SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

# FORM 10-Q

(Check One)

# [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

# [   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to ________________

Commission file number 0-16577

# CYBEROPTICS CORPORATION

(Exact name of registrant as specified in its charter)

|Minnesota                         | 41-1472057         
|--------------------------------- | -------------------
|(State or other jurisdiction      | (IRS Employer      
|of incorporation or organization) | Identification No.)

5900 Golden Hills Drive, Minneapolis, Minnesota 55416
(Address of principal executive offices)

(763) 542-5000
(Issuers telephone number)

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 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 ___

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).   Yes ___   No __X__

Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date.

At November 12, 2004, there were 8,808,480 shares of the registrants
Common Stock, no par value, issued and outstanding.



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# PART I. FINANCIAL INFORMATION

| | ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS
| | -------------------------------------------

CYBEROPTICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)

|                                            | SEPTEMBER 30, 2004(Unaudited) |  | DECEMBER 31, 2003
|------------------------------------------- | ----------------------------- |  | -----------------
|                                           
|ASSETS                                      |                               |  |                  
|                                           
|Cash and cash equivalents                   |                               |  | $                
|Marketable securities                       |                               |  |                  
|Accounts receivable, net                    |                               |  |                  
|Inventories                                 |                               |  |                  
|Other current assets                        |                               |  |                  
|                                           
|Total current assets                        |                               |  |                  
|                                           
|Marketable securities                       |                               |  |                  
|Equipment and leasehold improvements, net   |                               |  |                  
|Intangible and other assets, net            |                               |  |                  
|Goodwill, net                               |                               |  |                  
|                                           
|Total assets                                |                               |  | $                
|                                           
|                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY        |                               | 
|                                           
|Accounts payable                            |                               |  | $                
|Accrued expenses                            |                               |  |                  
|                                           
|Total current liabilities                   |                               |  |                  
|                                           
|Commitments and contingencies               |                               | 
|Stockholders' equity:                       |                               | 
|Preferred stock, no par value, 5,000 shares |                               | 
|authorized, none outstanding                |                               | 
|Common stock, no par value, 37,500 shares   |                               | 
|authorized, 8,808 and 8,291 shares issued   |                               | 
|and outstanding, respectively               |                               |  |                  
|Retained (deficit) earnings                 |                               |  |                  
|Accumulated other comprehensive loss        |                               |  |                  
|                                           
|Total stockholders' equity                  |                               |  |                  
|                                           
|                                           
|Total liabilities and stockholders' equity  |                               |  | $                
|                                           

# SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



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CYBEROPTICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

|                                              | THREE MONTHS ENDED SEPTEMBER 30,
|--------------------------------------------- | --------------------------------
|
|                                             
|Revenues                                      |                                 
|Cost of revenues                              |                                 
|                                             
|Gross margin                                  |                                 
|Research and development expenses             |                                 
|Selling, general and administrative expenses  |                                 
|Restructuring and severance costs             |                                 
|Amortization of intangibles                   |                                 
|                                             
|Income (loss) from operations                 |                                 
|Interest income and other                     |                                 
|                                             
|Income (loss) before income taxes             |                                 
|Income tax provision                          |                                 
|                                             
|Net income (loss)                             |                                 
|                                             
|Net income (loss) per share - Basic           |                                 
|Net income (loss) per share - Diluted         |                                 
|                                             
|Weighted average shares outstanding - Basic   |                                 
|Weighted average shares outstanding - Diluted |                                 
|                                             

|                                              | NINE MONTHS ENDED SEPTEMBER 30,
|--------------------------------------------- | -------------------------------
|
|                                             
|Revenues                                      |                                
|Cost of revenues                              |                                
|                                             
|Gross margin                                  |                                
|Research and development expenses             |                                
|Selling, general and administrative expenses  |                                
|Restructuring and severance costs             |                                
|Gain from technology transfer and license     |                                
|Amortization of intangibles                   |                                
|                                             
|Income (loss) from operations                 |                                
|Interest income and other                     |                                
|                                             
|Income (loss) before income taxes             |                                
|Income tax provision                          |                                
|                                             
|Net income (loss)                             |                                
|                                             
|Net income (loss) per share - Basic           |                                
|Net income (loss) per share - Diluted         |                                
|                                             
|Weighted average shares outstanding - Basic   |                                
|Weighted average shares outstanding - Diluted |                                
|                                             

# SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



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CYBEROPTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(In thousands)

|                                                     | NINE MONTHS ENDED SEPTEMBER 30,
|---------------------------------------------------- | -------------------------------
|
|                                                    
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                
|Net income (loss)                                    |                                
|Adjustments to reconcile net income (loss) to        |                                
|net cash provided by operating activities:           |                                
|Depreciation and amortization                        |                                
|Gain from technology transfer and license            |                                
|Provision for losses on inventories                  |                                
|Provision for doubtful accounts                      |                                
|Tax benefit from exercise of stock options and other |                                
|Changes in operating assets and liabilities:         |                                
|Accounts receivable                                  |                                
|Inventories                                          |                                
|Other current assets                                 |                                
|Accounts payable                                     |                                
|Income taxes payable/receivable                      |                                
|Accrued expenses                                     |                                
|                                                    
|Net cash provided                                    |                                
|by operating activities                              |                                
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                
|Maturities of marketable securities                  |                                
|Purchases of marketable securities                   |                                
|Proceeds from technology transfer and license        |                                
|Purchase of patent license                           |                                
|Additions to equipment and leasehold improvements    |                                
|Additions to patents                                 |                                
|                                                    
|Net cash used in                                     |                                
|investing activities                                 |                                
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                
|Proceeds from exercise of stock options              |                                
|Proceeds from issuance of common stock               |                                
|under employee stock purchase plan                   |                                
|Repurchase of common stock                           |                                
|                                                    
|Net cash provided by financing                       |                                
|activities                                           |                                
|Increase (decrease) in cash and cash equivalents     |                                
|Cash and cash equivalents - beginning                |                                
|of period                                            |                                
|                                                    
|Cash and cash equivalents - end of period            |                                
|                                                    

# SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



---

# CYBEROPTICS CORPORATION

# NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1.    INTERIM REPORTING:

The interim consolidated financial statements presented herein as of
September 30, 2004, and for the nine and three month periods ended September 30, 2004 and 2003, are unaudited; however, in our
opinion, the interim consolidated financial statements include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.

The results of operations for the nine and three month period ended September
30, 2004, do not necessarily indicate the results to be expected for the full year. The December 31, 2003, consolidated balance
sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by generally
accepted accounting principles. These unaudited interim consolidated financial statements should be read in conjunction with our
consolidated financial statements and notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31,
2003.

2.   ACCOUNTING FOR STOCK-BASED COMPENSATION:

In December 2002, the Financial Accounting Standards Board issued SFAS No.
148 Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123". We intend to continue to account for stock-based compensation to our employees and directors using the intrinsic value
method prescribed by APB Opinion No. 25. We have adopted the disclosure requirements of SFAS No. 148 in these notes to the
consolidated financial statements.

As permitted by SFAS No. 123, Accounting for Stock Based
Compensation, we continue to measure compensation cost for our stock incentive and option plans using the intrinsic value
method of accounting. Had we used the fair value method of accounting for our stock option and incentive plans and charged
compensation costs against income over the vesting period, net income and net income per share for the three and nine month
periods ended September 30, 2004 and 2003 would have been reduced to the following pro forma amounts (In thousands):

|                                       | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|-------------------------------------- | ------------------------------- |  | ------------------------------
|
|                                      
|Net income (loss) as reported          |                                 |  | $                             
|Add: Stock-based compensation          |                                 | 
|expense included in net income,        |                                 | 
|net of related tax effects             |                                 |  |                               
|                                       |                                 | 
|Deduct: Total stock-based compensation |                                 | 
|expense determined under fair value,   |                                 | 
|net of related tax effects             |                                 |  |                               
|                                      
|Net income (loss) - Pro forma          |                                 |  | $                             
|                                      
|                                       |                                 | 
|Net income (loss) per share:           |                                 | 
|As reported - Basic                    |                                 |  | $                             
|Pro forma - Basic                      |                                 |  | $                             
|                                       |                                 | 
|As reported - Diluted                  |                                 |  | $                             
|Pro forma - Diluted                    |                                 |  | $                             

Because we established a valuation allowance on our deferred tax assets
during the three month period ended September 30, 2002, the above table does not reflect the tax benefit that would be applied if
we expensed the fair value of options under SFAS 123. The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and our experience. The FASB is currently considering a new
standard, which could require us to adopt the fair value method of accounting for stock options and other stock based incentive
plans in future periods.

---

3.   CERTAIN BALANCE SHEET COMPONENTS:

Inventories consisted of the following (In thousands):

|                           | September 30,2004 |  | December 31,2003
|-------------------------- | ----------------- |  | ----------------
|                          
|Raw materials              |                   |  | $               
|Work in process            |                   |  |                 
|Finished goods             |                   |  |                 
|                          
|                           |                   |  |                 
|                           |                   | 
|Allowance for obsolescence |                   |  |                 
|                          
|Total inventories          |                   |  | $               
|                          

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 (In thousands):

|                                  
|----------------------------------
|
|                                  
|Balance at the beginning of period
|Accruals for Warranties           
|Settlements made during the period
|                                  
|Balance at the end of period      
|                                  

4.   INTANGIBLE ASSETS:

Intangible and other assets include the following (In thousands):

|                       | As of September 30,2004 |  | As of December 31,2003
|---------------------- | ----------------------- |  | ----------------------
|                      
|
|                      
|Developed technology   |                         |  | $                     
|Patents and trademarks |                         |  |                       
|Customer Base          |                         |  |                       
|                      
|Total                  |                         |  | $                     
|                      

---

Amortization expense for the three and nine month periods ended September 30,
2004 and 2003 is as follows (In thousands):

|                       | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|---------------------- | ------------------------------- |  | ------------------------------
|
|                      
|Developed technology   |                                 |  | $                             
|Patents and trademarks |                                 |  |                               
|Customer base          |                                 |  |                               
|                      
|Total                  |                                 |  | $                             
|                      

As required by SFAS 142, we periodically reassess the carrying value, useful
lives and classification of identifiable intangible assets. During the third quarter of 2003, the amortization of certain
intangible assets related to general-purpose sensor product lines acquired in 1999 was accelerated as a result of our plan to
discontinue these product lines over the next few quarters, and consequently, amortization of the developed technology was
accelerated. The accelerated amortization resulted in $632,000 of additional expense during 2003. Estimated aggregate amortization
expense based on current intangibles for the next five years is expected to be as follows: $1.1 million in 2004, $0.9 million in
2005, $0.6 million in 2006 and, $0.1 million in 2007 and 2008.

At September 30, 2004 and December 31, 2003 we had net goodwill of $6.0
million and $6.1 million, respectively. Goodwill increased by $50,000 during the first nine months of 2004 as the result of the
translation impact on foreign denominated goodwill balances. This increase was offset by a $110,000 reduction in goodwill
resulting from the utilization of pre-acquisition deferred tax assets of CyberOptics UK, Ltd. We completed our annual test for
goodwill impairment as of December 31, 2003. Our methodology for estimating fair value included utilizing several valuation
methodologies, including consideration of our market capitalization and discounted cash flows, in determining a reasonable
valuation. The result of the tests performed indicates goodwill was not impaired as of December 31, 2003.

5.   GEOGRAPHIC REVENUE INFORMATION:

Export sales for the nine months ended September 30, 2004 and the nine months
ended September 30, 2003 amounted to 81% and 78% of revenues, respectively. For the three months ended September 30, 2004 and the
three months ended September 30, 2003, export sales amounted to 78% and 81% of revenues. All of our export sales are negotiated,
invoiced and paid in U.S. dollars. Export sales by geographic area are summarized as follows (In thousands):

|                   | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|------------------ | ------------------------------- |  | ------------------------------
|
|                  
|Americas           |                                 |  | $                             
|Europe             |                                 |  |                               
|Asia               |                                 |  |                               
|Other              |                                 |  |                               
|                  
|Total export sales |                                 |  | $                             
|                  

---

6.   NET INCOME (LOSS) PER SHARE:

Basic net income (loss) per share has been computed using the weighted
average number of shares outstanding during the period presented. The diluted net income per share includes the effect of common
stock equivalents, consisting of common shares issuable upon exercise of stock options, for each period. The number of shares
utilized in the denominator of the diluted net income per share computation has been increased from the number of shares used in
computing basic net income per share by 332,000 and 398,000 equivalent shares for the three and nine month periods ended September
30, 2004. The shares used in the basic and diluted net (loss) per share computation for the three and nine month periods ended
September 30, 2003 are the same, as 398,000 and 178,000 additional equivalent shares in the denominator would have been
anti-dilutive due to our net loss. Weighted average shares for which the option price exceeded the average market price were
208,000 and 196,000 for the three and nine month periods ended September 30, 2004. Weighted average shares for which the option
price exceeded the average market price were 1,131,000 and 1,395,000 for the three and nine month periods ended September 30,
2003.

7.   COMPREHENSIVE INCOME (LOSS):

Statement of Financial Accounting Standards No. 130 requires that unrealized
gains and losses on our available-for-sale marketable securities and the cumulative affect of foreign currency translation
adjustments be included as a component of other comprehensive income.

During the three and nine month periods ended September 30, 2004,
comprehensive income totaled $3,675,000 and $9,651,000, respectively. During the three and nine month periods ended September 30
2003, comprehensive (loss) totaled ($877,000) and ($3,848,000), respectively. Accumulated other comprehensive loss at September
30, 2004 and December 31, 2003 was ($607,000) and ($426,000), respectively.

8.   INCOME TAXES:

We carry the benefit we will derive in future accounting periods from tax
losses and credits and deductible temporary differences as a deferred tax asset on our balance sheet. In the third
quarter of fiscal 2002, however, we recorded a full valuation allowance (a charge to income that creates an offsetting balance on
our balance sheet) against our deferred tax assets. We recorded this valuation allowance because the cumulative losses we had
incurred over the three years prior to that date and the operating losses we continued to incur made it questionable whether we
would realize value from the deferred tax assets and because we fully utilized our loss carryback potential in 2002. Since the
third quarter of fiscal 2002, we have continued to record in each quarter a full valuation allowance against all future tax
benefits produced by our operating results. We assess the realizability of our deferred tax assets and the need for this valuation
allowance based on Statement of Financial Accounting Standards No. 109. We expect to continue to record a full valuation allowance
until we can sustain a level of profitability that demonstrates our ability to use these assets. At that time, the valuation
allowance will be reassessed, and could be eliminated, resulting in recognition of deferred taxes.

During the three month period ended September 30, 2004 we recorded an income
tax provision of $1,890,000 to adjust the provision for income taxes on earnings for the nine month period ended September 30,
2004 to the annual expected tax rate. Income earned in 2004 will result in our fully utilizing remaining tax operating loss
carryforwards with the result that we will pay income taxes in 2004. Because we continue to maintain a valuation allowance on
deferred tax assets (deferred tax assets not available to reduce taxable income or taxes payable in 2004) estimated 2004 income
tax requirements are reflected in our annual expected tax rate. Tax expense of $13,000 and $202,000 recorded during the three and
nine month periods ended September 30, 2003 related to income generated by foreign subsidiaries.

9.   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

We enter into foreign currency swap agreements to hedge short term
inter-company financing transactions with our subsidiary in the United Kingdom. These currency swap agreements are structured to
mature on the last day of each quarter and are designated as cash flow hedges. At September 30, 2004, CyberOptics had one open
swap agreement that was purchased on that date. As a result, there were no material unrealized gains or losses as of September 30,
2004. During the nine months ended September 30, 2004 we recognized a net loss of approximately $190,000 from the settlement of
foreign currency swap agreements which offset the approximately $65,000 translation gain on the underlying inter-company balance.

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. We do not expect material losses as a result of defaults by other parties.

---

10.   RESTRUCTURING AND SEVERANCE:

In January 2003, we incurred approximately $170,000 of severance costs and
facility costs associated with further consolidation of our semiconductor product group from Redwood City, California to Portland,
Oregon. Severance costs were associated with a workforce reduction of 5 people. Substantially all of these costs were paid as of
March 31, 2003.

During 2002 and 2003 we implemented a series of workforce reductions, closed
our facilities in California, downsized other facilities and made other reductions in discretionary spending designed to reduce
our overall fixed cost structure. The following table reports the activity and ending balance related to accruals established for
these restructuring actions (In thousands).

|                                            | EmployeeTerminationBenefits |  | LeaseCommitmentCosts |      | Other |   | Total
|------------------------------------------- | --------------------------- |  | -------------------- | ---- | ----- | - | -----
|                                            |                            
|Restructuring liability, December 31, 2002  |                             |  | $                    | 148  |       | $ | 188  
|Initial expense and accrual                 |                             |  |                      | 541  |       |   | 694  
|Cash payments                               |                             |  |                      | (509 | )     |   | (510 
|                                            |                            
|Restructuring liability, December 31, 2003  |                             |  |                      | 180  |       |   | 372  
|Change in estimate                          |                             |  |                      | --   |       |   | 170  
|Cash payments                               |                             |  |                      | (180 | )     |   | (181 
|                                            |                            
|Restructuring liability, September 30, 2004 |                             |  | $                    | --   |       | $ | 361  

During the nine and three month periods ended September 30, 2004, we recorded
a restructuring charges of $169,000 and $131,000, respectively. These charges reflect our change in estimate relative to the
amount of sub-lease income we will receive from space vacated during the last corporate restructuring. Although this space is
being actively marketed for sub-lease, we have not been successful in securing a sub-lease tenant and our lease term ends in May
of 2006. Consequently, we determined it was appropriate to record a restructure charge in the third quarter of 2004 for all
remaining estimated net sub-lease income. Cash payments for lease termination costs are expected to be made through the term of
our lease, which expires in May 2006.

11.   TECHNOLOGY TRANSFER AND LICENSE AGREEMENT:

In March 2003, we transferred to the Optical Gaging Products Division of
Quality Vision International, Inc. (QVI) the rights and technology necessary to manufacture our Digital Range Sensors (DRS). In
addition, we granted QVI a non-exclusive license to the intellectual property associated with this product line and sold a portion
of our inventory as part of this transaction. QVI had been the primary customer for DRS sensors prior to this agreement as part of
a separate 1999 agreement. The agreement called for QVI to pay $750,000 as a one-time fee for the purchase of fixtures, a
technology transfer fee and a non-refundable royalty payment. In addition, we sold QVI raw material inventories associated with
the product line. The gain was determined as the difference between the proceeds received and our carrying value of product line
inventory and fixed assets prior to the sale. As a result of this transaction, we recorded a $645,000 gain in the three month
period ended March 31, 2003.

12.   ACQUISITION OF PATENT LICENSE:

In September 2004, we acquired a license to certain patents required for our
WaferSense auto leveling sensor (ALS) product recently introduced in our Semiconductor Products Group. We made a cash
payment of $500,000 for the license to these patents. The cash payment was recorded as an asset to be amortized over its estimated
useful life of approximately 7 years.

---

# ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS:

The following managements discussion and analysis describes factors
that have affected our results and financial position during the periods included in the accompanying financial statements or that
could have an impact on future results. You should read this section with our Annual Report on Form 10-K for the year ended
December 31, 2003 and our interim consolidated financial statements and associated notes.

We make forward looking statements in this section that represent
our expectations or beliefs about future events, including statements regarding trends in the industries in which we function,
levels of orders, research and development expenses, taxation levels, the sufficiency of cash to meet operating and capital
expenses and our ability to continue to price foreign transactions in U.S. currency. 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:

| |  |  | We operate in a very cyclical market  the electronics
capital equipment market. Because we sell to manufacturers (both OEM manufacturers of production equipment and end-user circuit
board assembly companies) and do not have immediate access to trends in their sales, it has been difficult for us to predict the
timing and affect of downturns in this market on our sales. We believe that this affect typically lags general market conditions
by several months. Some of these downturns, particularly the severe downturn in electronics production markets from 2001 through
2003, negatively affected our operations. We may be unable to foresee downturns in these markets before they affect our operations
in the future.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our operations and markets could be negatively affected by world
events that effect economies and commerce in countries, such as China and Japan, in which we do business, including any additional
outbreaks of infectious disease such as SARS.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We have been dependent on two original equipment manufacturer
customers for a large portion of our revenue (41%, 28% and 40% of revenues in 2003, 2002 and 2001, respectively). Our operations
were significantly negatively affected by reduced order rates from these two customers during 2001, 2002 and the first half of
2003, and have been favorably impacted by increased order rates in the past five quarters. If these 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, our results of operations would be significantly
negatively affected.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We generate more than half of our revenue (approximately 81% in
the first nine months of 2004 and 79% in fiscal 2003) from export sales. Our export sales are subject to many of the risks of
international operations, including changes in economic and business climate in foreign countries that affect the business health
of our customers, changes in exchange rates that affect the willingness of customers to purchase our products, different laws that
may affect our ability to protect our intellectual property, and the expense of long-distance commerce.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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 and
printed circuit boards. The technology for these components changes rapidly and 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our electronic assembly sensor products compete with products made
by larger machine vision companies, other optical sensor companies, and by solutions internally developed by our customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| |  |  | 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 system and sensor products may become subject to increased levels of price competition and competition from
other technologies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We use a different distribution network to sell our end-user
systems products, such as the SE 300, and generate lower margins from these products, than the distribution system and margins
from our electronic assembly sensor products. To the extent our end-user systems constitute a larger portion of our business, our
profitability may be affected.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We compete with large multinational systems companies in sales of
end-user systems products, many of which are able to take advantage of greater financial resources and larger sales distribution
networks.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We compete in large part based on the technology we have developed
and our success will depend in part on how successful we are in protecting that technology and enforcing our technology rights in
the United States and other countries.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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 plan to introduce a number of new products during fiscal 2004
and 2005 and if those introductions are delayed, our future revenue and profitability could be negatively affected. In particular,
we are currently devoting significant resources to complete development and commence sale of our embedded process verification
(EPV) products. These products have yet to generate substantial commercial sales.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Section 404 of the Sarbanes-Oxley Act of 2002 requires that we
establish and maintain an internal control framework and procedures for financial reporting and assess on an on-going basis the
design and operating effectiveness of the internal control structure and procedures for financial reporting. Our auditors are
required to audit both the design and operating effectiveness of the internal controls and our managements assessment of the
design and the effectiveness of its internal controls. Although neither our management nor our auditors have identified any known
material weaknesses at this point, the year ending December 31, 2004 will be the first year that our internal controls and
procedures will be audited.  If a material weakness were identified and we were unable to remediate the weakness, our
auditors would be required to issue an adverse opinion on our internal controls. Opinions on internal controls have not been
required until this year, and it is unclear what impact an adverse opinion would have on our business or market price.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

The preparation of the financial information contained in this 10-Q 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. We evaluate these estimates on an ongoing basis, including those related to
allowances for doubtful accounts, for warranty expense, and for obsolete inventory, the carrying value and any impairment of
intangible assets, and the valuation allowance for deferred tax assets. These critical accounting policies are discussed in more
detail in the Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Form
10-K for the year ended December 31, 2003.

---

# RESULTS OF OPERATIONS:

# General

Our results of operations in the quarter ended September 30, 2004 continued
to reflect the strength of the global electronics market that contributed to our performance in the first two quarters of the
year. Sales of electronic assembly sensors to OEMs of robotic assembly equipment grew significantly, and revenues from shipments
of SMT inspection systems primarily to Asian outsourcing manufacturers and manufacturers of memory modules exceeded planned
levels. In addition, third quarter results benefited from $3.0 million of sales resulting from two large orders for solder paste
and AOI inspection systems that had been placed in previous quarters. Although we anticipated recognition of the revenue for the
solder paste systems in the third quarter, customer acceptance of the AOI systems, which are being used to inspect semiconductor
memory modules, occurred more rapidly than anticipated causing us to recognize most of the revenue on these sales in the third
quarter. We believe the semiconductor memory module market presents a strong opportunity for sales of our products and we are
actively pursuing other opportunities in this area. We also experienced strong demand for new-generation electronic assembly
sensors, reflecting demand from our largest customer that added capacity during the quarter, and in our semiconductor products,
particularly in the area of reflective wafer mapping sensors.

Overall, our revenues increased 84% in the quarter ended September 30, 2004
compared to the same quarter in 2003, and by 91% for the nine month period ended September 30, 2004 compared to 2003. Our
earnings, which benefited from revenue growth and from the streamlined cost structure established through several workforce
reductions and restructuring over the past few years, increased from a net loss of $793,000 in the third quarter of 2003 to net
income of $3.6 million in the third quarter of 2004 and from a net loss of $3.5 million in the first nine months of 2003 to net
income of $9.8 million in the first nine months of 2004.

Nevertheless, our order rate for products in all product groups began to
moderate during the second half of the quarter, resulting in a reduction in our backlog at September 30, 2004 to $4.3 million
compared to $8.1 million at June 30, 2004. Consequently, we expect revenues for the fourth quarter of 2004 to be substantially
lower than revenues recorded in the third quarter of 2004.

# Revenues

The following table sets forth revenues by product line for the periods
indicated (in thousands):

|                                  | Nine months endedSeptember 30, |  | Three months endedSeptember 30,
|--------------------------------- | ------------------------------ |  | -------------------------------
|
|                                  |                               
|OEM Solutions:                    |                                |  |                                
|Electronic Assembly Sensors (EAS) |                                | 
|Products                          |                                |  | $                              
|Semiconductor Products            |                                |  |                                
|End-User Systems Products         |                                |  |                                
|                                  |                               
|Total                             |                                |  | $                              

Our revenues from EAS products increased 144% during the nine months ended
September 30, 2004 from the nine months ended September 30, 2003 and increased 119% during the three months ended September 30,
2004 from the three months ended September 30, 2003. Third quarter EAS products revenues also reflect a 10% increase from revenue
levels during the quarter ended June 30, 2004. These increased revenues reflect increased order rates from our two largest EAS
customers. During the three and nine month periods ended September 30, 2004, revenues from EAS products, primarily LaserAlign
sensors, were positively impacted by improved market conditions in the worldwide market for SMT capital equipment and the
introduction of two new sensors for one of our large OEM customers. These sensors were designed for the latest generation
pick-and-place machine of this customer, which was introduced during 2003. Our two largest EAS customers accounted for
approximately 51% of total revenues for the nine months ended September 30, 2004, and approximately 38% of revenues for the
comparable period in 2003. These customers accounted for approximately 47% of revenues in the third quarter of 2004, compared to
approximately 39% of revenues in the third quarter of 2003.

---

Our revenues from sales of semiconductor product increased 38% during the
nine months ended September 30, 2004 from the nine months ended September 30, 2003 and increased 42% during the three months ended
September 30, 2004 from the three months ended September 30, 2003. Third quarter semiconductor product revenues were down 8% from
revenue levels in the quarter ended June 30, 2004. Increase in revenue during 2004 compared to 2003 is primarily due to improved
market conditions in the semiconductor capital equipment market, which began in late 2003. This trend is consistent with the
growth in the overall electronics capital equipment market and resulted in increased sales of our wafer mapping products, which
represented approximately 56% and 43% of semiconductor product revenues during the nine months ended September 30, 2004 and 2003,
and approximately 66% and 46% of revenues during the three months ended September 30, 2004 and 2003, respectively.

Our revenues from sales of end-user systems increased 58% during the nine
months ended September 30, 2004 from the nine months ended September 30, 2003 and increased 64% during the three months ended
September 30, 2004 from the three months ended September 30, 2003. Third quarter end-user systems revenues also increased 97% from
revenue levels in the three months ended June 30, 2004. These revenue increases are the result of improved market conditions in
the SMT capital equipment markets and continued success in selling inspection systems to many of the large manufacturers of
circuit boards and memory modules, particularly in Asia. A large portion of the worldwide production capacity for printed circuit
boards is being added in China, and we have been successful in selling inspection systems to new and existing customers in that
region. We opened a sales office in China during the fourth quarter of 2004 to further pursue opportunities in that market. Also,
during the fourth quarter of 2003 and the first quarter of 2004, we shipped SE 300 systems for a large $1.8 million order where
revenue recognition was deferred due to pending customer acceptance and we also received a large order for our KS line of
automated optical inspection systems during the first quarter of 2004 for shipment in the second and third quarters. We recognized
revenue of approximately $3.0 million relative to these large SE 300 and KS orders in the third quarter of 2004. This revenue
accounted for a substantial portion of the increase from the second quarter to the third quarter of 2004.

International revenues comprised approximately 81% and 78% of total revenues
during the nine month periods ended September 30, 2004 and 2003, respectively, and approximately 78% and 81% of revenues during
the three month periods ended September 30, 2004 and 2003, respectively. The international markets in Asia, Japan and Europe
account for a significant portion of the capital equipment market for the manufacture of electronics, the primary market for our
EAS sensors and End-User systems product lines. Revenues generated from products used primarily for SMT electronic assembly
production (revenues from OEM sensors and End-User systems) were approximately 88% and 83% of revenues for the nine month periods
ended September 30, 2004 and 2003, respectively.

# Gross Margin

Gross margin for the nine months ended September 30, 2004 increased as a
percentage of revenues to 59%, compared to 50% during the nine months ended September 30, 2003. For the three months ended
September 30, 2004, gross margins increased to 60% of revenues compared to 51% during the three months ended September 30, 2003.

There were two primary reasons for higher gross margins as a percentage of
revenues: increased revenue that allows us to leverage our operations and, a change in our revenue mix with higher levels of
sensor revenues. Our gross margin is highly dependent on the level of revenues and resulting production levels over which to
spread manufacturing overhead costs such as facilities and other compensation and non-compensation expenses that do not vary with
activity levels and manufacturing processes become more efficient with higher production volumes. Revenue levels were 84% and 91%
higher in the three and nine month periods ended September 30, 2004 than during the same periods in 2003. Further, our sensor
products carry higher gross margins as a percentage of revenues than end-user systems products and our sensor products constituted
a higher proportion of our total revenue in the nine months ended September 30, 2004 (55%) than they did in the nine months ended
September 30, 2003 (43%). These positive influences were somewhat offset by continued price pressure resulting in lower selling
prices, particularly on end-user systems products, and increased warranty costs during the first nine months of 2004 compared to
2003. We expect that lower forecasted sales levels in the fourth quarter of 2004 as compared to the second and third quarters of
2004 will have a negative impact on gross margins, resulting in a decrease in gross margin as a percentage of sales compared to
those periods.

---

# Research and Development

Research and development expenses increased 7% to $5.7 million during the
nine months ended September 30, 2004 from the nine months ended September 30, 2003 and increased 17% to $2.0 million in the three
months ended September 30, 2004 from the three months ended September 30, 2003. As a percentage of revenue, research and
development expenses decreased to 12% during the nine months ended September 30, 2004 from 22% during the comparable period in
2003 and decreased to 10% in the third quarter of 2004 compared to 16% in the same period in 2003. As a percentage of revenue,
research and development expense was maintained at a relatively high level during 2002 and 2003, as we continued to fund product
development on important new products even as revenues levels declined. Although our investment in research and development
remained relatively constant on a quarterly basis during 2003 and the first quarter of 2004, we increased the level of research
and development spending in the second and third quarters of 2004 in order to accelerate completion of projects and to increase
the number of development projects in process. We expect research and development expenses to remain relatively flat in the fourth
quarter of 2004 as compared to the levels recorded in the second and third quarters of 2004, as we continue to work on development
of important new products.

Research and development expenses during the nine months ended September 30,
2004 were primarily focused on initial development activities for several new sensor products, including the new Embedded Process
Verification sensor family (EPV), continued development of the SE and KS series inspection systems, next generation LaserAlign
products and other new sensors for the SMT market. In addition, we are continuing development of new products for the
Semiconductor market, and are completing development of the recently introduced WaferSense auto leveling sensor (ALS).
Customer funded research and development is recognized as a reduction of research and development expense. During the nine months
ended September 30, 2004, there was $90,000 of customer funded research and development recognized as a reduction of research and
development expense compared to $14,000 during the nine months ended September 30, 2003.

# Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 11% to $9.8 million
during the nine month period ended September 30, 2004 compared to $8.8 million during the nine months ended September 30, 2003,
and increased 17% to $3.7 million during the three months ended September 30, 2004 from the three months ended September 30, 2003.
As a percentage of revenue, selling, general and administrative expenses decreased to 21% during the nine month period ended
September 30, 2004 from 36% in 2003, and for the third quarter decreased to 19% in 2004 from 30% in 2003. The increase in selling,
general and administrative expense is primarily the result of additional investments in sales and marketing, primarily in Asia,
other variable costs associated with supporting a growing revenue base, company wide incentive programs associated with higher
revenue levels and increased corporate governance costs, including costs associated with implementing an internal control
framework in accordance with section 404 of the Sarbanes Oxley Act of 2002. We anticipate that selling general and administrative
costs in the fourth quarter to be at or slightly below the levels recorded in the three months ended September 30, 2004, but that
the decrease will be dependant on the level of revenues and profits achieved during that period.

# Restructuring and Severance Costs

During 2001, 2002 and 2003, we implemented a series of workforce reductions,
closed our facility in California, downsized other facilities and made other reductions in discretionary spending designed to
reduce our overall fixed cost structure. In January 2003, we incurred approximately $170,000 of severance costs and facility
closure costs associated with further consolidation of our semiconductor product group from Redwood City, California to Portland,
Oregon. Severance costs were associated with a workforce reduction of 5 people. Substantially all of these costs were paid as of
March 31, 2003.

During the nine and three month periods ended September 30, 2004, we recorded
a restructuring charges of $169,000 and $131,000, respectively. These charges reflect our change in estimate relative to the
amount of sub-lease income we will receive from space vacated during the last corporate restructuring. Although this space is
being actively marketed for sub-lease, we have not been successful in securing a sub-lease tenant and our lease term ends in May
of 2006. Consequently, we determined it was appropriate to record a restructure charge in the third quarter of 2004 for all
remaining estimated net sub-lease income.

---

# Gain from Technology Transfer and License

In March 2003, we transferred to the Optical Gaging Products Division of
Quality Vision International, Inc. (QVI) the rights and technology necessary to manufacture our Digital Range Sensors (DRS). In
addition, we granted QVI a non-exclusive license to the intellectual property associated with this product line and sold a portion
of our inventory as part of this transaction. QVI had been the primary customer for DRS sensors prior to this agreement as part of
a separate 1999 agreement. The agreement called for QVI to pay $750,000 as a one-time fee for the purchase of fixtures, a
technology transfer fee and a non-refundable royalty payment. In addition, we sold QVI raw material inventories associated with
the product line. The gain was determined as the difference between the proceeds received and our carrying value of product line
inventory and fixed assets prior to the sale. As a result of this transaction, we recorded a $645,000 gain in the three month
period ended March 31, 2003.

# Amortization of Intangible Assets

Amortization of acquired intangible assets was $688,000 for the nine month
period ended September 30, 2004 compared to $1.5 million during the nine months ended September 30, 2003. During the three month
period ended September 30, 2004 amortization of intangibles was $231,000 compared to $913,000 during the three month period ended
September 30, 2003. The decrease in amortization during the nine and three month periods ended September 30, 2004 compared to the
same periods in 2003 was due to the acceleration of amortization of some of the intangible assets established as the result of the
acquisition of HAMA Laboratories, Inc. in 1999. The accelerated amortization of $632,000 was recorded in the third quarter of
2003. Amortization is primarily attributable to developed technology and trademarks resulting from our acquisition of technology
and other assets of HAMA Laboratories Inc. during the second quarter of 1999 and our acquisition of Imagenation Corporation during
the fourth quarter of 2000. Amortization of these acquisition related intangible assets and amortization of patent costs is
expected to be approximately $1.1 million in 2004.

# Interest and Other

Interest income and other primarily includes interest earned on investments.
Interest income increased during the three and nine month periods ended September 30, 2004 compared to the same period in 2003
primarily as a result of increased investment balances as the result of $12.7 million of cash and investments generated during
2004.

# Provision for Income Taxes and Effective Income Tax Rate

We carry the benefit we will derive in future accounting periods from tax
losses and credits and deductible temporary differences as a deferred tax asset on our balance sheet. In the third
quarter of fiscal 2002, however, we recorded a full valuation allowance (a charge to income that creates an offsetting balance on
our balance sheet) against our deferred tax assets. We recorded this valuation allowance because the cumulative losses we had
incurred over the three years prior to that date and the operating losses we continued to incur made it questionable whether we
would realize value from the deferred tax assets and because we fully utilized our loss carryback potential in 2002. Since the
third quarter of fiscal 2002, we have continued to record in each quarter a full valuation allowance against all future tax
benefits produced by our operating results. We assess the realizability of our deferred tax assets and the need for this valuation
allowance based on Statement of Financial Accounting Standards No. 109. We expect to continue to record a full valuation allowance
until we can sustain a level of profitability that demonstrates our ability to use these assets. At that time, the valuation
allowance will be reassessed, and could be eliminated, resulting in recognition of deferred taxes.

During the three month period ended September 30, 2004 we recorded an income
tax provision of $1,890,000 to adjust the provision for income taxes on earnings for the nine month period ended September 30,
2004 to the annual expected tax rate. Income earned in 2004 will result in our fully utilizing remaining tax operating loss
carryforwards with the result that we will pay income taxes in 2004. Because we continue to maintain a valuation allowance on
deferred tax assets (deferred tax assets not available to reduce taxable income or taxes payable in 2004) estimated 2004 income
tax requirements are reflected in our annual expected tax rate. Tax expense of $13,000 and $202,000 recorded during the three and
nine month periods ended September 30, 2003 related to income generated by foreign subsidiaries.

---

# Order Rate and Backlog

Our orders totaled $44.4 million during the nine month period ended September
30, 2004 compared to $25.5 million during the nine month period ended September 30, 2003. For the three month period ended
September 30, 2004, orders totaled $15.5 million compared to $9.3 million during the three month period ended September 30, 2003.
Backlog totaled $4.3 million and $3.9 million at September 30, 2004 and 2003, respectively. The scheduled shipment (or revenue for
systems recognized upon acceptance) of the September 30, 2004 backlog is as follows (in thousands):

|                           | 
|-------------------------- | 
|
|4th Quarter 2004           | 
|1st Quarter 2005 and after | 
|                           | 
|Total backlog              | 

# LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents increased by $10.3 million during the nine
month period ended September 30, 2004, primarily because of $8.7 million of cash generated from operating activities and $4.9
million of cash generated from financing activities, offset by the purchase of $2.4 million of marketable securities, net of
maturities of marketable securities, and the purchase of $929,000 of capital assets. Our cash and cash equivalents fluctuate in
part because of maturities of marketable securities and investment of cash balances resulting from those maturities, or from other
sources of cash, in additional to marketable securities. Accordingly, we believe the combined balances of cash and marketable
securities provide a more reliable indication of our available liquidity. Our combined balances of cash and marketable securities
increased $12.7 million to $37.5 million as of September 30, 2004 from $24.8 million as of December 31, 2003.

We generated $8.7 million of cash from operations during the nine months
ended September 30, 2004. Cash generated from operations primarily included net income of $9.8 million, which included
$1.9 million of net non-cash expenses for depreciation and amortization, provision for inventory obsolescence and other
non-cash items, tax benefits from the exercise of stock options of $725,000 and increased accrued expenses of $1.9 million. This
cash generated more than offset investments in accounts receivable of $3.2 million, inventory of $2.1 million and other
assets of $396,000 as well as reductions in accounts payable of $23,000. Increased investment in accounts receivable and inventory
is primarily the result of increased revenue levels in 2004, and the increase in accrued expenses is primarily due to increased
incentive and warranty accruals. During the nine months ended September 30, 2003, we generated $1.4 million of cash from
operations, primarily due to funding a net loss of $3.5 million, which included a $645,000 gain from a technology transfer and
license agreement and $3.2 million of non-cash expenses, which was more than offset by $2.4 million of net cash generated from
changes in operating assets.

We used $3.3 million of cash in investing activities during the nine months
ended September 30, 2004 compared to $2.6 million during the same period in 2003. Changes in the level of investment in marketable
securities resulting from the purchases and maturities of those securities used $2.4 million of cash in 2004 and used $3.0 million
of cash in 2003. We used approximately $929,000 and $361,000 of cash for the purchase of fixed assets and the acquisition of a
patent license during the nine months ended September 30, 2004 and 2003, respectively. In addition, during the nine months ended
September 30, 2003, we generated $750,000 of cash from a technology transfer and license agreement.

We generated $4.9 million of cash from financing activities during the nine
months ended September 30, 2004 compared to generating $582,000 of cash during the same period in 2003. Cash generated from
financing activities represents cash from stock option exercises and issuance of common stock under the Employee Stock Purchase
Plan, offset by $90,000 of cash used in 2003 for the repurchase of common stock.

A table of our contractual obligations was provided in Item 7 in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2003. There were no significant changes to our contractual obligations
during the nine months ended September 30, 2004 and we have not entered into any material commitments for capital expenditures
outside of those normal contractual obligations. Purchase commitments for inventory can vary based on the volume of revenue and
resulting inventory requirements. Our cash and cash equivalents and investments totaled $37.5 million at September 30, 2004. With
this level of cash and cash equivalents and investments, and the fact that we are generating net profits and cash during 2004, we
believe that our cash and cash equivalents and investments will be adequate to fund cash flow needs for the foreseeable future.

---

At September 30, 2004, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance of special purpose entities, which
would have been established for the purpose of establishing off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to the financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.

# OTHER FACTORS

Changes in revenues have resulted primarily from changes in the level of unit
shipments and new product introductions. We believe that inflation has not had any significant effect on operations. Most 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.

As a result of the Kestra Ltd. acquisition we have a sales and software
development office located in the UK. We also have a sales office in Singapore and China. We do not believe that currency
fluctuations will have a material impact on our consolidated financial statements.

---

# ITEM 4  CONTROLS AND PROCEDURES

a.      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 timely alerting them to
the material information relating to us (or our consolidated subsidiaries) required to be included in the reports we file or
submit under the Exchange Act.

b.      During the quarter ended September 30,
2004, 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.

# PART II.   OTHER INFORMATION

# ITEM 6  EXHIBITS

31.1    Certification of Chief Executive Officer pursuant
to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002

31.2    Certification of Chief Financial Officer pursuant
to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002

32       Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



---

# SIGNATURES

Pursuant to the requirements 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. IversonKathleen P. Iverson, President and Chief Executive Officer(Principal Executive Officer andDuly Authorized Officer)
| | -------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
| |                                                                                                                                            
| | /s/   Scott G. LarsonScott G. Larson, Chief Financial Officer(Principal Accounting Officer andDuly Authorized Officer)                     

Dated:   November 12, 2004

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