|                                                                                          
|------------------------------------------------------------------------------------------
|SECURITIES AND EXCHANGE COMMISSION                                                        
|WASHINGTON, D.C. 20549                                                                    
|                                                                                          
|FORM 10-Q                                                                                 
|                                                                                          
|(Check One)                                                                               
|                                                                                          
|xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
  OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                          
|For the quarterly period ended June 30,
  2006                                            
|                                                                                          
|oTRANSITION PURSUANT TO SECTION 13 OR 15(D)
  OF THE SECURITIES EXCHANGE ACT              
|                                                                                          
|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
  incorporation or organization) |  | (I.R.S. Employer
  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)          

---

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 xNo o

Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
accelerated filer or large accelerated filer in Rule 12b-2 of the
Exchange Act.

|Large accelerated
filero | Accelerated filerx | Non-accelerated filero
|------------------------ | ------------------ | ----------------------

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

Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date. At July
31, 2006, there were 9,060,957 shares of the registrants Common Stock, no par
value, issued and outstanding.





---

PART I.
FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE
SHEETS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                                                                                |  |               |        |                     |   |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ------------------- | - | ------ | -
|(In
  thousands except share information)                                                                                       |  | June 30, 2006 |        | December 31,
  2005 |  
|                                                                                                                                |  |               |        |                     |  
|                                                                                                                                |  |               |        |                     |   |        |  
|ASSETS                                                                                                                          |  |               |        |                     |   |        |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Cash and cash equivalents                                                                                                       |  | $             | 32,934 |                     | $ | 19,592 |  
|Marketable securities                                                                                                           |  |               | 12,238 |                     |   | 15,607 |  
|Accounts receivable, net                                                                                                        |  |               | 8,533  |                     |   | 9,775  |  
|Inventories                                                                                                                     |  |               | 8,703  |                     |   | 7,512  |  
|Other current assets                                                                                                            |  |               | 828    |                     |   | 924    |  
|Deferred tax assets                                                                                                             |  |               | 1,942  |                     |   | 1,942  |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Total current assets                                                                                                            |  |               | 65,178 |                     |   | 55,352 |  
|                                                                                                                                |  |               |        |                     |   |        |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Marketable securities                                                                                                           |  |               | 3,412  |                     |   | 5,941  |  
|Equipment and leasehold improvements, net                                                                                       |  |               | 1,722  |                     |   | 1,378  |  
|Intangible and other assets, net                                                                                                |  |               | 1,334  |                     |   | 1,737  |  
|Goodwill                                                                                                                        |  |               | 5,019  |                     |   | 4,856  |  
|Deferred tax assets                                                                                                             |  |               | 3,858  |                     |   | 3,763  |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Total assets                                                                                                                    |  | $             | 80,523 |                     | $ | 73,027 |  
|                                                                                                                                |  |               |        |                     |   |        |  
|                                                                                                                                |  |               |        |                     |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                            |  |               |        |                     |   |        |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Accounts payable                                                                                                                |  | $             | 3,217  |                     | $ | 2,633  |  
|Advance customer payments                                                                                                       |  |               | 273    |                     |   | 428    |  
|Accrued expenses                                                                                                                |  |               | 5,548  |                     |   | 3,776  |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Total current liabilities                                                                                                       |  |               | 9,038  |                     |   | 6,837  |  
|                                                                                                                                |  |               |        |                     |   |        |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Commitments                                                                                                                     |  |               |        |                     |   |        |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Stockholders equity:                                                                                                           |  |               |        |                     |   |        |  
|Preferred stock, no par value, 5,000,000
  shares authorized, none outstanding                                                  |  |               |       |                     |   |       |  
|Common stock, no par value, 37,500,000
  shares authorized, 9,020,209 and 8,899,409 shares issued and outstanding, respectively |  |               | 51,268 |                     |   | 49,351 |  
|Accumulated other comprehensive loss                                                                                            |  |               | (685   | )                   |   | (700   | )
|Retained earnings                                                                                                               |  |               | 20,902 |                     |   | 17,539 |  
|                                                                                                                                |  |               |        |                     |   |        |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Total stockholders equity                                                                                                      |  |               | 71,485 |                     |   | 66,190 |  
|                                                                                                                                |  |               |        |                     |   |        |  
|                                                                                                                                |  |               |        |                     |   |        |  
|Total liabilities and stockholders
equity                                                                                      |  | $             | 80,523 |                     | $ | 73,027 |  
|                                                                                                                                |  |               |        |                     |   |        |  

SEE THE ACCOMPANYING NOTES TO UNAUDITED
INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

---

CONSOLIDATED STATEMENTS OF OPERATIONSCYBEROPTICS CORPORATION(Unaudited)

|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|--------------------------------------------- |  | ---------------------------- | ------ | -------------------------- | - | ----- |  | ---- | ------ |  | - | ------ | 
|                                              |  | Three Months Ended 
June 30, |        | Six Months Ended 
June 30, |  
|                                              |  |                              |        |                            |  
|(In
  thousands, except per share amount)     |  | 2006                         |        | 2005                       |   | 2006  |  | 2005 |       
|                                              |  |                              |        |                            |   |       |  |      |       
|                                             
|Revenues                                      |  | $                            | 14,551 |                            | $ | 8,429 |  | $    | 29,269 |  | $ | 19,718 | 
|Cost of revenues                              |  |                              | 6,438  |                            |   | 3,558 |  |      | 13,521 |  |   | 8,468  | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Gross profit                                  |  |                              | 8,113  |                            |   | 4,871 |  |      | 15,748 |  |   | 11,250 | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Research and development expenses             |  |                              | 1,907  |                            |   | 1,678 |  |      | 3,940  |  |   | 3,387  | 
|Selling, general and administrative expenses  |  |                              | 3,565  |                            |   | 2,960 |  |      | 7,118  |  |   | 6,110  | 
|Amortization of intangibles                   |  |                              | 172    |                            |   | 207   |  |      | 379    |  |   | 414    | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Income from
  operations                      |  |                              | 2,469  |                            |   | 26    |  |      | 4,311  |  |   | 1,339  | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Interest income and other                     |  |                              | 418    |                            |   | 246   |  |      | 812    |  |   | 403    | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Income before
  income taxes                  |  |                              | 2,887  |                            |   | 272   |  |      | 5,123  |  |   | 1,742  | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Income tax provision                          |  |                              | 980    |                            |   | 70    |  |      | 1,760  |  |   | 420    | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Net income                                    |  | $                            | 1,907  |                            | $ | 202   |  | $    | 3,363  |  | $ | 1,322  | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Net income per share  Basic                  |  | $                            | 0.21   |                            | $ | 0.02  |  | $    | 0.38   |  | $ | 0.15   | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Net income per share  Diluted                |  | $                            | 0.21   |                            | $ | 0.02  |  | $    | 0.37   |  | $ | 0.15   | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Weighted average shares outstanding  Basic   |  |                              | 8,997  |                            |   | 8,859 |  |      | 8,962  |  |   | 8,853  | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 
|Weighted average shares outstanding  Diluted |  |                              | 9,100  |                            |   | 8,980 |  |      | 9,072  |  |   | 8,988  | 
|                                              |  |                              |        |                            |   |       |  |      |        |  |   |        | 

SEE THE
ACCOMPANYING NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

2

---

CONSOLIDATED STATEMENTS OF CASH FLOWSCYBEROPTICS CORPORATION(Unaudited)

|                                                                                           |  |                           |        |      |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------------- | ------ | ---- | - | ------ | -
|                                                                                           |  | Six Months Ended June 30, |       
|                                                                                           |  |                           |       
|(In
  thousands)                                                                           |  | 2006                      |        | 2005 |  
|                                                                                           |  |                           |        |      |  
|                                                                                          
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |  |                           |        |      |   |        |  
|Net income                                                                                 |  | $                         | 3,363  |      | $ | 1,322  |  
|Adjustments to
  reconcile net income to net cash provided (used) by operating activities: |  |                           |        |      |   |        |  
|Depreciation and
  amortization                                                            |  |                           | 1,013  |      |   | 996    |  
|Provision for
  doubtful accounts                                                          |  |                           | 46     |      |   | 23     |  
|Provision for
  inventory obsolescence                                                     |  |                           | 168    |      |   | 46     |  
|Deferred income
  taxes                                                                    |  |                           | (95    | )    |   | 80     |  
|Foreign currency
  adjustment                                                              |  |                           | (175   | )    |   | 210    |  
|Stock
  compensation costs                                                                 |  |                           | 497    |      |   |       |  
|Changes in
  operating assets and liabilities:                                             |  |                           |        |      |   |        |  
|Accounts
  receivable                                                                      |  |                           | 1,196  |      |   | 2,066  |  
|Inventories                                                                                |  |                           | (1,538 | )    |   | (657   | )
|Other current
  assets                                                                     |  |                           | 109    |      |   | (37    | )
|Accounts payable                                                                           |  |                           | 581    |      |   | 324    |  
|Advance customer
  payments                                                                |  |                           | (155   | )    |   | (62    | )
|Accrued expenses                                                                           |  |                           | 1,766  |      |   | (1,766 | )
|                                                                                           |  |                           |        |      |   |        |  
|Net cash
  provided by operating activities                                                |  |                           | 6,776  |      |   | 2,545  |  
|                                                                                           |  |                           |        |      |   |        |  
|                                                                                           |  |                           |        |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |  |                           |        |      |   |        |  
|                                                                                           |  |                           |        |      |   |        |  
|Proceeds from
  sales of available for sale marketable securities                          |  |                           | 10,356 |      |   | 4,563  |  
|Purchases of
  available for sale marketable securities                                    |  |                           | (4,432 | )    |   | (8,716 | )
|Additions to
  equipment and leasehold improvements                                        |  |                           | (671   | )    |   | (304   | )
|Additions to
  patents                                                                     |  |                           | (69    | )    |   | (110   | )
|                                                                                           |  |                           |        |      |   |        |  
|Net cash
  provided (used) by investing activities                                         |  |                           | 5,184  |      |   | (4,567 | )
|                                                                                           |  |                           |        |      |   |        |  
|                                                                                           |  |                           |        |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |  |                           |        |      |   |        |  
|Proceeds from
  exercise of stock options                                                  |  |                           | 1,230  |      |   | 193    |  
|Excess tax
  benefit from exercise of stock options                                        |  |                           | 167    |      |   |       |  
|Repurchase of
  common stock                                                               |  |                           |       |      |   | (252   | )
|                                                                                           |  |                           |        |      |   |        |  
|Net cash
  provided (used) by financing activities                                         |  |                           | 1,397  |      |   | (59    | )
|                                                                                           |  |                           |        |      |   |        |  
|                                                                                           |  |                           |        |      |   |        |  
|Effects of exchange rate changes on cash and cash
  equivalents                            |  |                           | (15    | )    |   |       |  
|                                                                                           |  |                           |        |      |   |        |  
|                                                                                           |  |                           |        |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                       |  |                           | 13,342 |      |   | (2,081 | )
|                                                                                           |  |                           |        |      |   |        |  
|Cash and cash equivalents  beginning of period                                            |  |                           | 19,592 |      |   | 25,416 |  
|                                                                                           |  |                           |        |      |   |        |  
|                                                                                           |  |                           |        |      |   |        |  
|Cash and cash equivalents  end of period                                                  |  | $                         | 32,934 |      | $ | 23,335 |  
|                                                                                           |  |                           |        |      |   |        |  

SEE THE
ACCOMPANYING NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

3

---

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
(In thousands, except share and per share amounts)

1. INTERIM REPORTING:

The interim consolidated financial statements
presented herein as of June 30, 2006, and for the three and six month periods
ended June 30, 2006 and 2005, are unaudited, but in the opinion of our
management, 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 three and six month
periods ended June 30, 2006 do not necessarily indicate the results to be
expected for the full year. The December 31, 2005, consolidated balance sheet
data was derived from our audited consolidated financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. 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, 2005.

2. ACCOUNTING FOR STOCK-BASED COMPENSATION:

We also have three stock option plans that are administered
under the supervision of the Board of Directors and have 1,436,397 shares of
common stock reserved in the aggregate for issuance to employees, directors,
officers and others. Reserved shares underlying canceled options are available
for future grant under all 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 the Companys common stock as consideration for the
option price provided that the tendered shares have been held by the option
holder at least six months. In anticipation of adopting SFAS No. 123(R), we did
not modify the terms of any previously granted options.

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. As of June 30, 2006, 600,426
shares have been issued under this plan.

Effective January 1, 2006, we adopted SFAS No. 123(R),
Share-Based Payment, applying the modified prospective method. This Statement
requires all equity-based payments to employees, including grants of employee
stock options, to be recognized in the consolidated statement of earnings 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 awards 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 values of stock options granted both before and after adoption of SFAS No.
123(R) have been determined using the Black-Scholes model. The compensation
expense recognized for all equity based awards is net of estimated forfeitures.
We have classified equity based compensation within our statement of operations
in the same manner as our cash based employee compensation costs.

Prior to adoption of SFAS
123(R), we measured compensation cost related to our employee stock option
plans and employee stock purchase plan using the intrinsic value method of
accounting prescribed by APB Opinion No. 25 and related interpretations. No
compensation expense was recognized for share purchase rights granted under
these plans. The following table presents the effect of adopting SFAS 123(R) on
reported items during the three and six month periods ended June 30, 2006:

|                                              |  |                                    |       |                                  |   |             |   |                                |       |  |   |       |  
|--------------------------------------------- |  | ---------------------------------- | ----- | -------------------------------- | - | ----------- | - | ------------------------------ | ----- |  | - | ----- | -
|                                              |  | Three Months Ended
  June 30, 2006 |       | Six Months Ended
  June 30, 2006 |  
|                                              |  |                                    |       |                                  |  
|(In
  thousands except per share information) |  | As Reported                        |       | Impact of
Adopting
SFAS 123(R)   |   | As Reported |   | Impact of
Adopting
SFAS 123(R) |      
|                                              |  |                                    |       |                                  |   |             |   |                                |      
|                                              |  |                                    |       |                                  |   |             |   |                                |       |  |   |       |  
|Income from operations                        |  | $                                  | 2,469 |                                  | $ | (305        | ) | $                              | 4,311 |  | $ | (497  | )
|Net Income                                    |  | $                                  | 1,907 |                                  | $ | (235        | ) | $                              | 3,363 |  | $ | (402  | )
|                                              |  |                                    |       |                                  |   |             |   |                                |       |  |   |       |  
|Net income per
  share:                       |  |                                    |       |                                  |   |             |   |                                |       |  |   |       |  
|Basic                                         |  | $                                  | 0.21  |                                  | $ | (0.03       | ) | $                              | 0.38  |  | $ | (0.04 | )
|Diluted                                       |  | $                                  | 0.21  |                                  | $ | (0.03       | ) | $                              | 0.37  |  | $ | (0.04 | )

4

---

The total equity based compensation expense includes
$289,000 and $439,000 for the three and six months ended June 30, 2006,
respectively, for the unvested portion of stock option awards outstanding as of
the date of adoption and expense for all awards granted after the date of
adoption. Total equity based compensation expense also includes $16,000 and
$58,000 for the three and six months ended June 30, 2006, respectively, related
to our employee stock purchase plan. Inventory balances at June 30, 2006
include $23,000 of equity compensation costs that have been capitalized.

For the six month period ended
June 30, 2006, stock option activity was as follows:

|                                                     |  |        |          |                                     |   |                                                                |  |                             |  |   |       |  | 
|---------------------------------------------------- |  | ------ | -------- | ----------------------------------- | - | -------------------------------------------------------------- |  | --------------------------- |  | - | ----- |  | 
|(In
  thousands, except per share amounts and years) |  | Shares |          | Weighted
  Average
  Exercise Price |   | Weighted
  Average
  Remaining
  Contractual
  Term (in years) |  | Aggregate
  Intrinsic Value | 
|                                                     |  |        |          |                                     |   |                                                                |  |                             | 
|                                                     |  |        |          |                                     |   |                                                                |  |                             |  |   |       |  | 
|Options
  outstanding at December 31, 2005           |  |        | 901,176  |                                     | $ | 11.96                                                          |  |                             |  |   |       |  | 
|Granted                                              |  |        | 19,500   |                                     | $ | 13.75                                                          |  |                             |  |   |       |  | 
|Exercised                                            |  |        | (120,800 | )                                   | $ | 10.18                                                          |  |                             |  |   |       |  | 
|Forfeited                                            |  |        | (31,525  | )                                   | $ | 18.34                                                          |  |                             |  |   |       |  | 
|                                                     |  |        |          |                                     |   |                                                                |  |                             |  |   |       |  | 
|Options
  outstanding at June 30, 2006               |  |        | 768,351  |                                     | $ | 12.03                                                          |  | 3.8                         |  | $ | 1,392 | 
|                                                     |  |        |          |                                     |   |                                                                |  |                             |  |   |       |  | 
|                                                     |  |        |          |                                     |   |                                                                |  |                             |  |   |       |  | 
|Exercisable at
  June 30, 2006                       |  |        | 595,426  |                                     | $ | 12.23                                                          |  | 3.4                         |  | $ | 1,018 | 
|                                                     |  |        |          |                                     |   |                                                                |  |                             |  |   |       |  | 

The intrinsic value of an option is the amount by
which the fair value of the underlying stock exceeds its exercise price. The
total intrinsic value of all options exercised during the six months ended June
30, 2006 was $568,000. During the six months ended June 30, 2006, we received
total proceeds of $1.2 million from the exercise of stock options. The tax
benefit recognized as a credit to stockholders equity during the six months
ended June 30, 2006 for tax deductions related to option exercises was
$167,000.

A summary of non vested shares as of June 30, 2006,
and changes during the six months ended June 30, 2006 follows:

|                                |  |        |         |                                             |   |      | 
|------------------------------- |  | ------ | ------- | ------------------------------------------- | - | ---- | 
|Non vested
  shares             |  | Shares |         | Weighted- Average
  Grant Date Fair
  Value |  
|                                |  |        |         |                                             |  
|                                |  |        |         |                                             |   |      | 
|Non vested at December 31, 2005 |  |        | 252,976 |                                             | $ | 6.81 | 
|Granted                         |  |        | 19,500  |                                             | $ | 7.90 | 
|Vested                          |  |        | (98,001 | )                                           | $ | 6.91 | 
|Forfeited                       |  |        | (1,550  | )                                           | $ | 6.09 | 
|                                |  |        |         |                                             |   |      | 
|Non vested at June 30, 2006     |  |        | 172,925 |                                             | $ | 6.89 | 
|                                |  |        |         |                                             |   |      | 

We used historical data to estimate pre-vesting
forfeitures. As of June 30, 2006, the total unrecognized compensation cost
related to non vested equity-based compensation arrangements was $1.1 million
and the related weighted average period over which it is expected to be recognized
is approximately 1.7 years. The total fair value of shares vested during the
six months ended June 30, 2006 was $677,000.

The fair values of the options granted to our
employees during the six months ended June 30, 2006 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. For graded vesting options granted during the six months ended June 30,
2006, the expected life representing the length of time in years that the
options are expected to be outstanding was calculated under the simplified
approach allowed by SFAS No. 123 (R). For immediate vesting options granted
during the six months ended June 30, 2006, the expected life representing the
length of time in years that the options are expected to be outstanding was calculated
using historical exercise data. Expected volatility was computed based on
fluctuations in the daily price of our common stock.

The following table provides the range of assumptions
used for stock options valued during the six months ended June 30, 2006:

|                         |             
|------------------------ | ------------
|Risk-free interest rates | 4.30  5.04%
|Expected life in years   | 4.75 - 6.33 
|Expected volatility      | 54% - 60%   
|Expected dividends       | None        

5

---

2005 Fair
Value Disclosures  Prior to Adopting SFAS No. 123(R)

Prior to the first quarter of 2006, we accounted for equity-based
awards under the intrinsic value method, which followed the recognition and
measurement principles of APB Opinion No. 25 and related interpretations. As a
result, no compensation expense for equity-based awards was recognized in our
statement of operations prior to the first quarter of 2006, as all options
granted had an exercise price equal to the market value of the award on the
date of grant, and our employee stock purchase plan was deemed to be
non-compensatory under APB No. 25. Results of operations for fiscal year 2005
and prior periods have not been restated to reflect recognition of compensation
expense for equity-based awards. The following table illustrates the effect on
net income and net income per share if we had adopted the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation for the three and six month periods ended June 30, 2005:

|                                                                                                           |  |                                      |       |                                    |   |       |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----- | ---------------------------------- | - | ----- | -
|(In
  thousands except per share amounts)                                                                  |  | Three months
  ended
  June 30, 2005 |       | Six months
  Ended
  June 30, 2005 |  
|                                                                                                           |  |                                      |       |                                    |  
|                                                                                                           |  |                                      |       |                                    |   |       |  
|Net income as
  reported                                                                                   |  | $                                    | 202   |                                    | $ | 1,322 |  
|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 |  |                                      | (376  | )                                  |   | (697  | )
|                                                                                                           |  |                                      |       |                                    |   |       |  
|                                                                                                           |  |                                      |       |                                    |   |       |  
|Net income
  (loss)  Pro forma                                                                            |  | $                                    | (174  | )                                  | $ | 625   |  
|                                                                                                           |  |                                      |       |                                    |   |       |  
|                                                                                                           |  |                                      |       |                                    |   |       |  
|Net income
  (loss) per share:                                                                             |  |                                      |       |                                    |   |       |  
|As reported 
  Basic                                                                                      |  | $                                    | 0.02  |                                    | $ | 0.15  |  
|                                                                                                           |  |                                      |       |                                    |   |       |  
|Pro forma 
  Basic                                                                                        |  | $                                    | (0.02 | )                                  | $ | 0.07  |  
|                                                                                                           |  |                                      |       |                                    |   |       |  
|                                                                                                           |  |                                      |       |                                    |   |       |  
|As reported 
  Diluted                                                                                    |  | $                                    | 0.02  |                                    | $ | 0.15  |  
|                                                                                                           |  |                                      |       |                                    |   |       |  
|Pro forma 
  Diluted                                                                                      |  | $                                    | (0.02 | )                                  | $ | 0.07  |  
|                                                                                                           |  |                                      |       |                                    |   |       |  

No tax benefit was applied to the fair value expense
calculated under SFAS No. 123 for the three and six months ended June 30, 2005
due to establishing a valuation allowance on deferred tax assets during 2002.
Our valuation allowance on deferred tax assets was substantially reduced during
the fourth quarter of 2005.

3. CERTAIN BALANCE SHEET COMPONENTS:

Inventories Consist of the
Following:

|                                    |  |               |       |                     |   |       | 
|----------------------------------- |  | ------------- | ----- | ------------------- | - | ----- | 
|(In
  thousands)                    |  | June 30, 2006 |       | December 31,
  2005 |  
|                                    |  |               |       |                     |  
|                                    |  |               |       |                     |   |       | 
|Raw materials
  and purchased parts |  | $             | 3,790 |                     | $ | 3,256 | 
|Work in process                     |  |               | 1,117 |                     |   | 845   | 
|Finished goods                      |  |               | 3,796 |                     |   | 3,411 | 
|                                    |  |               |       |                     |   |       | 
|Total
  inventories                 |  | $             | 8,703 |                     | $ | 7,512 | 
|                                    |  |               |       |                     |   |       | 

6

---

Warranty Costs:

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:

|                                   |  |                               |      |                          |   |      |   |      |      |   |   |      |  
|---------------------------------- |  | ----------------------------- | ---- | ------------------------ | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                   |  | Three Months Ended
  June 30, |      | Six Months EndedJune 30, |  
|                                   |  |                               |      |                          |  
|(In
  thousands)                   |  | 2006                          |      | 2005                     |   | 2006 |   | 2005 |     
|                                   |  |                               |      |                          |   |      |   |      |     
|                                  
|Balance at beginning of
  period   |  | $                             | 654  |                          | $ | 646  |   | $    | 558  |   | $ | 646  |  
|Accrual for warranties             |  |                               | 123  |                          |   | (37  | ) |      | 415  |   |   | 224  |  
|Settlements made during the period |  |                               | (123 | )                        |   | (63  | ) |      | (319 | ) |   | (324 | )
|                                   |  |                               |      |                          |   |      |   |      |      |   |   |      |  
|                                  
|Balance at end of period           |  | $                             | 654  |                          | $ | 546  |   | $    | 654  |   | $ | 546  |  
|                                   |  |                               |      |                          |   |      |   |      |      |   |   |      |  

4.
INTANGIBLE ASSETS AND GOODWILL:

Intangible assets consist of the following:

|                       |  |                             |       |                             |   |        |   |                             |       |                             |   |       |  |   |        |   |   |       | 
|---------------------- |  | --------------------------- | ----- | --------------------------- | - | ------ | - | --------------------------- | ----- | --------------------------- | - | ----- |  | - | ------ | - | - | ----- | 
|                       |  | As of June 30, 2006         |       | As of December 31, 2005     |  
|                       |  |                             |       |                             |  
|(In
  thousands)       |  | Gross 
  Carrying 
  Amount |       | Accumulated 
  Amortization |   | Net    |   | Gross 
  Carrying 
  Amount |       | Accumulated 
  Amortization |   | Net   | 
|                       |  |                             |       |                             |   |        |   |                             |       |                             |   |       | 
|                      
|Developed technology   |  | $                           | 7,775 |                             | $ | (6,732 | ) | $                           | 1,043 |                             | $ | 7,775 |  | $ | (6,359 | ) | $ | 1,416 | 
|Patents and trademarks |  |                             | 2,168 |                             |   | (1,877 | ) |                             | 291   |                             |   | 2,099 |  |   | (1,778 | ) |   | 321   | 
|                       |  |                             |       |                             |   |        |   |                             |       |                             |   |       |  |   |        |   |   |       | 
|                      
|Total                  |  | $                           | 9,943 |                             | $ | (8,609 | ) | $                           | 1,334 |                             | $ | 9,874 |  | $ | (8,137 | ) | $ | 1,737 | 
|                       |  |                             |       |                             |   |        |   |                             |       |                             |   |       |  |   |        |   |   |       | 

Amortization expense for the three and six month
periods ended June 30, 2006 and 2005 is as follows:

|                       |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|---------------------- |  | ----------------------------- | --- | --------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                       |  | Three Months Ended
  June 30, |     | Six Months Ended
  June 30, |  
|                       |  |                               |     |                             |  
|(In
  thousands)       |  | 2006                          |     | 2005                        |   | 2006 |  | 2005 |    
|                       |  |                               |     |                             |   |      |  |      |    
|                      
|Developed technology   |  | $                             | 169 |                             | $ | 203  |  | $    | 373 |  | $ | 408 | 
|Patents and trademarks |  |                               | 50  |                             |   | 60   |  |      | 99  |  |   | 117 | 
|                       |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|                      
|Total                  |  | $                             | 219 |                             | $ | 263  |  | $    | 472 |  | $ | 525 | 
|                       |  |                               |     |                             |   |      |  |      |     |  |   |     | 

As required by SFAS 142, we periodically reassess the
carrying value, useful lives and classification of identifiable intangible
assets. Estimated aggregate amortization expense based on current intangibles
for the next five years is expected to be as follows: $340,000 for the
remainder of 2006, $261,000 in 2007 and $200,000 in 2008, 2009 and 2010.

Goodwill related to our Electronic Assembly segment
increased by $163,000 during the first six months of 2006 as the result of the
translation impact on foreign denominated goodwill balances.

7

---

5. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS:

Our Electronic Assembly segment is the design,
manufacture and sale of optical process control sensors and inspection systems
for the electronics 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:

|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|------------------------------ |  | ----------------------------- | ------ | --------------------------- | - | ----- | - | ---- | ------ | - | - | ------ | -
|                               |  | Three Months Ended
  June 30, |        | Six Months Ended
  June 30, |  
|                               |  |                               |        |                             |  
|(In
  thousands)               |  | 2006                          |        | 2005                        |   | 2006  |   | 2005 |       
|                               |  |                               |        |                             |   |       |   |      |       
|                              
|Revenue                        |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Electronic Assembly            |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|OEM Sensors                    |  | $                             | 9,497  |                             | $ | 3,966 |   | $    | 17,250 |   | $ | 9,461  |  
|SMT Systems                    |  |                               | 3,480  |                             |   | 3,099 |   |      | 8,662  |   |   | 7,480  |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Total Electronic
  Assembly    |  |                               | 12,977 |                             |   | 7,065 |   |      | 25,912 |   |   | 16,941 |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Semiconductor                  |  |                               | 1,574  |                             |   | 1,364 |   |      | 3,357  |   |   | 2,777  |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Total                          |  | $                             | 14,551 |                             | $ | 8,429 |   | $    | 29,269 |   | $ | 19,718 |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Income from operations         |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Electronic Assembly            |  | $                             | 2,631  |                             | $ | 213   |   | $    | 4,446  |   | $ | 1,623  |  
|Semiconductor                  |  |                               | (162   | )                           |   | (187  | ) |      | (135   | ) |   | (284   | )
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Total income
  from operations |  |                               | 2,469  |                             |   | 26    |   |      | 4,311  |   |   | 1,339  |  
|Interest income and other      |  |                               | 418    |                             |   | 246   |   |      | 812    |   |   | 403    |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Income before
  taxes          |  | $                             | 2,887  |                             | $ | 272   |   | $    | 5,123  |   | $ | 1,742  |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Depreciation and amortization: |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Electronic Assembly            |  | $                             | 314    |                             | $ | 300   |   | $    | 633    |   | $ | 600    |  
|Semiconductor                  |  |                               | 173    |                             |   | 201   |   |      | 380    |   |   | 396    |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  
|Total                          |  | $                             | 487    |                             | $ | 501   |   | $    | 1,013  |   | $ | 996    |  
|                               |  |                               |        |                             |   |       |   |      |        |   |   |        |  

Export sales for the three month periods ended June
30, 2006 and 2005 amounted to 89% and 82% of revenues, respectively. Export
sales for the six month periods ended June 30, 2006 and 2005 amounted to 84%
and 78% of revenues, respectively. All of our export sales are negotiated,
invoiced and paid in U.S. dollars. Export sales by geographic area are
summarized as follows:

|                     |  |                               |        |                             |   |       |  |      |        |  |   |        | 
|-------------------- |  | ----------------------------- | ------ | --------------------------- | - | ----- |  | ---- | ------ |  | - | ------ | 
|                     |  | Three Months Ended
  June 30, |        | Six Months Ended
  June 30, |  
|                     |  |                               |        |                             |  
|(In
  thousands)     |  | 2006                          |        | 2005                        |   | 2006  |  | 2005 |       
|                     |  |                               |        |                             |   |       |  |      |       
|                    
|Americas             |  | $                             | 18     |                             | $ | 16    |  | $    | 178    |  | $ | 33     | 
|Europe               |  |                               | 6,384  |                             |   | 2,003 |  |      | 10,933 |  |   | 5,290  | 
|Asia                 |  |                               | 6,542  |                             |   | 4,851 |  |      | 13,566 |  |   | 10,043 | 
|Other                |  |                               |       |                             |   |      |  |      | 1      |  |   | 4      | 
|                     |  |                               |        |                             |   |       |  |      |        |  |   |        | 
|                    
|Total export
  sales |  | $                             | 12,944 |                             | $ | 6,870 |  | $    | 24,678 |  | $ | 15,370 | 
|                     |  |                               |        |                             |   |       |  |      |        |  |   |        | 

8

---

6. NET INCOME
PER SHARE:

Basic net
income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed by dividing net income by the weighted average number of
common shares plus common equivalent shares outstanding. Common equivalent
shares consist of common shares to be issued upon exercise of stock options and
the issuance of shares under our employee stock purchase plan, as calculated
using the treasury stock method. The calculation of diluted net income per
common share includes 103,000 and 110,000 common equivalent shares for the
three and six month periods ended June 30, 2006, and includes 121,000 and
135,000 common equivalent shares for the three and six month periods ended June
30, 2005. The calculation of diluted net income per common share excludes
172,000 and 180,000 of potentially dilutive outstanding stock options for the
three and six month periods ended June 30, 2006, and excludes 314,000 and
316,000 of potentially dilutive outstanding stock options for the three and six
month periods ended June 30, 2005, because their effect would be anti-dilutive.

7.
COMPREHENSIVE INCOME:

Components of
comprehensive income include net income, foreign-currency translation
adjustments and unrealized gains and losses on our available-for-sale
marketable securities. During the three and six month periods ended June 30,
2006, total comprehensive income amounted to $1,911,000 and $3,378,000
respectively. During the three and six month periods ended June 30, 2005, total
comprehensive income amounted to $239,000 and $1,300,000 respectively. At
December 31, 2005 and June 30, 2006, components of accumulated other
comprehensive loss are as follows:

|                            |  |                                    |      |                                                                        |   |                                               |   |   |      |  
|--------------------------- |  | ---------------------------------- | ---- | ---------------------------------------------------------------------- | - | --------------------------------------------- | - | - | ---- | -
|(In thousands)              |  | Foreign 
  Currency 
  Translation |      | Unrealized 
  Gains (Losses) 
  on Available 
  for Sale 
  Securities |   | Accumulated 
  Other 
  Comprehensive 
  Loss |  
|                            |  |                                    |      |                                                                        |   |                                               |  
|                           
|Balance
  December 31, 2005 |  | $                                  | (630 | )                                                                      | $ | (70                                           | ) | $ | (700 | )
|Current Year
  Change       |  |                                    | (11  | )                                                                      |   | 26                                            |   |   | 15   |  
|                            |  |                                    |      |                                                                        |   |                                               |   |   |      |  
|                            |  |                                    |      |                                                                        |   |                                               |   |   |      |  
|Balance June
  30, 2006     |  | $                                  | (641 | )                                                                      | $ | (44                                           | ) | $ | (685 | )
|                            |  |                                    |      |                                                                        |   |                                               |   |   |      |  

8. INCOME
TAXES:

During the
third quarter of 2002, we concluded that a valuation allowance against all of
our deferred tax assets was appropriate due to the cumulative U.S. losses we
had incurred over the prior three years, continued operating losses and full
utilization of our loss carryback potential in 2002. We continued to provide a
full valuation allowance on our deferred tax assets during 2003, 2004 and the first
three quarters of 2005. During the first six months of 2005, we recorded a tax
provision at an estimated annual effective rate of 24% because we had utilized
our available tax operating losses and tax credit carryforwards and were
subject to Alternative Minimum Tax limitations. Because we continued to
maintain a valuation allowance on deferred tax assets, projected current taxes
payable comprised the entire tax provision and were the basis for determining
our annual effective tax rate.

During the fourth
quarter of 2005, we substantially reduced the valuation allowance on our
deferred tax assets initially established in the third quarter of 2002. As a
result, for the first six months of 2006 we recorded a tax provision at an
estimated annual consolidated worldwide effective tax rate approximating 34%.

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 June 30, 2006, we had one open swap
agreement that was purchased on that date. As a result, there were no material
unrealized gains or losses as of June 30, 2006. During the three months ended
June 30, 2006, we recognized a net loss of approximately $188,000 from the
settlement of foreign currency swap agreements and a transaction gain of
approximately $146,000 on the underlying inter-company balance. During the six
months ended June 30, 2006, we recognized a net loss of approximately $203,000
from the settlement of foreign currency swap agreements and a transaction gain
of approximately $175,000 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.

9

---

10. 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, will be recognized on a straight-line basis over the term of
the lease. Future minimum rental payments under this lease are $465,000 in 2006,
$885,000 in 2007 and 2008, $908,000 in 2009, $932,000 in 2010 and $466,000 in
2011.

11. CONTINGENCIES:

In the normal
course of business and 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 an indemnification
claim 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.

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.

12. RECENT
ACCOUNTING DEVELOPMENTS:

In June 2006,
the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement
No. 109 Accounting for Income Taxes. FASB Interpretation No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises
financial statements in accordance with FASB Statement No. 109. The
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation also provides guidance
on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The Interpretation is effective
for fiscal years beginning after December 15, 2006. We are currently evaluating
the impact of adopting the interpretation on our financial position and results
of operations.

13. BOARD AUTHORIZATION OF STOCK REPURCHASE:

Our board of directors has approved a stock repurchase program,
effective July 31, 2006 for a period of one year, under which we may acquire up
to 500,000 shares of our common stock from time to time in open market
transactions, block purchases and other transactions. We have adopted a structured
trading plan to implement the repurchase program.

10

---

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

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 and returns, warranty
obligations, inventory valuation, the carrying value and any impairment of
intangible assets, income taxes and restructuring costs. 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, 2005.

RESULTS OF OPERATIONS:

General

Our
results of operations for the three and six months ended June 30, 2006 reflect
the improving global market conditions for electronics and semiconductor
capital equipment that began during the fourth quarter of 2005. Overall, our
revenues increased 73% and 48% for the three and six months ended June 30,
2006, respectively, compared to the same periods in 2005. Our income from
operations increased to $2.5 million in the three months ended June 30, 2006
from $26,000 during the same period in 2005 and increased to $4.3 million in
the six months ended June 30, 2006 from $1.3 million during the same period in
2005. Our earnings continue to benefit from the streamlined cost structure
established through several workforce reductions and restructurings over the
past few years, which has resulted in a significantly reduced revenue break-even
level. Our cash and marketable securities position increased by $7.5 million
during the six months ended June 30, 2006 to $48.6 million.

Our
order rate increased approximately 46% in the three months ended June 30, 2006
to $14.2 million from $9.7 million in the same period in 2005, and our backlog
increased 63% to $7.8 million at June 30, 2006 from $4.8 million at June 30,
2005. While we have seen significant increases in order rate and backlog
compared to 2005, the order rate for the second quarter of 2006 decreased 12%
from $16.0 million in the first quarter of 2006 and backlog at June 30, 2006
decreased 5% from $8.2 million at March 31, 2006. Despite these decreases from
the first quarter of 2006, we are optimistic that we will continue to see near
term strength in our global markets for electronic assembly and semiconductor
capital equipment.

Segment Results

Operating
results for our Electronics Assembly and Semiconductor segments for the three
and six month periods ended June 30, 2006 and 2005 were as follows:

|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |       |  |   |       |   |   |       | 
|---------------------------------------------- |  | -------------------------------- | ------ | -------------------------------- | - | ----- | - | --------------------- | ------ | ----------------- | - | ----- |  | - | ----- | - | - | ----- | 
|                                               |  | Three months ended June 30, 2006 |        | Three months ended June 30, 2005 |  
|                                               |  |                                  |        |                                  |  
|(In
  thousands)                               |  | Electronic
  Assembly            |        | Semi-
  Conductor                |   | Total |   | Electronic
  Assembly |        | Semi-
  Conductor |   | Total | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |       | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |       |  |   |       |   |   |       | 
|Revenue                                        |  | $                                | 12,977 |                                  | $ | 1,574 |   | $                     | 14,551 |                   | $ | 7,065 |  | $ | 1,364 |   | $ | 8,429 | 
|Cost of
  revenue                              |  |                                  | 5,932  |                                  |   | 506   |   |                       | 6,438  |                   |   | 3,161 |  |   | 397   |   |   | 3,558 | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |       |  |   |       |   |   |       | 
|Gross Margin                                   |  |                                  | 7,045  |                                  |   | 1,068 |   |                       | 8,113  |                   |   | 3,904 |  |   | 967   |   |   | 4,871 | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |       |  |   |       |   |   |       | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |       |  |   |       |   |   |       | 
|Research and
  development expenses            |  |                                  | 1,413  |                                  |   | 494   |   |                       | 1,907  |                   |   | 1,223 |  |   | 455   |   |   | 1,678 | 
|Selling,
  general and administrative expenses |  |                                  | 2,974  |                                  |   | 591   |   |                       | 3,565  |                   |   | 2,441 |  |   | 519   |   |   | 2,960 | 
|Amortization
  of intangibles                  |  |                                  | 27     |                                  |   | 145   |   |                       | 172    |                   |   | 27    |  |   | 180   |   |   | 207   | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |       |  |   |       |   |   |       | 
|Total Income from operations                   |  | $                                | 2,631  |                                  | $ | (162  | ) | $                     | 2,469  |                   | $ | 213   |  | $ | (187  | ) | $ | 26    | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |       |  |   |       |   |   |       | 

11

---

|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        |  |   |       |   |   |        | 
|---------------------------------------------- |  | -------------------------------- | ------ | -------------------------------- | - | ----- | - | --------------------- | ------ | ----------------- | - | ------ |  | - | ----- | - | - | ------ | 
|                                               |  | Six months
  ended June 30, 2006 |        | Six months
  ended June 30, 2005 |  
|                                               |  |                                  |        |                                  |  
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        |  |   |       |   |   |        | 
|(In thousands)                                 |  | Electronic
  Assembly            |        | Semi-
  Conductor                |   | Total |   | Electronic
  Assembly |        | Semi-
  Conductor |   | Total  | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        |  |   |       |   |   |        | 
|Revenue                                        |  | $                                | 25,912 |                                  | $ | 3,357 |   | $                     | 29,269 |                   | $ | 16,941 |  | $ | 2,777 |   | $ | 19,718 | 
|Cost of revenue                                |  |                                  | 12,456 |                                  |   | 1,065 |   |                       | 13,521 |                   |   | 7,662  |  |   | 806   |   |   | 8,468  | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        |  |   |       |   |   |        | 
|Gross Margin                                   |  |                                  | 13,456 |                                  |   | 2,292 |   |                       | 15,748 |                   |   | 9,279  |  |   | 1,971 |   |   | 11,250 | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        |  |   |       |   |   |        | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        |  |   |       |   |   |        | 
|Research and
  development expenses            |  |                                  | 2,999  |                                  |   | 941   |   |                       | 3,940  |                   |   | 2,499  |  |   | 888   |   |   | 3,387  | 
|Selling, general
  and administrative expenses |  |                                  | 5,957  |                                  |   | 1,161 |   |                       | 7,118  |                   |   | 5,103  |  |   | 1,007 |   |   | 6,110  | 
|Amortization of
  intangibles                  |  |                                  | 54     |                                  |   | 325   |   |                       | 379    |                   |   | 54     |  |   | 360   |   |   | 414    | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        |  |   |       |   |   |        | 
|Total Income from operations                   |  | $                                | 4,446  |                                  | $ | (135  | ) | $                     | 4,311  |                   | $ | 1,623  |  | $ | (284  | ) | $ | 1,339  | 
|                                               |  |                                  |        |                                  |   |       |   |                       |        |                   |   |        |  |   |       |   |   |        | 

Revenues

Our
revenues increased by 73% to $14.6 million in the three months ended June 30, 2006
from $8.4 million in the three months ended June 30, 2005 and increased 48% to
$29.3 million in the six months ended June 30, 2006 from $19.7 million in the
six months ended June 30, 2005. The following table sets forth revenues by
product line for the three and six month periods ended June 30, 2006 and 2005:

|                            |  |                                 |        |                               |   |       |  |      |        |  |   |        | 
|--------------------------- |  | ------------------------------- | ------ | ----------------------------- | - | ----- |  | ---- | ------ |  | - | ------ | 
|                            |  | Three
  Months Ended
  June 30, |        | Six Months
  Ended
  June 30, |  
|                            |  |                                 |        |                               |  
|(In thousands)              |  | 2006                            |        | 2005                          |   | 2006  |  | 2005 |       
|                            |  |                                 |        |                               |   |       |  |      |       
|                            |  |                                 |        |                               |   |       |  |      |        |  |   |        | 
|Electronic Assembly         |  |                                 |        |                               |   |       |  |      |        |  |   |        | 
|OEM Sensors                 |  | $                               | 9,497  |                               | $ | 3,966 |  | $    | 17,250 |  | $ | 9,461  | 
|SMT Systems                 |  |                                 | 3,480  |                               |   | 3,099 |  |      | 8,662  |  |   | 7,480  | 
|                            |  |                                 |        |                               |   |       |  |      |        |  |   |        | 
|Total Electronic
  Assembly |  |                                 | 12,977 |                               |   | 7,065 |  |      | 25,912 |  |   | 16,941 | 
|Semiconductor               |  |                                 | 1,574  |                               |   | 1,364 |  |      | 3,357  |  |   | 2,777  | 
|                            |  |                                 |        |                               |   |       |  |      |        |  |   |        | 
|Total                       |  | $                               | 14,551 |                               | $ | 8,429 |  | $    | 29,269 |  | $ | 19,718 | 
|                            |  |                                 |        |                               |   |       |  |      |        |  |   |        | 

Electronic
Assembly

Revenues
from our electronic assembly sensors increased by 139% to $9.5 million
in the three months ended June 30, 2006 from $4.0 million in the three months
ended June 30, 2005 and increased 82% to $17.3 million in the six months ended
June 30, 2006 from $9.5 million in the six months ended June 30, 2005. During the second quarter and first six months
of 2006, revenue from electronic assembly sensors were positively impacted by
improved conditions in our SMT electronic assembly market that began late in
the third quarter of 2005. The second quarter of 2006 represents the fourth
quarter of sequentially higher sensor revenue. During the second quarter and
first six months of 2005, revenue from electronic assembly sensors were
negatively impacted by a downturn in our SMT electronic assembly market, which
began in the fourth quarter of 2004, and continued through the second quarter
of 2005.

Revenues
from our SMT systems products increased by 12% to $3.5 million in the
three months ended June 30, 2006 from $3.1 million in the three months ended
June 30, 2005 and increased 16% to $8.7 million in the six months ended June
30, 2006 from $7.5 million in the six months ended June 30, 2005. During the second quarter and first six months
of 2006, revenue from SMT systems products were positively impacted by improved
conditions in our SMT electronic assembly market that began late in the third
quarter of 2005. Our SMT systems products revenue for the first six months of
2006 were also favorably impacted by a large sale in the first quarter to a
single customer for 25 solder paste inspections systems. During the second
quarter and first six months of 2005, revenue from SMT systems were negatively
impacted by a downturn in our SMT electronic assembly market, which began in
the fourth quarter of 2004, and continued through the second quarter of 2005.
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 has caused increased demand for our inspection
equipment.

12

---

International revenue from
electronic assembly sensors and SMT systems comprised approximately 95% and 91%
of our electronic assembly revenue during the three month periods ended June
30, 2006 and 2005, respectively, and comprised approximately 91% and 86% of our
electronic assembly revenue during the six months ended June 30, 2006 and 2005,
respectively. The international markets of China and the rest of Asia, Japan
and Europe account for a significant portion of the production capability of
capital equipment for the manufacture of electronics, the primary market for
our electronic assembly sensor and SMT system product lines. An increasing
proportion of our sales have been to international customers as manufacturing
of electronic components has migrated offshore, particularly to China.

Semiconductor

Revenues
from semiconductor products increased by 15% to $1.6 million in the three
months ended June 30, 2006 from $1.4 million in the three months ended June 30,
2005 and increased 21% to $3.4 million in the six months ended June 30, 2006
from $2.8 million in the six months ended June 30, 2005. The increase in 2006
was primarily due to higher revenues from our wafer mapping sensors and
WaferSenseÔ products as a
result of improved market conditions in the semiconductor fabrication capital
equipment market that began late in the fourth quarter of 2005. Revenues from
our frame grabber products increased slightly in 2006 compared to 2005.

Our
wafer mapping 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 WaferSenseÔ products. WaferSenseÔ is a family of wireless, wafer like precision
measurement tools for in-situ setup, calibration and process optimization in
semiconductor processing equipment. We are currently working on several new
additions to the WaferSenseÔ product line.

International
revenue comprised approximately 36% and 31% of our semiconductor revenue during
the three month periods ended June 30, 2006 and 2005, respectively, and
comprised approximately 31% and 30% of our semiconductor revenue during the six
months ended June 30, 2006 and 2005, respectively. The increase in
international revenue as a percentage of total semiconductor revenue for 2006,
compared to 2005, is primarily due to increased frame grabber sales in Europe.

Adoption of SFAS No. 123(R)

During
the first quarter of 2006, we began recording compensation expense for
equity-based awards as required by SFAS No. 123(R). The following table sets
forth compensation expense by segment for our equity-based awards for the three
and six months ended June 30, 2006 (in thousands):

|                                             |  |                                    |     |                                  |   |       |  |                       |     |                   |   |       |  |   |    |  |   |     | 
|-------------------------------------------- |  | ---------------------------------- | --- | -------------------------------- | - | ----- |  | --------------------- | --- | ----------------- | - | ----- |  | - | -- |  | - | --- | 
|                                             |  | Three
  months ended June 30, 2006 |     | Six months
  ended June 30, 2006 |  
|                                             |  |                                    |     |                                  |  
|                                             |  |                                    |     |                                  |   |       |  |                       |     |                   |   |       |  |   |    |  |   |     | 
|(In thousands)                               |  | Electronic
  Assembly              |     | Semi-
  Conductor                |   | Total |  | Electronic
  Assembly |     | Semi-
  Conductor |   | Total | 
|                                             |  |                                    |     |                                  |   |       |  |                       |     |                   |   |       | 
|                                             |  |                                    |     |                                  |   |       |  |                       |     |                   |   |       |  |   |    |  |   |     | 
|Cost of revenue                              |  | $                                  | 27  |                                  | $ | 3     |  | $                     | 30  |                   | $ | 27    |  | $ | 6  |  | $ | 33  | 
|Research and development expenses            |  |                                    | 32  |                                  |   | 2     |  |                       | 34  |                   |   | 71    |  |   | 16 |  |   | 87  | 
|Selling, general and administrative expenses |  |                                    | 232 |                                  |   | 9     |  |                       | 241 |                   |   | 344   |  |   | 33 |  |   | 377 | 
|                                             |  |                                    |     |                                  |   |       |  |                       |     |                   |   |       |  |   |    |  |   |     | 
|Total                                        |  | $                                  | 291 |                                  | $ | 14    |  | $                     | 305 |                   | $ | 442   |  | $ | 55 |  | $ | 497 | 
|                                             |  |                                    |     |                                  |   |       |  |                       |     |                   |   |       |  |   |    |  |   |     | 

Gross
Margin

Our
gross margin as a percentage of sales for both our Electronic Assembly and
Semiconductor products are somewhat dependent on the level of revenues and
resulting production levels over which to spread fixed manufacturing overhead
costs that do not vary with activity levels. In addition, with higher
production volumes manufacturing processes become more efficient and we are
able to negotiate lower material costs from our suppliers as the result of
volume discounts which reduces the overall cost of producing products for sale.
The mix of products sold can also have an impact on Electronic Assembly and
Semiconductor margins.

13

---

Electronic
Assembly

Gross
margin as a percentage of electronic assembly sales were 54% and 55% in the
three months ended June 30, 2006 and 2005, respectively, and were 52% and 55%
in the six months ended June 30, 2006 and 2005, respectively. The decrease in
gross margin as a percentage of sales in 2006, compared to 2005, was due
to mix of SMT systems and pricing pressures from increased competition for sales of our
solder paste inspection machines. These pricing pressures offset an increase in
higher margin sensor products as a percentage of total electronic assembly
sales. With respect to our systems products, and particularly our solder paste
inspection machines, we anticipate that pricing pressures will continue
throughout 2006 due to additional competition in the marketplace for solder
paste inspection. In the first quarter of 2006, we introduced our new Flex
Ultra automated optical inspection (AOI) system that inspects printed circuit
boards for missing or misplaced electronic components, solder joint quality or
other defects. This system has been favorably received by the market and
typically provides a somewhat better gross margin than our solder paste
inspection system. We anticipate that sales of our Flex Ultra system will
constitute a larger percentage of our SMT systems revenue in future periods.

Semiconductor

Gross
margin as a percentage of sales were 68% and 71% in the three months ended June
30, 2006 and 2005, respectively, and were 68% and 71% in the six months ended
June 30, 2006 and 2005, respectively. The decrease in gross margin as a
percentage of sales in 2006, compared to 2005, is due to changes in product
mix.

Operating Expenses

We
believe continued investment in research and development of new products,
coupled with continued investment and development of our sales channels, is
critical to future growth and profitability. We maintain research and
development and sales and marketing expenses at relatively high levels, even
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.

We
are currently expecting research and development, and selling, general and
administrative expenses to be higher in 2006, compared to 2005, as we continue
new product development efforts, particularly related to SMT systems, and
continue development of our sales channels and new sales territories, also
related to our SMT systems. The adoption of SFAS No. 123(R) will increase our
research and development and selling, general and administrative expenses in
2006 compared to 2005. In addition, we are continually considering additional
research and development projects, and may elect to increase expenditures based
on an assessment of the future revenue and profit potential of these projects.
Further, we expect sales commissions and incentive compensation costs to be
higher in 2006 compared to 2005, due to anticipated improvement in revenue and
profit levels.

Electronic
Assembly

Research
and development expenses were $1.4 million or 11% of revenue in the three
months ended June 30, 2006 and $1.2 million or 17% of revenue in the three
months ended June 30, 2005 and were $3.0 million or 12% of revenue in the six
months ended June 30, 2006 and $2.5 million or 15% of revenue in the six months
ended June 30, 2005. The 16% and 20% increases in research and development
expenses for the three and six months ended June 30, 2006 compared to the same
periods in 2005 were due to increased compensation costs, including
equity-based compensation and company wide incentive compensation costs
resulting from higher levels of revenue and profits, and increased investment
in R&D initiatives. Research and development initiatives were focused
primarily on our SMT systems and the new
Embedded Process Verification sensor family (EPV®).

Selling,
general and administrative expenses were $3.0 million or 23% of revenue in the
three months ended June 30, 2006 and $2.4 million or 35% of revenue in the
three months ended June 30, 2005 and were $6.0 million or 23% of revenue in the
six months ended June 30, 2006 and $5.1 million or 30% of revenue in the six
months ended June 30, 2005. The 22% and 17% increases in selling, general and
administrative expenses for the three and six months ended June 30, 2006
compared to the same periods in 2005 were due to higher costs for sales
commissions, equity compensation and company wide incentive compensation costs
associated with higher levels of revenue and profits.

Semiconductor

Research
and development expenses were $494,000 or 31% of revenue in the three months
ended June 30, 2006 and $455,000 or 33% of revenue in the three months ended
June 30, 2005 and were $941,000 or 28% of revenue in the six months ended June
30, 2006 and $888,000 or 32% of revenue in the six months ended June 30, 2005.
The 9% and 6% increases in research and development expenses for the three and
six months ended June 30, 2006 compared to the same periods in 2005 were due to
increased compensation costs, including equity-based compensation and company
wide incentive compensation costs resulting from higher levels of
revenue and profits, and were partially offset by lower outside contract labor
costs. During 2006 and 2005, research and development efforts were primarily
focused on development of new products for the semiconductor market, including
enhancements to the WaferSense auto leveling sensor (ALS) first introduced in
late 2004 and extensions to the WaferSense family of products to be introduced
later in 2006 and 2007.

14

---

Selling,
general and administrative expenses were $591,000 or 38% of revenue in the
three months ended June 30, 2006 and $519,000 or 38% of revenue in the three
months ended June 30, 2005 and were $1.2 million or 35% of revenue in the six
months ended June 30, 2006 and $1.0 million or 36% of revenue in the six months
ended June 30, 2005. The 14% and 15% increases in selling, general and
administrative expenses for the three and six months ended June 30, 2006
compared to the same periods in 2005 were due to additional management added in
the third quarter of 2005, increased sales commissions, equity compensation
costs and company wide incentive compensation costs associated with higher
levels of revenue and profits.

Amortization of
Intangible Assets

Amortization
of acquired intangible assets related to our Electronic Assembly segment was
approximately $27,000 in the three months ended June 30, 2006 and 2005 and
$54,000 in the six months ended June 30, 2006 and 2005. We expect amortization
expense for acquired intangible assets related to our Electronic Assembly
segment to be $27,000 for each quarter during the remainder of 2006.

Amortization
of acquired intangible assets related to our Semiconductor segment was $145,000
and $180,000 in the three months ended June 30, 2006 and 2005, respectively,
and $325,000 and $360,000 in the six months ended June 30, 2006 and 2005,
respectively. We expect amortization expense for acquired intangible assets
related to our Semiconductor segment to be $109,000 in the three months ended
September 30, 2006 and $48,000 in the three months ended December 31, 2006.

Interest
and Other

Interest
income and other primarily includes interest earned on investments and gains
and losses associated with foreign currency translation. Interest income and
other increased during the three and six months ended June 30, 2006 compared to
the same periods in 2005 as the result of additional invested funds and higher
interest rates. In addition, we recognized foreign currency translation losses
of $43,000 and $28,000 during the three and six months ended June 30, 2006,
respectively, compared to foreign currency translation losses of $14,000 and
$64,000 during the three and six months ended June 30, 2005, respectively.

Provision
for Income Taxes and Effective Income Tax Rate

During
the third quarter of 2002, we concluded that a valuation allowance against all
of our deferred tax assets was appropriate due to the cumulative U.S. losses we
had incurred over the prior three years, continued operating losses and full
utilization of our loss carryback potential in 2002. We continued to provide a
full valuation allowance on our deferred tax assets during 2003, 2004 and the
first three quarters of 2005. During the first six months of 2005, we recorded
a tax provision at an estimated annual effective rate of 24% because we had
utilized our available tax operating losses and tax credit carryforwards and
were subject to Alternative Minimum Tax limitations. Because we continued to
maintain a valuation allowance on deferred tax assets, projected current taxes
payable comprised the entire tax provision and were the basis for determining
our annual effective tax rate.

During
the fourth quarter of 2005, we substantially reduced the valuation allowance on
our deferred tax assets initially established in the third quarter of 2002. As
a result, for the first six months of 2006, we recorded a tax provision at a
full rate of tax, approximating an estimated annual consolidated worldwide
effective tax rate of 34%.

15

---

Order Rate and Backlog

Our
orders totaled $14.2 million during the three month period ended June 30, 2006
compared to $9.7 million during the three month period ended June 30,
2005.  For the six months ended June 30,
2006, orders totaled $30.2 million compared to $20.9 million during the six
months ended June 30, 2005.  Backlog
totaled $7.8 million and $4.8 million at June 30, 2006 and 2005, respectively.
The scheduled shipment (or estimated timing of revenue for systems recognized
upon acceptance) for backlog at June 30, 2006 is as follows:

|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|(In
thousands)               |  |   |       | 
|                             |  |   |       | 
|                             |  |   |       | 
|3rd Quarter
  2006           |  | $ | 7,559 | 
|4th Quarter
  2006 and after |  |   | 246   | 
|                             |  |   |       | 
|Total backlog                |  | $ | 7,805 | 
|                             |  |   |       | 

LIQUIDITY AND CAPITAL RESOURCES

Our
cash and cash equivalents increased by $13.3 million during the six month
period ended June 30, 2006, primarily because of $6.8 million of cash generated
from operating activities, net maturities of $5.9 million of marketable
securities, and $1.4 million from financing activities, primarily from stock
option exercises, offset by $740,000 used for the purchase of long-lived
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 addition 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 $7.5 million to $48.6 million as of June 30, 2006 from
$41.1 million as of December 31, 2005.

We
generated $6.8 million of cash from operations during the six months ended June
30, 2006. Cash generated from operations primarily included net income of $3.4
million, which included $1.0 million of net non-cash expenses for depreciation
and amortization, provision for inventory obsolescence and other non-cash
items, non-cash equity compensation of $497,000, decreased accounts receivable
of $1.2 million, increased accounts payable of $581,000 and increased accrued
expenses of $1.8 million.  This cash
generated more than offset increases in inventory of $1.5 million. Increased accounts
payable is primarily the result of increased inventory purchases and the timing
of vendor payments.  The increase in
accrued expenses is due to wage and benefit accruals resulting from higher
incentive compensation, warranty reserves resulting from higher revenue levels
and income taxes payable that result from higher levels of profitability.  Decreases in accounts receivable resulted
from a higher percentage of our revenue coming from sales of OEM sensors.  These customers tend to pay more promptly
than our SMT system customers.  Increases
in inventory resulted from lower than planned revenue from SMT system
products.  During the six months ended
June 30, 2005, we generated $2.5 million of cash from operations. Cash
generated primarily included net income of $1.3 million, which included $1.1
million of non-cash expenses, a decrease in accounts receivable of $2.1 million
and an increase in accounts payable of $324,000. This cash generated more than
offset an increase in inventory of $657,000 and a decrease in accrued expenses
of $1.8 million.

We
generated $5.2 million of cash from investing activities during the six months
ended June 30, 2006 compared to using $4.6 million of cash during the same
period in 2005. Changes in the level of investment in marketable securities
resulting from purchases and maturities of those securities generated $5.9
million of cash in 2006 and used $4.2 million of cash in 2005.  We used approximately $740,000 and $414,000
of cash for the purchase of fixed assets and capitalized patent costs during
the six months ended June 30, 2006 and 2005, respectively.

We
generated $1.4 million of cash from financing activities during the six months
ended June 30, 2006.  Financing
activities used $59,000 of cash during the same period in 2005.  Cash generated from financing activities
during 2006 includes $1.2 million from stock option exercises and a $167,000
tax benefit from the exercise of stock options.  During the six months ended June 30, 2005, $193,000 of cash was
generated from stock option exercises and $252,000 of cash was used for the
repurchase of our 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, 2005. During the first
quarter of 2006 we negotiated a new lease for our primary office space. The
lease has a five-year term and began in the second quarter of 2006. Future
minimum lease payments under this lease are $465,000 in 2006, $885,000 in 2007
and 2008, $908,000 in 2009, $932,000 in 2010 and $466,000 in 2011. There were no
other significant changes to our contractual obligations during the six months
ended June 30, 2006 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 board of directors has approved a stock repurchase
program, effective July 31, 2006, under which we may acquire up to 500,000 shares of our common stock from
time to time in open market transactions, block purchases and other
transactions. We have adopted a 10b5-1 trading plan to implement the repurchase
program. Our cash, cash equivalents and marketable securities totaled $48.6
million at June 30, 2006. We believe that our available balances of cash, cash
equivalents and marketable securities, coupled with anticipated cash flow from
operations, will be adequate to fund our cash flow needs for the foreseeable
future.

16

---



At
June 30, 2006, 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.  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 the relative strength of the worldwide electronics and semiconductor
fabrication capital equipment markets. We believe that inflation has not had
any significant effect on operations. 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
have sales office located in the United Kingdom, 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 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 Accounting for Income Taxes. FASB
Interpretation No. 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB
Statement No. 109.  The Interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.  The
Interpretation also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition.  The Interpretation is effective for fiscal
years beginning after December 15, 2006.
We are currently evaluating the impact of adopting the interpretation on
our financial position and results of operations.

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ITEM 7A - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

We
invest excess funds not required for current operations in marketable
securities. The investment policy for these marketable securities is approved
annually by the Board of Directors and administered by management. A third
party, approved by our Board of Directors, manages the portfolio at the
direction of management. The investment policy dictates that marketable
securities consist of U.S. Government or U.S. Government agency securities,
various tax exempt securities or certain approved corporate instruments with
maturities of three years or less and an average portfolio maturity of not more
that 18 months. As of June 30, 2006, our portfolio of marketable securities had
an average term to maturity of less than one year. All marketable securities
are classified as available for sale and carried at fair value. We estimate
that a hypothetical 1% increase in market interest rates would result in a
decrease in the market value of the portfolio of marketable securities of
approximately $100,000. If such a rate
increase occurred, our net income would only be impacted if securities were
sold prior to maturity.

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 June 30, 2006, we had
one open swap agreement that was purchased on that date.  As a result, there were no unrealized gains
or losses as of June 30, 2006.  During
the three months ended June 30, 2006, we recognized a net loss of approximately
$188,000 from the settlement of a foreign currency swap agreement and a
transaction gain of approximately $146,000 on the underlying inter-company
balance.  During the six months ended
June 30, 2006, we recognized a net loss of approximately $203,000 from the
settlement of foreign currency swap agreements and a transaction gain of
approximately $175,000 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.  The Company minimizes such risk by limiting
its counter-parties to major financial institutions.  We do not expect material losses as a result of defaults by other
parties.

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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 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 our management, including our Chief Executive
Officer and Chief Financial Officer, in a manner that allows timely decisions
regarding required disclosure.

b. During the
quarter ended June 30, 2006, 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.

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PART
II. OTHER INFORMATION

ITEM 1A
 Risk Factors

In
addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I  Item 1A. Risk Factors in
our Annual Report on Form 10-K for the year ended December 31, 2005, which
could materially affect our business, financial condition or future results.
The risks described in our Annual Report on Form 10-K are not the only risks
facing our Company. Additional risks and uncertainties not currently known to
us or that we currently deem to be immaterial also may adversely affect our
business, financial condition and/or operating results.

ITEM 4 
SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

The annual meeting of shareholders of CyberOptics
Corporation was held at 3:00 p.m. on Monday, May 15, 2006. Shareholders holding
8,234,427 shares, or approximately 92% of the outstanding shares, were
represented at the meeting by proxy or in person. Matters submitted at the
meeting for vote by the shareholders were as follows:

a. Election of Directors

The following nominees were elected to serve as
members of the Board of Directors until the annual meeting in 2007 or until
such time as a successor may be elected:

|                       |  |           |  |                    |  | 
|---------------------- |  | --------- |  | ------------------ |  | 
|                       |  | For       |  | Withhold Authority | 
|                       |  |          
|Steven K. Case         |  | 8,039,012 |  | 195,415            |  | 
|Alex B. Cimochowski    |  | 7,921,643 |  | 312,784            |  | 
|Kathleen P. Iverson    |  | 8,136,245 |  | 98,182             |  | 
|Erwin A. Kelen         |  | 8,132,999 |  | 101,428            |  | 
|Irene M. Qualters      |  | 8,133,974 |  | 100,453            |  | 
|Michael M. Selzer, Jr. |  | 8,136,462 |  | 97,965             |  | 

b. Amendment to Employee Stock Purchase Plan

Shareholders approved an amendment to the Employee
Stock Purchase Plan to increase the number of shares of common stock reserved
for issuance by 100,000 by a vote of 5,560,171 shares in favor, 117,288 shares
against and 34,093 shares abstained. There were 2,522,875 broker no-votes.

c. Amendment to Stock Option Plan for Non-Employee
Directors

Shareholders approved an amendment to the Stock Option
Plan to increase the number of shares of common stock reserved for issuance to
Non-Employee Directors by 75,000 by a vote of 5,211,965 shares in favor,
460,878 shares against and 38,709 shares abstained. There were 2,522,875 broker
no-votes.

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               

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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. Iverson                                                                                        
| |                                                                                                                
| | By Kathleen P. Iverson,
  President and CEO
  (Principal Executive Officer and Duly Authorized Officer)        
| |                                                                                                                
|
| | /s/ Jeffrey A. Bertelsen                                                                                       
| |                                                                                                                
| | By Jeffrey A. Bertelsen, Chief
  Financial Officer
  (Principal Accounting Officer and Duly Authorized Officer)

Dated: August 7, 2006

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