|----------------------------------- |  | ----------------------- | ----- | ---- | - | ---- | -
|                                    |  | Year ended December 31, |      
|(In
 thousands)                     |  | 2010                    |       | 2009 |  
|                                    |  |                         |       |      |   |      |  
|Balance at the beginning of
 period |  | $                       | 488   |      | $ | 823  |  
|Accruals for warranties             |  |                         | 1,124 |      |   | 473  |  
|Settlements made during the
 period |  |                         | (910  | )    |   | (808 | )
|                                    |  |                         |       |      |   |      |  
|Balance at the end of
 period       |  | $                       | 702   |      | $ | 488  |  

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Extended warranty:

Our extended warranty liability
is included as a component of advance customer payments. A reconciliation of
the changes in our extended warranty liability is as follows:

|                                    |  |                         |      |      |   |      |  
|----------------------------------- |  | ----------------------- | ---- | ---- | - | ---- | -
|                                    |  | Year ended December 31, |     
|(In
 thousands)                     |  | 2010                    |      | 2009 |  
|                                    |  |                         |      |      |   |      |  
|Balance at the beginning of
 period |  | $                       | 636  |      | $ | 605  |  
|Revenue deferrals                   |  |                         | 589  |      |   | 441  |  
|Amortization of deferred
 revenue   |  |                         | (438 | )    |   | (410 | )
|                                    |  |                         |      |      |   |      |  
|Balance at the end of
 period       |  | $                       | 787  |      | $ | 636  |  

NOTE 7  GOODWILL

We assess our goodwill for
impairment in the fourth quarter of each year, and whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.

In evaluating whether
goodwill was impaired, we compared the fair value of our reporting units to
which goodwill is assigned to their carrying value (Step 1 of the impairment
test). In calculating fair value, we used the income approach. The income
approach is a valuation technique under which we estimate future cash flows
using the reporting units financial forecasts. Future estimated cash flows are
discounted to their present value to calculate fair value. The summation of our
reporting units fair values is compared and reconciled to our market
capitalization as of the date of our impairment test. In the situation where a
reporting units carrying amount exceeds its fair value, the amount of the
impairment loss must be measured. The measurement of the impairment (Step 2 of the impairment test) is calculated by
determining the implied fair value of a reporting units goodwill. In
calculating the implied fair value of goodwill, the fair value of the reporting
unit is allocated to all other assets and liabilities of that unit based on
their fair values. The excess of the fair value of a reporting unit over the
amount assigned to its other assets and liabilities is the implied fair value
of goodwill. The goodwill impairment is measured as the excess of the carrying
amount of goodwill over its implied fair value.

In determining the fair value
of our reporting units under the income approach, our expected cash flows are
affected by various assumptions. Fair value on a discounted cash flow basis
uses our business plan and projections as the basis for expected future cash
flow forecasts, with an estimation of residual growth rates thereafter. The
significant assumptions incorporated in the cash flow forecasts used for our
2010 goodwill impairment tests include a 20% discount rate and a 6% terminal
growth rate. We utilized a 20% discount rate and a 7% terminal growth rate for
our 2009 goodwill impairment test. Our goodwill at December 31, 2010 and 2009
in the amount of $569,000, relates entirely to our semiconductor reporting
unit. Our recent analyses indicate that this goodwill is not impaired.

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NOTE 8  INCOME TAXES

Income (loss)
before income taxes consists of the following:

|                                               |  |                         |       |      |   |         |  
|---------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------- | -
|                                               |  | Year ended December 31, |      
|(In thousands)                                 |  | 2010                    |       | 2009 |  
|                                               |  |                         |       |      |   |         |  
|Sources of income (loss) before income
 taxes: |  |                         |       |      |   |         |  
|United States                                  |  | $                       | 1,681 |      | $ | (11,999 | )
|Foreign                                        |  |                         | 2,248 |      |   | 1,303   |  
|Total income (loss) before income taxes        |  | $                       | 3,929 |      | $ | (10,696 | )

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

|                                           |  |                         |      |      |   |        |  
|------------------------------------------ |  | ----------------------- | ---- | ---- | - | ------ | -
|                                           |  | Year ended December 31, |     
|(In thousands)                             |  | 2010                    |      | 2009 |  
|                                           |  |                         |      |      |   |        |  
|Current:                                   |  |                         |      |      |   |        |  
|Federal                                    |  | $                       | 292  |      | $ | (3,141 | )
|State                                      |  |                         | (101 | )    |   | (154   | )
|Foreign                                    |  |                         | 272  |      |   | 99     |  
|Total current                              |  | $                       | 463  |      | $ | (3,196 | )
|Deferred:                                  |  |                         |      |      |   |        |  
|Federal                                    |  | $                       | 301  |      | $ | (958   | )
|State                                      |  |                         | (9   | )    |   | 203    |  
|Foreign                                    |  |                         | 39   |      |   | 71     |  
|Total deferred                             |  | $                       | 331  |      | $ | (684   | )
|Total provision (benefit) for income taxes |  | $                       | 794  |      | $ | (3,880 | )

A
reconciliation of the statutory rate to the effective income tax rate is as
follows:

|                                              |  |                         |       |      |  |       |   
|--------------------------------------------- |  | ----------------------- | ----- | ---- |  | ----- | --
|                                              |  | Year ended December 31, |      
|                                              |  | 2010                    |       | 2009 | 
|                                              |  |                         |       |      |  |       |   
|Federal statutory rate                        |  |                         | 34.0  | %    |  | (34.0 | )%
|                                              |  |                         |       |      |  |       |   
|State income taxes, net of federal benefit    |  |                         | (2.2  | )    |  | (1.4  | ) 
|ETI and manufacturing tax incentives          |  |                         | (0.9  | )    |  | 1.0   |   
|U.S. Subpart F income                         |  |                         | 1.8   |      |  | 0.3   |   
|Stock based compensation                      |  |                         | 0.7   |      |  | 0.3   |   
|Research and experimentation credit           |  |                         | (1.9  | )    |  | (0.5  | ) 
|Foreign rate difference                       |  |                         | (11.5 | )    |  | (2.3  | ) 
|Reserve for income taxes                      |  |                         | 1.2   |      |  | 3.2   |   
|Settlement of internal revenue service audits |  |                         |      |      |  | (5.2  | ) 
|Valuation allowance                           |  |                         | 0.4   |      |  | 1.8   |   
|Other, net                                    |  |                         | (1.4  | )    |  | 0.5   |   
|                                              |  |                         |       |      |  |       |   
|Effective tax rate                            |  |                         | 20.2  | %    |  | (36.3 | )%

Our effective
tax rate for 2010 reflects the benefit of having a significant portion of our
operations in Singapore where corporate income tax rates are substantially
lower than the United States. Lower tax rates in foreign jurisdictions
favorably impacted our 2010 income tax rate by 11.5%.

Our effective
tax rate for 2009 was favorably impacted by 5.2% or $551,000 from settlement of
Internal Revenue Service audits of our 2006 and 2007 federal income tax
returns, including both the impact of settlement payments and reversal of a
portion of our reserve for income taxes.

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A reconciliation
of the beginning and ending amount of gross unrecognized tax benefits (UTB)
is as follows:

|                                                              |  |      |       |      |   |       |  
|------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|(In
 thousands)                                               |  | 2010 |       | 2009 |  
|                                                              |  |      |       |      |   |       |  
|Gross UTB balance at beginning of year                        |  | $    | 1,446 |      | $ | 1,564 |  
|Additions based on tax positions related to
 the current year |  |      | 97    |      |   | 510   |  
|Additions for tax positions of prior years                    |  |      |      |      |   |      |  
|Reductions for tax positions of prior years                   |  |      |      |      |   |      |  
|Settlements                                                   |  |      |      |      |   | (628  | )
|Reductions due to lapse of applicable
 statute of limitations |  |      |      |      |   |      |  
|Gross UTB balance at end of year                              |  | $    | 1,543 |      | $ | 1,446 |  
|Net UTB balance at end of year                                |  | $    | 686   |      | $ | 546   |  

The ending net
UTB results from adjusting the gross balance for items such as federal, state,
and non-U.S. deferred items, interest and penalties, and deductible taxes. The
net UTB is a long-term income tax reserve within our Consolidated Balance
Sheet. We
recognize interest and penalties accrued related to unrecognized tax benefits
in tax expense. Accrued interest and penalties on a gross basis were $159,000
as of December 31, 2010 and $140,000 as of December 31, 2009.

During the
year ended December 31, 2010, we recorded a $49,000 increase in liabilities,
net of deferred tax benefit, for uncertain tax positions that was recorded as
income tax expense. Estimated gross interest and penalties included in this
amount total $19,000. During the year ended December 31, 2009, we recorded a
$312,000 decrease in liabilities, net of deferred taxes, for uncertain tax
positions that were recorded as an income tax benefit. The estimated gross
reduction in interest and penalties included in this amount total $39,000.

We file income
tax returns in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. During 2009, the Internal Revenue Service completed audits of
our 2006 and 2007 federal income tax returns. Our settlement with the Internal
Revenue Service did not have a material impact on our financial condition. We
are no longer subject to state and local income tax examinations by tax
authorities for years before 2007. Due to the carryback of our 2009 federal
taxable loss to the years 2004 -2006, the Internal Revenue Service could
potentially examine our federal income tax returns for those years. The statute
of limitations for examination of these returns had previously expired. We
received a federal income tax refund in 2010 of approximately $2.4 million from
carryback of our 2009 federal taxable loss.

Deferred tax
assets consist of the following:

|                                              |  |              |       |      |   |       |  
|--------------------------------------------- |  | ------------ | ----- | ---- | - | ----- | -
|                                              |  | December 31, |      
|(In thousands)                                |  | 2010         |       | 2009 |  
|                                              |  |              |       |      |   |       |  
|Fixed asset and intangible amortization,
 net |  | $            | 961   |      | $ | 1,215 |  
|Inventory allowances                          |  |              | 629   |      |   | 806   |  
|Accrued liabilities                           |  |              | 193   |      |   | 192   |  
|Warranty accrual                              |  |              | 246   |      |   | 171   |  
|Deferred revenue                              |  |              | 612   |      |   | 467   |  
|Accounts receivable allowance                 |  |              | 353   |      |   | 367   |  
|Federal and state tax credits                 |  |              | 2,676 |      |   | 2,678 |  
|Foreign net operating loss carry forwards     |  |              | 459   |      |   | 574   |  
|Stock based compensation                      |  |              | 397   |      |   | 333   |  
|Other, net                                    |  |              | 144   |      |   | 114   |  
|Sub-total                                     |  |              | 6,670 |      |   | 6,917 |  
|Valuation allowance                           |  |              | (732  | )    |   | (717  | )
|                                              |  |              |       |      |   |       |  
|Total net deferred tax assets                 |  | $            | 5,938 |      | $ | 6,200 |  

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At December
31, 2010 and 2009 we had no significant deferred tax liabilities. We currently
have significant deferred tax assets as a result of temporary differences
between taxable income on our tax returns and U.S. GAAP income, research and
development tax credit carry forwards and foreign net operating loss carry
forwards. A deferred tax asset generally represents future tax benefits to be received
when temporary differences previously reported in our financial statements
become deductible for income tax purposes, or when net operating loss carry
forwards or credits are applied against future taxable income, or when tax
credit carry forwards are utilized on our tax returns. We assess the
realizability of our deferred tax assets and the need for a valuation allowance
based on the guidance provided in current financial accounting standards.

Significant
judgment is required in determining the realizability of our deferred tax
assets. The assessment of whether valuation allowances are required considers,
among other matters, the nature, frequency and severity of any current and
cumulative losses, forecasts of future profitability, the duration of statutory
carry forward periods, our experience with loss carry forwards not expiring
unused and tax planning alternatives.

In analyzing
the need for valuation allowances, we first considered our history of
cumulative losses for U.S. income tax purposes over the past three years and
also gave significant consideration to our results for U.S. income tax purposes
over the past five years, as the economic cycles in our industry have tended to
average five years in length (from peak to trough). We also considered our
forecasts of future profitability, the duration of statutory carry forward
periods and tax planning alternatives. Finally, we considered the length and
severity of the recent global economic crisis, the impact that it had on our
operating results and our expectation for rebound given recent signs of
recovery in the global economy and more specifically in our markets. After
considering all of these factors, and after considering other significant
positive evidence, we concluded that a valuation allowance, with respect to
substantially all of our U.S. based deferred tax assets, was not required at
December 31, 2010.

Our results in
both 2008 and 2009 were negatively impacted by the recent global economic
slowdown, and we incurred a loss in the United States in both 2008 and 2009,
where most of our net deferred tax assets are recorded. We recorded a profit in
2010. Achievement of ongoing profitability in the United States will be a
significant factor in determining our continuing ability to carry these deferred
tax assets without recording a valuation allowance. If future results from our
operations are less than projected, a valuation allowance may be required
against virtually all of our deferred tax assets, which could have a material
impact on our results of operations in the period in which it is recorded.

Deferred tax
assets at December 31, 2010, include $459,000 of net operating loss carry
forwards incurred in the UK by CyberOptics Ltd., which was acquired in 1999.
The utilization of these net operating loss carry forwards is dependent on
CyberOptics Ltd.s ability to generate sufficient UK taxable income during the
carry forward period. We reduced our deferred tax asset for UK net operating
loss carry forwards by $16,000 in 2010 due to a reduction in the future UK
income tax rate. At December 31, 2010 we had $2,327,000 of federal R&D tax
credits that will begin to expire in 2019 if unused.

The valuation
allowances at December 31, 2010 and 2009 are needed for various long-term state
tax credit carry forwards, state operating loss carry forwards and capital
losses for which recovery is not deemed to be more likely than not. The
valuation allowance was increased in 2010 for additional state tax credit and
net operating loss carry forwards that failed to satisfy the more likely than
not criteria for recovery.

Income tax
refunds received, net of cash payments for income taxes, were $1,951,000 for
the year ended December 31, 2010 and $1,739,000 for the year ended December 31,
2009.

We have been
granted a tax holiday with respect to a wholly owned foreign subsidiary
allowing us to pay a reduced rate of tax for a period of five years through
2013. The tax holiday decreased income tax expense in 2010 by $120,000 and
increased our recorded income tax benefit in 2009 by $56,000.

It is the
intention of management to permanently reinvest all undistributed earnings of
international subsidiaries, and accordingly, we have not provided United States
taxes on such earnings. It is not practicable to determine the income tax
liability that would be payable if such earnings was not indefinitely
reinvested.

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NOTE 9  OPERATING LEASES

We lease a
60,217 square foot mixed office and warehouse facility in Golden Valley,
Minnesota. The lease has a term of 61 months and expires on June 30, 2011.
Rental expense, including the effects of lease incentives, is recognized on a
straight-line basis over the term of the lease. We are also required to pay
insurance, property taxes and other operating expenses related to the leased facility.

We also lease
a 20,000 square foot mixed office and warehouse facility in Singapore through
July 2013, in addition to facilities for the operations of our other
subsidiaries under operating leases that expire at various times through
December 2012.

Total rent
expense was $1,442,000 for the year ended December 31, 2010 and $1,510,000 for
the year ended December 31, 2009. At December 31, 2010, the future minimum
lease payments required under non-cancelable operating lease agreements are as
follows:

|                         |  |                |       | 
|------------------------ |  | -------------- | ----- | 
|Year ending December 31, |  | (In thousands) |      
|2011                     |  | $              | 982   | 
|2012                     |  |                | 456   | 
|2013                     |  |                | 200   | 
|Total                    |  | $              | 1,638 | 

NOTE 10  DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES

We enter into
foreign currency swap agreements to hedge short-term inter-company financing
transactions with our subsidiaries in the United Kingdom and Singapore. These
currency swap agreements are structured to mature on or about the last day of
each quarter and are designated as cash flow hedges. At December 31, 2010, we had
two open swap agreements for $1 million Singapore dollars and £175,000 British
pounds that were purchased on that day. As a result, any unrealized gains or
losses as of December 31, 2010 were inconsequential.

We recognized
net gains (losses) from settlement of foreign currency swap agreements of
$(23,000) for the year ended December 31, 2010 and $(229,000) for the year
ended December 31, 2009, that offset foreign currency transaction gains
(losses) on the underlying inter-company balances of $129,000 for the year
ended December 31, 2010 and $137,000 for the year ended December 31, 2009.
These gains and losses are recognized in interest income and other in our
statement of operations.

Our foreign
currency swap agreements contain credit risk to the extent that our bank
counter-parties may be unable to meet the terms of the agreements. We minimize
such risk by limiting our counter-parties to major financial institutions.
Management does not expect material losses as a result of defaults by other
parties.

NOTE 11  401(K) PLAN

We have a
retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code
(the Code), whereby eligible employees may contribute a portion of their
earnings, not to exceed annual amounts allowed under the Code. In addition, we
may also make contributions at the discretion of the Board of Directors. We
provided matching contributions to employees totaling $221,000 in 2010 and
$229,000 in 2009.

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NOTE 12  BUSINESS SEGMENTS AND SIGNIFICANT
CUSTOMERS

The guidance
codified in ASC Topic 280-10, Disclosure
about Segments of an Enterprise and Related Information requires
the management approach in determining business segments. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of our
reportable segments. We have determined that our business operates as two
reportable segments. Balance sheet and income statement information for all
periods presented has been allocated to our two segments. The electronic
assembly segment is the design, manufacture and sale of optical process control
sensors and inspection systems for the electronic assembly and photovoltaic
cell equipment markets. The semiconductor segment is the design, manufacture
and sale of optical and other process control sensors and related equipment for
the semiconductor capital equipment market.

Information
regarding our segments is as follows:

|                                    |  |                         |        |      |   |         |  
|----------------------------------- |  | ----------------------- | ------ | ---- | - | ------- | -
|                                    |  | Year Ended December 31, |       
|(In
 thousands)                     |  | 2010                    |        | 2009 |  
|                                   
|Revenue:                            |  |                         |        |      |   |         |  
|Electronic assembly                 |  |                         |        |      |   |         |  
|OEM Sensors                         |  | $                       | 25,537 |      | $ | 8,428   |  
|SMT Systems                         |  |                         | 25,430 |      |   | 15,308  |  
|Total electronic assembly           |  |                         | 50,967 |      |   | 23,736  |  
|Semiconductor                       |  |                         | 5,984  |      |   | 3,330   |  
|Total                               |  | $                       | 56,951 |      | $ | 27,066  |  
|                                    |  |                         |        |      |   |         |  
|Income (loss) from operations:      |  |                         |        |      |   |         |  
|Electronic
 assembly                |  | $                       | 2,114  |      | $ | (10,711 | )
|Semiconductor                       |  |                         | 1,547  |      |   | (524    | )
|Total income (loss) from operations |  | $                       | 3,661  |      | $ | (11,235 | )
|Interest income and other           |  |                         | 268    |      |   | 539     |  
|Income (loss) before income taxes   |  | $                       | 3,929  |      | $ | (10,696 | )
|                                    |  |                         |        |      |   |         |  
|Depreciation and amortization:      |  |                         |        |      |   |         |  
|Electronic assembly                 |  | $                       | 2,035  |      | $ | 2,192   |  
|Semiconductor                       |  |                         | 228    |      |   | 352     |  
|Total                               |  | $                       | 2,263  |      | $ | 2,544   |  
|                                    |  |                         |        |      |   |         |  
|Expenditures for long-lived assets: |  |                         |        |      |   |         |  
|Electronic assembly                 |  | $                       | 1,083  |      | $ | 800     |  
|Semiconductor                       |  |                         | 228    |      |   | 201     |  
|Total                               |  | $                       | 1,311  |      | $ | 1,001   |  
|                                    |  |                         |        |      |   |         |  
|Total assets (end of year):         |  |                         |        |      |   |         |  
|Electronic assembly                 |  | $                       | 39,306 |      | $ | 27,509  |  
|Semiconductor                       |  |                         | 3,620  |      |   | 3,606   |  
|Corporate                           |  |                         | 15,308 |      |   | 20,022  |  
|Total                               |  | $                       | 58,234 |      | $ | 51,137  |  

The following
summarizes certain significant customer information:

|                             |  |                        |   |          |   |                       |  |  |  |    |   | 
|---------------------------- |  | ---------------------- | - | -------- | - | --------------------- |  |  |  | -- | - | 
|(In thousands)               |  | Significant 
 Customer |   | Revenues |   | Percentageof Revenues | 
|                             |  |                        |   |          |   |                       |  |  |  |    |   | 
|Year ended December 31, 2010 |  |                        | A |          | $ | 12,108                |  |  |  | 21 | % | 
|                             |  |                        | B |          | $ | 8,010                 |  |  |  | 14 | % | 
|                             |  |                        |   |          |   |                       |  |  |  |    |   | 
|Year ended December 31, 2009 |  |                        | A |          | $ | 2,152                 |  |  |  | 8  | % | 
|                             |  |                        | B |          | $ | 4,373                 |  |  |  | 16 | % | 

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The
significant customers listed above are related to our electronic assembly
segment. As of December 31, 2010, accounts receivable from significant customer
A were $1,496,000 and accounts receivable from significant customer B were
$1,961,000. As of December 31, 2009, accounts receivable from significant
customer A were $882,000 and accounts receivable from significant customer B
were $1,562,000. Our LaserAlign sensor family has accounted for a significant
portion of our electronic assembly sales. Revenue from new product shipments of
LaserAlign sensors accounted for 27% of our total revenue in 2010 and 13% of
our total revenue in 2009. Our revenue, results of operations and cash flows
would be negatively impacted if our LaserAlign customers are unsuccessful
selling the products into which our sensors are incorporated, design their
products to function without our sensors, purchase sensors from other
suppliers, or otherwise terminate their relationships with us.

Export sales
as a percentage of total sales were 86% for the year ended December 31, 2010
and 78% for the year ended December 31, 2009. Export sales are attributed to
the country where the product is shipped. Virtually all export sales are
negotiated, invoiced and paid in U.S. dollars.

Export sales by
geographic area are summarized as follows:

|                |  |      |        |      |   |        | 
|--------------- |  | ---- | ------ | ---- | - | ------ | 
|(In
 thousands) |  | 2010 |        | 2009 |  
|                |  |      |        |      |   |        | 
|Americas        |  | $    | 1,328  |      | $ | 761    | 
|Netherlands     |  |      | 7,833  |      |   | 4,122  | 
|Other Europe    |  |      | 7,732  |      |   | 4,816  | 
|China           |  |      | 11,714 |      |   | 3,889  | 
|Japan           |  |      | 12,529 |      |   | 2,400  | 
|Other Asia      |  |      | 7,035  |      |   | 3,611  | 
|Other           |  |      | 665    |      |   | 1,558  | 
|                |  |      |        |      |   |        | 
|                |  | $    | 48,836 |      | $ | 21,157 | 

Long-lived
assets include equipment and leasehold improvements attributable to each
geographic areas operations. Long-lived assets at December 31, 2010 and 2009 are
as follows:

|                         |  |      |       |      |   |       | 
|------------------------ |  | ---- | ----- | ---- | - | ----- | 
|(In
 thousands)          |  | 2010 |       | 2009 |  
|                         |  |      |       |      |   |       | 
|Long-lived
 assets:      |  |      |       |      |   |       | 
|United States            |  | $    | 1,245 |      | $ | 1,207 | 
|Europe                   |  |      | 3     |      |   | 3     | 
|Asia and other           |  |      | 648   |      |   | 711   | 
|                         |  |      |       |      |   |       | 
|Total
 long-lived assets |  | $    | 1,896 |      | $ | 1,921 | 

NOTE 13  SEVERANCE, RECRUITMENT AND
SINGAPORE TRANSITION

The transition of a significant
portion of development and final assembly and integration for our systems
products to Singapore was substantially complete by the end of the first
quarter of 2009. Severance costs incurred in connection with the February 2008
decision to move our systems related product development and final assembly and
integration to Singapore related entirely to our electronic assembly segment
and totaled $48,000 in 2009.

In February 2009, we further
reduced our workforce by 24 positions in response to the weakening global
economy, our transition to Singapore and our decision to consolidate
manufacturing for our semiconductor products into our Minneapolis facility.
Severance costs incurred in connection with the February 2009 workforce
reduction totaled $315,000 in 2009, of which $201,000 related to our electronic
assembly segment and $114,000 related to our semiconductor segment.

All of the severance costs
related to the Singapore transition and the February 2009 workforce reduction
have been classified as severance in our statement of operations. In addition,
all of the aforementioned severance costs incurred in 2009 were paid prior to
December 31, 2009. No severance costs were incurred in 2010.

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NOTE 14  CONTINGENCIES

In the
ordinary course of business, we are a defendant in miscellaneous claims and
disputes. While the outcome of these matters cannot be predicted with
certainty, management presently believes the disposition of these matters will
not have a material effect on our financial position, results of operations or
cash flows.

In the normal
course of business to facilitate sales of our products and services, we at
times, indemnify other parties, including customers, with respect to certain
matters. In these instances, we have agreed to hold the other parties harmless
against losses arising out of intellectual property infringement or other types
of claims. These agreements may limit the time within which indemnification
claims can be made and almost always limit the amount of the claim. It is not
possible to determine the maximum potential amount under these indemnification
agreements due to the limited history of prior indemnification claims and the
unique facts and circumstances involved in each particular agreement.
Historically, payments made, if any, under these agreements have not had a
material impact on our operating results, financial position or cash flows.

NOTE 15  QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
(In thousands, except per share amounts)



|                                           |  |              |        |             |   |              |   |         |        |   |   |        |  
|------------------------------------------ |  | ------------ | ------ | ----------- | - | ------------ | - | ------- | ------ | - | - | ------ | -
|2010                                       |  | March 31     |        | June 30     |   | Sept. 30     |   | Dec. 31 |       
|                                           |  |              |        |             |   |              |   |         |        |   |   |        |  
|Revenues                                   |  | $            | 12,341 |             | $ | 16,499       |   | $       | 14,145 |   | $ | 13,966 |  
|Gross margin                               |  |              | 5,256  |             |   | 6,656        |   |         | 6,663  |   |   | 6,387  |  
|Income from
 operations                    |  |              | 257    |             |   | 1,189        |   |         | 1,174  |   |   | 1,041  |  
|Net income                                 |  |              | 247    |             |   | 969          |   |         | 948    |   |   | 971    |  
|Net income
 per share  Basic (1)          |  |              | 0.04   |             |   | 0.14         |   |         | 0.14   |   |   | 0.14   |  
|Net income
 per share  Diluted (1)        |  |              | 0.04   |             |   | 0.14         |   |         | 0.14   |   |   | 0.14   |  
|                                           |  |              |        |             |   |              |   |         |        |   |   |        |  
|2009                                       |  | March 31 (2) |        | June 30 (2) |   | Sept. 30 (2) |   | Dec. 31 |       
|                                           |  |              |        |             |   |              |   |         |        |   |   |        |  
|Revenues                                   |  | $            | 4,362  |             | $ | 5,179        |   | $       | 8,550  |   | $ | 8,975  |  
|Gross margin                               |  |              | 1,378  |             |   | 1,598        |   |         | 2,937  |   |   | 3,292  |  
|Income
 (loss) from operations             |  |              | (3,981 | )           |   | (3,970       | ) |         | (1,724 | ) |   | (1,560 | )
|Net income
 (loss)                         |  |              | (2,433 | )           |   | (1,923       | ) |         | (841   | ) |   | (1,619 | )
|Net income
 (loss) per share  Basic (1)   |  |              | (0.36  | )           |   | (0.28        | ) |         | (0.12  | ) |   | (0.24  | )
|Net income
 (loss) per share  Diluted (1) |  |              | (0.36  | )           |   | (0.28        | ) |         | (0.12  | ) |   | (0.24  | )

|    |                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The
 summation of quarterly per share amounts may not equal the calculation for
 the full year, as each quarterly calculation is performed discretely.                                                                                        
|    |                                                                                                                                                                                                                                               
|(2) | Severance
 costs in 2009 related to our move to Singapore and November 2008 and February
 2009 workforce reductions were $305,000 in the first quarter, $90,000 in the
 second quarter and a $(32,000) expense reduction in the third quarter.

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Report of Independent
Registered Public Accounting Firm

Board of
Directors and Stockholders
CyberOptics Corporation

We have
audited the accompanying consolidated balance sheets of CyberOptics Corporation
(a Minnesota corporation) as of December 31, 2010 and 2009, and the
related consolidated statements of operations, stockholders equity and
comprehensive income and cash flows for each of the two years in the period ended December 31, 2010. Our audits of the basic financial statements
included the financial statement schedule listed in the index appearing under
Item 15(a)(2). These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CyberOptics
Corporation as of December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2010 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related financial
statement schedule when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.

Grant Thornton
LLP
Minneapolis, Minnesota
March 9, 2011

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|         |                                                                                     
|-------- | ------------------------------------------------------------------------------------
|ITEM 9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|         |                                                                                     
|NONE.   
|         |                                                                                     
|ITEM 9A. | CONTROLS AND PROCEDURES                                                             

Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by
this report, our disclosure controls and procedures were effective in ensuring
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable rules and forms and that such
information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, in a manner that allows timely
decisions regarding required disclosure.

|     |                                                                 
|---- | ----------------------------------------------------------------
|(i). | MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in the Securities Exchange Act of 1934 Rule
13a-15(f), and for performing an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2010. Internal
control over financial reporting is a process designed by, or under the
supervision of, the registrants principal executive and principal financial
officers, or persons performing similar functions, and effected by the
registrants board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles (GAAP) and includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the registrant; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the registrant are
being made only in accordance with authorizations of management and directors
of the registrant; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the registrants
assets that could have a material effect on the financial statements.

Management
performed an assessment of the effectiveness of the Companys internal control
over financial reporting as of December 31, 2010 based upon criteria inInternal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment, management determined that the Companys
internal control over financial reporting was effective as of December 31, 2010
based on the criteria in Internal
Control-Integrated Framework issued by the COSO.

Because
the Company is a smaller reporting company, this annual report on Form 10-K
does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting.

(ii).     During
the quarter ended December 31, 2010, there has been no change in our internal
control 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.

|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION

NONE.

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PART III.

|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The
information contained under the headings Proposal IElection of Directors,
Information About our Board of Directors and its Committees and Other
Corporate Governance Matters and Section 16(a) Beneficial Ownership Reporting
Compliance of the Companys definitive proxy statement for its annual meeting
of shareholders to be held May 23, 2011 (hereafter, the Proxy Statement), is
hereby incorporated by reference.

|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The
information under the headings Information About our Board of Directors and
its Committees and Other Corporate Governance MattersCompensation of
Independent Directors, and Executive Compensation of the Proxy Statement is
hereby incorporated by reference.

|         |                                                                                                
|-------- | -----------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
 RELATED STOCKHOLDER MATTERS

The
information contained under the heading Shares Outstanding  of the Proxy
Statement is hereby incorporated by reference.

|         |                                                                           
|-------- | --------------------------------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
 INDEPENDENCE

The
information under the headings Information About our Board of Directors and
its Committees and Other Corporate Governance Matters Committees of Our
BoardAudit Committee of the Proxy Statement is hereby incorporated by
reference.

|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

The
information under the heading Independent Accountants and Payment of Fees and
Information About our Board of Directors and its Committees and Other
Corporate Governance Matters Committees of Our BoardAudit Committee of the
Proxy Statement is hereby incorporated by reference.

PART IV.

|         |                                           
|-------- | ------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

|                                                                                                                                        |  |                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|(a)(1)     Financial
 Statements: The Consolidated Financial Statements included in Item 8 to this
 Form 10-K consist of the following:
|                                                                                                                                        |  | Consolidated
 Balance Sheets as of December 31, 2010 and 2009.                                                             
|                                                                                                                                        |  | Consolidated
 Statements of Operations for the years ended December 31, 2010 and 2009.                                     
|                                                                                                                                        |  | Consolidated
 Statements of Cash Flows for the years ended December 31, 2010 and 2009.                                     
|                                                                                                                                        |  | Consolidated
 Statements of Stockholders Equity and Comprehensive Income for the years
 ended December 31, 2010 and 2009. 
|                                                                                                                                        |  | Notes to the
 Consolidated Financial Statements                                                                            
|                                                                                                                                       
|(a)(2)     Financial
 Statement Schedule:                                                                                              
|                                                                                                                                       
|                                                                                                                                        |  | Schedule II,
 Valuation and Qualifying Accounts for the years ended December 31, 2010 and
 2009, is attached as Item 15(c).

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| |     |                  
| | --- | -----------------
| | (b) | LIST OF
 EXHIBITS

| |                 |  |             |                                                                                                                                                                                                                                                                           | 
| | --------------- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | Exhibit
 Number |  | Description |                                                                                                                                                                                                                                                                          
| | 3.1             |  |             | Articles of
 Incorporation of Company, as amended (incorporated by reference to Exhibit
 3.1 to the Companys Annual Report on Form 10-K for the year ended December
 31, 1997).                                                                                         
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 3.2             |  |             | Bylaws of
 the Company (incorporated by reference to Exhibit 3.1 to the current report
 on Form 8-K dated September 8, 2008).                                                                                                                                            
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 4.1             |  |             | Restated
 Stock Option Plan of the Company, as amended (incorporated by reference to
 Exhibit 4.1 of the Companys Registration Statement on Form S-8 filed August
 18, 1998 (file no 333-61711)).                                                                       
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 4.2             |  |             | CyberOptics
 Corporation Stock Option Plan for Non-Employee Directors, as amended
 (incorporated by reference to Exhibit 4.2 of the Companys Registration
 Statement on Form S-8 filed August 10, 2006 (file no 333-136500)).                                           
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 4.3             |  |             | CyberOptics
 Corporation 1998 Stock Incentive Plan, as amended (incorporated by reference
 to Exhibit 4.1 to the Companys Registration Statement on Form S-8 filed
 December 4, 2000 (file no. 333-51200)).                                                             
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 4.4             |  |             | CyberOptics
 Corporation Employee Stock Purchase Plan (incorporated by reference to
 Exhibit 4.1 of the Companys Registration Statement on Form S-8 filed August
 10, 2006 (file no 333-136500)).                                                                       
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 4.5             |  |             | CyberOptics
 Corporation Stock Grant Plan for Non-Employee Directors (incorporated by
 reference to Exhibit 4.1 of the Companys Registration Statement on Form S-8
 filed August 14, 2008 (file no 333-153015)).                                                        
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 10.1            |  |             | Lease
 Agreement between FirstCal Industrial 2 Acquisitions LLC and the Company
 dated March 27, 2006 (incorporated by reference to Exhibit 10.1 to the
 Companys quarterly report on Form 10-Q for the quarter ended March 31,
 2006).                                 
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | *10.2           |  |             | Severance Pay Agreement with Kathleen P.
 Iverson (incorporated by reference to Exhibit 10.2 to the current report on
 Form 8-K dated June 23, 2008).                                                                                                                    
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | *10.3           |  |             | Severance Pay Agreement with Jeffrey A.
 Bertelsen (incorporated by reference to Exhibit 10.3 to the current report on
 Form 8-K dated June 23, 2008).                                                                                                                   
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | *10.4           |  |             | Amendment to Severance Pay Agreement with
 Jeffrey A. Bertelsen (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K dated May 18,
 2009).                                                                                                       
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 10.5            |  |             | Tenancy Agreement between NIDEC Component
 Technology Co. LTD and CyberOptics PTE LTD (Singapore) Term 15 May 2011 to 24 July 2013 (incorporated
 by reference to Exhibit 10.1 to the Companys quarterly report on Form 10-Q
 for the quarter ended September 30, 2010).
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | *10.6           |  |             | Severance
 Pay Agreement with Daniel Good                                                                                                                                                                                                                                
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 21.0            |  |             | Subsidiaries
 of the Company.                                                                                                                                                                                                                                            
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 23.1            |  |             | Consent of
 Independent Registered Public Accounting Firm.                                                                                                                                                                                                               
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 31.1            |  |             | Certification
 of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                                    
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 31.2            |  |             | Certification
 of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                                    
| |                 |  |             |                                                                                                                                                                                                                                                                          
| | 32.0            |  |             | Certification
 of Chief Executive Officer and Chief Financial Officer Pursuant to Section
 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                        

* Management
Contract or Compensatory Plan or Arrangement

56

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Table of Contents

| |     |                                
| | --- | -------------------------------
| | (c) | FINANCIAL
 STATEMENT SCHEDULES:

SCHEDULE II

CYBEROPTICS CORPORATION 
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES 
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|----------------------------------- |  | -------------------------------- | --------- | ------------------------------- | - | ----------------------------- |  | ---------------------- | -------- | - | - | --------- | 
|Description                         |  | Balance at
 Beginning of
 Period |           | Charged to
 Costs and
 Expenses |   | Deductions                    |  | Balanceat end ofPeriod |         
|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|Allowance
 for doubtful accounts:   |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|Year ended December 31, 2010        |  | $                                | 1,049,000 |                                 | $ | 6,000                         |  | $                      | (50,000  | ) | $ | 1,005,000 | 
|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|Year ended December 31, 2009        |  | $                                | 250,000   |                                 | $ | 827,000                       |  | $                      | (28,000  | ) | $ | 1,049,000 | 
|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|Description                         |  | Balance at
 Beginning of
 Period |           | Charged to
 Costs and
 Expenses |   | Other Increases
 (Deductions) |  | Balanceat end ofPeriod |         
|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|Allowance
 for deferred tax assets: |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|Year ended December 31, 2010        |  | $                                | 717,000   |                                 | $ | 15,000                        |  | $                      |         |   | $ | 732,000   | 
|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 
|Year ended December 31, 2009        |  | $                                | 640,000   |                                 | $ | 187,000                       |  | $                      | (110,000 | ) | $ | 717,000   | 
|                                    |  |                                  |           |                                 |   |                               |  |                        |          |   |   |           | 

57

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Table of Contents

SIGNATURES

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

| |                                       
| | --------------------------------------
| | CYBEROPTICS
 CORPORATION              
| |                                       
| | /s/ KATHLEEN P. IVERSON               
| | By Kathleen
 P. Iverson, CEO and Chair

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.



|                           |  |                                                                 |       |               |  |      | 
|-------------------------- |  | --------------------------------------------------------------- | ----- | ------------- |  | ---- | 
|Name                       |  |                                                                 | Title |               |  | Date | 
|                           |  |                                                                 |       |              
|/s/ KATHLEEN P. IVERSON    |  | Director, CEO and Chair                                         |       | March 8, 2011
|Kathleen P. Iverson        |  | (Principal Executive Officer)                                   |       |              
|                           |  |                                                                 |       |              
|                           |  |                                                                 |       |              
|/s/ ALEX B. CIMOCHOWSKI    |  | Director                                                        |       | March 7, 2011
|Alex B. Cimochowski        |  |                                                                 |       |              
|                           |  |                                                                 |       |              
|/s/ MICHAEL M. SELZER, JR. |  | Director                                                        |       | March 8, 2011
|Michael M. Selzer, Jr.     |  |                                                                 |       |              
|                           |  |                                                                 |       |              
|/s/ IRENE M. QUALTERS      |  | Director                                                        |       | March 8, 2011
|Irene M. Qualters          |  |                                                                 |       |              
|                           |  |                                                                 |       |              
|/s/ SUBODH K. KULKARNI     |  | Director                                                        |       | March 8, 2011
|Subodh K. Kulkarni         |  |                                                                 |       |              
|                           |  |                                                                 |       |              
|/s/ JEFFREY A. BERTELSEN   |  | Vice President and CFO                                          |       | March 8, 2011
|Jeffrey A. Bertelsen       |  | (Principal Financial Officer
 and Principal Accounting Officer) |       |              

58

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