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|SECURITIES AND EXCHANGE COMMISSION                                               
|WASHINGTON, D.C. 20549                                                           
|                                                                                 
|FORM 10-K                                                                        
|                                                                                 
|xANNUAL
 REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange       
|Act
 of 1934 for the Year Ended December 31, 2009.                               
|                                                                                 
|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)                                                    
|                                                                                 
|                                                                                 
|CYBEROPTICS
 CORPORATION

(Exact
 name of registrant as specified in its charter)

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

|                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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                  

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:
$38,396,032.

As of February 28, 2010,
there were 6,845,391 shares of the registrants Common Stock, no par value,
issued and outstanding.

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 21, 2010.





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CYBEROPTICS
CORPORATION
FORM 10-K
For the Fiscal Year Ended December 31, 2009

|          |  |                                                                                                                |  |   
|--------- |  | -------------------------------------------------------------------------------------------------------------- |  | --
|          |  | TABLE OF CONTENTS                                                                                              |  |   
|PART I    |  |                                                                                                                |  |   
|ITEM 1.   |  | DESCRIPTION
 OF BUSINESS                                                                                       |  | 3 
|ITEM 1A.  |  | RISK
 FACTORS                                                                                                  |  | 14
|ITEM 2.   |  | PROPERTIES                                                                                                     |  | 17
|ITEM 3.   |  | LEGAL
 PROCEEDINGS                                                                                             |  | 17
|ITEM 4.   |  | RESERVED                                                                                                       |  | 17
|          |  |                                                                                                                |  |   
|PART II   |  |                                                                                                                |  |   
|ITEM 5.   |  | MARKET
 FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
 PURCHASES OF EQUITY SECURITIES |  | 18
|ITEM 6.   |  | SELECTED
 FINANCIAL DATA                                                                                       |  | 18
|ITEM 7.   |  | MANAGEMENTS
 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |  | 19
|ITEM 8.   |  | FINANCIAL
 STATEMENTS AND SUPPLEMENTARY DATA                                                                   |  | 34
|ITEM 9.   |  | CHANGES
 IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                          |  | 62
|ITEM 9A.  |  | CONTROLS
 AND PROCEDURES                                                                                       |  | 62
|ITEM 9B.  |  | OTHER
 INFORMATION                                                                                             |  | 62
|          |  |                                                                                                                |  |   
|PART
 III |  |                                                                                                                |  |   
|ITEM 10.  |  | DIRECTORS,
 EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE MATTERS                                                |  | 63
|ITEM 11.  |  | EXECUTIVE
 COMPENSATION                                                                                        |  | 63
|ITEM 12.  |  | SECURITY
 OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
 MATTERS               |  | 63
|ITEM 13.  |  | CERTAIN
 RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                     |  | 64
|ITEM 14.  |  | PRINCIPAL
 ACCOUNTANT FEES AND SERVICES                                                                        |  | 64
|          |  |                                                                                                                |  |   
|PART IV   |  |                                                                                                                |  |   
|ITEM 15.  |  | EXHIBITS
 AND FINANCIAL STATEMENT SCHEDULES                                                                    |  | 64
|          |  |                                                                                                                |  |   
|          |  | SIGNATURES                                                                                                     |  | 67

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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 2010 annual shareholders meeting to be held on May
21, 2010 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, and the placement and transport of wafers during
semiconductor fabrication. Our products assist the global SMT and semiconductor
industries in meeting the rigorous quality demands for printed circuit board
assembly and semiconductor wafer fabrication. 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 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
equipment market. 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 (88% of revenue in 2009) are developed and sold for use in SMT
electronic circuit board assembly or with equipment used in SMT electronic
circuit board assembly as part of our Electronic Assembly segment. We sell
products in this market both as sensor components that are incorporated into
products manufactured by other companies for sale to circuit board assembly
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. Our stand alone system
products are sold to contract 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. Manufacturers of DRAM
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 a frame grabber product line for
general industrial applications. Semiconductor products were 12% of total
revenues in 2009.

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. Revenues were $27.1 million in 2009, down 40% from $45.5 million in
2008. We lost $11.2 million from operations in 2009, down from a $10.5 million
loss from operations in 2008. Our loss from operations in 2008 included a $3.9
million non-cash pre-tax charge for goodwill impairment.

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We
are starting to see signs of strengthening in the global electronics market.
Manufacturers of SMT assembly equipment, who did not place sensor orders in the
first half of 2009, have resumed ordering. In addition, demand for stand alone
SE500 solder paste inspection and AOI systems is improving. For the quarter
ending March 31, 2010, we are forecasting near break-even results on revenue of
$11.0-$12.0 million, up from revenue of $9.0 million in the quarter ending
December 31, 2009. We are forecasting a return to full year profitability in
2010.

Throughout
2008 and into the first six months of 2009, we continued to restructure our
operations, improve efficiency and reduce costs in response to the severe
global economic recession. Significant restructuring actions included the
following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In February 2008, we
 announced plans to move a significant portion of our systems-related product
 development and manufacturing 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.                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | In response to the
 significant weakness in our markets and the global economy, we implemented
 workforce reductions in November 2008 and February 2009. Additional cost
 savings measures were implemented in February 2009, including consolidation
 of manufacturing operations for our semiconductor products into our
 Minneapolis, Minnesota headquarters facility.                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | From the start of the
 fourth quarter of 2008 through the end of the second quarter of 2009, we
 reduced our workforce by 50 employees or approximately 25%, and reduced our
 use of contractors, resulting from the move to Singapore, relocation of our
 manufacturing operations for our semiconductor products, and the November
 2008 and February 2009 workforce reductions. We incurred a $363,000 charge
 for severance in 2009 related to these actions. We expect implementation of
 these cost reduction actions to provide for a more focused R&D effort,
 for both our alignment sensors and systems products.

We
also continued to work on our next generation inspection technology and various
other growth programs. Significant initiatives undertaken by us in 2008 and
2009 and other events impacting our future prospects include the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We announced in September
 2009 that Assembleon has elected to continue to use our alignment products on
 its current and future pick-and-place platforms. We previously disclosed in
 2008 that Assembleon intended to start transitioning away from our alignment
 products when it introduced its next generation of equipment in 2010. Sales
 of new alignment sensors to Assembleon accounted for 12% of total revenue in
 2009 and 10% in 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | During 2008, we invested
 heavily in our next-generation SE500 solder paste inspection system. We
 believe the SE500 is the fastest and most accurate solder paste inspection
 system available on the market. We believe the SE500 has been favorably
 received in the market since its recent introduction and should enable us to
 gain a larger share of the global solder paste inspection market, while also
 improving our margins due to its cost-reduced platform.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | One of our strategies is
 to increase the size of our addressable market for inspection by pursuing
 embedded inspection solutions and by offering a tiered product strategy for
 our stand alone inspection systems that allows customers to purchase the
 level of functionality and performance they desire. The foundation of this
 strategy is common platforms for our next-generation hardware and sensing
 capabilities that allows essentially the same sensor technology to be used
 across a variety of applications. We believe these features will enable us to
 remove significant cost from several new products, resulting in a menu of
 tiered offerings at various price points for different segments of the
 inspection market. By expanding our addressable market to electronics
 manufacturers that desire a lower-cost inspection solution and to those who
 currently do not use any form of inspection, we believe we can generate
 longer-term returns on our R&D investments.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Our next-generation QX500
 AOI system, which was introduced in November 2009, features a cost reduced
 design by leveraging our next-generation common hardware platforms and sensor
 technology. We believe this product will exceed many of the performance metrics
 of our current AOI offering and those of our competitors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | We continue to pursue
 several promising growth opportunities for our next generation inspection
 technologies. In the past year, we have signed two new OEM development
 contracts for our embedded inspection technology with manufacturers of
 electronic assembly equipment. One of these new products provides
 two-dimensional inspection of 100% of the solder paste printed during surface
 mount assembly without slowing the assembly process. The other new product
 incorporates our embedded process verification or EPV inspection technology
 into component placement equipment used in the surface mount assembly
 process. Both of these products expand our addressable market for inspection
 solutions.                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We also recently signed a
 third OEM development contract for an embedded sensor for the photovoltaic
 solar market. Initial shipments of this product will occur in the first and
 second quarters of 2010.                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                               
| |  | We have introduced and
 continue to develop various new sensors for our WaferSense family of
 precision measurement tools, including new automated leveling, gapping,
 teaching, vibration and particle detection sensors to assist with process
 optimization and yield improvement in the semiconductor fabrication process.

We
believe that these anticipated new products, which we anticipate can be sold at
improved margins, will generate significant sales, and will allow us to address
the various price points desired by our customers within the electronic
assembly market and the greater efficiencies we are realizing through our
strategic repositioning in Asia, will lead to improved operating results as the
global electronics market continues to recover from the current economic
recession. Nevertheless, our ability to implement our strategy effectively is
subject to numerous uncertainties and risk, 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.

Objective

Our
objective is to develop complete surface mount technology process control
solutions for our customers. 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 will eventually gain acceptance among manufacturers
of pick and place machines 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 solar wafer 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.

In
order to bring our development and manufacturing for our stand alone inspection
systems products closer to the markets in Asia where the majority of our
customers are located, 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
manufacturing operations for our systems products, to Singapore. The transition
plan was substantially complete by the end of the first quarter of 2009. We had
established sales offices in Singapore in 2001 and China in 2004 to further
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.

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 and semiconductor fabrication sectors of the electronics
industry 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 semiconductor
fabrication industries and to end-user customers who use our SMT systems
products directly for process and quality control in the circuit board
manufacturing process.

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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 8% of our revenue in 2009 and 21% of our revenue in 2008. Sales
of these products, including service repairs, to Assembleon B.V. accounted for
approximately 16% of our revenue in 2009 and 15% of our revenue in 2008.
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.

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 13% of our revenue in 2009, 26% in 2008 and 35% in
2007.

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 6% of our revenue in 2009, 6% in 2008
and 7% in 2007.

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 2009, 5% in 2008 and 4% in 2007.

Alignment Sensors for New Markets

Solar Wafer Alignment Camera. We recently entered into an OEM agreement with a global supplier of
state-of-the art solutions for photovoltaic (Solar) cell manufacturing for our
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. We recently received our first orders for the Solar Wafer
Alignment Camera and expect initial shipments in the first quarter of 2010.

Embedded Inspection Solutions

2D Embedded Solder Paste Inspection.
We are completing development of an inspection module that will allow two
dimensional solder paste inspection with a DEK 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 late in the second quarter of
2010.

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Embedded Process Verification.We recently entered into an agreement with
Juki Corporation, our largest LaserAlign customer, for our embedded process
verification, or EPV, inspection technology. Juki has incorporated EPV 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 LaserAlign®
component placement sensors to ensure that electronic components placed on the
circuit board are properly aligned and positioned.

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

SE500.In 2009, we introduced our next-generation
SE500 solder paste inspection system. Based on a new cost-reduced platform, we believe
the SE500 is the fastest and most accurate solder paste inspection system
available on 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. A version of the SE500
capable of accommodating large board sizes has also been introduced.

In
2010, we expect to introduce a new SPI system 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. We expect to start production
shipments of this product by the middle of 2010.

SE 300 Ultra.We introduced the SE 300, our first in-line
solder paste measurement machine, 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. Since its introduction,
we have continued to enhance the SE 300 Ultra to improve speed, reliability and
ease of use, including simplified operator interfaces with foreign language
capability, an inspection capability for flexible circuits, and a MicroPad
sensor option to improve inspection measurement performance for the smallest
solder paste deposits.

Revenues
from shipments of our SE500 and SE 300 Ultra products accounted for 30% of our
revenue in 2009, 24% in 2008 and 23% in 2007.

Automated Optical Inspection Products.

Flex Ultra HR. The Flex Ultra series of Automated Optical
Inspection (AOI) products were initially introduced in the fourth quarter of
2000 and incorporate technology acquired from Kestra, Ltd. in 1999. Our Flex
Ultra products allow for a variety of machine configurations (different number
of cameras based on board size and resolution requirements) based on customer
needs. These in-line products measure and inspect circuit boards after
component placement to determine whether all components are present, that all
components have been placed correctly and measure the quality of solder joints
after reflow. These products incorporate high-resolution color cameras for
improved imaging, and are designed to inspect the placement of the smallest
components on circuit boards.

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Table of Contents

The
principal advantage of the Flex Ultra series of AOI products is the low level
of false calls at in line speeds compared to other AOI machines. We have
introduced a number of versions of the Flex series AOI products since their
initial introduction in 2000. The latest Flex version introduced in 2007, the
Flex Ultra HR, is capable of inspecting down to 0105 components with 5.0
megapixel camera technology.

QX500. Our next-generation QX500 AOI system, which
was introduced in November 2009, features a cost reduced design by leveraging
our next-generation common hardware platforms and sensor technology. We believe
this new product will exceed many of the performance metrics of our current Flex
Ultra AOI offerings and those of our competitors. We expect to start production
shipments of this product by the middle of 2010.

Revenues
from shipments of our Flex Ultra products accounted for 21% of our revenue in
2009, 15% in 2008 and 12% in 2007.

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 12% of our revenue in 2009, 12%
in 2008, and 9% in 2007.

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 continued to add new
products to the WaferSense
family each year. 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) 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.

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Table of Contents

Markets and Customers

We
sell the vast majority of our products into the electronics manufacturing
market (88% of total revenue in 2009); particularly the portion servicing
manufacturers doing SMT circuit board assembly. The value of automation is high
in this market because the products produced have high unit costs and are
manufactured at speeds too high for effective human intervention. Moreover, the
trend in these industries toward smaller 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 LaserAlign and embedded inspection products are
sold to OEMs serving this market and our stand alone solder paste and automated
optical inspection (AOI) systems are sold to end-user electronic assembly
manufacturers in this market.

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.

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 manufacturing 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 manufacturing
operations for our stand alone systems products, to Singapore. This transition
was substantially complete by the end of the first quarter of 2009. We had
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 manufacturing 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 three years:

|                                                                                                        |  |                         |   |      |    |      |  |    |   | 
|------------------------------------------------------------------------------------------------------- |  | ----------------------- | - | ---- | -- | ---- |  | -- | - | 
|                                                                                                        |  | Year Ended December 31, |  
|                                                                                                        |  | 2009                    |   | 2008 |    | 2007 | 
|                                                                                                        |  |                         |   |      |    |      |  |    |   | 
|Asia                                                                                                    |  | 37                      | % |      | 49 | %    |  | 51 | % | 
|                                                                                                        |  |                         |   |      |    |      |  |    |   | 
|Europe                                                                                                  |  | 33                      | % |      | 33 | %    |  | 34 | % | 
|                                                                                                        |  |                         |   |      |    |      |  |    |   | 
|Other (1)                                                                                               |  | 8                       | % |      | 4  | %    |  | 2  | % | 
|                                                                                                        |  |                         |   |      |    |      |  |    |   | 
|(1) Includes export sales
 in the Americas, primarily export sales to Canada, Mexico and Latin America.

See
Note 11 to the Companys 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.

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Sales and Marketing

Our
electronic assembly alignment sensors are sold to large OEM customers by a
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, US and
China. We have agreements with 44 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 (12).

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.

Backlog

Our
products are typically shipped two weeks to two months after the receipt of an
order. Product backlog was $7.1 million on December 31, 2009, compared to $3.9
million on December 31, 2008, and $6.1 million on December 31, 2007. Backlog at
December 31, 2009 totaling $6.1 million is deliverable in the first quarter of
2010. 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 and semiconductor industries.
For example, production capacity expansion for anticipated holiday or back to
school demands can impact our revenue. 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 QX500 automated optical
 inspection (AOI) systems, additional stand alone solder paste and AOI
 systems, including a new lower-tier solder paste inspection system that we
 expect to introduce in the second quarter of 2010.
| |   |                                                                                                                                                                                                                                                                                                         
| |  | 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.                                                                                                                                                                                                                                                   

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| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 development of
 our WaferSense family of precision measurement tools, including new
 automated leveling, gapping, teaching, vibration and particle sensors to
 assist with process automation and yield improvement.            

Research
and development expenses were $7.1 million in 2009, $10.4 million in 2008 and
$9.8 million in 2007. These amounts represented 26% of revenues in 2009, 23% of
revenues in 2008, and 17% of revenues in 2007. 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 in 2010 to increase slightly as we continue
to focus on new products, including our next generation QX500 automated optical
inspection (AOI) system, a new embedded inspection solution for DEK offering 100% 2D solder paste
inspection, new stand alone inspection systems products, completion of our solar wafer alignment camera and other new
WaferSense products.

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 and 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 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. We believe that
sourcing of mechanical components for our system products in Asia and
distribution of these products from Singapore to our customers, the majority of
whom are located in Asia, will be less expensive than if we continued these
activities at our Minneapolis headquarters facility. Prior to the third quarter
of 2009, all of our semiconductor products had been assembled at our Portland,
Oregon facility. With the move of our stand alone SMT inspection systems
products to Singapore, we concluded that it would be most efficient to assemble
our semiconductor products at our Minneapolis headquarters 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 OEM 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 adapted by several customers 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, and
their price.

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The
primary competition for sales of our next generation SE500 solder paste
inspection system has been from Asian based companies such as KohYoung
Technology (Korea) and Test Research, Inc. (Taiwan). We believe the SE500
solder paste inspection system competes favorably against these competitive
products on the basis of performance and reliability and is the fastest and
most accurate solder paste inspection system available on the market. Our
automated optical inspection (AOI) inspection system products (Flex Ultra HR
and QX500 products) 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.

Our
WaferSense family of sensors is intended to go where wafers go in
semiconductor fabrication and provide measurements of critical factors that are
currently impossible or extremely difficult to obtain. 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, 2009, we had 156 full-time employees worldwide, including 41 in
sales, marketing and customer support, 46 in manufacturing, purchasing and
production engineering, 51 in research and development and 18 in finance,
administration and information services. Of these employees, 85 are located at
our corporate headquarters in Minneapolis and 71 are located in other offices
(7 in the UK, 12 in Oregon, 45 in Singapore, 6 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 93 patents (63 U.S. and 30 foreign) on a number of technologies, including those used in
LaserAlign, our embedded inspection technology, 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 89 pending patents (37 U.S. and 52 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 17 trademarks, 13 of which are registered trademarks, and 3 of which are foreign. We currently have 4 trademarks pending
registration. We also have 10 domain
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.

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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 effect
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 may continue to be significantly impacted by the
 worldwide recession, 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
 is starting to show signs of a tentative recovery, 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 and as these economies have moved into a recession, the
 demand for overall electronics has been adversely affected and therefore, demand
 for our products and our operating results has been adversely affected. We
 cannot predict the timing, strength or duration of any economic disruption or
 subsequent economic recovery, worldwide, in the United States, in our
 industry, or in the electronics market. These and other economic factors have
 had and may continue to have a material adverse effect on demand for our
 products and on our financial condition and operating results.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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 24% of our total revenue in 2009 and
 36% of our total revenue in 2008. Although we believe our relationship with
 these customers are good and we continue to pursue joint development projects
 with them, like most suppliers to the electronics manufacturing markets,
 their businesses have been impacted by the global economic downturn. One of
 these customers had tentatively determined to develop its own sensor
 technology, but has since reconsidered. If the order rates of these customers
 do not return to their historical levels 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | The move
 of stand alone systems product development and manufacturing operations to
 Singapore could prove costly or result in reduced control and efficiency of
 systems operations.
 Our move to Singapore presents a number of risks related to the retention of
 personnel, management of development and manufacturing, control over
 administrative, manufacturing 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
 personnel in Singapore of the caliber required for our products, we will be
 able to retain management on whom we can rely, or that these personnel, or
 manufacturing personnel, can be retained at attractive rates. Although we
 anticipate that components for our systems products may be more readily
 available there, we cannot be certain that we will be able to import the
 hardware components used in our systems products necessary for manufacture in
 Singapore at efficient rates. Our future 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 the current downturn
 from 2008 through 2009, have severely affected our operations and generated
 several years of unprofitable operations. Although we are starting to see
 signs of recovery in our markets, 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                         
| |  | World
 events beyond our control may effect 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 2009, approximately 30% of our
 total revenue was generated by sales of stand alone SE 300 Ultra 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 our market share and 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 78% in 2009)
 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.                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                         
| |  | Because
 we price our products in US dollars, 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 and income 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.                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                         
| |  | 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.                                                                                      

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | 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 two of 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.                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | We have
 experienced significant management turnover in the past twelve months and our
 results of operation could be materially adversely impacted by the loss of
 other management personnel. Both our Vice President of Operations and our Vice President and
 General Manager of Systems Operations resigned effective in May 2009 and our
 Chairman and Chief Technology Officer died in a plane crash in June 2009.
 Although we believe that our current management personnel have compensated
 well, the loss of additional management personnel and the loss of continuity
 in experience with our operations that would result could be very disruptive
 to our operations.                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Much of
 our growth is dependent upon the commercial success of products we have
 recently, or will shortly, introduce. We plan to commence commercial sale of
 several new products during 2010 on which we have completed development or
 are currently nearing completion of development, including the QX500
 automated optical inspection (AOI) systems, additional stand alone solder
 paste and AOI systems, our Embedded Process Verification (EPV®) system for
 Juki, our new solution for DEK offering 100% 2D solder paste inspection, and
 a new solar wafer alignment camera. We have not generated revenue from these
 products, and the first sale of these and other new products could be delayed
 by economic conditions affecting our customers, enhancements required by our
 OEM or end user customers, or technology issues encountered during final
 testing. Further, we have no assurances that these new products will generate
 substantial commercial sales.

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Table of Contents

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 this
 past summer. 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 significant new
 inventions, if we fail to create significant new product innovations, our
 market position would be negatively impacted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 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 6,845,391 shares of our common stock outstanding as of
 February 28, 2010. 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 only approximately 9,000 shares per day during the first two months
 of 2010. 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. The lease for this space will expire in June 2011. We
lease a 20,000 square foot mixed office and warehouse facility in Singapore
that serves as a sales, development and manufacturing facility for our stand
alone systems products. The lease for our facility in Singapore expires in May
2011. As of December 31, 2009, we also have operating leases in Oregon (for our
semiconductor products), the United Kingdom, and Shanghai, China, which expire
in December 2012, June 2010 and August 2010, 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. 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.

|        |  |      |   |      |  |      |  |     |      |  |  |  |   |       |  |  |  |   |      |  | 
|------- |  | ---- | - | ---- |  | ---- |  | --- | ---- |  |  |  | - | ----- |  |  |  | - | ---- |  | 
|        |  | 2009 |   | 2008 | 
|Quarter |  | High |   | Low  |  | High |  | Low |     
|        |  |      |   |      |  |      |  |     |      |  |  |  |   |       |  |  |  |   |      |  | 
|First   |  |      | $ | 6.00 |  |      |  | $   | 4.00 |  |  |  | $ | 12.41 |  |  |  | $ | 9.69 |  | 
|Second  |  |      | $ | 5.90 |  |      |  | $   | 4.23 |  |  |  | $ | 11.70 |  |  |  | $ | 7.88 |  | 
|Third   |  |      | $ | 7.06 |  |      |  | $   | 4.98 |  |  |  | $ | 10.74 |  |  |  | $ | 8.51 |  | 
|Fourth  |  |      | $ | 7.45 |  |      |  | $   | 4.95 |  |  |  | $ | 9.60  |  |  |  | $ | 4.26 |  | 

As
of February 28, 2010, 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 therefore. Our board has no current
intention of paying dividends.

ITEM
6. SELECTED FINANCIAL DATA

Five-Year Financial Summary 
CyberOptics Corporation
(In thousands, except per share information)

|                               |  |         |         |         |   |         |   |      |        |         |   |        |  |   |        | 
|------------------------------ |  | ------- | ------- | ------- | - | ------- | - | ---- | ------ | ------- | - | ------ |  | - | ------ | 
|Year Ended
 December 31        |  | 2009(1) |         | 2008(2) |   | 2007    |   | 2006 |        | 2005(3) |  
|                               |  |         |         |         |   |         |   |      |        |         |   |        |  |   |        | 
|Revenues                       |  | $       | 27,066  |         | $ | 45,452  |   | $    | 58,776 |         | $ | 57,089 |  | $ | 42,179 | 
|Income (loss) from
 operations |  | $       | (11,235 | )       | $ | (10,463 | ) | $    | 5,540  |         | $ | 7,121  |  | $ | 3,104  | 
|Net income (loss)              |  | $       | (6,816  | )       | $ | (6,671  | ) | $    | 5,028  |         | $ | 6,390  |  | $ | 7,150  | 
|Net income (loss) per
 share:  |  |         |         |         |   |         |   |      |        |         |   |        |  |   |        | 
|Basic                          |  | $       | (1.00   | )       | $ | (0.87   | ) | $    | 0.57   |         | $ | 0.71   |  | $ | 0.80   | 
|Diluted                        |  | $       | (1.00   | )       | $ | (0.87   | ) | $    | 0.56   |         | $ | 0.70   |  | $ | 0.79   | 
|                               |  |         |         |         |   |         |   |      |        |         |   |        |  |   |        | 
|Cash and cash equivalents      |  | $       | 4,177   |         | $ | 4,516   |   | $    | 18,864 |         | $ | 30,056 |  | $ | 19,592 | 
|Marketable securities          |  |         | 17,702  |         |   | 25,267  |   |      | 33,754 |         |   | 18,951 |  |   | 21,548 | 
|Working capital                |  |         | 34,348  |         |   | 30,461  |   |      | 47,939 |         |   | 55,662 |  |   | 48,515 | 
|Total assets                   |  |         | 51,137  |         |   | 58,949  |   |      | 87,039 |         |   | 82,010 |  |   | 73,027 | 
|Stockholders equity           |  |         | 44,402  |         |   | 50,880  |   |      | 78,116 |         |   | 73,020 |  |   | 66,190 | 

|    |                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2009 results include a
 $363,000 pre-tax charge for severance costs related to our move to Singapore
 and November 2008 and February 2009 workforce reductions.                                                                                                                              
|    |                                                                                                                                                                                                                                                                                              
|(2) | 2008 results include a
 non-cash pre-tax charge for goodwill impairment of $3.9 million, a $650,000
 pre-tax charge for inventory obsolescence, and a $770,000 pre-tax charge for
 restructuring and severance costs related to our move to Singapore and
 November 2008 workforce reduction.
|    |                                                                                                                                                                                                                                                                                              
|(3) | 2005 results include a
 $3.7 million non-cash income tax benefit related to a reduction in the
 valuation allowance for deferred income taxes.                                                                                                                                               

18

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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 Three Years Ended December 31,
2009:

General Overview

Our
products are sold primarily into the electronics assembly, semiconductor DRAM
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 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. Revenues were $27.1 million in 2009, down 40% from $45.5 million in the
same period last year. We lost $11.2 million from operations in 2009, down from
a $10.5 million loss from operations in 2008. Our loss from operations in 2008
included a $3.9 million non-cash pre-tax charge for goodwill impairment.

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 manufacturing 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, in direct response to the recession, we
implemented workforce reductions in November 2008 and February 2009, including
consolidation of manufacturing operations for our semiconductor products into
our Minneapolis, Minnesota headquarters facility. From the start of the fourth
quarter of 2008 through the end of the second quarter of 2009, we reduced our
workforce by 50 employees or approximately 25%, resulting from the move to
Singapore, relocation of manufacturing for our semiconductor operations, and
the November 2008 and February 2009 workforce reductions. Implementation of
these cost reduction actions has not impacted any of our strategic growth
programs.

We
also continued to work on our next generation inspection technology and various
other growth programs during the recession. We invested heavily during 2008 and
2009 in our next-generation SE500 solder paste inspection system and introduced
this new system, which we believe is the fastest and most accurate solder paste
inspection system available, in the second quarter of 2009. In November 2009,
we introduced our QX500 AOI system, which uses a cost reduced design that was
created using sensor technology that we believe we can replicate and apply to
generate a family of products with price points and functionality that meets
the needs of a larger group of customers. We have also signed three new OEM
development contracts during 2009, two with manufacturers of electronic
assembly equipment for embedded inspection functionality, and a third in a new
market for us: the photovoltaic solar market. One of these new products
provides 100% 2D solder paste inspection with no cycle time penalty, another
represents the first commercial application of our embedded process
verification technology, and the third represents our entry into a new
marketsolar cell manufacture.

In
addition to these contracts for product initiatives, we revived our long-term
relationship with one of our major customers. Although we had previously been
advised that Assembleon intended to start transitioning away from our alignment
products, in late summer 2009, Assembleon determined that it would continue to
use our sensors on its next-generation system.

We
are starting to see signs of strengthening in the global electronics market.
Manufacturers of SMT assembly equipment, who did not place sensor orders in the
first half of 2009, have resumed ordering. In addition, demand for stand alone
SE500 solder paste inspection and AOI systems is improving. 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 2010, will lead to improved operating results over the coming year. For the
quarter ending March 31, 2010, we are forecasting near break-even results on
revenue of $11.0-$12.0 million, up from revenue of $9.0 million in the quarter
ending December 31, 2009. We are presently forecasting a return to full year
profitability in 2010.

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Table of Contents

Segment Results

Our
business consists of two operating segments, the electronic assembly and semiconductor
segments. The electronic assembly segment designs, manufactures and sells
optical process control sensors and inspection systems for the electronic
assembly equipment market. The semiconductor segment designs, manufactures and
sells optical and other process control sensors and related equipment for the
semiconductor capital equipment market. Segment information follows:

|                                    |  |                         |         |      |   |         |   |   |        | 
|----------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------ | 
|                                    |  | Year Ended December 31, |        
|(In
 thousands)                     |  | 2009                    |         | 2008 |   | 2007    |  
|                                    |  |                         |         |      |   |         |   |   |        | 
|Revenue:                            |  |                         |         |      |   |         |   |   |        | 
|Electronic assembly                 |  | $                       | 23,736  |      | $ | 40,193  |   | $ | 53,203 | 
|Semiconductor                       |  |                         | 3,330   |      |   | 5,259   |   |   | 5,573  | 
|Total                               |  | $                       | 27,066  |      | $ | 45,452  |   | $ | 58,776 | 
|                                    |  |                         |         |      |   |         |   |   |        | 
|Gross margin:                       |  |                         |         |      |   |         |   |   |        | 
|Electronic assembly                 |  | $                       | 7,061   |      | $ | 15,867  |   | $ | 26,631 | 
|Semiconductor                       |  |                         | 2,144   |      |   | 3,198   |   |   | 3,616  | 
|Total                               |  | $                       | 9,205   |      | $ | 19,065  |   | $ | 30,247 | 
|                                    |  |                         |         |      |   |         |   |   |        | 
|Operating expense:                  |  |                         |         |      |   |         |   |   |        | 
|Electronic assembly                 |  | $                       | 17,772  |      | $ | 26,206  |   | $ | 21,223 | 
|Semiconductor                       |  |                         | 2,668   |      |   | 3,322   |   |   | 3,484  | 
|Total                               |  | $                       | 20,440  |      | $ | 29,528  |   | $ | 24,707 | 
|                                    |  |                         |         |      |   |         |   |   |        | 
|Income (loss) from
 operations:     |  |                         |         |      |   |         |   |   |        | 
|Electronic assembly                 |  | $                       | (10,711 | )    | $ | (10,339 | ) | $ | 5,408  | 
|Semiconductor                       |  |                         | (524    | )    |   | (124    | ) |   | 132    | 
|Total income (loss) from operations |  | $                       | (11,235 | )    | $ | (10,463 | ) | $ | 5,540  | 
|Interest income and other           |  |                         | 539     |      |   | 1,193   |   |   | 2,214  | 
|Income (loss) before income taxes   |  | $                       | (10,696 | )    | $ | (9,270  | ) | $ | 7,754  | 

Revenues

Our
revenues decreased by 40% to $27.1 million in 2009 from $45.5 million in 2008
and decreased by 23% in 2008 from $58.8 million in 2007. The following table
sets forth, for the years indicated, revenues by product line (in thousands):

|                          |  |      |        |      |   |        |  |   |        | 
|------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                          |  | 2009 |        | 2008 |   | 2007   | 
|Electronic Assembly       |  |      |        |      |   |        |  |   |        | 
|OEM Sensors               |  | $    | 8,428  |      | $ | 20,250 |  | $ | 31,774 | 
|SMT Systems               |  |      | 15,308 |      |   | 19,943 |  |   | 21,429 | 
|Total Electronic Assembly |  |      | 23,736 |      |   | 40,193 |  |   | 53,203 | 
|Semiconductor             |  |      | 3,330  |      |   | 5,259  |  |   | 5,573  | 
|Total                     |  | $    | 27,066 |      | $ | 45,452 |  | $ | 58,776 | 

Electronic
Assembly

The
global recession caused severe weakness and disruption in our electronics
markets starting late in 2008 and throughout all of 2009, causing significant
declines in revenue from both our OEM alignment sensors and stand alone SMT
inspection systems products in both 2008 and 2009 when compared to the same
period of the prior year. Revenue from sales of our OEM alignment sensors
decreased by $11.8 million or 58% in 2009 to $8.4 million, down from $20.2
million in 2008 and decreased by $11.5 million or 36% in 2008, down from $31.8
million in 2007. Revenue from sales of our stand alone SMT inspection systems
products decreased by $4.6 million or 23% to $15.3 million in 2009, down from
$19.9 million in 2008 and decreased $1.5 million or 7% in 2008, down from $21.4
million in 2007.

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The
decrease in sales of OEM alignment sensors, which are primarily dependent on
two significant customers, resulted from significantly reduced orders in late
2008 through most of 2009, as these customers worked to sell their own
inventories of assembly machines in a market where virtually no capital
purchases were occurring. These customers began to increase their orders in
late 2009, and have projected further increases in 2010.

Sales
of our system products were impacted to a large extent by the same capital
purchase issues. 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 and by $1.5
million or 10% in 2008 to $11.1 million, after increasing $2.0 million or 16%
in 2007. Sales of our Flex AOI systems decreased by $1.2 million or 17% in 2009
to $5.7 million and remained virtually unchanged in 2008 at $6.9 million when
compared to 2007. We believe the introduction of our SE500 solder paste
inspection system in the second quarter of 2009, combined with the planned
introduction of our new AOI system, the QX500 and a new lower tier solder paste
inspection system will strengthen our competitive position in the inspection
market. Unlike revenue from our OEM 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 increased use of outsourcing for circuit board assembly,
production difficulties associated with smaller component sizes, increased
production speeds and increased cost pressure on companies manufacturing
circuit boards caused increased demand for our inspection equipment, prior to
the recent global economic recession and will increase demand in the future as
the recession eases and our markets strengthen. However, our electronic
assembly revenue has been, and will continue to be impacted by increasing
competition and price pressure, particularly for stand alone SMT inspection systems
products sold in Asia.

Export
revenue from OEM alignment sensors and stand alone SMT inspection systems
totaled $20.2 million in 2009, $36.7 million in 2008 and $49.4 million in 2007,
comprising 85% of our electronic assembly revenue in 2009, 91% of electronic
assembly revenue in 2008 and 93% of electronic assembly revenue in 2007. 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 semiconductor products decreased by $1.9 million or 37% to $3.3 million in
2009 down from $5.3 million in 2008 and decreased by $314,000 or 6% in 2008
from $5.6 million in 2007. The decrease in revenue 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. Total
WaferSense revenue decreased to $1.6 million in 2009 after increasing 55% to
$1.7 million in 2008 from $1.1 million in 2007.

Our
wafer mapper and frame grabber products are relatively mature. 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 recently introduced several new additions to the WaferSense product line,
including additional leveling sensors, along with new gapping, teaching,
vibration and particle sensors.

Export
revenue from semiconductor products totaled $1.0 million or 30% of total
semiconductor revenue in 2009, $2.4 million or 46% of total semiconductor
revenue in 2008 and $1.8 million or 32% of total semiconductor revenue in 2007.
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.

The
percentage of semiconductor sales coming from international markets increased
substantially in 2008 due to the large increase in WaferSense sales, which
have a higher concentration of international sales than our other semiconductor
products. In addition, sales of our wafer mapping products, which do not
generate significant international sales, declined more in 2008 than our frame
grabber products, which do generate significant international sales.

Cost of Revenue and Gross Margin

Electronic
Assembly

Gross
margin as a percentage of electronic assembly sales were 30% in 2009, 39% in
2008 and 50% in 2007. The reduction in gross margin percentage during 2009 and
2008 was due to significantly lower sales of higher margin OEM 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.

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Other
factors having a negative impact on our gross margins in 2009 and 2008 included
Jukis transition to our next generation LNC 60 sensor, which carries a lower
gross margin than the older sensors we sell to Juki and increasing price
competition for our SMT inspection systems products. In addition, our gross
margin in 2008 was negatively impacted by a $650,000 write-down of excess and
obsolete inventory resulting from our anticipated loss of Assembleon as a
significant customer for our OEM alignment sensors, combined with a sharp
drop-off in demand at the end of 2008 resulting from the recession. In 2009, we
sold most of the previously written-down inventory to Assembleon at a reduced
price. Assembleon has since elected to continue to use our OEM alignment
sensors for its current and future pick-and-place platforms.

In
response to significant weakness in our markets resulting from the global
recession, and transition of manufacturing for our SMT inspection systems
products to Singapore, we reduced our manufacturing workforce by over 30
employees or 45% by the end of the second quarter of 2009. In addition, by the
end of the second quarter of 2009, we completed consolidating our
Portland-based semiconductor manufacturing into our Minneapolis facility, a
move that has further streamlined our cost structure. These actions have
reduced our overall manufacturing costs and have better leveraged our
manufacturing operations, thereby favorably impacting our gross margins not
only in the second half of 2009, but also in future periods.

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 solder paste inspection system
and QX500 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. .

Semiconductor

Gross
margin as a percentage of semiconductor sales was 64% in 2009, compared to 61%
in 2008 and 65% in 2007. Gross margin as a percentage of semiconductor sales
increased in 2009 due to the cost benefit from consolidation of manufacturing
for our semiconductor products into our Minneapolis, Minnesota headquarters.
Gross margins decreased as a percentage of revenue in 2008 compared to 2007 due
to a change in revenue mix, with our highest margin wafer mapping sensors
representing a smaller percentage of total semiconductor revenue.

We
expect gross margins as a percentage of revenue from our semiconductor products
to continue to improve in 2010. Gross margins in 2009 only reflect a partial
year benefit from consolidation of manufacturing for our semiconductor products
into our Minneapolis, Minnesota headquarters facility. Gross margins in 2010
will benefit from the consolidation for the entire year.

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 maintain research and
development and sales and marketing expenses at relatively high levels, even
during the recession and during periods of 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 manufacturing. 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 manufacturing 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
manufacturing 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, and
also due to our transition of a significant portion of our operations to
Singapore, we reduced our workforce by 50 employees or 25% (over 30 in
manufacturing and approximately 20 in development, selling, general and
administrative) 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, have 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.

As
a result of signs of an improving economy, we elected to restore salary levels
for our employees to pre-reduction levels in 2010. In addition, we anticipate
that our 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.

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Electronic Assembly

Research
and development expenses for our electronic assembly segment were $6.0 million
or 25% of revenue in 2009, $8.8 million or 22% of revenue in 2008 and $8.1
million or 15% of revenue in 2007. 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.
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.

The
7% increase in research and development expense in 2008 compared to 2007
resulted from costs incurred to transition our systems related research and
development to Singapore. 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 totaled $1.5 million in 2008. Of this amount, transition costs included
in 2008 research and development expense totaled $879,000.

Selling,
general and administrative expenses for our electronic assembly segment were
$11.4 million or 48% of revenue in 2009, $12.7 million or 32% of revenue in
2008 and $13.0 million or 24% of revenue in 2007. 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 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 and lower foreign sales office
expenses resulting from favorable foreign exchange rates.

The
slight decrease in selling, general and administrative expenses in 2008
compared to 2007 was due to a $178,000 reduction in wage expense resulting from
reduced incentive and stock compensation costs and a $105,000 reduction in
commissions for third party sales representatives resulting from the lower level
of system sales. Selling general and administrative expense in 2007 included
approximately $200,000 of expense related to a canceled acquisition. The
savings from this non-recurring activity were partially offset by additional
expense related to our Singapore transition.

Semiconductor

Research
and development expenses for our semiconductor segment were $1.1 million or 33%
of revenue in 2009, $1.7 million or 31% of revenue in 2008 and $1.7 million or
31% of revenue in 2007. 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 $1.4
million or 41% of revenue in 2009, $1.5 million or 29% of revenue in 2008 and
$1.7 million or 30% of revenue in 2007. 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. The decrease in selling, general and administrative expense in 2008
compared to 2007 was due to a small workforce reduction which occurred early in
2007, and lower costs for incentive compensation.

Severance, Recruitment and Singapore
Transition

We
started to incur severance and recruitment costs in February 2008 in connection
with our decision to move a significant portion of development and
manufacturing for our systems products to Singapore. The transition of
systems-related product development was substantially complete by the end of
the fourth quarter of 2008, and the transition of systems-related manufacturing
was substantially complete by the end of the first quarter of 2009. Severance
costs incurred in 2008 in connection with the February 2008 decision to move
our systems related development and manufacturing to Singapore totaled
$302,000.

We
also incurred expenses totaling $234,000 in 2008 for outside service providers
to assist us with recruitment of our new Singapore based development and
manufacturing team. We maintained our Minneapolis-based systems development
team while we trained our new Singapore based team, resulting in extra costs
totaling $879,000 for wages, training, travel, and other costs, during the
initial start-up and training period. These costs have been classified in our
2008 statement of operations as research and development expense. Other
start-up costs totaling $112,000 have been classified in our 2008 statement of
operations as selling, general and administrative expense. Costs in 2009
related to the move and transition to Singapore were not significant.

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Additional
severance costs of $234,000 were incurred in November 2008 when we reduced our
workforce by approximately 10% or 20 employees in response to weak global
economic conditions.

In
February 2009, we further reduced our workforce by 24 positions in response to
further weakening in the global economy, our transition to Singapore and our
decision to consolidate manufacturing for our semiconductor products in our
Minneapolis facility. Severance costs in 2009 related to the November 2008 and
February 2009 workforce reductions totaled $363,000. All of the severance costs
related to the February 2008 transition to Singapore, and the November 2008 and
February 2009 workforce reductions have been classified as severance and
recruitment in our statement of operations.

A
summary of our severance accruals follows:

|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|-------------------------- |  | --------------------------- | ---- | ------------- | - | ------------------------------------- | - | --------------------------------------- | ---- | ----- | - | --------------------------------------- | - | --------------------------------------- | ---- | ----- | - | ----- | - | - | ---- | - | - | ---- | - | - | ---- | -
|                           |  | Electronic
 Assembly        |      | Semiconductor |   |                                       |  
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |  
|(In thousands)             |  | February
 
 2008
 Singapore |      | Recruit-ment  |   | November
 2008
 workforce 
 reduction |   | February
 
 2009
 workforce 
 reduction |      | Total |   | November
 
 2008
 workforce 
 reduction |   | February
 
 2009
 workforce 
 reduction |      | Total |   | Total |  
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|Balance, January 1, 2008   |  | $                           |     |               | $ |                                      |   | $                                       |     |       | $ |                                        |   | $                                       |     |       | $ |      |   | $ |     |   | $ |     |   | $ |     |  
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|Cost
 incurred             |  |                             | 302  |               |   | 234                                   |   |                                         | 155  |       |   |                                        |   |                                         | 691  |       |   | 79    |   |   |     |   |   | 79   |   |   | 770  |  
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|Payments
 made             |  |                             | (95  | )             |   | (234                                  | ) |                                         | (51  | )     |   |                                        |   |                                         | (380 | )     |   | (75   | ) |   |     |   |   | (75  | ) |   | (455 | )
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|Balance, December 31, 2008 |  | $                           | 207  |               | $ |                                      |   | $                                       | 104  |       | $ |                                        |   | $                                       | 311  |       | $ | 4     |   | $ |     |   | $ | 4    |   | $ | 315  |  
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|Cost
 incurred             |  |                             | 48   |               |   |                                      |   |                                         |     |       |   | 201                                     |   |                                         | 249  |       |   |      |   |   | 114  |   |   | 114  |   |   | 363  |  
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|Payments
 made             |  |                             | (255 | )             |   |                                      |   |                                         | (104 | )     |   | (201                                    | ) |                                         | (560 | )     |   | (4    | ) |   | (114 | ) |   | (118 | ) |   | (678 | )
|                           |  |                             |      |               |   |                                       |   |                                         |      |       |   |                                         |   |                                         |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|Balance, December 31, 2009 |  | $                           |     |               | $ |                                      |   | $                                       |     |       | $ |                                        |   | $                                       |     |       | $ |      |   | $ |     |   | $ |     |   | $ |     |  

Goodwill Impairment and Amortization of
Intangibles

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. We measure for potential impairment of goodwill
associated with each of our reporting units 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. 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.

We
performed our annual goodwill impairment test in the fourth quarter of 2009 and
concluded that the goodwill related to our semiconductor segment in the amount
of $569,000 was not impaired. For 2008, our annual impairment review coincided
with a series of facts and circumstances indicating that our goodwill might be impaired,
including weakness in the United States capital markets, caused by the
deepening global recession, as well as our reduced level of profitability,
causing a significant drop in our market capitalization. Upon completion of our
analysis, we concluded that the goodwill related to our electronic assembly
segment was fully impaired, resulting in a pre-tax goodwill impairment charge
in 2008 of $3.9 million.

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Interest Income and Other

Interest
income and other includes interest earned on investments, realized gains and
losses from sales of investments, gains and losses associated with foreign
currency transactions and in 2008, an unrealized loss on an available for sale
equity security.

Interest income and other decreased in 2009 and 2008 compared to 2007 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. In 2008, we recognized a $166,000
unrealized loss on an available for sale equity security. The decline in market
value for this security was determined to be other than temporary resulting in
recognition of the unrealized loss in our statement of operations. We also
incurred foreign currency transaction losses, net of underlying currency
hedges, of $92,000 in 2009 and $176,000 in 2008.

Income Taxes

We
recorded an income tax benefit of $3.9 million in 2009, reflecting an effective
income tax rate of 36%. In 2008, we recorded an income tax benefit of $2.6
million, reflecting an effective income tax rate of 28.0%. In 2007, we recorded
an income tax provision of $2.7 million, reflecting an effective income tax
rate of 35.2%.

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.
Our effective income tax rate for 2008 was negatively impacted by 10.5% due to
the non-deductibility of a large portion of our goodwill impairment charge. A
reduction in our reserve for income tax exposures reduced our effective rate by
approximately 1.1% in 2008.

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 2006.

Due
to the anticipated carry back of our 2009 federal taxable loss to 2004 and
2005, 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 expect to receive a federal income tax
refund in 2010 of approximately $2.5 million from carry back of our 2009
federal taxable loss.

We
currently have significant deferred tax assets as a result of temporary
differences between taxable income on our tax returns and income before income taxes
under U.S. generally accepted accounting principals, 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
are applied against future taxable income, or when tax credit carry forwards
are applied against future tax liabilities. 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 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 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, 2009.

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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. Therefore,
achievement of 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. We are seeing signs of strengthening
in the global electronics market. Manufacturers of SMT assembly equipment, who
did not place sensor orders in the first half of 2009, have resumed ordering.
In addition, demand for SE500 solder paste inspection and AOI systems is
improving. For the quarter ending March 31, 2010, we are forecasting near
break-even results on revenue of $11.0-$12.0 million, up from revenue of $9.0
million in the quarter ending December 31, 2009, and we are forecasting a
return to full year profitability in 2010. 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, 2009, 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.

Liquidity and Capital Resources

Our
cash and cash equivalents decreased by $339,000 during 2009 due to our use of
$6.5 million of cash to fund our net loss and other operating activities,
purchases of capital assets of $1.0 million, mostly offset by $7.0 million of
proceeds from maturities and sales of marketable securities, net of purchases.
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 declined by $7.9
million to $21.9 million as of December 31, 2009 from $29.8 million as of
December 31, 2008.

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 our 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 later 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.

We
generated $94,000 of cash from operations in 2008. Cash generated from operations
included our net loss of $6.7 million, which included a $3.9 million non-cash
goodwill impairment charge and other non-cash expenses totaling $2.1 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 include a decrease in accounts
receivable of $2.9 million, a decrease in inventories of $127,000 and a
decrease in current assets of $179,000. Cash generated from the reduction in
accounts receivable was mostly offset by an increase in income tax refunds
receivable of $1.5 million, a decrease in accounts payable of $441,000, and decreases
in accrued expenses and advance customer payments of $452,000. The reduction in
accounts receivable and inventory resulted from the significant and rapid
decline in our sales during the later half of 2008. We recorded revenue of $6.7
million in the fourth quarter of 2008 compared to $14.9 million in the fourth
quarter of 2007. Income tax refunds receivable reflects the anticipated tax
refund we expect to receive from the carry back of our 2008 taxable loss to
earlier years. The decrease in accounts payable resulted from a reduction in
new inventory purchases late in the year, in anticipation of the global
economic recession and its impact on near term sales in 2009. The decrease in
accrued expenses and advance customer payments primarily resulted from the
elimination of incentive bonuses in 2008 given our financial performance.

We
generated $6.0 million of cash from investing activities in 2009 compared to
generating $6.4 million of cash from investing activities in 2008. Changes in
the level of investment in marketable securities, resulting from the purchases,
sales and maturities of those securities generated $7.0 million of cash in 2009
and $8.6 million of cash in 2008. We used $1.0 million of cash in 2009 and $2.2
million of cash in 2008 for the purchase of fixed asset and capitalized patent
costs.

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Financing
activities provided $167,000 of cash in 2009 from the exercise of employee
stock options and issuance of common stock under our Employee Stock Purchase
Plan. We used $20.7 million of cash for financing activities in 2008, mainly
for the repurchase of 2.1 million shares of our common stock at a cost of $20.9
million. Stock option exercises and issuance of common stock under our Employee
Stock Purchase Plan generated $241,000 of cash in 2008.

At
December 31, 2009, 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, 2009. 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, 2009, and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods.

|                                            |  |       |       |                   |   |             |  |              |       |  |   |   | 
|------------------------------------------- |  | ----- | ----- | ----------------- | - | ----------- |  | ------------ | ----- |  | - | - | 
|December
 31, 2009 (in 000s)               |  | Total |       | LessThan 
 1 Year |   | 1  4 Years |  | After4 Years |      
|                                            |  |       |       |                   |   |             |  |              |       |  |   |   | 
|Contractual Obligations:                    |  |       |       |                   |   |             |  |              |       |  |   |   | 
|Non-cancelable
 operating lease obligations |  | $     | 2,201 |                   | $ | 1,468       |  | $            | 733   |  | $ |  | 
|Purchase
 obligations                       |  |       | 7,222 |                   |   | 7,222       |  |              |      |  |   |  | 
|Reserve for
 income taxes                   |  |       | 546   |                   |   |            |  |              | 546   |  |   |  | 
|Total contractual cash obligations          |  | $     | 9,969 |                   | $ | 8,690       |  | $            | 1,279 |  | $ |  | 

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. The lease for this space is
set to expire in June 2011. We lease a 20,000 square foot mixed office and
warehouse facility in Singapore. The lease for this facility is set to expire
in May 2011.

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 $21.9 million at
December 31, 2009. 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.

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Fair Value Measurements

We
value our cash equivalents and marketable securities based on a three-level
fair value hierarchy. 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 table provides information regarding fair value measurements for our
cash equivalents and marketable securities as of December 31, 2009 according to
the three-level fair value hierarchy:

|                                        |  |                             |        |                                                                   |                                                    |                                                  |  |                                              |        |  |   |   | 
|--------------------------------------- |  | --------------------------- | ------ | ----------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                        |  |                             |        |                                                                   | Fair Value Measurements at December 31, 2009 Using |                                                 
|                                        |  |                             |       
|(In
 thousands)                         |  | Balance
 December 31,
 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                    | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                        |  |                             |       
|Cash
 equivalents                       |  | $                           | 2,320  |                                                                   | $                                                  |                                                 |  | $                                            | 2,320  |  | $ |  | 
|U.S.
 government and agency obligations |  | $                           | 14,161 |                                                                   | $                                                  |                                                 |  | $                                            | 14,161 |  | $ |  | 
|Corporate
 debt securities              |  | $                           | 3,301  |                                                                   | $                                                  |                                                 |  | $                                            | 3,301  |  | $ |  | 
|Asset backed
 securities                |  | $                           | 210    |                                                                   | $                                                  |                                                 |  | $                                            | 210    |  | $ |  | 
|Equity
 securities                      |  | $                           | 30     |                                                                   | $                                                  | 30                                               |  | $                                            |       |  | $ |  | 

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.

Related Party Transactions

We
did not engage in any related party transactions during the three year period
ended December 31, 2009.

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 and
income per unit, they can influence the price competitiveness of our products
and the willingness of existing and potential customers to purchase units.

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, 2009, we had two open swap agreement that were purchased on that day. As a
result, any unrealized gains or losses as of December 31, 2009 were
inconsequential. During the year ended December 31, 2009, losses from the
settlement of foreign currency swap agreements totaling $229,000 were partially
offset by non-cash transaction gains on the underlying inter-company balances
of $137,000.

We
have sales offices located in the UK, Singapore, and China. We do not believe
that currency fluctuations will have a material impact on our consolidated
financial statements.

Recent Accounting Developments

In
June 2009, the FASB issued ASC No. 105, Generally
Accepted Accounting Principles (GAAP), previously referred to as
Statement of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB
Statement No 162. The
effective date for use of the FASB Codification is for interim and annual
periods ending after September 15, 2009. Our adoption of the FASB Codification
had no impact on our consolidated financial statements.

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In
March 2008, the FASB issued guidance codified in ASC Topic 815, Derivatives and
Hedging (ASC 815), Disclosures about
Derivative Instruments and Hedging Activities.The new guidance is
intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entitys financial condition, financial
performance, and cash flows. We adopted guidance included in ASC 815 on January
1, 2009 and included the appropriate disclosures in our financial statements.
The adoption of this guidance did not have a material impact on our
consolidated financial condition, results of operations or cash flows.

In
April 2009, the FASB issued ASC No. 820-10-35, Fair
Value Measurements and Disclosures  Subsequent Measurement, which
discusses the provisions related to the determination of fair value when the
volume and level of activity for the asset or liability have significantly
decreased. Based on the guidance in ASC No. 820-10-35, if an entity determines
that the level of activity for an asset or liability has significantly
decreased and that a transaction is not orderly, further analysis of
transactions or quoted prices is needed, and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value. The guidance in ASC No. 820-10-35 is to
be applied prospectively and is effective for interim and annual periods ending
after June 15, 2009 with early adoption permitted for periods ending after
March 15, 2009. Our adoption of this guidance had no impact on our consolidated
financial statements.

In
April 2009, the FASB issued ASC No. 320-10-65, Transition
Related to Recognition and Presentation of Other-Than-Temporary Impairments,
which applies to investments in debt securities for which other-than-temporary
impairments may be recorded. If an entitys management asserts that it does not
have the intent to sell a debt security and it is more likely than not that it
will not have to sell the security before recovery of its cost basis, then an
entity may separate other-than-temporary impairments into two components: 1)
the amount related to credit losses (recorded in earnings), and 2) all other amounts
(recorded in other comprehensive income). ASC No. 320-10-65 is effective for
interim and annual reporting periods ending after June 15, 2009. Our adoption
of this guidance had no material impact on our consolidated financial
statements.

In
April 2009, the FASB issued ASC No. 825-10-65, Interim
Disclosures about Fair Value of Financial Instruments, which amends
previous interim disclosure requirements and requires an entity to provide
disclosures about the fair value of financial instruments in interim financial
information. The guidance in ASC No. 825-10-65 is to be applied prospectively
and is effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. Our adoption
of this guidance had no material impact on our consolidated financial
statements.

In
May 2009, the FASB issued ASC No. 855, Subsequent
Events, which requires an entity to disclose the date through which
it has evaluated subsequent events and the basis for that date, whether that
date represents the date the financial statements were issued or were available
to be issued. We adopted this guidance on June 30, 2009 with no material impact
on our consolidated financial statements (see Note 1). This guidance was
subsequent amended by ASU 2010-09, which eliminates the Companys need to
reference the date through which subsequent events were evaluated.

In
October 2009, the FASB issued Accounting Standard Update No. 2009-13 on Topic
605, Revenue Recognition Multiple
Deliverable Revenue Arrangements  a consensus of the FASB Emerging Issues Task
Force.The objective of Accounting Standard Update No. 2009-13 is to
address the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than as a
combined unit. Vendors often provide multiple products or services to their
customers. Those deliverables often are provided at different points in time or
over different time periods. This Update provides amendments to the criteria in
Subtopic 605-25 for separating consideration in multiple-deliverable
arrangements. The amendments in this Update establish a selling price hierarchy
for determining the selling price of a deliverable. The selling price used for
each deliverable will be based on vendor specific objective evidence if
available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor specific objective evidence
nor third-party evidence is available. The amendments in this Update also will
replace the term fair value in the revenue allocation guidance with selling
price to clarify that the allocation of revenue is based on entity-specific
assumptions rather than assumptions of a marketplace participant.

In
October 2009, the FASB issued Accounting Standard Update No. 2009-14 on Topic
985, Certain Revenue Arrangements That
Include Software Elements.The
objective of Accounting Standard Update No. 2009-14 is to exclude tangible
products containing software components and non-software components that
function together to deliver the tangible products essential functionality
from the scope of Topic 985. Instead, arrangements containing software components
and non-software components that function together to deliver the tangible
products essential functionality will fall within the scope of available
revenue accounting guidance for non-software products.

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Accounting
Standard Updates No. 2009-13 and 2009-14 can be applied on a prospective basis
or in certain circumstances on a retrospective basis. If prospective adoption
is elected, it is to be applied to arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Earlier adoption
is permitted. If an entity elects early adoption on a prospective basis, and
the period of adoption is not the beginning of the reporting entitys fiscal
year, the requirements are applied retrospectively to the beginning of the
fiscal year. We anticipate adopting the provisions of Accounting Standard
Updates No. 2009-13 and No. 2009-14 in the first quarter of 2010. Our adoption
of these updates is not expected to have a material impact on our consolidated
financial statements.

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.

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. Allocation of
revenue to undelivered elements of the arrangement is based on fair value of
the element being sold on a stand-alone basis.

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 $1,049,000 as of December 31,
2009.

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 is $488,000 at December 31, 2009.

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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, 2009, we had a reserve
for obsolete and excess inventory of $580,000.

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. 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.

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.

In
the fourth quarter of 2009, we performed our annual goodwill impairment test
and concluded that our remaining goodwill was not impaired.

In
the fourth quarter of 2008, we reviewed our identifiable intangible assets,
long-lived assets and goodwill for impairment because facts and circumstances
similar to those noted above indicated that the assets might be impaired,
including weakness in the United States capital markets caused by the deepening
global recession, and our reduced level of profitability, causing a significant
drop in our market capitalization.

An
impairment loss for our identifiable intangible and long lived assets would be
recognized when future undiscounted cash flows expected to result from use of
the asset and eventual disposition are less than the carrying amount. As of
December 31, 2008, we projected our future undiscounted cash flows associated
with these assets and concluded that there was no impairment.

In
evaluating whether goodwill was impaired, we compared the fair value of our two
reporting units to which goodwill is assigned to their carrying value (Step 1of
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.

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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 forecasts over a 3 year period with an
estimation of residual growth rates thereafter. We use our business plans and
projections as the basis for expected future cash flows. The significant
assumptions incorporated in these forecasts for the 2008 goodwill impairment
tests include our expectations regarding revenue during the 3 year period, a 7
percent terminal growth rate and a 25% discount rate for both our electronic
assembly and semiconductor reporting units. The selection of discount rates may
have a significant impact on the determination of fair value. However, an
increase or decrease of one percent in the discount rate would have had no
impact on the amount of impairment recorded in 2008.

For
purposes of our 2008 goodwill impairment test, we reconciled the fair value for
each of our reporting units to our overall fair value. The publicly traded
market price of our common stock and a control premium of 30 percent were used
in our determination of fair value, which represents the value an investor
would pay above minority interest transaction prices in order to obtain a
controlling interest in the company. The control premium was determined by a
review of premiums paid for similar companies over the past five years. While
the control premium is a significant assumption in determining our overall fair
value, it had a minimal impact on the determination of goodwill impairment in
2008. An increase in the assumed control premium by five percent to 35 percent
would have had no impact on the amount of impairment recorded in 2008 for our electronic
assembly reporting unit.

Our
remaining goodwill at December 31, 2009 and 2008 in the amount of $569,000
relates to our semiconductor reporting unit. Our recent analyses 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.

We
currently have significant deferred tax assets as a result of temporary
differences between taxable income on our tax returns and income before income
taxes under U.S. generally accepted accounting principals, 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
are applied against future taxable income, or when tax credit carry forwards
are applied against future tax liabilities. 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 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 cumulative 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 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, 2009.

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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. Therefore,
achievement of 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. We are seeing signs of strengthening in
the global electronics market. Manufacturers of SMT assembly equipment, who did
not place sensor orders in the first half of 2009, have resumed ordering. In
addition, demand for SE500 solder paste inspection and AOI systems is
improving. For the quarter ending March 31, 2010, we are forecasting near
break-even results on revenue of $11.0-$12.0 million, up from revenue of $9.0
million in the quarter ending December 31, 2009, and we are forecasting a
return to full year profitability in 2010. 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.

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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)                                                                                                                                                  |  | 2009               |        | 2008 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|ASSETS                                                                                                                                                                                    |  |                    |        |      |   |        |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Cash and cash equivalents                                                                                                                                                                 |  | $                  | 4,177  |      | $ | 4,516  |  
|Marketable securities                                                                                                                                                                     |  |                    | 14,557 |      |   | 10,433 |  
|Accounts receivable, less allowance for doubtful accounts of $1,049
 at December 31, 2009 and $250 at December 31, 2008                                                                   |  |                    | 8,389  |      |   | 6,951  |  
|Inventories                                                                                                                                                                               |  |                    | 7,745  |      |   | 9,869  |  
|Income tax refunds receivable                                                                                                                                                             |  |                    | 2,499  |      |   | 1,505  |  
|Other current assets                                                                                                                                                                      |  |                    | 1,130  |      |   | 1,074  |  
|Deferred tax assets, net                                                                                                                                                                  |  |                    | 2,040  |      |   | 2,604  |  
|Total current assets                                                                                                                                                                      |  |                    | 40,537 |      |   | 36,952 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Marketable securities, long term                                                                                                                                                          |  |                    | 3,145  |      |   | 14,834 |  
|Equipment and leasehold improvements, net                                                                                                                                                 |  |                    | 1,921  |      |   | 2,615  |  
|Intangible and other assets, net                                                                                                                                                          |  |                    | 642    |      |   | 956    |  
|Goodwill                                                                                                                                                                                  |  |                    | 569    |      |   | 569    |  
|Other assets                                                                                                                                                                              |  |                    | 163    |      |   | 189    |  
|Deferred tax assets, net                                                                                                                                                                  |  |                    | 4,160  |      |   | 2,834  |  
|Total assets                                                                                                                                                                              |  | $                  | 51,137 |      | $ | 58,949 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                      |  |                    |        |      |   |        |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Accounts payable                                                                                                                                                                          |  | $                  | 3,652  |      | $ | 2,753  |  
|Advance customer payments                                                                                                                                                                 |  |                    | 657    |      |   | 684    |  
|Accrued expenses                                                                                                                                                                          |  |                    | 1,880  |      |   | 3,054  |  
|Total current liabilities                                                                                                                                                                 |  |                    | 6,189  |      |   | 6,491  |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Reserve for income taxes                                                                                                                                                                  |  |                    | 546    |      |   | 1,578  |  
|Total liabilities                                                                                                                                                                         |  |                    | 6,735  |      |   | 8,069  |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Commitments and contingencies (notes 7 and 14)                                                                                                                                            |  |                    |        |      |   |        |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Stockholders equity:                                                                                                                                                                     |  |                    |        |      |   |        |  
|Preferred stock, no par value, 5,000,000 shares authorized, none
 outstanding                                                                                                             |  |                    |       |      |   |       |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Common stock, no par value, 37,500,000 shares authorized, 6,828,616
 shares issued and outstanding at December 31, 2009 and 6,769,295 shares
 issued and outstanding at December 31, 2008 |  |                    | 29,732 |      |   | 29,156 |  
|Accumulated other comprehensive loss                                                                                                                                                      |  |                    | (768   | )    |   | (530   | )
|Retained earnings                                                                                                                                                                         |  |                    | 15,438 |      |   | 22,254 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Total stockholders equity                                                                                                                                                                |  |                    | 44,402 |      |   | 50,880 |  
|                                                                                                                                                                                          |  |                    |        |      |   |        |  
|Total liabilities and stockholders equity                                                                                                                                                |  | $                  | 51,137 |      | $ | 58,949 |  

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)                           |  | 2009                    |         | 2008 |   | 2007    |  
|Revenues                                                            |  | $                       | 27,066  |      | $ | 45,452  |   | $ | 58,776 | 
|Cost of revenues                                                    |  |                         | 17,861  |      |   | 26,387  |   |   | 28,529 | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Gross margin                                                        |  |                         | 9,205   |      |   | 19,065  |   |   | 30,247 | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Research and development expenses                                   |  |                         | 7,130   |      |   | 10,406  |   |   | 9,824  | 
|Selling, general and administrative expenses                        |  |                         | 12,766  |      |   | 14,229  |   |   | 14,701 | 
|Amortization of intangibles                                         |  |                         | 181     |      |   | 182     |   |   | 182    | 
|Severance and recruitment                                           |  |                         | 363     |      |   | 770     |   |   |       | 
|Goodwill impairment                                                 |  |                         |        |      |   | 3,941   |   |   |       | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Income (loss) from operations                                       |  |                         | (11,235 | )    |   | (10,463 | ) |   | 5,540  | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Interest income and other                                           |  |                         | 539     |      |   | 1,193   |   |   | 2,214  | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Income (loss) before income taxes                                   |  |                         | (10,696 | )    |   | (9,270  | ) |   | 7,754  | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Income tax provision (benefit)                                      |  |                         | (3,880  | )    |   | (2,599  | ) |   | 2,726  | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Net income (loss)                                                   |  | $                       | (6,816  | )    | $ | (6,671  | ) | $ | 5,028  | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Net income (loss) per share  Basic                                 |  | $                       | (1.00   | )    | $ | (0.87   | ) | $ | 0.57   | 
|Net income (loss) per share  Diluted                               |  | $                       | (1.00   | )    | $ | (0.87   | ) | $ | 0.56   | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|                                                                    |  |                         |         |      |   |         |   |   |        | 
|Weighted average shares outstanding  Basic                         |  |                         | 6,793   |      |   | 7,703   |   |   | 8,897  | 
|Weighted average and common equivalent shares outstanding  Diluted |  |                         | 6,793   |      |   | 7,703   |   |   | 8,975  | 

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)                                                                    |  | 2009                    |        | 2008 |   | 2007    |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                         |        |      |   |         |   |   |         |  
|Net income (loss)                                                                  |  | $                       | (6,816 | )    | $ | (6,671  | ) | $ | 5,028   |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |                         |        |      |   |         |   |   |         |  
|Depreciation and amortization                                                      |  |                         | 2,544  |      |   | 2,246   |   |   | 1,907   |  
|Provision for doubtful accounts                                                    |  |                         | 827    |      |   | (34     | ) |   | 98      |  
|Deferred income tax provision (benefit)                                            |  |                         | (684   | )    |   | (1,349  | ) |   | 604     |  
|Foreign currency transaction (gains) losses                                        |  |                         | (137   | )    |   | 485     |   |   | (22     | )
|Excess tax benefits from equity compensation plans                                 |  |                         | (11    | )    |   | (2      | ) |   | (33     | )
|Stock compensation expense                                                         |  |                         | 449    |      |   | 580     |   |   | 693     |  
|Unrealized loss on available for sale equity security                              |  |                         |       |      |   | 166     |   |   |        |  
|Realized gains on available for sale debt securities                               |  |                         | (27    | )    |   | (40     | ) |   |        |  
|Goodwill impairment                                                                |  |                         |       |      |   | 3,941   |   |   |        |  
|Changes in operating assets and liabilities:                                       |  |                         |        |      |   |         |   |   |         |  
|Accounts receivable                                                                |  |                         | (2,265 | )    |   | 2,864   |   |   | 592     |  
|Inventories                                                                        |  |                         | 1,700  |      |   | 127     |   |   | (2,862  | )
|Income tax refunds receivable                                                      |  |                         | (901   | )    |   | (1,505  | ) |   |        |  
|Other assets                                                                       |  |                         | 173    |      |   | 179     |   |   | (484    | )
|Accounts payable                                                                   |  |                         | 857    |      |   | (441    | ) |   | (571    | )
|Advance customer payments                                                          |  |                         | (27    | )    |   | (110    | ) |   | 718     |  
|Accrued expenses and other liabilities                                             |  |                         | (2,191 | )    |   | (342    | ) |   | (111    | )
|Net cash provided (used) by operating activities                                   |  |                         | (6,509 | )    |   | 94      |   |   | 5,557   |  
|                                                                                   |  |                         |        |      |   |         |   |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                         |        |      |   |         |   |   |         |  
|Proceeds from maturities of available for sale marketable securities               |  |                         | 12,683 |      |   | 15,199  |   |   | 17,591  |  
|Proceeds from sales of available for sale marketable securities                    |  |                         | 3,363  |      |   | 6,860   |   |   |        |  
|Purchases of available for sale marketable securities                              |  |                         | (9,095 | )    |   | (13,502 | ) |   | (32,064 | )
|Additions to equipment and leasehold improvements                                  |  |                         | (729   | )    |   | (1,834  | ) |   | (1,017  | )
|Additions to patents                                                               |  |                         | (272   | )    |   | (343    | ) |   | (279    | )
|Net cash provided (used) by investing activities                                   |  |                         | 5,950  |      |   | 6,380   |   |   | (15,769 | )
|                                                                                   |  |                         |        |      |   |         |   |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                         |        |      |   |         |   |   |         |  
|Proceeds from exercise of stock options                                            |  |                         | 38     |      |   | 12      |   |   | 632     |  
|Excess tax benefits from equity compensation plans                                 |  |                         | 11     |      |   | 2       |   |   | 33      |  
|Proceeds from issuance of common stock under Employee Stock Purchase
 Plan         |  |                         | 118    |      |   | 227     |   |   | 306     |  
|Repurchase of common stock                                                         |  |                         |       |      |   | (20,949 | ) |   | (1,901  | )
|Net cash provided (used) by financing activities                                   |  |                         | 167    |      |   | (20,708 | ) |   | (930    | )
|                                                                                   |  |                         |        |      |   |         |   |   |         |  
|Effects of exchange rate changes on cash and cash equivalents                      |  |                         | 53     |      |   | (114    | ) |   | (50     | )
|                                                                                   |  |                         |        |      |   |         |   |   |         |  
|Net increase (decrease) in cash and cash equivalents                               |  |                         | (339   | )    |   | (14,348 | ) |   | (11,192 | )
|                                                                                   |  |                         |        |      |   |         |   |   |         |  
|Cash and cash equivalents  beginning of year                                      |  |                         | 4,516  |      |   | 18,864  |   |   | 30,056  |  
|                                                                                   |  |                         |        |      |   |         |   |   |         |  
|Cash and cash equivalents  end of year                                            |  | $                       | 4,177  |      | $ | 4,516   |   | $ | 18,864  |  

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

|                                                                                                                                       |  |              |        |                                                  |   |                    |   |                          |      |   |   |        |   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------------------------------------------ | - | ------------------ | - | ------------------------ | ---- | - | - | ------ | - | - | ------- | -
|                                                                                                                                       |  | Common Stock |        | Accumulated
 Other
 Comprehensive
 Income (Loss) |   | Retained
 Earnings |   | TotalStockholdersEquity |     
|(In
 thousands)                                                                                                                        |  | Shares       |        | Amount                                           |   |                    |   |                         
|BALANCE, DECEMBER 31, 2006                                                                                                             |  |              | 8,862  |                                                  | $ | 49,544             |   | $                        | (453 | ) | $ | 23,929 |   | $ | 73,020  |  
|Adoption of FIN 48 (ASC Topic 740-10-25)                                                                                               |  |              |       |                                                  |   |                   |   |                          |     |   |   | (32    | ) |   | (32     | )
|Excess tax benefit from exercise of stock
 options                                                                                     |  |              |       |                                                  |   | 29                 |   |                          |     |   |   |       |   |   | 29      |  
|Exercise of stock options and vesting of
 restricted stock units, net of shares exchanged as payment                                   |  |              | 60     |                                                  |   | 632                |   |                          |     |   |   |       |   |   | 632     |  
|Stock compensation                                                                                                                     |  |              |       |                                                  |   | 693                |   |                          |     |   |   |       |   |   | 693     |  
|Issuance of common stock under Employee
 Stock Purchase Plan                                                                           |  |              | 29     |                                                  |   | 306                |   |                          |     |   |   |       |   |   | 306     |  
|Repurchase of common stock                                                                                                             |  |              | (158   | )                                                |   | (1,901             | ) |                          |     |   |   |       |   |   | (1,901  | )
|Comprehensive income:                                                                                                                  |  |              |        |                                                  |   |                    |   |                          |      |   |   |        |   |   |         |  
|Market value adjustments of marketable
 securities                                                                                     |  |              |       |                                                  |   |                   |   |                          | 268  |   |   |       |   |   | 268     |  
|Cumulative translation adjustment                                                                                                      |  |              |       |                                                  |   |                   |   |                          | 73   |   |   |       |   |   | 73      |  
|Net income                                                                                                                             |  |              |       |                                                  |   |                   |   |                          |     |   |   | 5,028  |   |   | 5,028   |  
|Total comprehensive income                                                                                                             |  |              |       |                                                  |   |                   |   |                          |     |   |   |       |   |   | 5,369   |  
|BALANCE, DECEMBER 31, 2007                                                                                                             |  |              | 8,793  |                                                  | $ | 49,303             |   | $                        | (112 | ) | $ | 28,925 |   | $ | 78,116  |  
|                                                                                                                                       |  |              |        |                                                  |   |                    |   |                          |      |   |   |        |   |   |         |  
|Excess tax benefit from exercise of stock
 options, net of deferred tax shortfall related to stock options and
 restricted stock units |  |              |       |                                                  |   | (17                | ) |                          |     |   |   |       |   |   | (17     | )
|Exercise of stock options, vesting of restricted
 stock units, net of shares exchanged as payment                                      |  |              | 7      |                                                  |   | 12                 |   |                          |     |   |   |       |   |   | 12      |  
|Share issuances for compensation purposes                                                                                              |  |              | 23     |                                                  |   | 127                |   |                          |     |   |   |       |   |   | 127     |  
|Stock compensation                                                                                                                     |  |              |       |                                                  |   | 453                |   |                          |     |   |   |       |   |   | 453     |  
|Issuance of common stock under Employee Stock
 Purchase Plan                                                                           |  |              | 28     |                                                  |   | 227                |   |                          |     |   |   |       |   |   | 227     |  
|Repurchase of common stock                                                                                                             |  |              | (2,082 | )                                                |   | (20,949            | ) |                          |     |   |   |       |   |   | (20,949 | )
|Comprehensive income:                                                                                                                  |  |              |        |                                                  |   |                    |   |                          |      |   |   |        |   |   |         |  
|Market value adjustments of marketable
 securities, net of reclassification adjustment                                                 |  |              |       |                                                  |   |                   |   |                          | 120  |   |   |       |   |   | 120     |  
|Cumulative translation adjustment                                                                                                      |  |              |       |                                                  |   |                   |   |                          | (538 | ) |   |       |   |   | (538    | )
|Net loss                                                                                                                               |  |              |       |                                                  |   |                   |   |                          |     |   |   | (6,671 | ) |   | (6,671  | )
|Total comprehensive loss                                                                                                               |  |              |       |                                                  |   |                   |   |                          |     |   |   |       |   |   | (7,089  | )
|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 income:                                                                                                                  |  |              |        |                                                  |   |                    |   |                          |      |   |   |        |   |   |         |  
|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  |  

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 BusinessWe 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, and the
placement and transport of wafers during semiconductor fabrication.

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,
2009.

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 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, 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)
primarily 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. An impairment loss would be recognized
when future undiscounted cash flows expected to result from use of the asset
and eventual disposition are less than the carrying amount. We periodically
assess the potential impairment of our intangible and other long-lived assets
based on anticipated undiscounted cash flows.

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.

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. Allocation of revenue to
undelivered elements of the arrangement is based on fair value of the element
being sold on a stand-alone basis.

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.

Foreign Currency TranslationFinancial position and results of operations of our
international subsidiaries are measured using local currency as the 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.

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Income TaxesIn July 2006, the Financial Accounting Standards Board
(FASB) issued guidance codified in Accounting Standards Codification (ASC)
Topic 740-10-25 Accounting for Uncertainty
in Income Taxes. ASC Topic 740-10-25 supersedes guidance codified
in ASC Topic 450, Accounting for
Contingencies, as it relates to income tax liabilities and lowers the
minimum threshold a tax position is required to meet before being recognized in
the financial statements from probable to more likely than not (i.e., a
likelihood of occurrence greater than fifty percent). 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.

We adopted ASC
Topic 740-10-25 on January 1, 2007, at which time differences between the
amounts recognized in the financial statements prior to the adoption of ASC
Topic 740-10-25 and the amounts recognized at the time of adoption were
accounted for as a cumulative effect adjustment recorded to the beginning
balance of retained earnings. 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.

All common
equivalent shares were excluded from our calculation of net loss per diluted
share for the years ended December 31, 2009 and 2008 due to their anti-dilutive
effect. The calculation of net income per diluted share for the year ended
December 31, 2007 includes 78,000 dilutive common equivalent shares. The
calculation of net income (loss) per diluted share excludes potentially
dilutive shares of 674,000 for the year ended December 31, 2009, 813,000 for
the year ended December 31, 2008 and 304,000 for the year ended December 31,
2007, because their effect would be anti-dilutive.

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.

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 3 to
the Consolidated Financial Statements for additional information on stock-based
compensation.

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Recent Accounting DevelopmentsIn June 2009, the FASB issued ASC No. 105, Generally Accepted Accounting Principles (GAAP),
previously referred to as Statement of Financial Accounting Standard (SFAS)
No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No 162. The effective date for use of the FASB Codification is for
interim and annual periods ending after September 15, 2009. Our adoption of the
FASB Codification had no impact on our consolidated financial statements.

In March 2008,
the FASB issued guidance codified in ASC Topic 815, Derivatives and Hedging
(ASC 815), Disclosures about Derivative
Instruments and Hedging Activities.The new guidance is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand
their effects on an entitys financial condition, financial performance, and
cash flows. We adopted guidance included in ASC 815 on January 1, 2009 and
included the appropriate disclosures in our financial statements. The adoption
of this guidance did not have a material impact on our consolidated financial
condition, results of operations or cash flows.

In April 2009,
the FASB issued ASC No. 820-10-35, Fair
Value Measurements and Disclosures  Subsequent Measurement, which
discusses the provisions related to the determination of fair value when the
volume and level of activity for the asset or liability have significantly
decreased. Based on the guidance in ASC No. 820-10-35, if an entity determines
that the level of activity for an asset or liability has significantly
decreased and that a transaction is not orderly, further analysis of
transactions or quoted prices is needed, and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value. The guidance in ASC No. 820-10-35 is to
be applied prospectively and is effective for interim and annual periods ending
after June 15, 2009 with early adoption permitted for periods ending after
March 15, 2009. Our adoption of this guidance had no impact on our consolidated
financial statements.

In April 2009,
the FASB issued ASC No. 320-10-65, Transition
Related to Recognition and Presentation of Other-Than-Temporary Impairments,
which applies to investments in debt securities for which other-than-temporary
impairments may be recorded. If an entitys management asserts that it does not
have the intent to sell a debt security and it is more likely than not that it
will not have to sell the security before recovery of its cost basis, then an
entity may separate other-than-temporary impairments into two components: 1)
the amount related to credit losses (recorded in earnings), and 2) all other
amounts (recorded in other comprehensive income). ASC No. 320-10-65 is
effective for interim and annual reporting periods ending after June 15, 2009.
Our adoption of this guidance had no material impact on our consolidated
financial statements.

In April 2009,
the FASB issued ASC No. 825-10-65, Interim
Disclosures about Fair Value of Financial Instruments, which amends
previous interim disclosure requirements and requires an entity to provide
disclosures about the fair value of financial instruments in interim financial
information. The guidance in ASC No. 825-10-65 is to be applied prospectively
and is effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. Our
adoption of this guidance had no material impact on our consolidated financial
statements.

In May 2009,
the FASB issued ASC No. 855, Subsequent
Events, which requires an entity to disclose the date through which
it has evaluated subsequent events and the basis for that date, whether that
date represents the date the financial statements were issued or were available
to be issued. We adopted this guidance on June 30, 2009 with no material impact
on our consolidated financial statements (see Note 1). This guidance was
subsequent amended by ASU 2010-09, which eliminates the Companys need to
reference the date through which subsequent events were evaluated.

In October
2009, the FASB issued Accounting Standard Update No. 2009-13 on Topic 605, Revenue Recognition Multiple Deliverable Revenue
Arrangements  a consensus of the FASB Emerging Issues Task Force.The
objective of Accounting Standard Update No. 2009-13 is to address the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than as a combined
unit. Vendors often provide multiple products or services to their customers.
Those deliverables often are provided at different points in time or over
different time periods. This Update provides amendments to the criteria in
Subtopic 605-25 for separating consideration in multiple-deliverable
arrangements. The amendments in this Update establish a selling price hierarchy
for determining the selling price of a deliverable. The selling price used for
each deliverable will be based on vendor specific objective evidence if
available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor specific objective
evidence nor third-party evidence is available. The amendments in this Update
also will replace the term fair value in the revenue allocation guidance with
selling price to clarify that the allocation of revenue is based on
entity-specific assumptions rather than assumptions of a marketplace
participant.

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In October
2009, the FASB issued Accounting Standard Update No. 2009-14 on Topic 985, Certain Revenue Arrangements That Include Software Elements.The objective of
Accounting Standard Update No. 2009-14 is to exclude tangible products
containing software components and non-software components that function
together to deliver the tangible products essential functionality from the
scope of Topic 985. Instead, arrangements containing software components and
non-software components that function together to deliver the tangible products
essential functionality will fall within the scope of available revenue
accounting guidance for non-software products.

Accounting
Standard Updates No. 2009-13 and 2009-14 can be applied on a prospective basis
or in certain circumstances on a retrospective basis. If prospective adoption
is elected, it is to be applied to arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Earlier adoption
is permitted. If an entity elects early adoption on a prospective basis, and
the period of adoption is not the beginning of the reporting entitys fiscal
year, the requirements are applied retrospectively to the beginning of the
fiscal year. We anticipate adopting the provisions of Accounting Standard
Updates No. 2009-13 and No. 2009-14 in the first quarter of 2010. Our adoption
of these updates is not expected to have a material impact on our consolidated
financial statements.

Comprehensive Income (Loss)Components of comprehensive income (loss) include net
income (loss), foreign-currency translation adjustments, unrealized gains on
available-for-sale securities and reclassification adjustments. At December 31,
2009 and 2008, components of accumulated other comprehensive loss is as
follows:

|                                                                                                       |  |                                |      |                                       |   |                                         |   |   |      |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ---- | ------------------------------------- | - | --------------------------------------- | - | - | ---- | -
|(In
 thousands)                                                                                        |  | Foreign
 Currency
 Translation |      | Net
 Unrealized
 Gains on
 Securities |   | Accumulated
 Other
 Comprehensive
 Loss |  
|                                                                                                       |  |                                |      |                                       |   |                                         |   |   |      |  
|Balance
 December 31, 2006                                                                             |  | $                              | (441 | )                                     | $ | (12                                     | ) | $ | (453 | )
|Unrealized gains on investments, net of tax
 of $147                                                   |  |                                |     |                                       |   | 268                                     |   |   | 268  |  
|Translation adjustments                                                                                |  |                                | 73   |                                       |   |                                        |   |   | 73   |  
|Other
 comprehensive income (loss)                                                                     |  |                                | 73   |                                       |   | 268                                     |   |   | 341  |  
|                                                                                                       |  |                                |      |                                       |   |                                         |   |   |      |  
|Balance
 December 31, 2007                                                                             |  | $                              | (368 | )                                     | $ | 256                                     |   | $ | (112 | )
|Unrealized gains on investments, net of tax
 of $20                                                    |  |                                |     |                                       |   | 38                                      |   |   | 38   |  
|Reclassification adjustment for realized
 gains and impairment losses on securities, net of tax of $44 |  |                                |     |                                       |   | 82                                      |   |   | 82   |  
|Translation adjustments                                                                                |  |                                | (538 | )                                     |   |                                        |   |   | (538 | )
|Other
 comprehensive income (loss)                                                                     |  |                                | (538 | )                                     |   | 120                                     |   |   | (418 | )
|                                                                                                       |  |                                |      |                                       |   |                                         |   |   |      |  
|Balance
 December 31, 2008                                                                             |  | $                              | (906 | )                                     | $ | 376                                     |   | $ | (530 | )
|Unrealized losses on investments, net of
 tax of $132                                                  |  |                                |     |                                       |   | (240                                    | ) |   | (240 | )
|Reclassification adjustment for realized
 gains on sales of 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 | )

Net unrealized
gains on securities include deferred tax liabilities of $63,000 at December 31,
2009 and $205,000 at December 31, 2008.

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NOTE 2  MARKETABLE SECURITIES

Investments in
marketable securities classified as available for sale with a carrying amount
of $17,702,000 at December 31, 2009 and $25,267,000 at December 31, 2008
consist of the following:

|                                                       |  |                   |        |                   |   |                    |  |                 |     |   |   |        | 
|------------------------------------------------------ |  | ----------------- | ------ | ----------------- | - | ------------------ |  | --------------- | --- | - | - | ------ | 
|                                                       |  | 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  | 

|                                                       |  |                   |        |                   |   |                    |  |                 |     |   |   |        | 
|------------------------------------------------------ |  | ----------------- | ------ | ----------------- | - | ------------------ |  | --------------- | --- | - | - | ------ | 
|                                                       |  | December 31, 2008 |       
|                                                       |  |                   |       
|(In
 thousands)                                        |  | Cost              |        | Unrealized
 Gains |   | Unrealized
 Losses |  | Recorded
 Basis |    
|                                                       |  |                   |        |                   |   |                    |  |                 |     |   |   |        | 
|U.S.
 government and agency obligations                |  | $                 | 8,793  |                   | $ | 130                |  | $               |    |   | $ | 8,923  | 
|Corporate
 debt securities and certificates of deposit |  |                   | 1,500  |                   |   | 10                 |  |                 |    |   |   | 1,510  | 
|Marketable
 securities  short term                    |  | $                 | 10,293 |                   | $ | 140                |  | $               |    |   | $ | 10,433 | 
|                                                       |  |                   |        |                   |   |                    |  |                 |     |   |   |        | 
|U.S.
 government and agency obligations                |  | $                 | 11,739 |                   | $ | 489                |  | $               |    |   | $ | 12,228 | 
|Corporate
 debt securities                             |  |                   | 1,010  |                   |   | 9                  |  |                 | (2  | ) |   | 1,017  | 
|Asset backed
 securities                               |  |                   | 1,560  |                   |   | 9                  |  |                 | (10 | ) |   | 1,559  | 
|Equity
 securities                                     |  |                   | 84     |                   |   |                   |  |                 | (54 | ) |   | 30     | 
|Marketable
 securities  long term                     |  | $                 | 14,393 |                   | $ | 507                |  | $               | (66 | ) | $ | 14,834 | 

Our investment
in equity securities was in a $54,000 unrealized loss position at December 31,
2009 and 2008 due to weak economic and stock market conditions. In 2008, we
recognized a $166,000 impairment charge for this security resulting from a
decline in market value which we determined to be other than temporary. We
intend to hold this security indefinitely. No other impairment charges were
recognized for marketable securities in 2009 or 2008.

Our
investments in long term marketable debt securities all have maturities of less
than five years. At December 31, 2009, marketable debt securities valued at
$16,463,000 were in an unrealized gain position totaling $235,000. 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). At December 31, 2008, marketable debt
securities valued at $23,645,000 were in an unrealized gain position totaling
$647,000. All remaining marketable debt securities at December 31, 2008, valued
at $1,592,000, were in an unrealized loss position totaling $12,000 (all had
been in an unrealized loss position for less than twelve months).

Net pre-tax
unrealized gains for marketable securities of $182,000 at December 31, 2009 and
$581,000 at December 31, 2008 were recorded as a component of accumulated other
comprehensive income (loss) in stockholders equity. In 2009, we recognized a
gain of $27,000 from the sale of marketable debt securities and received sale
proceeds totaling $3,363,000. In 2008, we recognized a gain of $40,000 from the
sale of marketable debt securities and received sale proceeds totaling
$6,860,000. There were no sales of marketable securities in 2007.

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NOTE 3  ACCOUNTING FOR STOCK BASED
COMPENSATION

Share Based Compensation Information

The following
is a summary of pre-tax equity based compensation expense for the three year
period ended December 31, 2009:

|                                                          |  |      |     |      |   |      |  |   |     | 
|--------------------------------------------------------- |  | ---- | --- | ---- | - | ---- |  | - | --- | 
|(In
 thousands)                                           |  | 2009 |     | 2008 |   | 2007 | 
|                                                          |  |      |     |      |   |      | 
|Pre-tax
 equity compensation expense                      |  | $    | 449 |      | $ | 580  |  | $ | 693 | 
|Income tax
 benefits related to equity based compensation |  | $    | 142 |      | $ | 144  |  | $ | 132 | 

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, 2009, the
total unrecognized compensation cost related to non vested equity based
compensation arrangements was $526,000 and the related weighted average period
over which it is expected to be recognized is 2.3 years. The total fair value
of shares vested was $274,000 in 2009, $393,000 in 2008 and $758,000 in 2007.

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 2009 and 2008 because
our historical exercise experience is not expected to be representative of
exercise patterns in the future, due to our recent restructuring activities.
For immediate vesting options granted to our outside directors in 2007, the
expected life representing the length of time in years that the options are
expected to be outstanding was calculated using historical exercise data. No
stock options were granted to our outside directors in 2009 or 2008. Instead,
each of our outside directors received 1,000 shares of our common stock and an
increase in their annual cash retainer for service on our board. Expected
volatility was computed based on historical fluctuations in the daily price of
our common stock.

For stock
options granted during the three year period ended December 31, 2009, 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:

|                                           |  |      |             |      |  |       |  |  |             | 
|------------------------------------------ |  | ---- | ----------- | ---- |  | ----- |  |  | ----------- | 
|                                           |  | 2009 |             | 2008 |  | 2007  | 
|                                           |  |      |             |      |  |       | 
|Risk-free
 interest rates                  |  |      | 2.09%-2.29% |      |  | 1.67% |  |  | 3.51%-4.73% | 
|Expected
 life in years                    |  |      | 4.75        |      |  | 4.75  |  |  | 4.75 - 6.86 | 
|Expected
 volatility                       |  |      | 49%-53%     |      |  | 44%   |  |  | 43% - 52%   | 
|Expected
 dividends                        |  |      | None        |      |  | None  |  |  | None        | 
|Weighted
 average fair value on grant date |  |      | $2.29       |      |  | $1.95 |  |  | $5.99       | 

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Stock Options

We have three
stock incentive plans that are administered under the supervision of the
Compensation Committee of the Board of Directors which have 909,709 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, 2009, there are 363,795 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 three stock incentive plans.

The following
is a summary of stock option activity for each of the years in the three year
period ended December 31, 2009:

|                                           |  |                        |          |      |   |         |   |   |          |  
|------------------------------------------ |  | ---------------------- | -------- | ---- | - | ------- | - | - | -------- | -
|                                           |  | Year ended December 31 |         
|Shares                                     |  | 2009                   |          | 2008 |   | 2007    |  
|                                           |  |                        |          |      |   |         |  
|Outstanding,
 beginning of year            |  |                        | 715,646  |      |   | 607,346 |   |   | 763,721  |  
|Granted                                    |  |                        | 45,000   |      |   | 133,900 |   |   | 48,800   |  
|Exercised                                  |  |                        | (16,250  | )    |   | (2,250  | ) |   | (57,625  | )
|Expired                                    |  |                        | (143,576 | )    |   | (20,150 | ) |   | (145,300 | )
|Forfeited                                  |  |                        | (51,725  | )    |   | (3,200  | ) |   | (2,250   | )
|Outstanding,
 end of year                  |  |                        | 549,095  |      |   | 715,646 |   |   | 607,346  |  
|                                           |  |                        |          |      |   |         |   |   |          |  
|Exercisable                                |  |                        | 412,328  |      |   | 515,134 |   |   | 491,543  |  
|                                           |  |                        |          |      |   |         |   |   |          |  
|Weighted
 average exercise price per share |  | 2009                   |          | 2008 |   | 2007    |  
|                                           |  |                        |          |      |   |         |   |   |          |  
|Outstanding,
 beginning of year            |  | $                      | 10.44    |      | $ | 11.71   |   | $ | 12.11    |  
|Granted                                    |  | $                      | 5.13     |      | $ | 4.99    |   | $ | 12.54    |  
|Exercised                                  |  | $                      | 4.30     |      | $ | 5.20    |   | $ | 11.11    |  
|Expired                                    |  | $                      | 12.11    |      | $ | 12.57   |   | $ | 14.32    |  
|Forfeited                                  |  | $                      | 7.34     |      | $ | 14.06   |   | $ | 11.88    |  
|Outstanding,
 end of year                  |  | $                      | 10.04    |      | $ | 10.44   |   | $ | 11.71    |  
|                                           |  |                        |          |      |   |         |   |   |          |  
|Exercisable                                |  | $                      | 11.36    |      | $ | 11.56   |   | $ | 11.45    |  

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, 2009,
the weighted average remaining contractual term was 3.54 years and the
aggregate intrinsic value was $287,000. For options exercisable at December 31,
2009, the weighted average remaining contractual term was 2.75 years and the
aggregate intrinsic value was $91,000. The aggregate intrinsic value of stock
options exercised was $32,000 in 2009, $12,000 in 2008 and $132,000 in 2007. We
received proceeds of $46,000 and realized an income tax benefit of $11,000 from
the exercise of stock options in 2009. 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.

The following
is a summary of outstanding options as of December 31, 2009:

|                  |  |                    |         |                                           |  |                                 |  |                    |       |                                         |  |                                 |  |  |      |  |   |       | 
|----------------- |  | ------------------ | ------- | ----------------------------------------- |  | ------------------------------- |  | ------------------ | ----- | --------------------------------------- |  | ------------------------------- |  |  | ---- |  | - | ----- | 
|Exercise
 Price   |  | OptionsOutstanding |         | WeightedAverageRemaining Life
 (in years) |  | Weighted
 AverageExercise Price |  | OptionsExercisable |       | WeightedAverageRemaining Life(in years) |  | Weighted
 AverageExercise Price | 
|                  |  |                    |         |                                           |  |                                 |  |                    |       |                                         |  |                                 | 
|Less than
 $4.99  |  |                    | 132,600 |                                           |  | 6.05                            |  | $                  | 4.94  |                                         |  | 24,400                          |  |  | 5.93 |  | $ | 4.99  | 
|$5.00 to
 $9.99   |  |                    | 84,000  |                                           |  | 1.26                            |  | $                  | 6.11  |                                         |  | 74,000                          |  |  | .53  |  | $ | 6.09  | 
|$10.00 to
 $14.99 |  |                    | 299,395 |                                           |  | 3.17                            |  | $                  | 12.05 |                                         |  | 280,828                         |  |  | 3.08 |  | $ | 12.01 | 
|$15.00 to
 $19.99 |  |                    | 1,400   |                                           |  | 1.21                            |  | $                  | 17.59 |                                         |  | 1,400                           |  |  | 1.21 |  | $ | 17.59 | 
|Over $20.00       |  |                    | 31,700  |                                           |  | 2.65                            |  | $                  | 22.55 |                                         |  | 31,700                          |  |  | 2.65 |  | $ | 22.55 | 
|                  |  |                    |         |                                           |  |                                 |  |                    |       |                                         |  |                                 |  |  |      |  |   |       | 
|Total             |  |                    | 549,095 |                                           |  | 3.54                            |  | $                  | 10.04 |                                         |  | 412,328                         |  |  | 2.75 |  | $ | 11.36 | 

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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 $4.69 in 2009, $4.99
in 2008 and $12.34 in 2007. The aggregate fair value of outstanding restricted
stock units based on the closing share price of our common stock as of December
31, 2009 was $153,000. 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 $80,000 for the year ended December 31, 2009, $25,000 for the year
ended December 31, 2008 and $36,000 for the year ended December 31, 2007.

A summary of
activity in non vested restricted stock units for the year ended December 31,
2009 follows:

|                                  |  |        |         |                                          |   |      | 
|--------------------------------- |  | ------ | ------- | ---------------------------------------- | - | ---- | 
|                                  |  | Shares |         | Weighted  Average
Grant Date Fair
Value |  
|                                  |  |        |        
|Non vested
restricted stock units |  |        |        
|                                  |  |        |         |                                          |   |      | 
|Non vested
at December 31, 2008   |  |        | 42,701  |                                          | $ | 7.05 | 
|Granted                           |  |        | 4,000   |                                          | $ | 4.69 | 
|Vested                            |  |        | (13,670 | )                                        | $ | 7.08 | 
|Forfeited                         |  |        | (10,212 | )                                        | $ | 6.64 | 
|Non vested
at December 31, 2009   |  |        | 22,819  |                                          | $ | 6.79 | 

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. Under the
plan, 800,000 shares of common stock have been reserved for issuance. Share
issuances under the Employee Stock Purchase Plan were 20,810 for the year ended
December 31, 2009, 28,505 for the year ended December 31, 2008 and 28,859 for
the year ended December 31, 2007. As of December 31, 2009, 92,002 shares remain
available for issuance under this plan.

Stock Grant Plan for Non-Employee Directors

In 2008, our
shareholders approved a stock grant plan for our non-employee directors. The
plan provides for automatic grants of 1,000 shares of our common stock to each
of our non-employee directors upon their re-election to the board of directors.
The plan took the place of our stock option plan for non-employee directors,
under which each director received a stock option to purchase 4,500 shares of
common stock exercisable at market value on the date of their re-election.

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. We issued 3,000 shares under this
plan in 2009 to non-employee directors, and 24,000 shares remain available at
December 31, 2009 for future issuance. The shares issued in 2009 had a fair
market value on the date of grant equal to $14,000.

NOTE 4  OTHER FINANCIAL STATEMENT DATA

Inventories
consist of the following:

|                                  |  |              |       |      |   |       | 
|--------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                  |  | December 31, |      
|(In
thousands)                    |  | 2009         |       | 2008 |  
|                                  |  |              |       |      |   |       | 
|Raw
materials and purchased parts |  | $            | 3,312 |      | $ | 3,442 | 
|Work in
process                   |  |              | 637   |      |   | 724   | 
|Finished
goods                    |  |              | 3,796 |      |   | 5,703 | 
|                                  |  |              |       |      |   |       | 
|                                  |  | $            | 7,745 |      | $ | 9,869 | 

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Equipment and
Leasehold Improvements consist of the following:

|                                          |  |              |         |      |   |        |  
|----------------------------------------- |  | ------------ | ------- | ---- | - | ------ | -
|                                          |  | December 31, |        
|(In
thousands)                            |  | 2009         |         | 2008 |  
|                                          |  |              |         |      |   |        |  
|Equipment                                 |  | $            | 10,881  |      | $ | 10,657 |  
|Leasehold
improvements                    |  |              | 1,347   |      |   | 1,487  |  
|                                          |  |              | 12,228  |      |   | 12,144 |  
|                                          |  |              |         |      |   |        |  
|Accumulated
depreciation and amortization |  |              | (10,307 | )    |   | (9,529 | )
|                                          |  |              |         |      |   |        |  
|                                          |  | $            | 1,921   |      | $ | 2,615  |  

Total
depreciation expense related to equipment and leasehold improvements was
$1,283,000 for the year ended December 31, 2009, $1,147,000 for the year ended
December 31, 2008 and $901,000 for the year ended December 31, 2007.

Intangible and
Other Assets consist of the following:

|                       |  |                       |        |                          |   |        |   |                       |     |                          |   |        |  |   |        |   |   |     | 
|---------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | - | --------------------- | --- | ------------------------ | - | ------ |  | - | ------ | - | - | --- | 
|                       |  | December 31, 2009     |        | December 31, 2008        |  
|(In
thousands)         |  | Gross Carrying
Amount |        | Accumulated
Amortization |   | Net    |   | Gross Carrying Amount |     | Accumulated Amortization |   | Net    | 
|                      
|Developed
technology   |  | $                     | 7,775  |                          | $ | (7,485 | ) | $                     | 290 |                          | $ | 7,775  |  | $ | (7,304 | ) | $ | 471 | 
|Patents and
trademarks |  |                       | 2,681  |                          |   | (2,329 | ) |                       | 352 |                          |   | 2,730  |  |   | (2,245 | ) |   | 485 | 
|                      
|                       |  | $                     | 10,456 |                          | $ | (9,814 | ) | $                     | 642 |                          | $ | 10,505 |  | $ | (9,549 | ) | $ | 956 | 

Amortization
expense for the three years ended December 31, 2009, 2008 and 2007 is as
follows:

|                       |  |                        |     |      |   |      |  |   |     | 
|---------------------- |  | ---------------------- | --- | ---- | - | ---- |  | - | --- | 
|                       |  | Year ended December 31 |    
|(In
thousands)         |  | 2009                   |     | 2008 |   | 2007 | 
|                       |  |                        |     |      |   |      |  |   |     | 
|Developed
technology   |  | $                      | 181 |      | $ | 182  |  | $ | 182 | 
|Patents and
trademarks |  |                        | 293 |      |   | 274  |  |   | 243 | 
|                       |  |                        |     |      |   |      |  |   |     | 
|                       |  | $                      | 474 |      | $ | 456  |  | $ | 425 | 

As of December
31, 2009, the weighted average remaining life of our intangible assets was
approximately 1.5 years for developed technology and 1.8 years for patents and
trademarks. Estimated aggregate amortization expense based on current
intangibles for the next three years is expected to be as follows: $371,000 in
2010, $226,000 in 2011 and $45,000 in 2012.

In the fourth
quarter of 2008, we reviewed our identifiable intangible and long lived assets for
impairment because a series of facts and circumstances indicated that the
assets might be impaired, including weakness in the United States capital
markets caused by the deepening global recession, and our reduced level of
profitability, causing a significant drop in our market capitalization. An
impairment loss for our identifiable intangible and long lived assets would be
recognized when future undiscounted cash flows expected to result from use of
the asset and eventual disposition are less than the carrying amount. We
projected our future undiscounted cash flows associated with these assets and
have concluded that there is no impairment.

Accrued
Expenses consist of the following:

|                     |  |             |       |      |   |       | 
|-------------------- |  | ----------- | ----- | ---- | - | ----- | 
|                     |  | December 31 |      
|(In
thousands)       |  | 2009        |       | 2008 |  
|                     |  |             |       |      |   |       | 
|Wages and
benefits   |  | $           | 894   |      | $ | 1,429 | 
|Warranty
liability   |  |             | 488   |      |   | 823   | 
|Severance            |  |             |      |      |   | 315   | 
|Income taxes
payable |  |             | 98    |      |   | 45    | 
|Other                |  |             | 400   |      |   | 442   | 
|                     |  |             |       |      |   |       | 
|                     |  | $           | 1,880 |      | $ | 3,054 | 

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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. 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)                    |  | 2009                   |      | 2008 |  
|                                   |  |                        |      |      |   |        |  
|Balance at the beginning of period |  | $                      | 823  |      | $ | 819    |  
|Accruals for warranties            |  |                        | 473  |      |   | 1,084  |  
|Settlements made during the period |  |                        | (808 | )    |   | (1,080 | )
|                                   |  |                        |      |      |   |        |  
|Balance at the end of period       |  | $                      | 488  |      | $ | 823    |  

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)                     |  | 2009                   |      | 2008 |  
|                                   |  |                        |      |      |   |      |  
|Balance at the beginning of period |  | $                      | 605  |      | $ | 425  |  
|Revenue deferrals                  |  |                        | 441  |      |   | 449  |  
|Amortization of deferred revenue   |  |                        | (410 | )    |   | (269 | )
|                                   |  |                        |      |      |   |      |  
|Balance at the end of period       |  | $                      | 636  |      | $ | 605  |  

NOTE 5  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. For 2008, our annual
impairment review coincided with a series of facts and circumstances indicating
that our goodwill might be impaired, including weakness in the United States
capital markets, caused by the deepening global recession, as well as our
reduced level of profitability, causing a significant drop in our market capitalization.

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
forecasts over a 3 year period with an estimation of residual growth rates
thereafter. We use our business plans and projections as the basis for expected
future cash flows.

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2009
Goodwill Impairment Analysis

The goodwill
remaining on our books at December 31, 2009 in the amount of $569,000, relates
entirely to our semiconductor reporting unit.
The significant assumptions incorporated in the cash flow forecasts used
for our 2009 goodwill impairment test include our expectations regarding revenue
during the next 3 year period for our semiconductor reporting unit, a 7 percent
terminal growth rate and a 20% discount rate.
Our recent analyses indicate that this goodwill is not impaired.

2008
Goodwill Impairment Analysis

The significant
assumptions incorporated in the cash flow forecasts used for our 2008 goodwill
impairment tests include our expectations regarding revenue during the next 3
year period, a 7 percent terminal growth rate and a 25% discount rate for both
our electronic assembly and semiconductor reporting units. The selection of
discount rates may have a significant impact on the determination of fair
value. However, for the 2008 test, an increase or decrease of one percent in
the discount rate would have had no impact on the impairment recorded for our
electronic assembly reporting unit.

For purposes
of our goodwill impairment test, we reconciled the fair value for each of our
reporting units to our overall fair value.
The publicly traded market price of our common stock and a control
premium of 30 percent were used in our determination of fair value, which
represents the value an investor would pay above minority interest transaction
prices in order to obtain a controlling interest in the company. The control
premium was determined by a review of premiums paid for similar companies over
the past five years. While the control premium is a significant assumption in
determining our overall fair value, it had a minimal impact on the
determination of goodwill impairment in 2008. An increase in the assumed
control premium by five percent to 35 percent would have had no impact on the
impairment recorded for our electronic assembly reporting unit.

Upon
completion of our analysis, we concluded that the goodwill related to our electronic
assembly reporting unit at December 31, 2008 was fully impaired, resulting in a
$3,941,000 impairment charge. Our
remaining goodwill at December 31, 2008, in the amount of $569,000 relates to
our semiconductor reporting unit. Our analyses indicate that this goodwill is
not impaired.

Goodwill at
December 31, 2009 in the amount of $569,000 relates entirely to our
semiconductor segment. There was no change in our goodwill during 2009. Changes to our goodwill balance during the
year ended December 31 2008 include the following:

|                             |  |                             |        |                        |   |       |  |   |        |  
|---------------------------- |  | --------------------------- | ------ | ---------------------- | - | ----- |  | - | ------ | -
|(In
 thousands)              |  | ElectronicAssembly
 Segment |        | Semiconductor
 Segment |   | Total | 
|Goodwill,
 December 31, 2007 |  | $                           | 4,638  |                        | $ | 569   |  | $ | 5,207  |  
|Translation
 adjustment      |  |                             | (697   | )                      |   |      |  |   | (697   | )
|Impairment                   |  |                             | (3,941 | )                      |   |      |  |   | (3,941 | )
|Goodwill,
 December 31, 2008 |  | $                           |       |                        | $ | 569   |  | $ | 569    |  

Goodwill
translation adjustments on foreign denominated goodwill balances relate to our
wholly owned subsidiary in the UK, CyberOptics Holdings Ltd.

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NOTE 6  INCOME TAXES

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

|                                               |  |                         |         |      |   |        |   |   |       | 
|---------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ----- | 
|                                               |  | Year ended December 31, |        
|(In
 thousands)                                |  | 2009                    |         | 2008 |   | 2007   |  
|                                               | 
|Sources of income (loss) before income
 taxes: |  |                         |         |      |   |        |   |   |       | 
|United States                                  |  | $                       | (11,999 | )    | $ | (6,881 | ) | $ | 6,403 | 
|Foreign                                        |  |                         | 1,303   |      |   | (2,389 | ) |   | 1,351 | 
|Total income (loss) before income taxes        |  | $                       | (10,696 | )    | $ | (9,270 | ) | $ | 7,754 | 

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

|                                           |  |                         |        |      |   |        |   |   |       |  
|------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ | - | - | ----- | -
|                                           |  | Year ended December 31, |       
|(In
 thousands)                            |  | 2009                    |        | 2008 |   | 2007   |  
|                                           | 
|Current:                                   |  |                         |        |      |   |        |   |   |       |  
|Federal                                    |  | $                       | (3,141 | )    | $ | (1,196 | ) | $ | 2,025 |  
|State                                      |  |                         | (154   | )    |   | (78    | ) |   | 69    |  
|Foreign                                    |  |                         | 99     |      |   | 24     |   |   | 28    |  
|Total current                              |  | $                       | (3,196 | )    | $ | (1,250 | ) | $ | 2,122 |  
|Deferred:                                  |  |                         |        |      |   |        |   |   |       |  
|Federal                                    |  | $                       | (958   | )    | $ | (1,431 | ) | $ | 311   |  
|State                                      |  |                         | 203    |      |   | (80    | ) |   | (2    | )
|Foreign                                    |  |                         | 71     |      |   | 162    |   |   | 295   |  
|Total deferred                             |  | $                       | (684   | )    | $ | (1,349 | ) | $ | 604   |  
|Total provision (benefit) for income taxes |  | $                       | (3,880 | )    | $ | (2,599 | ) | $ | 2,726 |  

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

|                                               |  |                         |       |      |  |       |    |  |      |  
|---------------------------------------------- |  | ----------------------- | ----- | ---- |  | ----- | -- |  | ---- | -
|                                               |  | Year ended December 31, |      
|                                               |  | 2009                    |       | 2008 |  | 2007  |   
|                                               | 
|Federal statutory rate                         |  |                         | (34.0 | )%   |  | (34.0 | )% |  | 34.0 | %
|                                               |  |                         |       |      |  |       |    |  |      |  
|State income taxes, net of federal benefit     |  |                         | (1.4  | )    |  | (2.0  | )  |  | (0.1 | )
|Non-deductible goodwill impairment charge      |  |                         |      |      |  | 10.5  |    |  |     |  
|ETI and manufacturing tax incentives           |  |                         | 1.0   |      |  |      |    |  | (1.5 | )
|U.S. Subpart F income                          |  |                         | 0.3   |      |  | 0.4   |    |  | 2.1  |  
|Stock based compensation                       |  |                         | 0.3   |      |  | 0.7   |    |  | 1.4  |  
|Research and experimentation credit            |  |                         | (0.5  | )    |  | (3.1  | )  |  | (3.9 | )
|Foreign rate difference                        |  |                         | (2.3  | )    |  | (1.2  | )  |  | 0.1  |  
|Reserve for income taxes                       |  |                         | 3.2   |      |  | (1.1  | )  |  | 2.3  |  
|Settlement of internal revenue service
 audits |  |                         | (5.2  | )    |  |      |    |  |     |  
|Valuation allowance                            |  |                         | 1.8   |      |  | 1.5   |    |  | 0.7  |  
|Other, net                                     |  |                         | 0.5   |      |  | 0.3   |    |  | 0.1  |  
|                                               |  |                         |       |      |  |       |    |  |      |  
|Effective tax rate                             |  |                         | (36.3 | )%   |  | (28.0 | )% |  | 35.2 | %

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. We recorded a $3,941,000
non-cash goodwill impairment charge in 2008, of which $2,860,000 is not tax
deductible, resulting in a 10.5% increase in our effective income tax rate for
2008.

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In July 2006,
the FASB issued guidance codified in ASC Topic 740-10-25 Accounting for Uncertainty in Income
Taxes. ASC Topic 740-10-25 supersedes guidance codified in ASC
Topic 450, Accounting
for Contingencies, as it relates to income tax liabilities and
lowers the minimum threshold a tax position is required to meet before being
recognized in the financial statements from probable to more likely than
not (i.e. a likelihood of occurrence greater than fifty percent). 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. Differences between the amounts recognized in the financial
statements prior to the adoption of ASC Topic 740-10-25 and the amounts
recognized after adoption are accounted for as a cumulative effect adjustment
recorded to the beginning balance of retained earnings. 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. Accordingly, our liability for
uncertain tax positions has been classified as non-current at both December 31,
2009 and 2008.

We adopted the
provisions of ASC Topic 740-10-25 on January 1, 2007. As a result of our
implementation of ASC Topic 740-10-25, we recognized a $32,000 increase in the
liability for unrecognized tax benefits, which was accounted for as a reduction
to the January 1, 2007, balance of retained earnings. A reconciliation of
the beginning and ending amount of gross unrecognized tax benefits (UTB) is
as follows:

|                                                              |  |      |       |      |   |       |   |   |       | 
|------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | 
|(In
 thousands)                                               |  | 2009 |       | 2008 |   | 2007  |  
|                                                              | 
|Gross UTB
 balance at beginning of year                       |  | $    | 1,564 |      | $ | 1,648 |   | $ | 1,498 | 
|Additions
 based on tax positions related to the current year |  |      | 510   |      |   | 132   |   |   | 150   | 
|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 |  |      |      |      |   | (216  | ) |   |      | 
|Gross UTB
 balance at end of year                             |  | $    | 1,446 |      | $ | 1,564 |   | $ | 1,648 | 
|Net UTB
 impacting the effective tax rate at end of year      |  | $    | 546   |      | $ | 1,578 |   | $ | 1,583 | 

The total
amount of UTB that, if recognized, would affect the effective tax rate was
$546,000 as of December 31, 2009, $1,578,000 as of December 31, 2008 and
$1,583,000 as of December 31, 2007. 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 $140,000 as of December
31, 2009, $167,000 as of December 31, 2008, and $192,000 as of December 31,
2007.

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. During the year ended December 31, 2008,
we recorded a $98,000 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 $25,000. During the year ended December 31, 2007, we recorded a
$182,000 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 $49,000.

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
2006. Due to the anticipated carry back of our 2009 federal taxable loss to
2004 and 2005, 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 expect to receive a federal income
tax refund in 2010 of approximately $2.5 million from carry back of our 2009
federal taxable loss.

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Deferred tax
assets consist of the following:

|                                              |  |              |       |      |   |       |  
|--------------------------------------------- |  | ------------ | ----- | ---- | - | ----- | -
|                                              |  | December 31, |      
|(In
 thousands)                               |  | 2009         |       | 2008 |  
|                                              | 
|Fixed asset and intangible amortization,
 net |  | $            | 1,215 |      | $ | 1,422 |  
|Inventory allowances                          |  |              | 806   |      |   | 986   |  
|Accrued liabilities                           |  |              | 192   |      |   | 244   |  
|Warranty accrual                              |  |              | 171   |      |   | 290   |  
|Deferred revenue                              |  |              | 467   |      |   | 525   |  
|Accounts receivable allowance                 |  |              | 367   |      |   | 88    |  
|Federal and state tax credits                 |  |              | 2,678 |      |   | 1,491 |  
|Foreign net operating loss carry forwards     |  |              | 574   |      |   | 587   |  
|Stock based compensation                      |  |              | 333   |      |   | 295   |  
|Other, net                                    |  |              | 114   |      |   | 150   |  
|Sub-total                                     |  |              | 6,917 |      |   | 6,078 |  
|Valuation allowance                           |  |              | (717  | )    |   | (640  | )
|                                              |  |              |       |      |   |       |  
|Total net deferred tax assets                 |  | $            | 6,200 |      | $ | 5,438 |  

We currently
have significant deferred tax assets as a result of temporary differences
between taxable income on our tax returns and income before income taxes under
U.S. generally accepted accounting principals, 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
are applied against future taxable income, or when tax credit carry forwards
are applied against future tax liabilities. 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 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 cumulative 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 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, 2009.

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. Therefore, achievement
of 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, 2009, include $574,000 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 $64,000 in 2007 due to a reduction in the future UK
income tax rate. Deferred tax assets at December 31, 2009 also include
$2,368,000 of federal R&D tax credits that will begin to expire in 2019 if
unused.

The valuation
allowances at December 31, 2009 and 2008 are needed for various 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 2009 for additional state tax credit and net
operating loss carry forwards that failed to satisfy the more likely than not
criteria for recovery.

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Income tax
refunds received, net of cash payments for income taxes, were $1,739,000 for
the year ended December 31, 2009. Cash payments for income taxes, net of
refunds received, were $100,000 for the year ended December 31, 2008, and
$1,979,000 for the year ended December 31, 2007.

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 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. These earnings relate to ongoing operations and were
not significant as of December 31, 2009. It is not practicable to
determine the income tax liability that would be payable if such earnings were
not indefinitely reinvested.

NOTE 7  OPERATING LEASES

On March 27,
2006 we signed a new lease for our primary office space consisting of 60,217
square feet. The lease has a term of 61 months and began on June 1, 2006. The
lease also provides for one month of free rent, other lease incentives and
escalating rents over the lease term. Rental expense, including the effects of
lease incentives, are 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. Future minimum lease
payments under this lease due within one year from December 31, 2009 are
$1,027,000 and due from one to three years are $470,000. We have two
consecutive options to renew the lease, each for an additional term of 3 years,
at then current fair market rent as defined in the lease.

During 2008,
we entered into a new three year lease for a 20,000 square foot mixed office
and warehouse facility in Singapore. The lease provides for a 3 year term from
May 15, 2008, annual rent of approximately $350,000 and a two year renewal
option. We also lease other facilities for the operations of our subsidiaries
under operating leases that expire at various times through December 2012.

Total rent
expense was $1,510,000 for the year ended December 31, 2009, $1,423,000 for the
year ended December 31, 2008 and $1,141,000 for the year ended December 31,
2007. At December 31, 2009, the future minimum lease payments required under
non-cancelable operating lease agreements, are as follows:

|                          |  |                |       | 
|------------------------- |  | -------------- | ----- | 
|Year ending
 December 31, |  | (In thousands) |      
|2010                      |  | $              | 1,468 | 
|2011                      |  |                | 673   | 
|2012                      |  |                | 60    | 
|Total                     |  | $              | 2,201 | 

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NOTE 8  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, 2009, the
Company had two open swap agreements that were purchased on that day. As a
result, any unrealized gain or losses as of December 31, 2009 were
inconsequential. We recognized net gains (losses) from settlement of foreign
currency swap agreements of ($229,000) for the year ended December 31, 2009,
$277,000 for the year ended December 31, 2008, and ($61,000) for the year ended
December 31, 2007, that offset foreign currency transaction gains (losses) on the
underlying inter-company balances of $137,000 for the year ended December 31,
2009, ($453,000) for the year ended December 31, 2008 and $22,000 for the year
ended December 31, 2007. 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 9  COMMON STOCK REPURCHASES

We did not
repurchase any shares of our common stock in 2009. We spent $20,949,000 to
repurchase a total 2,082,000 shares of our common stock in 2008. These
repurchases were accomplished through of series of repurchase programs and a
modified dutch auction tender offer approved by our board of directors. The
modified dutch auction tender offer closed on July 29, 2008, with the purchase
of 1,499,996 shares of our common stock at a price of $10.00 per share.

All common
share repurchase programs have been canceled and we presently have no
authorization from our board of directors to repurchase shares of our common
stock.

NOTE 10  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 $229,000 in 2009, $301,000 in 2008 and
$297,000 in 2007.

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NOTE 11  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 equipment market. 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)                      |  | 2009                    |         | 2008 |   | 2007    |  
|                                     |  |                         |         |      |   |         |   |   |        | 
|Revenue:                             |  |                         |         |      |   |         |   |   |        | 
|Electronic
 assembly                 |  |                         |         |      |   |         |   |   |        | 
|OEM Sensors                          |  | $                       | 8,428   |      | $ | 20,250  |   | $ | 31,774 | 
|SMT Systems                          |  |                         | 15,308  |      |   | 19,943  |   |   | 21,429 | 
|Total electronic assembly            |  |                         | 23,736  |      |   | 40,193  |   |   | 53,203 | 
|Semiconductor                        |  |                         | 3,330   |      |   | 5,259   |   |   | 5,573  | 
|Total                                |  | $                       | 27,066  |      | $ | 45,452  |   | $ | 58,776 | 
|                                     |  |                         |         |      |   |         |   |   |        | 
|Income
 (loss) from operations:      |  |                         |         |      |   |         |   |   |        | 
|Electronic
 assembly                 |  | $                       | (10,711 | )    | $ | (10,339 | ) | $ | 5,408  | 
|Semiconductor                        |  |                         | (524    | )    |   | (124    | ) |   | 132    | 
|Total income (loss) from operations  |  | $                       | (11,235 | )    | $ | (10,463 | ) | $ | 5,540  | 
|Interest
 income and other           |  |                         | 539     |      |   | 1,193   |   |   | 2,214  | 
|Income (loss) before income taxes    |  | $                       | (10,696 | )    | $ | (9,270  | ) | $ | 7,754  | 
|                                     |  |                         |         |      |   |         |   |   |        | 
|Depreciation
 and amortization:      |  |                         |         |      |   |         |   |   |        | 
|Electronic
 assembly                 |  | $                       | 2,192   |      | $ | 1,978   |   | $ | 1,680  | 
|Semiconductor                        |  |                         | 352     |      |   | 268     |   |   | 227    | 
|Total                                |  | $                       | 2,544   |      | $ | 2,246   |   | $ | 1,907  | 
|                                     |  |                         |         |      |   |         |   |   |        | 
|Expenditures
 for long-lived assets: |  |                         |         |      |   |         |   |   |        | 
|Electronic
 assembly                 |  | $                       | 800     |      | $ | 1,998   |   | $ | 1,088  | 
|Semiconductor                        |  |                         | 201     |      |   | 179     |   |   | 208    | 
|Total                                |  | $                       | 1,001   |      | $ | 2,177   |   | $ | 1,296  | 
|                                     |  |                         |         |      |   |         |   |   |        | 
|Total assets
 (end of year):         |  |                         |         |      |   |         |   |   |        | 
|Electronic
 assembly                 |  | $                       | 27,509  |      | $ | 27,563  |   | $ | 31,326 | 
|Semiconductor                        |  |                         | 3,606   |      |   | 3,698   |   |   | 3,658  | 
|Corporate                            |  |                         | 20,022  |      |   | 27,688  |   |   | 52,055 | 
|Total                                |  | $                       | 51,137  |      | $ | 58,949  |   | $ | 87,039 | 

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The following
summarizes certain significant customer information:

|                              |  |                       |  |          |        |                       |    |  
|----------------------------- |  | --------------------- |  | -------- | ------ | --------------------- | -- | -
|(In
 thousands)               |  | Significant
 Customer |  | Revenues |        | Percentageof Revenues |   
|                              |  |                       |  |          |        |                       |    |  
|Year ended
 December 31, 2009 |  | A                     |  | $        | 2,152  |                       | 8  | %
|                              |  | B                     |  | $        | 4,373  |                       | 16 | %
|                              |  |                       |  |          |        |                       |    |  
|Year ended
 December 31, 2008 |  | A                     |  | $        | 9,592  |                       | 21 | %
|                              |  | B                     |  | $        | 6,672  |                       | 15 | %
|                              |  |                       |  |          |        |                       |    |  
|Year ended
 December 31, 2007 |  | A                     |  | $        | 16,213 |                       | 28 | %
|                              |  | B                     |  | $        | 11,661 |                       | 20 | %

The significant customers listed above are
related to our electronic assembly segment. 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. As of December 31, 2008, accounts
receivable from significant customer A were $723,000 and accounts receivable
from significant customer B were $376,000. 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 13% of our
revenue in 2009, 26% of our revenue in 2008, and 35% in 2007. 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 78% for the year ended December 31, 2009,
86% for the year ended December 31, 2008, and 87% for the year ended December
31, 2007. 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) |  | 2009 |        | 2008 |   | 2007   | 
|               |  |      |        |      |   |        |  |   |        | 
|Americas       |  | $    | 761    |      | $ | 1,740  |  | $ | 927    | 
|Netherlands    |  |      | 4,122  |      |   | 6,338  |  |   | 10,717 | 
|Other Europe   |  |      | 4,816  |      |   | 8,871  |  |   | 9,508  | 
|China          |  |      | 3,889  |      |   | 7,176  |  |   | 6,038  | 
|Japan          |  |      | 2,400  |      |   | 10,066 |  |   | 16,901 | 
|Other Asia     |  |      | 3,611  |      |   | 4,901  |  |   | 7,077  | 
|Other          |  |      | 1,558  |      |   | 10     |  |   |       | 
|               |  |      |        |      |   |        |  |   |        | 
|               |  | $    | 21,157 |      | $ | 39,102 |  | $ | 51,168 | 

Long-lived assets include
equipment and leasehold improvements attributable to each geographic areas
operations. Long-lived assets at December 31, 2009, 2008 and 2007 are as
follows:

|                         |  |      |       |      |   |       |  |   |       | 
|------------------------ |  | ---- | ----- | ---- | - | ----- |  | - | ----- | 
|(In
 thousands)          |  | 2009 |       | 2008 |   | 2007  | 
|                         |  |      |       |      |   |       |  |   |       | 
|Long-lived
 assets:      |  |      |       |      |   |       |  |   |       | 
|United States            |  | $    | 1,207 |      | $ | 1,798 |  | $ | 1,906 | 
|Europe                   |  |      | 3     |      |   | 5     |  |   | 10    | 
|Asia and other           |  |      | 711   |      |   | 812   |  |   | 28    | 
|                         |  |      |       |      |   |       |  |   |       | 
|Total
 long-lived assets |  | $    | 1,921 |      | $ | 2,615 |  | $ | 1,944 | 

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NOTE 12  SEVERANCE, RECRUITMENT AND
SINGAPORE TRANSITION

We started to
incur severance and recruitment costs in February 2008 in connection with our
decision to move a significant portion of development and manufacturing for our
systems products to Singapore. The transition of systems-related product
development was substantially complete by the end of the fourth quarter of
2008, and the transition of systems-related manufacturing was substantially
complete by the end of the first quarter of 2009. Severance costs incurred in
2008 in connection with the February 2008 decision to move our systems related
product development and manufacturing to Singapore totaled $302,000.

We also
incurred expenses totaling $234,000 for outside service providers to assist us
with recruitment of our new Singapore based development and manufacturing team.
We maintained our Minneapolis-based systems development team while we trained
our new Singapore based team, resulting in extra costs totaling $879,000 for
wages, training, travel, and other costs, during the initial start-up and
training period. These costs have been classified in our 2008 statement of
operations as research and development expense. Other start-up costs totaling
$112,000 have been classified in our 2008 statement of operations as selling,
general and administrative expense. Costs in 2009 related to the move and
transition to Singapore were not significant.

Additional severance
costs of $234,000 were incurred in November 2008 when we reduced our workforce
by approximately 10% or 20 employees in response to weak global economic
conditions.

In February
2009, we further reduced our workforce by 24 positions in response to further
weakening in the global economy, our transition to Singapore and our decision
to consolidate manufacturing for our semiconductor products in our Minneapolis
facility. Severance costs in 2009 related to the November 2008 and February
2009 workforce reductions totaled $363,000. All of the severance costs related
to the February 2008 transition to Singapore, and the November 2008 and
February 2009 workforce reductions have been classified as severance and
recruitment in our statement of operations.

A summary of
our severance accruals follows:

|                           |  |                           |      |                |   |                                      |   |                                      |      |       |   |                                      |   |                                      |      |       |   |       |   |   |      |   |   |      |   |   |      |  
|-------------------------- |  | ------------------------- | ---- | -------------- | - | ------------------------------------ | - | ------------------------------------ | ---- | ----- | - | ------------------------------------ | - | ------------------------------------ | ---- | ----- | - | ----- | - | - | ---- | - | - | ---- | - | - | ---- | -
|                           |  | Electronic
 Assembly      |      | Semiconductor  |  
|(In thousands)             |  | February
 2008
 Singapore |      | Recruit-
 ment |   | November
 2008
 workforce
 reduction |   | February
 2009
 workforce
 reduction |      | Total |   | November
 2008
 workforce
 reduction |   | February
 2009
 workforce
 reduction |      | Total |   | Total |  
|Balance, January 1, 2008   |  | $                         |     |                | $ |                                     |   | $                                    |     |       | $ |                                     |   | $                                    |     |       | $ |      |   | $ |     |   | $ |     |   | $ |     |  
|Cost incurred              |  |                           | 302  |                |   | 234                                  |   |                                      | 155  |       |   |                                     |   |                                      | 691  |       |   | 79    |   |   |     |   |   | 79   |   |   | 770  |  
|Payments made              |  |                           | (95  | )              |   | (234                                 | ) |                                      | (51  | )     |   |                                     |   |                                      | (380 | )     |   | (75   | ) |   |     |   |   | (75  | ) |   | (455 | )
|Balance, December 31, 2008 |  | $                         | 207  |                | $ |                                     |   | $                                    | 104  |       | $ |                                     |   | $                                    | 311  |       | $ | 4     |   | $ |     |   | $ | 4    |   | $ | 315  |  
|Cost incurred              |  |                           | 48   |                |   |                                     |   |                                      |     |       |   | 201                                  |   |                                      | 249  |       |   |      |   |   | 114  |   |   | 114  |   |   | 363  |  
|Payments made              |  |                           | (255 | )              |   |                                     |   |                                      | (104 | )     |   | (201                                 | ) |                                      | (560 | )     |   | (4    | ) |   | (114 | ) |   | (118 | ) |   | (678 | )
|Balance, December 31, 2009 |  | $                         |     |                | $ |                                     |   | $                                    |     |       | $ |                                     |   | $                                    |     |       | $ |      |   | $ |     |   | $ |     |   | $ |     |  

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NOTE 13 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 (an 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, 2009 and 2008 according to the
three-level fair value hierarchy:

|                                       |  |                             |        |                                                                   |                                                    |                                                  |  |                                              |        |  |   |   | 
|-------------------------------------- |  | --------------------------- | ------ | ----------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                       |  |                             |        |                                                                   | Fair Value Measurements at December 31, 2009 Using |                                                 
|                                       |  |                             |        |                                                                   |                                                    |                                                  |  |                                              |        |  |   |   | 
|(In
 thousands)                        |  | Balance
 December 31,
 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                    | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                       |  |                             |        |                                                                   |                                                    |                                                  |  |                                              |        |  |   |   | 
|Cash equivalents                       |  | $                           | 2,320  |                                                                   | $                                                  |                                                 |  | $                                            | 2,320  |  | $ |  | 
|U.S. government and agency obligations |  | $                           | 14,161 |                                                                   | $                                                  |                                                 |  | $                                            | 14,161 |  | $ |  | 
|Corporate debt securities              |  | $                           | 3,301  |                                                                   | $                                                  |                                                 |  | $                                            | 3,301  |  | $ |  | 
|Asset backed securities                |  | $                           | 210    |                                                                   | $                                                  |                                                 |  | $                                            | 210    |  | $ |  | 
|Equity securities                      |  | $                           | 30     |                                                                   | $                                                  | 30                                               |  | $                                            |       |  | $ |  | 
|Total                                  |  | $                           | 20,022 |                                                                   | $                                                  | 30                                               |  | $                                            | 19,992 |  | $ |  | 

|                                       |  |                             |        |                                                                   |                                                    |                                                  |  |                                              |        |  |   |   | 
|-------------------------------------- |  | --------------------------- | ------ | ----------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                       |  |                             |        |                                                                   | Fair Value Measurements at December 31, 2008 Using |                                                 
|                                       |  |                             |        |                                                                   |                                                    |                                                  |  |                                              |        |  |   |   | 
|(In
 thousands)                        |  | Balance
 December 31,
 2008 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                    | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                       |  |                             |        |                                                                   |                                                    |                                                  |  |                                              |        |  |   |   | 
|Cash equivalents                       |  | $                           | 2,421  |                                                                   | $                                                  |                                                 |  | $                                            | 2,421  |  | $ |  | 
|U.S. government and agency obligations |  | $                           | 21,151 |                                                                   | $                                                  |                                                 |  | $                                            | 21,151 |  | $ |  | 
|Corporate debt securities              |  | $                           | 2,527  |                                                                   | $                                                  |                                                 |  | $                                            | 2,527  |  | $ |  | 
|Asset backed securities                |  | $                           | 1,559  |                                                                   | $                                                  |                                                 |  | $                                            | 1,559  |  | $ |  | 
|Equity securities                      |  | $                           | 30     |                                                                   | $                                                  | 30                                               |  | $                                            |       |  | $ |  | 
|Total                                  |  | $                           | 27,688 |                                                                   | $                                                  | 30                                               |  | $                                            | 27,658 |  | $ |  | 

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 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)

|                                           |  |              |        |             |   |              |   |             |        |   |   |        |  
|------------------------------------------ |  | ------------ | ------ | ----------- | - | ------------ | - | ----------- | ------ | - | - | ------ | -
|2009                                       |  | March 31 (4) |        | June 30 (4) |   | Sept. 30 (4) |   | 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  | )
|                                           |  |              |        |             |   |              |   |             |        |   |   |        |  
|2008                                       |  | March 31 (2) |        | June 30 (2) |   | Sept. 30 (2) |   | Dec. 31 (3) |       
|                                           |  |              |        |             |   |              |   |             |        |   |   |        |  
|Revenues                                   |  | $            | 13,807 |             | $ | 13,391       |   | $           | 11,570 |   | $ | 6,684  |  
|Gross margin                               |  |              | 6,439  |             |   | 5,922        |   |             | 4,992  |   |   | 1,712  |  
|Income (loss) from
 operations             |  |              | 159    |             |   | (733         | ) |             | (1,716 | ) |   | (8,173 | )
|Net income (loss)                          |  |              | 427    |             |   | (269         | ) |             | (772   | ) |   | (6,057 | )
|Net income (loss) per share  Basic (1)    |  |              | 0.05   |             |   | (0.03        | ) |             | (0.11  | ) |   | (0.90  | )
|Net income (loss) per share  Diluted (1)  |  |              | 0.05   |             |   | (0.03        | ) |             | (0.11  | ) |   | (0.90  | )

|    |                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
 and recruitment costs related to our move to Singapore in 2008 were $193,000
 in the first quarter, $185,000 in the second quarter and $98,000 in the third
 quarter.                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                              
|(3) | 2008 fourth
 quarter results include a non-cash pre-tax charge for goodwill impairment of
 $3.9 million, a $650,000 pre-tax charge for inventory obsolescence and a
 $294,000 pre-tax charge for severance and recruitment costs related to our
 move to Singapore and our November 2008 workforce reduction.
|    |                                                                                                                                                                                                                                                                                                              
|(4) | 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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Table of Contents

Report of Independent Registered Public
Accounting Firm

Board of
Directors and Stockholders CyberOptics Corporation

We have
audited the accompanying consolidated balance sheet of CyberOptics Corporation
(a Minnesota corporation) as of December 31, 2009, and the related
consolidated statements of operations, stockholders equity and comprehensive
income and cash flows for the year ended December 31, 2009. Our audit 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, 2009, and the results of their operations
and their cash flows for the year then ended, 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 11, 2010

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Report of
Independent Registered Public Accounting Firm

To Stockholders and the Board of Directors of CyberOptics Corporation:

In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, consolidated statements of cash
flows and consolidated statements of stockholders equity and comprehensive
income present fairly, in all material respects, the financial position of
CyberOptics Corporation and its subsidiaries at December 31, 2008, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule for each of the two years in the
period ended December 31, 2008 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated
financial statements. 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 audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 9, 2009

61

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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, 2009. 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, 2009 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, 2009
based on the criteria in Internal
Control-Integrated Framework issued by the COSO.

The
annual report does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by the Companys
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only managements
report in this annual report.

(ii).     During
the quarter ended December 31, 2009, 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 21, 2010 (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

Equity Compensation Plan Information

The
following table describes shares of our common stock that are available on
December 31, 2009 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     |  |  |                                                                                                      |  |                                                                                      |       |                                                                                                                                                  |  |         | 
|                                                           |  |  |                                                                                                      |  |                                                                                      |       |                                                                                                                                                  |  |         | 
|Restated Stock Option Plan                                 |  |  | 53,875                                                                                               |  | $                                                                                    | 8.97  |                                                                                                                                                  |  |        | 
|1998 Stock Incentive Plan (1)                              |  |  | 346,539                                                                                              |  | $                                                                                    | 7.70  |                                                                                                                                                  |  | 363,795 | 
|Stock Option Plan for Non Employee Directors               |  |  | 121,500                                                                                              |  | $                                                                                    | 14.56 |                                                                                                                                                  |  |        | 
|Stock Grant Plan for Non Employee Directors                |  |  | N/A                                                                                                  |  |                                                                                      | N/A   |                                                                                                                                                  |  | 24,000  | 
|Employee Stock Purchase Plan (2)                           |  |  | N/A                                                                                                  |  |                                                                                      | N/A   |                                                                                                                                                  |  | 92,002  | 
|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                                                      |  |  | 571,914                                                                                              |  | $                                                                                    | 9.64  |                                                                                                                                                  |  | 479,797 | 

|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

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

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|          |                                                                           
|--------- | --------------------------------------------------------------------------
|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, 2009 and 2008.                                                                   
|                                                                                                                                       |  | Consolidated
 Statements of Operations for the years ended December 31, 2009, 2008 and
 2007.                                    
|                                                                                                                                       |  | Consolidated
 Statements of Cash Flows for the years ended December 31, 2009, 2008 and
 2007.                                    
|                                                                                                                                       |  | Consolidated
 Statements of Stockholders Equity and Comprehensive Income for the years
 ended December 31, 2009, 2008 and 2007. 
|                                                                                                                                       |  | Notes to the
 Consolidated Financial Statements                                                                                  
|                                                                                                                                       |  |                                                                                                                                  
|(a)(2)    Financial
 Statement Schedule:                                                                                              
|                                                                                                                                       |  |                                                                                                                                  
|                                                                                                                                       |  | Schedule II,
 Valuation and Qualifying Accounts for the years ended December 31, 2009, 2008
 and 2007, is attached as Item 15(c).

64

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Table of Contents

(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 Brilliant Manufacturing LTD and
 CyberOptics PTE LTD (Singapore) Term 15 May 2008 to 14 May 2011.
 (incorporated by reference to Exhibit 10.1 to the Companys quarterly report
 on Form 10-Q for the quarter ended March 31, 2008).
| |                |  |             |                                                                                                                                                                                                                                                                
| | 21.0           |  |             | Subsidiaries
 of the Company.                                                                                                                                                                                                                                  
| |                |  |             |                                                                                                                                                                                                                                                                
| | 23.1           |  |             | Consent of
 Independent Registered Public Accounting Firm.                                                                                                                                                                                                     
| |                |  |             |                                                                                                                                                                                                                                                                
| | 23.2           |  |             | 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

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

SCHEDULE II

CYBEROPTICS CORPORATION 
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES 
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|----------------------------------- |  | -------------------------------- | ------- | ------------------------------- | - | --------------------------- | - | ---------------------- | -------- | - | - | --------- | 
|Description                         |  | Balance at
 Beginning of
 Period |         | Charged to
 Costs and
 Expenses |   | Deductions                  |   | Balanceat end ofPeriod |         
|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|Allowance for doubtful
 accounts:   |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|Year ended December 31, 2009        |  | $                                | 250,000 |                                 | $ | 827,000                     |   | $                      | (28,000  | ) | $ | 1,049,000 | 
|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|Year ended December 31, 2008        |  | $                                | 310,000 |                                 | $ | (34,000                     | ) | $                      | (26,000  | ) | $ | 250,000   | 
|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|Year ended December 31, 2007        |  | $                                | 221,000 |                                 | $ | 98,000                      |   | $                      | (9,000   | ) | $ | 310,000   | 
|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|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, 2009        |  | $                                | 640,000 |                                 | $ | 187,000                     |   | $                      | (110,000 | ) | $ | 717,000   | 
|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|Year ended December 31, 2008        |  | $                                | 599,000 |                                 | $ | 135,000                     |   | $                      | (94,000  | ) | $ | 640,000   | 
|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 
|Year ended December 31, 2007        |  | $                                | 451,000 |                                 | $ | 54,000                      |   | $                      | 94,000   |   | $ | 599,000   | 
|                                    |  |                                  |         |                                 |   |                             |   |                        |          |   |   |           | 

66

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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
 (Principal Executive Officer)                                  |       | March
 11, 2010
|Kathleen
 P. Iverson        |  |                                                                                          |      
|                            |  |                                                                                          |       |                
|/s/ ALEX
 B. CIMOCHOWSKI    |  | Director                                                                                 |       | March
 11, 2010
|Alex B.
 Cimochowski        |  |                                                                                          |       |                
|                            |  |                                                                                          |       |                
|/s/
 MICHAEL M. SELZER, JR. |  | Director                                                                                 |       | March
 11, 2010
|Michael
 M. Selzer, Jr.     |  |                                                                                          |       |                
|                            |  |                                                                                          |       |                
|/s/
 IRENE M. QUALTERS      |  | Director                                                                                 |       | March
 11, 2010
|Irene M.
 Qualters          |  |                                                                                          |       |                
|                            |  |                                                                                          |       |                
|/s/
 SUBODH K. KULKARNI     |  | Director                                                                                 |       | March
 11, 2010
|Subodh
 K. Kulkarni         |  |                                                                                          |       |                
|                            |  |                                                                                          |       |                
|/s/
 JEFFREY A. BERTELSEN   |  | Vice
 President and CFO
 (Principal Financial Officer
 and Principal Accounting Officer) |       | March
 11, 2010
|Jeffrey
 A. Bertelsen       |  |                                                                                          |      

67

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