# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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# FORM 10-Q

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(Check One)

x  
Quarterly Report Pursuant to Section 13 or 15(d)of the Securities
Exchange Act of 1934

For the quarterly
period ended September 30, 2005or

o  
Transition Report
Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934

For the transition
period from ______ to ______

Commission File No. 0-16577

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CYBEROPTICS
CORPORATION (Exact name of
registrant as specified in its charter)

|Minnesota                                                     | 41-1472057                         
|------------------------------------------------------------- | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification No.)

|5900 Golden Hills DriveMinneapolis, Minnesota | 55416     
|--------------------------------------------- | ----------
|(Address of principal executive offices)      | (Zip Code)

(763) 542-5000 (Registrants telephone number, including area code)

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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.
Yesx
No
o

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

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

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date. At October 31, 2005, there were 8,915,159 shares of the
registrants Common Stock, no par value, issued and outstanding.





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# PART I. FINANCIAL
INFORMATION

# Item 1. CONSOLIDATED
FINANCIAL STATEMENTS

# CONSOLIDATED BALANCE SHEETSCYBEROPTICS
CORPORATION



|(In thousands)                                                                                             |  | September 30,
2005 |   | December 31,2004
|---------------------------------------------------------------------------------------------------------- |  | ------------------ | - | ----------------
|
|
|                                                                                                          
|ASSETS                                                                                                     |  |                    |   |                 
|                                                                                                          
|Cash and cash equivalents                                                                                  |  |                    | $ | 17,321          
|Marketable securities                                                                                      |  |                    |   | 13,878          
|Accounts receivable, net                                                                                   |  |                    |   | 9,240           
|Inventories                                                                                                |  |                    |   | 7,774           
|Other current assets                                                                                       |  |                    |   | 918             
|                                                                                                           |  |                    |   |                 
|Total current assets                                                                                       |  |                    |   | 49,131          
|                                                                                                          
|Marketable securities                                                                                      |  |                    |   | 8,330           
|Equipment and leasehold improvements, net                                                                  |  |                    |   | 1,140           
|Intangible and other assets, net                                                                           |  |                    |   | 1,964           
|Goodwill                                                                                                   |  |                    |   | 5,694           
|                                                                                                           |  |                    |   |                 
|Total assets                                                                                               |  |                    | $ | 66,259          
|                                                                                                           |  |                    |   |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  |                   
|                                                                                                          
|Accounts payable                                                                                           |  |                    | $ | 2,639           
|Advance customer payments                                                                                  |  |                    |   | 253             
|Accrued expenses                                                                                           |  |                    |   | 2,944           
|                                                                                                           |  |                    |   |                 
|Total current liabilities                                                                                  |  |                    |   | 5,836           
|                                                                                                          
|Commitments                                                                                                |  |                   
|                                                                                                          
|Stockholders equity:                                                                                      |  |                   
|Preferred stock, no par value, 5,000 shares authorized, none outstanding                                   |  |                    |   |                
|Common stock, no par value, 37,500 authorized, 8,911 and 8,847 shares issued and outstanding, respectively |  |                    |   | 48,831          
|Accumulated other comprehensive loss                                                                       |  |                    |   | (745            
|Retained earnings                                                                                          |  |                    |   | 12,337          
|                                                                                                           |  |                    |   |                 
|                                                                                                          
|Total stockholders equity                                                                                 |  |                    |   | 60,423          
|                                                                                                           |  |                    |   |                 
|                                                                                                          
|Total liabilities and stockholders equity                                                                 |  |                    | $ | 66,259          
|                                                                                                           |  |                    |   |                 

# SEE THE ACCOMPANYING
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

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# CONSOLIDATED STATEMENTS
OF OPERATIONSCYBEROPTICS CORPORATION(Unaudited)

|                                              |  | Three Months EndedSeptember 30, |   | Nine Months EndedSeptember 30,
|--------------------------------------------- |  | ------------------------------- | - | ------------------------------
|
|
|                                              |  |                                 |   |                               
|                                             
|Revenues                                      |  |                                 | $ | 10,339                        
|Cost of revenues                              |  |                                 |   | 4,925                         
|                                              |  |                                 |   |                               
|                                             
|Gross profit                                  |  |                                 |   | 5,414                         
|                                             
|Research and development expenses             |  |                                 |   | 1,785                         
|Selling, general and administrative expenses  |  |                                 |   | 2,868                         
|Restructuring and severance costs             |  |                                 |   |                              
|Amortization of intangibles                   |  |                                 |   | 208                           
|                                              |  |                                 |   |                               
|                                             
|Income from operations                        |  |                                 |   | 553                           
|                                             
|Interest income and other                     |  |                                 |   | 268                           
|                                              |  |                                 |   |                               
|                                             
|Income before income taxes                    |  |                                 |   | 821                           
|                                             
|Income tax provision                          |  |                                 |   | 195                           
|                                              |  |                                 |   |                               
|                                             
|Net income                                    |  |                                 | $ | 626                           
|                                              |  |                                 |   |                               
|                                             
|Net income per share  Basic                  |  |                                 | $ | 0.07                          
|                                              |  |                                 |   |                               
|Net income per share  Diluted                |  |                                 | $ | 0.07                          
|                                              |  |                                 |   |                               
|                                             
|Weighted average shares outstanding  Basic   |  |                                 |   | 8,890                         
|                                              |  |                                 |   |                               
|Weighted average shares outstanding  Diluted |  |                                 |   | 9,070                         
|                                              |  |                                 |   |                               

# SEE THE
ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

2

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# CONSOLIDATED STATEMENTS
OF CASH FLOWSCYBEROPTICS CORPORATION(Unaudited)

|                                                                                         |  | Nine Months Ended September 30,
|---------------------------------------------------------------------------------------- |  | -------------------------------
|
|
|                                                                                        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                                
|Net income                                                                               |  |                                
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |                                
|Depreciation and amortization                                                            |  |                                
|Provision for doubtful accounts                                                          |  |                                
|Provision for inventory obsolescence                                                     |  |                                
|Deferred income taxes                                                                    |  |                                
|Tax benefit from exercise of stock options and other                                     |  |                                
|Changes in operating assets and liabilities:                                             |  |                                
|Accounts receivable                                                                      |  |                                
|Inventories                                                                              |  |                                
|Other current assets                                                                     |  |                                
|Accounts payable                                                                         |  |                                
|Advance customer payments                                                                |  |                                
|Accrued expenses                                                                         |  |                                
|                                                                                         |  |                                
|Net cash provided (used) by operating activities                                         |  |                                
|                                                                                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                                
|Proceeds from sales of available for sale marketable securities                          |  |                                
|Purchases of available for sale marketable securities                                    |  |                                
|Purchase of patent license                                                               |  |                                
|Additions to equipment and leasehold improvements                                        |  |                                
|Additions to patents                                                                     |  |                                
|                                                                                         |  |                                
|Net cash used by investing activities                                                    |  |                                
|                                                                                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                                
|Proceeds from exercise of stock options                                                  |  |                                
|Repurchase of common stock                                                               |  |                                
|Proceeds from issuance of common stock under employee stock purchase plan                |  |                                
|                                                                                         |  |                                
|Net cash provided by financing activities                                                |  |                                
|                                                                                        
|Net increase (decrease) in cash and cash equivalents                                     |  |                                
|                                                                                        
|Cash and cash equivalents  beginning of period                                          |  |                                
|                                                                                         |  |                                
|                                                                                        
|Cash and cash equivalents  end of period                                                |  |                                
|                                                                                         |  |                                

# SEE THE
ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

3

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

1.  INTERIM REPORTING:

The interim consolidated financial
statements presented herein as of September 30, 2005, and for the three and nine month
periods ended September 30, 2005 and 2004, 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 nine month periods ended September 30, 2005, do not necessarily indicate the
results to be expected for the full year. The December 31, 2004, consolidated balance
sheet data was derived from audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles. These
unaudited interim consolidated financial statements should be read in conjunction with our
consolidated financial statements and notes thereto, contained in our Annual Report on
Form 10-K for the year ended December 31, 2004.

2.  ACCOUNTING FOR STOCK-BASED COMPENSATION:

In December 2002, the Financial
Accounting Standards Board issued SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123. We have adopted the disclosure requirements of SFAS No. 148 in these notes to
the consolidated financial statements.

As permitted by SFAS No. 123,
Accounting for Stock Based Compensation, we continue to measure compensation
cost for our stock incentive and option plans using the intrinsic value method of
accounting prescribed by APB Opinion No. 25. Had we used the fair value method of
accounting for our stock option and incentive plans and charged compensation costs against
income over the vesting period, net income and net income per share for the three and nine
month periods ended September 30, 2005 and 2004 would have been reduced to the following
pro forma amounts:

|                                                                                                               |  | Three Months EndedSeptember 30, |   | Nine Months EndedSeptember 30,
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | - | ------------------------------
|
|
|                                                                                                               |  |                                 |   |                               
|                                                                                                              
|Net income as reported                                                                                         |  |                                 | $ | 626                           
|Add:  Stock-based compensation expense included in net income, net of related tax effects                      |  |                                 |   |                              
|                                                                                                              
|Deduct:  Total stock-based compensation expense determined under fair value method, net of related tax effects |  |                                 |   | (271                          
|                                                                                                               |  |                                 |   |                               
|                                                                                                              
|Net income  Pro forma                                                                                         |  |                                 | $ | 355                           
|                                                                                                               |  |                                 |   |                               
|                                                                                                              
|Net income per share:                                                                                          |  |                                
|As reported  Basic                                                                                            |  |                                 | $ | 0.07                          
|Pro forma  Basic                                                                                              |  |                                 | $ | 0.04                          
|                                                                                                              
|As reported  Diluted                                                                                          |  |                                 | $ | 0.07                          
|Pro forma  Diluted                                                                                            |  |                                 | $ | 0.04                          

No tax benefit was applied to the
fair value expense calculated under SFAS No. 123 due to establishing a valuation allowance
on deferred tax assets during 2002. The assumptions used to calculate the fair value of
options granted are evaluated and revised, as necessary, to reflect market conditions and
our experience.

4

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3.  CERTAIN BALANCE SHEET COMPONENTS:

# Inventories Consist of
the Following:

|(In thousands)                    |  | September 30,
2005 |   | December 31,2004
|--------------------------------- |  | ------------------ | - | ----------------
|                                  |  |                    |   |                 
|                                 
|Raw materials and purchased parts |  |                    | $ | 4,678           
|Work in process                   |  |                    |   | 842             
|Finished goods                    |  |                    |   | 3,108           
|                                  |  |                    |   |                 
|                                  |  |                    |   | 8,628           
|                                 
|Allowance for obsolescence        |  |                    |   | (854            
|                                  |  |                    |   |                 
|                                 
|Total inventories                 |  |                    | $ | 7,774           
|                                  |  |                    |   |                 

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.
Our warranty liability is recorded in accrued expenses on our consolidated balance sheet,
and a reconciliation of the changes in our estimated warranty liability is as follows:

|                                   |  | Three Months Ended September 30,
|---------------------------------- |  | --------------------------------
|
|                                   |  |                                 
|                                  
|Balance at the beginning of period |  |                                 
|Accruals for warranties            |  |                                 
|Settlements made during the period |  |                                 
|                                   |  |                                 
|                                  
|Balance at the end of period       |  |                                 
|                                   |  |                                 
|                                  
|
|
|                                   |  |                                 
|                                  
|Balance at the beginning of period |  |                                 
|Accruals for warranties            |  |                                 
|Settlements made during the period |  |                                 
|                                   |  |                                 
|                                  
|Balance at the end of period       |  |                                 
|                                   |  |                                 

4.  INTANGIBLE ASSETS:

Intangible and other assets include
the following:

|                       |  | As of September 30, 2005 |   | As of December 31, 2004
|---------------------- |  | ------------------------ | - | -----------------------
|
|                       |  |                          |   |                        
|                      
|Developed technology   |  |                          | $ | 7,775                  
|Patents and trademarks |  |                          |   | 2,093                  
|Customer base          |  |                          |   | 280                    
|                       |  |                          |   |                        
|                      
|Total                  |  |                          | $ | 10,148                 
|                       |  |                          |   |                        

5

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Amortization expense for the three
and nine month periods ended September 30, 2005 and 2004 are as follows:

|                       |  | Three Months Ended
September 30, |   | Nine Months Ended
September 30,
|---------------------- |  | -------------------------------- | - | -------------------------------
|
|                       |  |                                  |   |                                
|                      
|Developed technology   |  |                                  | $ | 206                            
|Patents and trademarks |  |                                  |   | 59                             
|Customer base          |  |                                  |   |                               
|                       |  |                                  |   |                                
|                      
|Total                  |  |                                  | $ | 265                            
|                       |  |                                  |   |                                

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: $1.0 million in 2005, $0.7 million
in 2006, $0.2 million in 2007 and $0.2 million in 2008 and 2009.

At September 30, 2005 and December
31, 2004 we had net goodwill of $5.7 million and $6.1 million, respectively. Goodwill
decreased by $273,000 during the first nine months of 2005 as the result of the
translation impact on foreign denominated goodwill balances and by $152,000 from
utilization of pre-acquisition operating loss carryforwards of CyberOptics UK, Ltd.

5.    
          GEOGRAPHIC REVENUE INFORMATION:

Export sales for the three months
ended September 30, 2005 and the three months ended September 30, 2004 amounted to 82% and
78% of revenues, respectively. For the nine months ended September 30, 2005 and the nine
months ended September 30, 2004, export sales amounted to 79% and 81% 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
September 30, |   | Nine Months Ended
September 30,
|------------------ |  | -------------------------------- | - | -------------------------------
|
|                   |  |                                  |   |                                
|                  
|Americas           |  |                                  | $ | 61                             
|Europe             |  |                                  |   | 3,237                          
|Asia               |  |                                  |   | 5,184                          
|Other              |  |                                  |   | 4                              
|                   |  |                                  |   |                                
|                  
|Total export sales |  |                                  | $ | 8,486                          
|                   |  |                                  |   |                                

6.  NET INCOME PER SHARE:

Basic net income per share has been
computed using the weighted average number of shares outstanding during the period
presented. The diluted net income per share includes the effect of common stock
equivalents, consisting of common shares issuable upon exercise of stock options, for each
period. The number of shares utilized in the denominator of the diluted net income per
share computation has been increased from the number of shares used in computing basic net
income per share by 180,000 and 151,000 equivalent shares for the three and nine month
periods ended September 30, 2005 and by 332,000 and 398,000 for the three and nine month
periods ended September 30, 2004. Weighted average shares for which the option price
exceeded the average market price were 293,000 and 308,000 for the three and nine month
periods ended September 30, 2005. Weighted average shares for which the option price
exceeded the average market price were 208,000 and 196,000 for the three and nine month
periods ended September 30, 2004.

6

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7.  COMPREHENSIVE INCOME:

Components of comprehensive income
include unrealized gains and losses on our available-for-sale marketable securities and
the cumulative affect of foreign currency translation adjustments. During the three and
nine month periods ended September 30, 2005, comprehensive income totaled $580,000 and
$1,880,000, respectively. During the three and nine month periods ended September 30,
2004, comprehensive income amounted to $3,675,000 and $9,651,000, respectively. At
December 31, 2004 and September 30, 2005, components of accumulated other comprehensive
loss are as follows:

|(In thousands)             |  | Foreign Currency Translation |   | Unrealized Gains (losses) on Securities |   | Accumulated Other Comprehensive Income
|-------------------------- |  | ---------------------------- | - | --------------------------------------- | - | --------------------------------------
|                           |  |                              |   |                                         |   |                                       
|                          
|Balance December 31, 2004  |  |                              | $ | (576                                    | ) | $                                     
|Current Year Change        |  |                              |   | (48                                     | ) |                                       
|                           |  |                              |   |                                         |   |                                       
|                          
|Balance September 30, 2005 |  |                              | $ | (624                                    | ) | $                                     
|                           |  |                              |   |                                         |   |                                       

8.  INCOME TAXES:

During the third quarter of 2002 we
concluded that a full valuation allowance against 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. A deferred
tax asset generally represents a future tax benefit to be received when certain expenses
and losses previously recognized in our U.S. GAAP-based financial statements become
deductible under applicable income tax laws. Consequently, realization of a deferred tax
asset is dependent on future taxable income against which these deductions can be applied.
Since the third quarter of 2002, we have continued to provide a full valuation allowance
against potential deferred tax assets. We will continue to assess carrying or eliminating
the full valuation allowance on U.S. based deferred tax assets on a quarterly basis.
Release of the full valuation allowance would result in the recognition of a significant
deferred tax benefit.

During the three and nine month
periods ended September 30, 2005 we recorded a tax provision at an estimated annual
effective rate of approximately 24% because we have now utilized tax operating loss and
tax credit carryforwards and have begun to again pay income taxes. Because we continue to
maintain a valuation allowance on deferred tax assets, estimated 2005 income tax payments
are expensed and used as the basis for determining our annual effective tax rate. For the
nine month period ended September 30, 2004 we recorded an income tax provision of
$1,940,000, representing an annual effective tax rate of 16%.

9.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

We enter into foreign currency swap
agreements to hedge short term inter-company financing transactions with our subsidiary in
the United Kingdom. These currency swap agreements are structured to mature on the last
day of each quarter and are designated as cash flow hedges. At September 30, 2005, 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 September 30, 2005. During the nine months ended
September 30, 2005 we recognized a net gain of approximately $192,000 from the settlement
of foreign currency swap agreements which partially offset the approximately $283,000
translation loss 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.

7

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10.  RESTRUCTURING AND SEVERANCE:

During 2003 and 2004 we implemented a
series of workforce reductions, closed our facilities in California, downsized other
facilities and made other reductions in discretionary spending designed to reduce our
overall fixed cost structure. The following table reports the activity and ending balance
related to accruals established for these restructuring actions.

|(In thousands)                              |  | EmployeeTerminationBenefits |   | LeaseCommitmentCosts |   | Other |      | Total
|------------------------------------------- |  | --------------------------- | - | -------------------- | - | ----- | ---- | -----
|                                            |  |                             |   |                      |   |       |      |      
|Restructuring liability, December 31, 2003  |  |                             | $ | 180                  |   | $     | 372  |      
|Change in estimate                          |  |                             |   |                     |   |       | 169  |      
|Cash payments                               |  |                             |   | (180                 | ) |       | (236 | )    
|                                            |  |                             |   |                      |   |       |      |      
|                                           
|Restructuring liability, December 31, 2004  |  |                             |   |                     |   |       | 305  |      
|Initial expense and accrual                 |  |                             |   |                     |   |       |     |      
|Cash payments                               |  |                             |   |                     |   |       | (166 | )    
|                                            |  |                             |   |                      |   |       |      |      
|                                           
|Restructuring liability, September 30, 2005 |  |                             | $ |                     |   | $     | 139  |      
|                                            |  |                             |   |                      |   |       |      |      

Cash payments for lease termination
costs are expected to be made through the term of our lease, which expires in May 2006.

11.  RECENT ACCOUNTING DEVELOPMENTS:

In December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment,
which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee stock
options, to be valued at fair value on the date of grant, and to be expensed over the
applicable vesting period. Originally, SFAS No. 123(R) was effective for all stock-based
awards granted beginning with the first interim period after June 15, 2005. On April 14,
2005, the Securities and Exchange Commission (SEC) approved a new rule that changed the
effective date of SFAS No. 123(R) for public companies to annual, rather than interim
periods that begin after June 15, 2005. The standard will be effective for us beginning
January 1, 2006. The standard may be adopted under either the modified prospective method
or alternative methods, which allow for restatement of prior interim periods or prior
years. We are currently evaluating how we will adopt the standard and the impact of
adopting SFAS No. 123(R), which may be material in future periods, to our financial
position and results of operations.

In November 2004, The FASB issued
Statement of Financial Accounting Standards No. 151 (SFAS 151), Inventory Cost
 an amendment of ARB No. 43. SFAS No. 151 requires idle facility expenses,
freight, handling costs, and wasted material spoilage costs to be recognized as
current-period charges. It also requires that allocations of fixed production overheads to
the costs of conversion be based on normal capacity of the production facilities. SFAS No.
151 will be effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. We are currently evaluating the impact of adopting the standard on our
financial position and results of operations.

8

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# Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# CAUTIONARY STATEMENT
REGARDING FORWARD LOOKING STATEMENTS:

The following managements
discussion and analysis describes factors that have affected our results and financial
position during the periods included in the accompanying financial statements or that
could have an impact on future results. You should read this section with our Annual
Report on Form 10-K for the year ended December 31, 2004 and our interim consolidated
financial statements and associated notes.

We make forward looking
statements in this section that represent our expectations or beliefs about future
events, including statements regarding trends in the industries in which we function,
levels of orders, research and development expenses, taxation levels, the sufficiency of
cash to meet operating and capital expenses and our ability to continue to price foreign
transactions in U.S. currency. Our actual results may vary from these expectations because
of a number of factors that affect our business, the most important of which include the
following:

| |  | We
operate in the electronics capital equipment market which is cyclical in nature. We are
unable to accurately predict the timing of periodic downturns in this market. These
downturns, as evidenced by the extreme downturn in electronics production markets from
2001 through 2003, severely and adversely affected the profitability of our operations.
We may be unable to anticipate changes in these markets before they affect our operations
in the future.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
operations and markets could be negatively affected by world events that effect economies
and commerce in countries, such as China and Japan, in which we do business.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
remain dependent on two original equipment manufacturer customers for a large portion of
our revenue (approximately 39% and 34% of revenue in the three and nine months ended
September 30, 2005 and 50% of revenues in fiscal 2004). If these customers are
unsuccessful selling the products into which our sensors are incorporated, design their
products to function without our sensors, purchase sensors from other suppliers, or
otherwise terminate their relationships with us, our results of operations would be
significantly negatively affected.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | During
2004, approximately 26% of our total revenue (26% in the nine months ended September 30,
2005) was generated by sales of a single SMT Systems product line, the SE 300. If we
are not successful in continuing to sell and differentiate this product line relative to
the increased competitors we are currently seeing, our results of operations would be
negatively affected.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
generate more than half of our revenue (approximately 79% in the nine months ended
September 30, 2005 and approximately 81% in fiscal 2004) from export sales. Our export
sales are subject to many of the risks of international operations, including changes in
economic and business climate in foreign countries that affect the business health of our
customers, changes in exchange rates that affect the willingness of customers to purchase
our products, different laws that may affect our ability to protect our intellectual
property, and the expense of long-distance commerce.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | All
of our international export sales are negotiated, invoiced and paid in U.S. dollars, and
accordingly, currency fluctuations do not significantly affect our revenue and income per
unit. However, significant fluctuations in the value of the U.S. dollar relative to other
currencies could have an impact on the price competitiveness of our products relative to
foreign suppliers, which could impact the willingness of customers to purchase our
products and have an impact on our results of operations.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
current products, as well as the products we have under development, are designed to
operate with the technology we believe currently exists or may exist for electronic
components and printed circuit boards. The technology for these components changes
rapidly and if we incorrectly anticipate technology developments, or have inadequate
resources to develop our products to deal with changes in technology, our products could
become obsolete.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | The
electronics capital equipment market for surface mount technologies is becoming more
mature, resulting in increased price pressure on suppliers of equipment. Consequently,
our electronic assembly system and sensor products have become subject to increased
levels of price competition and competition from other suppliers and technologies.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

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

| |  | We
compete with large multinational systems companies in sales of end-user systems products,
many of which are able to take advantage of greater financial resources and larger sales
distribution networks. We also compete with new Asian based suppliers of end-user systems
products, many of which have lower overall production costs and are willing to offer
their products at lower selling prices to customers.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | We
use outside contractors to manufacture the components used in many of our products and
some of the components we order require significant lead times that could affect our
ability to sell our products if not available. In addition, if these components do not
meet stringent quality requirements or become subject to obsolescence, there could be
delays in product availability, and we could be required to make significant investments
in designing replacement components.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | New
regulations have been enacted in various countries requiring the reduction of hazardous
substances in electronics products and capital equipment in future years. When effective,
these regulations will impact production processes of our customers and require us to
incorporate lead-free components into our products. If the production processes of our
customers are interrupted, or we are not able to complete the transition to lead-free
components in our products by the effective date of these regulations, our results of
operations could be negatively affected.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
have introduced a number of new products during fiscal 2005 and if those introductions
are not successful, our revenue and profitability could be negatively affected. For
example, we have devoted and continue to devote significant resources to complete
development and commence sale of our embedded process verification (EPV) products. If
these products are not successful because of economic conditions affecting our customers,
inability to obtain new OEM customers, required adaptations for OEM requirements if new
OEM customers are obtained and other issues, these products may not generate substantial
commercial sales.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
ability to capture, process and report transactions in a timely and accurate manner in
compliance with accounting principles generally accepted in the United States is
dependant upon the operation of our internal controls over financial reporting. Although
we believe our controls, policies, practices and systems are adequate to ensure the
integrity of our financial reporting, unanticipated and unauthorized actions of employees
(both domestic and internationally), temporary lapses in internal controls due to
shortfalls in transition planning and oversight, or resource constraints could lead to
improprieties and undetected errors that could impact our financial condition or 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, for warranty expense, and for
obsolete inventory, the carrying value and any impairment of intangible assets, and the
valuation allowance for deferred tax assets. These critical accounting policies are
discussed in more detail in the Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in our Form 10-K for the year ended December
31, 2004.

10

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# RESULTS OF OPERATIONS

# General

The global markets for our electronic
assembly and semiconductor capital equipment began to weaken following the third quarter
of 2004, after a period of strong global market conditions in the first nine months of
2004. Overall, our revenues decreased 47% in the quarter ended September 30, 2005 compared
to the same quarter in 2004, and were down 36% in the first nine months of 2005 compared
to the same period in 2004. Our earnings decreased to $626,000 in the quarter ended
September 30, 2005 from $3.6 million during the comparable quarter in 2004, and decreased
to $1.9 million in the first nine months of 2005 compared to $9.8 million in the first
nine months of 2004. Our ability to remain profitable during periods of weaker global
market conditions is primarily the result of our streamlined cost structure established
through several workforce reductions and restructurings over the past few years.

Following this period of weak global
market conditions, our business started to improve in the third quarter of 2005, and
orders for existing and new products continued to increase following the end of the third
quarter. Our third quarter revenue increased 23% compared to the second quarter of 2005.
Revenue from our OEM sensor customers increased 28% and sales of SMT systems increased 26%
in the third quarter compared to the second quarter of 2005. Our sensor revenue benefited
from increased sales to both our primary OEM customers. In addition, we made our first
shipments of fiducial/inspection sensors developed for DEK Internationals
industry-leading line of solder paste screen printers. Our SMT systems revenue benefited
from initial sales of our new higher speed SE 300 Ultra solder paste inspection system
that was introduced late in the second quarter. SMT systems revenue in the second quarter
of 2005 was negatively impacted by the introduction late in the quarter of the SE 300
Ultra product. The majority of customers were not able to evaluate the system and place
orders prior to June 30, 2005.

# Revenues

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

|                                  |  | Three Months EndedSeptember 30, |   | Nine Months EndedSeptember 30,
|--------------------------------- |  | ------------------------------- | - | ------------------------------
|                                  |  |                                 |   |                               
|
|                                  |  |                                 |   |                               
|OEM Solutions:                    |  |                                 |   |                               
|Electronic Assembly Sensors (EAS) |  |                                 | $ | 5,085                         
|Semiconductor Products            |  |                                 |   | 1,345                         
|SMT Systems                       |  |                                 |   | 3,909                         
|                                  |  |                                 |   |                               
|                                 
|Total                             |  |                                 | $ | 10,339                        
|                                  |  |                                 |   |                               

Our revenues from EAS products decreased
43% during the nine months ended September 30, 2005 from the nine months ended September
30, 2004 and decreased 47% during the three months ended September 30, 2005 from the three
months ended September 30, 2004. These decreased revenues reflect reduced order rates from
our two largest EAS customers. When comparing the three and nine month periods ended
September 30, 2005 to September 30, 2004, revenues from EAS products, primarily LaserAlign
sensors, were negatively impacted by soft market conditions in the worldwide market for
SMT capital equipment and increased levels of sensor inventory at our customers during the
market slowdown that began late in 2004. Our two largest EAS customers accounted for
approximately 34% of total revenues in the nine months ended September 30, 2005, and
approximately 51% of revenues for the comparable period in 2004. These customers accounted
for approximately 39% of revenues in the third quarter of 2005, compared to approximately
47% of revenues in the third quarter of 2004.

Our revenues from sales of
semiconductor products decreased 27% during the nine months ended September 30, 2005 from
the nine months ended September 30, 2004 and decreased 24% during the three months ended
September 30, 2005 from the three months ended September 30, 2004. Decreased revenue
during the three and nine month periods of 2005 compared to the same periods in 2004 is
primarily due to weakened market conditions in the semiconductor capital equipment market,
which began in late 2004. This trend is consistent with the overall electronics capital
equipment market and resulted in reduced sales of our wafer mapping products, which
represented approximately 46% of semiconductor product revenues during the nine months
ended September 30, 2005 and 56% in the nine months ended September 30, 2004 and
approximately 44% of semiconductor revenues during the three months ended September 30,
2005 and 66% during the three months ended September 30, 2004.

11

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Our revenues from sales of end-user
systems decreased 27% during the nine months ended September 30, 2005 from the nine months
ended September 30, 2004 and decreased 51% during the three months ended September 30,
2005 from the three months ended September 30, 2004. Decreased revenues from sales of end
user systems were primarily the result of the weak global market conditions for electronic
assembly capital equipment in 2005 compared to 2004. The three months ended September 30,
2004 represented a peak period for sales of our SE 300 products. Partially offsetting
reduced revenue in 2005 from the SE 300 product line was increased revenue from our KS
Automated Optical Inspection (AOI) systems which increased 39% during the nine months
ended September 30, 2005 compared to the same period in 2004.

Following this period of weak global
market conditions, our business started to improve in the third quarter of 2005, and
orders for existing and new products continued to increase following the end of the third
quarter. EAS revenues for the third quarter of 2005 increased 28% compared to the second
quarter of 2005. During the third quarter of 2005, we made our first shipments of
fiducial/inspection sensors developed for DEK Internationals industry-leading line
of solder paste screen printers. End-user systems revenues for the third quarter of 2005
increased 26% compared to the second quarter of 2005, primarily due to shipment and
acceptance of our new SE 300 Ultra solder paste inspection system. We continue to have
success selling inspection systems to a growing number of large manufacturers of circuit
boards and memory modules, particularly in Asia. A large portion of the worldwide
production capacity for printed circuit boards is being added in China, and we have been
successful in selling inspection systems to new and existing customers in that region.

International revenues comprised
approximately 79% of total revenues during the nine months ended September 30, 2005 and
81% during the nine months ended September 30, 2004, and comprised approximately 82% of
revenues during the three months ended September 30, 2005 and 78% during the three months
ended September 30, 2004. The international markets in Asia, Japan and Europe account for
a significant portion of the capital equipment market for the manufacture of electronics,
the primary market for our EAS sensors and End-User systems product lines. Revenues
generated from products used primarily for SMT electronic assembly production (revenues
from OEM sensors and End-User systems) were approximately 86% of revenues for the nine
months ended September 30, 2005 and 88% for the nine months ended September 30, 2004.

# Gross Margin

Gross profit for the nine months
ended September 30, 2005 decreased as a percentage of revenues to 55%, compared to 60%
during the nine months ended September 30, 2004. For the three months ended September 30,
2005, gross profit decreased to 52% of revenues compared to 59% during the three months
ended September 30, 2004. The decrease in gross profit as a percentage of revenues during
the three and nine month periods ended September 30, 2005 from the comparable periods in
2004 is primarily due to a decline in gross profit margins from end user inspection
systems, and lower production volumes due to reduced revenue levels. There continues to be
increased price pressure on all products sold into the SMT electronics assembly production
markets due to increased competition, particularly in the growing Asian markets for our
end user systems, negatively impacting our gross margins. We expect gross profit as a
percentage of revenue in the fourth quarter of 2005 to be at or near the third quarter
level.

# Research and Development

Research and development expenses
decreased 10% to $5.2 million during the nine months ended September 30, 2005 from the
nine months ended September 30, 2004 and decreased 12% to $1.8 million in the three months
ended September 30, 2005 from the three months ended September 30, 2004. As a percentage
of revenue, research and development expenses increased to 17% during the nine months
ended September 30, 2005 from 12% during the comparable period in 2004 and increased to
17% in the third quarter of 2005 compared to 10% in the same period in 2004. We expect
research and development expenses to increase by approximately 5% in the fourth quarter of
2005, compared to the third quarter of 2005, as we continue a variety of new product
development initiatives.

Research and development expenses
during the three and nine months ended September 30, 2005 were primarily focused on
development activities for completion of our new SE 300 Ultra solder paste inspection
system, introduced late in the second quarter, our new Embedded Process Verification
sensor family (EPV), other development activities for the SE and KS series inspection
systems, next generation LaserAlign products and re-designing new and existing products to
comply with new regulations related to hazardous waste. We also designed a new
fiducial/inspection sensor for DEK Internationals industry-leading line of solder
paste screen printers, and made our first production level shipments of this sensor in the
third quarter. In addition, we are continuing development of new products for the
semiconductor market, and are completing development of the recently introduced
WaferSense auto leveling sensor (ALS).

# Selling, General and
Administrative Expenses

Selling, general and administrative
expenses decreased 8% to $9.0 million during the nine month period ended September 30,
2005 compared to the nine months ended September 30, 2004 and decreased 22% to $2.9
million during the three months ended September 30, 2005 from the three months ended
September 30, 2004. As a percentage of revenue, selling, general and administrative
expenses increased to 30% during the nine month period ended September 30, 2005 from 21%
in 2004, and for the third quarter increased to 28% in 2005 from 19% in 2004. Reduced
selling, general and administrative expenses in the three and nine month periods ended
September 30, 2005, compared to the same periods in 2004, is primarily due to reduced
variable costs, including sales commissions and variable compensation associated with
reduced levels of sales and profits.

12

---

# Amortization of
Intangible Assets

Amortization of acquired intangible
assets was $622,000 for the nine month period ended September 30, 2005 compared to
$688,000 during the nine months ended September 30, 2004. During the three month period
ended September 30, 2005 amortization of intangibles was $208,000 compared to $231,000
during the three month period ended September 30, 2004. The decrease in amortization
during the three and nine month periods ended September 30, 2005 compared to the same
period in 2004 is primarily due to certain acquired intangible assets becoming fully
amortized in 2004. Total amortization of intangible assets is expected to be approximately
$0.8 million in 2005.

# Interest and Other

Interest income and other primarily
includes interest earned on investments. Interest income increased during the three and
nine month periods ended September 30, 2005 compared to the same periods in 2004,
primarily due to increased balances of cash and marketable securities available for
investment, and higher interest rates in 2005 on invested funds.

# Provision for Income
Taxes and Effective Income Tax Rate

During the third quarter of 2002 we
concluded that a full valuation allowance against 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. A deferred
tax asset generally represents a future tax benefit to be received when certain expenses
and losses previously recognized in our U.S. GAAP-based financial statements become
deductible under applicable income tax laws. Consequently, realization of a deferred tax
asset is dependent on future taxable income against which these deductions can be applied.
Since the third quarter of 2002, we have continued to provide a full valuation allowance
against potential deferred tax assets. We will continue to assess carrying or eliminating
the full valuation allowance on U.S. based deferred tax assets on a quarterly basis.
Release of the full valuation allowance would result in the recognition of a significant
deferred tax benefit.

During the three and nine month
periods ended September 30, 2005 we recorded a tax provision at an estimated annual
effective rate of approximately 24% because we have now utilized tax operating loss and
tax credit carryforwards and have begun to again pay income taxes. Because we continue to
maintain a valuation allowance on deferred tax assets, estimated 2005 income tax payments
are expensed and used as the basis for determining our annual effective tax rate. For the
nine month period ended September 30, 2004 we recorded an income tax provision of
$1,940,000, representing an annual effective tax rate of 16%.

# Order Rate and Backlog

Our orders totaled $30.6 million
during the nine month period ended September 30, 2005 compared to $44.4 million during the
nine month period ended September 30, 2004. For the three month period ended September 30,
2005, orders totaled $9.7 million compared to $15.5 million during the three month period
ended September 30, 2004. Backlog totaled $4.0 million at September 30, 2005 and $4.3
million at September 30, 2004. The scheduled shipment (or revenue for systems recognized
upon acceptance) of the September 30, 2005 backlog is as follows (in thousands):

|                           | 
|-------------------------- | 
|(In thousands)             | 
|                          
|4th Quarter 2005           | 
|1st Quarter 2006 and after | 
|                           | 
|                          
|Total backlog              | 

13

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# LIQUIDITY AND CAPITAL
RESOURCES

Our cash and cash equivalents
decreased by $8.1 million during the nine month period ended September 30, 2005. Uses of
cash included purchases of marketable securities net of maturities of $7.4 million, the
purchase of equipment and expenditures for patents of $776,000, cash used in operating
activities of $551,000, and the repurchase of $252,000 of our common stock. The issuance
of common stock under our employee stock purchase plan provided $471,000 of cash, and the
exercise of stock options provided $373,000 of cash during the 2005 period. Our cash and
cash equivalents fluctuate in part because of the maturities of marketable securities and
the 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 decreased $0.8 million
to $39.5 million as of September 30, 2005 from $40.3 million as of December 31, 2004.

Operations used $551,000 of cash
during the nine months ended September 30, 2005. Cash generated from operations primarily
included net income of $1.9 million, which included $1.7 million of net non-cash expenses
for depreciation and amortization, provision for inventory obsolescence and other non-cash
items, and increased accounts payable of $1.1 million. The cash generated was more than
offset by increases in accounts receivable and other current assets of $2.0 million,
increases in inventory of $895,000, reductions in accrued expenses of $2.2 million and
reductions in advance customer payments of $176,000. Increased accounts receivable are the
result of proportionately more systems sales through distributors, which increased the
timing of receivable collections. We do not anticipate any issues relative to collection
of these receivables, and we are working to improve the timing of payment. Increased
accounts payable is primarily the result of higher inventory balances and the timing of
vendor payments. The reduction in accrued expenses is primarily the result of 2004 bonuses
being paid in 2005. During the nine months ended September 30, 2004, we generated $8.7
million of cash from operations. Cash generated from operations included net income of
$9.8 million, which included $1.9 million of non-cash expenses, increases in accrued
expenses of $2.0 million and the tax benefit from stock option exercises of $725,000. This
cash generated more than offset investments in accounts receivable and other assets of
$3.6 million, inventory of $2.1 million, and decreased accounts payable of $23,000.

We used $8.1 million of cash in
investing activities during the nine months ended September 30, 2005 compared to $3.3
million during the same period in 2004. Changes in the level of investment in marketable
securities resulting from purchases and maturities of those securities used $7.4 million
of cash in 2005 and $2.4 million of cash in 2004. We used approximately $776,000 of cash
for the purchase of fixed assets and capitalized patent costs during the nine months ended
September 30, 2005 and $429,000 during the nine months ended September 30, 2004. During
the nine months ended September 30, 2004, we used $500,000 of cash for the purchase of a
technology license.

We generated $592,000 of cash from
financing activities during the nine months ended September 30, 2005, including cash
received from the issuance of common stock under the employee stock purchase plan of
$471,000 and from stock option exercises of $373,000. Uses of cash during the nine months
ended September 30, 2005 included $252,000 for the repurchase of our common stock. During
the nine months ended September 30, 2004, we generated cash of $4.5 million from stock
option exercises and $444,000 from the issuance of common stock under the employee stock
purchase plan.

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, 2004. There were no significant changes to our contractual obligations
during the nine months ended September 30, 2005 and we have not entered into any material
commitments for capital expenditures outside of those normal contractual obligations.
Purchase commitments for inventory can vary based on the volume of revenue and resulting
inventory requirements. Our cash and cash equivalents and investments totaled $39.5
million at September 30, 2005. With this level of cash and cash equivalents and
investments, we believe that our cash and cash equivalents and investments will be
adequate to fund cash flow needs for the foreseeable future.

At September 30, 2005, 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.

14

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# OTHER FACTORS

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

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

15

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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 September 30, 2005, there has been no change in our
          internal control over financial reporting (as defined in Rule 13a-15(f) under
          the Exchange Act) that has materially affected, or is reasonably likely to
          materially affect, our internal control over financial reporting.

# PART II. OTHER
INFORMATION

# Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

|(c) |  | Company
Repurchase of Equity Securities
|--- |  | ---------------------------------------

|Period                        |  | (a)Total Number of Shares Purchased |  | (b)Average Price Paid per Share |  | (c )Total Number of Shares Purchased as Part of
Publicly Announced Plans or Programs (1) |         | (d)Maximum Number of Shares that May Yet
Be Purchased Under the Plans or Programs (1)
|----------------------------- |  | ----------------------------------- |  | ------------------------------- |  | ---------------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------
|                              |  |                                     |  |                                 |  |                                                                                          |         |                                                                                      
|                             
|May 1, 2005 to May 31, 2005   |  |                                     |  | 14,600                          |  | $                                                                                        | 12.1639 |                                                                                      
|                              |  |                                     |  |                                 |  |                                                                                          |         |                                                                                      
|                             
|June 1, 2005 to June 30, 2005 |  |                                     |  | 5,900                           |  | $                                                                                        | 12.4947 |                                                                                      
|                              |  |                                     |  |                                 |  |                                                                                          |         |                                                                                      
|                             
|Total                         |  |                                     |  | 20,500                          |  | $                                                                                        | 12.2591 |                                                                                      

|(1) | The Company repurchased an aggregate of 20,500 shares of its common stock
          pursuant to the repurchase program that it publicly announced on May 7, 2005
          providing for the repurchase of 500,000 shares. On May 25, 2005, the Company
          also announced that it had adopted a 10b5-1 plan to facilitate the purchase of
          the shares during periods it might otherwise be prevented by insider trading
          laws from making such repurchases. Shares were purchased in open market
          transactions. No shares of common stock were repurchased by the company during
          the period from July 1, 2005 to September 30, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

16

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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                                  
|----- | ---------------------------------------------------------
|     
|     
|Date: | November 7, 2005                                         
|      | Kathleen P. Iverson, President and CEO                   
|      | (Principal Executive Officer and Duly Authorized Officer)

| |                                                           
| | ----------------------------------------------------------
|
|
| |                                                           
| | Jeffrey A. Bertelsen, Chief Financial Officer             
| | (Principal Accounting Officer and Duly Authorized Officer)

17

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