SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, 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 September 30,
2009

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
      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)

| |  | 
| |  | 
|

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files). Yes o No o

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

|                          |                     |                         |                            
|------------------------- | ------------------- | ----------------------- | ---------------------------
|Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes o 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,
2009, there were 6,817,377 shares of the registrants Common Stock, no par
value, issued and outstanding.







PART
I. FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                                                                                                         |  |                     |        |                    |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ------------------ | - | ------ | -
|(In
 thousands except share information)                                                                                                                 |  | September 30,
 2009 |        | December 31,
 2008 |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|ASSETS                                                                                                                                                   |  |                     |        |                    |   |        |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|Cash and cash equivalents                                                                                                                                |  | $                   | 4,710  |                    | $ | 4,516  |  
|Marketable securities                                                                                                                                    |  |                     | 12,714 |                    |   | 10,433 |  
|Accounts receivable, less allowance for
 doubtful accounts of $1,037 at September 30, 2009 and $250 at December 31,
 2008                                |  |                     | 7,139  |                    |   | 6,951  |  
|Inventories                                                                                                                                              |  |                     | 8,916  |                    |   | 9,869  |  
|Other current assets                                                                                                                                     |  |                     | 3,018  |                    |   | 2,579  |  
|Deferred tax assets                                                                                                                                      |  |                     | 2,770  |                    |   | 2,604  |  
|Total current assets                                                                                                                                     |  |                     | 39,267 |                    |   | 36,952 |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|Marketable securities                                                                                                                                    |  |                     | 5,327  |                    |   | 14,834 |  
|Equipment and leasehold improvements, net                                                                                                                |  |                     | 2,062  |                    |   | 2,615  |  
|Intangible and other assets, net                                                                                                                         |  |                     | 682    |                    |   | 956    |  
|Goodwill                                                                                                                                                 |  |                     | 569    |                    |   | 569    |  
|Other assets                                                                                                                                             |  |                     | 192    |                    |   | 189    |  
|Deferred tax assets                                                                                                                                      |  |                     | 4,523  |                    |   | 2,834  |  
|Total assets                                                                                                                                             |  | $                   | 52,622 |                    | $ | 58,949 |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                     |  |                     |        |                    |   |        |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|Accounts payable                                                                                                                                         |  | $                   | 3,506  |                    | $ | 2,753  |  
|Advance customer payments                                                                                                                                |  |                     | 680    |                    |   | 684    |  
|Accrued expenses                                                                                                                                         |  |                     | 1,831  |                    |   | 3,054  |  
|Total current liabilities                                                                                                                                |  |                     | 6,017  |                    |   | 6,491  |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|Other liabilities                                                                                                                                        |  |                     | 692    |                    |   | 1,578  |  
|Total liabilities                                                                                                                                        |  |                     | 6,709  |                    |   | 8,069  |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|Commitments and contingencies                                                                                                                            |  |                     |       |                    |   |       |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|Stockholders equity:                                                                                                                                    |  |                     |        |                    |   |        |  
|Preferred stock, no par value, 5,000,000
 shares authorized, none outstanding                                                                            |  |                     |       |                    |   |       |  
|Common stock, no par value, 37,500,000
 shares authorized, 6,816,377 shares issued outstanding at September 30, 2009
 and 6,769,295 at December 31, 2008 |  |                     | 29,627 |                    |   | 29,156 |  
|Accumulated other comprehensive loss                                                                                                                     |  |                     | (771   | )                  |   | (530   | )
|Retained earnings                                                                                                                                        |  |                     | 17,057 |                    |   | 22,254 |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|Total stockholders equity                                                                                                                               |  |                     | 45,913 |                    |   | 50,880 |  
|                                                                                                                                                         |  |                     |        |                    |   |        |  
|Total liabilities and stockholders equity                                                                                                               |  | $                   | 52,622 |                    | $ | 58,949 |  

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.

---



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
CYBEROPTICS CORPORATION
(Unaudited)

|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|---------------------------------------------- |  | --------------------------------- | ------ | -------------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                                               |  | Three Months Ended
 September 30, |        | Nine Months Ended
 September 30, |  
|(In
 thousands, except per share amounts)      |  | 2009                              |        | 2008                             |   | 2009   |   | 2008 |       
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Revenues                                       |  | $                                 | 8,550  |                                  | $ | 11,570 |   | $    | 18,091 |   | $ | 38,768 |  
|Cost of
 revenues                              |  |                                   | 5,613  |                                  |   | 6,578  |   |      | 12,178 |   |   | 21,415 |  
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Gross margin                                   |  |                                   | 2,937  |                                  |   | 4,992  |   |      | 5,913  |   |   | 17,353 |  
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Research and
 development expenses             |  |                                   | 1,813  |                                  |   | 2,830  |   |      | 5,620  |   |   | 8,002  |  
|Selling,
 general and administrative expenses  |  |                                   | 2,835  |                                  |   | 3,734  |   |      | 9,469  |   |   | 11,029 |  
|Severance
 and recruitment expenses            |  |                                   | (32    | )                                |   | 98     |   |      | 363    |   |   | 476    |  
|Amortization
 of intangibles                   |  |                                   | 45     |                                  |   | 46     |   |      | 136    |   |   | 136    |  
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Loss from operations                           |  |                                   | (1,724 | )                                |   | (1,716 | ) |      | (9,675 | ) |   | (2,290 | )
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Interest
 income and other                     |  |                                   | 92     |                                  |   | 276    |   |      | 450    |   |   | 1,039  |  
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Loss before income taxes                       |  |                                   | (1,632 | )                                |   | (1,440 | ) |      | (9,225 | ) |   | (1,251 | )
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Income tax
 benefit                            |  |                                   | (791   | )                                |   | (668   | ) |      | (4,028 | ) |   | (637   | )
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Net loss                                       |  | $                                 | (841   | )                                | $ | (772   | ) | $    | (5,197 | ) | $ | (614   | )
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Net loss per
 share  Basic                    |  | $                                 | (0.12  | )                                | $ | (0.11  | ) | $    | (0.77  | ) | $ | (0.08  | )
|Net loss per
 share  Diluted                  |  | $                                 | (0.12  | )                                | $ | (0.11  | ) | $    | (0.77  | ) | $ | (0.08  | )
|                                               |  |                                   |        |                                  |   |        |   |      |        |   |   |        |  
|Weighted
 average shares outstanding  Basic   |  |                                   | 6,801  |                                  |   | 7,208  |   |      | 6,785  |   |   | 8,022  |  
|Weighted
 average shares outstanding  Diluted |  |                                   | 6,801  |                                  |   | 7,208  |   |      | 6,785  |   |   | 8,022  |  

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.

2

---



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                             |  |                                 |        |      |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------- | -
|                                                                             |  | Nine Months Ended September 30, |       
|(In
 thousands)                                                              |  | 2009                            |        | 2008 |  
|                                                                             |  |                                 |        |      |   |         |  
|CASH FLOWS
 FROM OPERATING ACTIVITIES:                                       |  |                                 |        |      |   |         |  
|Net loss                                                                     |  | $                               | (5,197 | )    | $ | (614    | )
|Adjustments to reconcile net loss to net
 cash used by operating activities: |  |                                 |        |      |   |         |  
|Depreciation and amortization                                                |  |                                 | 1,845  |      |   | 1,654   |  
|Provision for doubtful accounts                                              |  |                                 | 804    |      |   | (34     | )
|Deferred tax benefit                                                         |  |                                 | (1,807 | )    |   |        |  
|Foreign currency transaction (gains) losses                                  |  |                                 | (116   | )    |   | 176     |  
|Stock compensation costs                                                     |  |                                 | 359    |      |   | 367     |  
|Realized gains on available for sale
 marketable securities                  |  |                                 | (26    | )    |   | (39     | )
|Unrealized loss on available for sale
 marketable equity security            |  |                                 |       |      |   | 166     |  
|Changes in operating assets and
 liabilities:                                |  |                                 |        |      |   |         |  
|Accounts receivable                                                          |  |                                 | (992   | )    |   | (554    | )
|Inventories                                                                  |  |                                 | 658    |      |   | 139     |  
|Other current assets                                                         |  |                                 | (278   | )    |   | (266    | )
|Accounts payable                                                             |  |                                 | 696    |      |   | (527    | )
|Advance customer payments                                                    |  |                                 | (4     | )    |   | (154    | )
|Accrued expenses                                                             |  |                                 | (2,123 | )    |   | (660    | )
|Net cash used by operating activities                                        |  |                                 | (6,181 | )    |   | (346    | )
|                                                                             |  |                                 |        |      |   |         |  
|CASH FLOWS
 FROM INVESTING ACTIVITIES:                                       |  |                                 |        |      |   |         |  
|Proceeds from maturities of available for
 sale marketable securities        |  |                                 | 10,391 |      |   | 11,558  |  
|Proceeds from sales of available for sale
 marketable securities             |  |                                 | 2,570  |      |   | 6,860   |  
|Purchases of available for sale marketable
 securities                       |  |                                 | (6,142 | )    |   | (10,086 | )
|Additions to equipment and leasehold
 improvements                           |  |                                 | (420   | )    |   | (1,568  | )
|Additions to patents                                                         |  |                                 | (210   | )    |   | (269    | )
|Net cash provided by investing activities                                    |  |                                 | 6,189  |      |   | 6,495   |  
|                                                                             |  |                                 |        |      |   |         |  
|CASH FLOWS
 FROM FINANCING ACTIVITIES:                                       |  |                                 |        |      |   |         |  
|Proceeds from exercise of stock options                                      |  |                                 | 46     |      |   | 12      |  
|Excess tax benefit from exercise of stock
 options                           |  |                                 |       |      |   | 2       |  
|Proceeds from issuance of common stock
 under employee stock purchase plan   |  |                                 | 118    |      |   | 227     |  
|Repurchase of common stock                                                   |  |                                 |       |      |   | (20,949 | )
|Net cash provided (used) by financing activities                             |  |                                 | 164    |      |   | (20,708 | )
|                                                                             |  |                                 |        |      |   |         |  
|Effects of
 exchange rate changes on cash and cash equivalents               |  |                                 | 22     |      |   | (28     | )
|                                                                             |  |                                 |        |      |   |         |  
|Net increase
 (decrease) in cash and cash equivalents                        |  |                                 | 194    |      |   | (14,587 | )
|                                                                             |  |                                 |        |      |   |         |  
|Cash and
 cash equivalents  beginning of period                             |  |                                 | 4,516  |      |   | 18,864  |  
|                                                                             |  |                                 |        |      |   |         |  
|Cash and
 cash equivalents  end of period                                   |  | $                               | 4,710  |      | $ | 4,277   |  

SEE THE ACCOMPANYING NOTES TO
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3

---



NOTES TO THE INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 
CYBEROPTICS CORPORATION

1. INTERIM REPORTING:

The interim
condensed consolidated financial statements presented herein as of September
30, 2009, and for the three and nine month periods ended September 30, 2009 and
2008, are unaudited, but in the opinion of 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. Certain reclassifications of previously reported amounts
have been made to conform that presentation to the current period presentation.

The results of
operations for the three and nine month periods ended September 30, 2009 do not
necessarily indicate the results to be expected for the full year. The December
31, 2008 consolidated balance sheet data was derived from 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 condensed 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,
2008.

We evaluated
subsequent events (see Note 15) through November 5, 2009, the issuance date of
our consolidated financial statements for the period ended September 30, 2009,
as this is the date on which we filed such financial statements on Form 10-Q
with the SEC.

2. MARKETABLE SECURITIES:

Our
investments in marketable securities are classified as available for sale and
consist of the following:

|                                                       |  |                    |        |                   |  |                    |  |            |     |   |  |        | 
|------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ------------------ |  | ---------- | --- | - |  | ------ | 
|                                                       |  | September 30, 2009 |       
|(In
 thousands)                                        |  | Amortized
 Cost    |        | Unrealized
 Gains |  | Unrealized
 Losses |  | Fair Value |    
|                                                       |  |                    |        |                   |  |                    |  |            |     |   |  |        | 
|Short Term                                             |  |                    |        |                   |  |                    |  |            |     |   |  |        | 
|U.S. government and agency obligations                 |  | $                  | 10,404 |                   |  | 178                |  |            |    |   |  | 10,582 | 
|Corporate debt securities and certificates
 of deposit |  |                    | 2,130  |                   |  | 2                  |  |            |    |   |  | 2,132  | 
|Marketable securities  short term                     |  | $                  | 12,534 |                   |  | 180                |  |            |     |   |  | 12,714 | 
|                                                       |  |                    |        |                   |  |                    |  |            |     |   |  |        | 
|Long Term                                              |  |                    |        |                   |  |                    |  |            |     |   |  |        | 
|U.S. government and agency obligations                 |  | $                  | 4,304  |                   |  | 135                |  |            |    |   |  | 4,439  | 
|Corporate debt securities and certificates
 of deposit |  |                    | 598    |                   |  | 17                 |  |            |    |   |  | 615    | 
|Asset backed securities                                |  |                    | 226    |                   |  | 12                 |  |            |    |   |  | 238    | 
|Equity securities                                      |  |                    | 84     |                   |  |                   |  |            | (49 | ) |  | 35     | 
|Marketable securities  long term                      |  | $                  | 5,212  |                   |  | 164                |  |            | (49 | ) |  | 5,327  | 

4

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

Our investment
in equity securities was in a $49,000 unrealized loss position at September 30,
2009 and a $54,000 unrealized loss position at December 31, 2008 due to weak
economic and stock market conditions. In the three months ended June 30, 2008,
we recognized a $166,000 impairment charge for this security resulting from a
decline in market value which we determined to be other than temporary. We
intend to hold this security indefinitely. No other impairment charges were recognized
for marketable securities in 2008 or the nine months ended September 30, 2009.

Our
investments in long term marketable debt securities all have maturities of less
than five years. At September 30, 2009, marketable debt securities valued at
$18,006,000 were in an unrealized gain position totaling $344,000. No
marketable debt securities were in an unrealized loss position. At December 31,
2008, marketable debt securities valued at $23,645,000 were in an unrealized
gain position totaling $647,000. All remaining marketable debt securities at
December 31, 2008, valued at $1,592,000, were in an unrealized loss position
totaling $12,000 (all had been in an unrealized loss position for less than
twelve months).

Net pre-tax
unrealized gains for marketable securities of $295,000 at September 30, 2009
and $581,000 at December 31, 2008 were recorded as a component of accumulated
other comprehensive income (loss) in stockholders equity. In the nine months
ended September 30, 2009, we recognized a gain of $26,000 from the sale of
marketable debt securities and received sale proceeds totaling $2,570,000. In
the nine months ended September 30, 2008, we recognized a gain of $39,000 from
the sale of marketable debt securities and received sale proceeds totaling $6,860,000.

3. ACCOUNTING FOR STOCK-BASED COMPENSATION:

Effective
January 1, 2006 (date of adoption), all equity-based payments to employees,
including grants of employee stock options, are required to be recognized as an
expense in our consolidated statement of operations based on the grant date
fair value of the award. Under the modified prospective method, we are required
to record equity-based compensation expense for all awards granted after the
date of adoption, and for all unvested shares granted prior to the date of
adoption. We utilize the straight-line method of expense recognition over the
awards service period for our graded vesting options. The fair value of stock
options, granted before and after adoption has been determined using the
Black-Scholes model. The compensation expense recognized for all equity based
awards is net of estimated forfeitures, which were based on historical data. We
have classified equity based compensation within our statement of operations in
the same manner as our cash based employee compensation costs.

The fair value
of the options granted to our employees was estimated on the date of grant
using the Black-Scholes model. Stock options for 45,000 shares of stock and
restricted stock units for 4,000 shares of stock were granted in the nine
months ended September 30, 2009 to certain officers, key employees and others.
We issued 3,000 shares of common stock under our stock grant plan for
non-employee directors upon their re-election to the board of directors in May
2009. We also issued 10,775 shares of common stock in the three months ended
March 31, 2009 to one of our officers under an incentive compensation
arrangement. These share grants and stock options were valued at their fair
market value on the date of grant, with recognition of compensation expense
over the corresponding vesting period.

5

---



Equity based
compensation expense in the three months ended September 30, 2009 totaled
$97,000 and includes $59,000 for stock option awards, $17,000 for our employee
stock purchase plan and $21,000 for unvested restricted stock units. Equity
based compensation expense in the three months ended September 30, 2008 totaled
$112,000 and includes $75,000 for stock option awards, $22,000 for our employee
stock purchase plan and $15,000 for unvested restricted stock units.

Equity based
compensation expense in the nine months ended September 30, 2009 totaled
$359,000 and includes $200,000 for stock option awards, $44,000 for our
employee stock purchase plan, $51,000 for unvested restricted stock units,
$14,000 for shares issued to our non-employee directors and $50,000 for shares
issued to an officer under an incentive compensation arrangement. Equity based
compensation expense in the nine months ended September 30, 2008 totaled
$367,000 and includes $227,000 for stock option awards, $70,000 for our
employee stock purchase plan, $43,000 for unvested restricted stock units and
$27,000 for shares issued to our non-employee directors. Common stock was
reduced by $52,000 in the nine months ended September 30, 2009 due to a
deferred tax shortfall related to stock options and restricted stock units.

At September
30, 2009, the total unrecognized compensation cost related to non vested equity
based compensation arrangements was $614,000 and the related weighted average
period over which it is expected to be recognized is 2.5 years.

The Black
Scholes valuation model incorporates ranges of assumptions that are disclosed
in the table below. The risk-free interest rate is based on the United States
Treasury yield curve at the time of grant with a remaining term equal to the
expected life of the awards. We estimated the expected term for our graded
vesting options, representing the length of time in years that the options are
expected to be outstanding, using the simplified method. We continued to use
the simplified method in 2009 because our historical exercise experience is not
expected to be representative of exercise patterns in the future, due to our
recent restructuring activities. Expected volatility was computed based on
historical fluctuations in the daily price of our common stock.

For stock
options granted during the nine months ending September 30, 2009, we utilized
the fair value of our common stock on the date of grant and employed the following
key assumptions in computing fair value using the Black-Scholes option-pricing
model:

|                                           |  |                                        |               | 
|------------------------------------------ |  | -------------------------------------- | ------------- | 
|Black
 Scholes Assumptions:                |  | Nine Months Ending
 September 30, 2009
|                                           |  |                                        |               | 
|Risk-free
 interest rates                  |  |                                        | 2.09% - 2.29% | 
|Expected
 life in years                    |  |                                        | 4.75          | 
|Expected
 volatility                       |  |                                        | 49% - 53%     | 
|Expected
 dividends                        |  |                                        | None          | 
|Weighted
 average fair value on grant date |  |                                        | $2.14         | 

Stock Options

We have three
stock incentive plans that are administered under the supervision of the
Compensation Committee of the Board of Directors. There are 923,379 shares of
common stock reserved in the aggregate for issuance of options and other stock
based benefits under these plans, including restricted stock units and share
grants to employees, officers, non-employee directors and others. Reserved
shares underlying canceled options are available for future grant under our
active plans. Options are granted at an option price per share equal to or
greater than the market value on 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. Stock options for 45,000 shares of stock were granted
during the nine months ended September 30, 2009. As of September 30, 2009,
there were 387,785 shares of common stock available under these plans for
future issuance to employees, officers and others. There are no options
available under these plans for future issuance to non-employee directors. In
addition, there are 50,000 shares reserved and included in the plan summaries
below that are not part of the three stock incentive plans.

6

---



The following
is a summary of stock option activity during the nine months ended September
30, 2009:

|                                 |  |                     |          |                                             |   |       | 
|-------------------------------- |  | ------------------- | -------- | ------------------------------------------- | - | ----- | 
|                                 |  | Options Outstanding |          | Weighted Average
 Exercise Price Per
 Share |  
|                                 |  |                     |          |                                             |   |       | 
|Outstanding,
 December 31, 2008  |  |                     | 715,646  |                                             | $ | 10.44 | 
|Granted                          |  |                     | 45,000   |                                             |   | 5.13  | 
|Exercised                        |  |                     | (16,250  | )                                           |   | 4.30  | 
|Expired                          |  |                     | (143,576 | )                                           |   | 12.11 | 
|Forfeited                        |  |                     | (51,725  | )                                           |   | 7.34  | 
|Outstanding,
 September 30, 2009 |  |                     | 549,095  |                                             | $ | 10.04 | 
|                                 |  |                     |          |                                             |   |       | 
|Exercisable,
 September 30, 2009 |  |                     | 372,436  |                                             | $ | 11.73 | 

The intrinsic
value of an option is the amount by which the fair value of the underlying
stock exceeds its exercise price. The weighted average remaining contractual
term and aggregate intrinsic value for all options outstanding at September 30,
2009 was 3.79 years and $292,000. The weighted average remaining contractual
term and aggregate intrinsic value of options that were exercisable at
September 30, 2009 was 2.74 years and $50,000. The aggregate intrinsic value of
stock options that were exercised in the nine months ended September 30, 2009
was $32,000. During the nine months ended September 30, 2009, we received total
proceeds of $46,000 from the exercise of stock options. The excess tax benefit
associated with the exercise of stock options in the nine months ended
September 30, 2009 was inconsequential.

Restricted Stock Units

Our 1998 Stock
Incentive Plan also permits our Compensation Committee to grant other
stock-based benefits, including restricted stock units. Restricted stock units
are valued at a price equal to the fair market value of our common stock on the
date of grant, vest over a four year period and entitle the holders to one
share of our common stock for each restricted stock unit. The aggregate
intrinsic value of outstanding restricted stock units as of September 30, 2009
was $246,000.

A summary of
activity in non vested restricted stock units for the nine months ended
September 30, 2009 is as follows:

|                                   |  |        |         |                                           |   |      | 
|---------------------------------- |  | ------ | ------- | ----------------------------------------- | - | ---- | 
|Non vested
 restricted stock units |  | Shares |         | Weighted  Average
 Grant Date Fair Value |  
|                                   |  |        |         |                                           |   |      | 
|Non vested
 at December 31, 2008   |  |        | 42,701  |                                           | $ | 7.05 | 
|Granted                            |  |        | 4,000   |                                           |   | 4.69 | 
|Vested                             |  |        |        |                                           |   |     | 
|Forfeited                          |  |        | (10,212 | )                                         |   | 6.64 | 
|Non vested
 at September 30, 2009  |  |        | 36,489  |                                           | $ | 6.70 | 

Employee Stock Purchase Plan

We have an
Employee Stock Purchase Plan available to eligible U.S. employees. Under terms
of the plan, eligible employees may designate from 1% to 10% of their
compensation to be withheld through payroll deductions, up to a maximum of
$6,500 in each plan year, for the purchase of common stock at 85% of the lower
of the market price on the first or last day of the offering period. There were
20,810 shares issued under this plan in the nine months ended September 30,
2009 and 28,505 shares issued in the nine months ended September 30, 2008. As
of September 30, 2009, 92,002 shares remain available for future issuance under
this plan.

Stock Grant Plan for Non-Employee Directors

Our stock
grant plan for non-employee directors provides for automatic grants of 1,000
shares of our common stock to each of our non-employee directors upon their
re-election to the board of directors. The plan provides for a total of 30,000
shares of our common stock for issuance to directors and will expire on May 19,
2018. We issued a total of 3,000 shares of common stock under this plan in
connection with our annual meeting in May 2009, resulting in $14,000 of stock
compensation expense in the nine months ended September 30, 2009. There are
presently 24,000 shares of common stock reserved in the aggregate for future
issuance under this plan.

7

---



4. INVENTORIES AND WARRANTIES:

Inventories
consist of the following:



|                                  |  |                     |       |                    |   |       | 
|--------------------------------- |  | ------------------- | ----- | ------------------ | - | ----- | 
|(In
 thousands)                   |  | September 30,
 2009 |       | December 31,
 2008 |  
|                                  |  |                     |       |                    |   |       | 
|Raw materials and purchased parts |  | $                   | 3,588 |                    | $ | 3,442 | 
|Work in process                   |  |                     | 673   |                    |   | 724   | 
|Finished goods                    |  |                     | 4,655 |                    |   | 5,703 | 
|                                  |  |                     |       |                    |   |       | 
|Total inventories                 |  | $                   | 8,916 |                    | $ | 9,869 | 

Warranty costs:

We provide for
the estimated cost of product warranties at the time revenue is recognized,
generally for one year. 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. Our warranty liability is included as a component
of accrued expenses. 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
 September 30, |      | Nine Months Ended
 September 30, |  
|(In
 thousands)                    |  | 2009                              |      | 2008                             |   | 2009 |   | 2008 |     
|                                   |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|Balance at beginning of period     |  | $                                 | 509  |                                  | $ | 751  |   | $    | 823  |   | $ | 819  |  
|Accrual for warranties             |  |                                   | 115  |                                  |   | 245  |   |      | 313  |   |   | 683  |  
|Settlements made during the period |  |                                   | (225 | )                                |   | (226 | ) |      | (737 | ) |   | (732 | )
|                                   |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|Balance at end of period           |  | $                                 | 399  |                                  | $ | 770  |   | $    | 399  |   | $ | 770  |  

Extended
warranty:

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

|                                 |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|-------------------------------- |  | --------------------------------- | ---- | -------------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                 |  | Three Months Ended
 September 30, |      | Nine Months Ended
 September 30, |  
|(In
 thousands)                  |  | 2009                              |      | 2008                             |   | 2009 |   | 2008 |     
|                                 |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|Balance at beginning of period   |  | $                                 | 639  |                                  | $ | 563  |   | $    | 605  |   | $ | 425  |  
|Revenue deferrals                |  |                                   | 163  |                                  |   | 128  |   |      | 369  |   |   | 395  |  
|Amortization of deferred revenue |  |                                   | (124 | )                                |   | (68  | ) |      | (296 | ) |   | (197 | )
|                                 |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|Balance at end of period         |  | $                                 | 678  |                                  | $ | 623  |   | $    | 678  |   | $ | 623  |  

8

---



5. INTANGIBLE ASSETS:

Intangible
assets consist of the following:

|                       |  |                          |        |                          |   |        |   |                       |     |                          |   |        |  |   |        |   |   |     | 
|---------------------- |  | ------------------------ | ------ | ------------------------ | - | ------ | - | --------------------- | --- | ------------------------ | - | ------ |  | - | ------ | - | - | --- | 
|                       |  | As of September 30, 2009 |        | As of December 31, 2008  |  
|(In
thousands)         |  | Gross
Carrying
Amount    |        | Accumulated
Amortization |   | Net    |   | Gross
Carrying
Amount |     | Accumulated
Amortization |   | Net    | 
|                       |  |                          |        |                          |   |        |   |                       |     |                          |   |        |  |   |        |   |   |     | 
|Developed
technology   |  | $                        | 7,775  |                          | $ | (7,440 | ) | $                     | 335 |                          | $ | 7,775  |  | $ | (7,304 | ) | $ | 471 | 
|Patents and
trademarks |  |                          | 2,618  |                          |   | (2,271 | ) |                       | 347 |                          |   | 2,730  |  |   | (2,245 | ) |   | 485 | 
|Total                  |  | $                        | 10,393 |                          | $ | (9,711 | ) | $                     | 682 |                          | $ | 10,505 |  | $ | (9,549 | ) | $ | 956 | 

Amortization
expense for the three and nine month periods ended September 30, 2009 and 2008
is as follows:

|                       |  |                                  |     |                                 |   |      |  |      |     |  |   |     | 
|---------------------- |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                       |  | Three Months Ended
September 30, |     | Nine Months Ended
September 30, |  
|(In
thousands)         |  | 2009                             |     | 2008                            |   | 2009 |  | 2008 |    
|                       |  |                                  |     |                                 |   |      |  |      |     |  |   |     | 
|Developed
technology   |  | $                                | 45  |                                 | $ | 46   |  | $    | 136 |  | $ | 136 | 
|Patents and
trademarks |  |                                  | 192 |                                 |   | 70   |  |      | 348 |  |   | 201 | 
|                       |  |                                  |     |                                 |   |      |  |      |     |  |   |     | 
|Total                  |  | $                                | 237 |                                 | $ | 116  |  | $    | 484 |  | $ | 337 | 

Intangible and
other long lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. An impairment loss would be recognized when future undiscounted
cash flows expected to result from use of the asset and eventual disposition
are less than the carrying amount.

Amortization
of patents and trademarks has been classified as research and development
expense in the accompanying statement of operations. Amortization expense for
the three and nine months ended September 30, 2009 includes a $113,000 charge
related to abandoned patents. Estimated aggregate amortization expense based on
current intangibles for the next four years is expected to be as follows:
$124,000 for the remainder of 2009 and $297,000 in 2010, $224,000 in 2011, and
$37,000 in 2012.

9

---



6. 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 electronic assembly equipment market.
The semiconductor segment is the design, manufacture and sale of optical and
other process control sensors and related equipment for the semiconductor
capital equipment market. Information regarding our segments is as follows:

|                               |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|------------------------------ |  | -------------------------------- | ------ | ------------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                               |  | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|(In
thousands)                 |  | 2009                             |        | 2008                            |   | 2009   |   | 2008 |       
|                               |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|Revenue:                       |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|Electronic
Assembly            |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|OEM Sensors                    |  | $                                | 2,599  |                                 | $ | 4,527  |   | $    | 5,243  |   | $ | 17,289 |  
|SMT Systems                    |  |                                  | 5,167  |                                 |   | 5,785  |   |      | 10,732 |   |   | 17,475 |  
|Total Electronic Assembly      |  |                                  | 7,766  |                                 |   | 10,312 |   |      | 15,975 |   |   | 34,764 |  
|                               |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|Semiconductor                  |  |                                  | 784    |                                 |   | 1,258  |   |      | 2,116  |   |   | 4,004  |  
|Total                          |  | $                                | 8,550  |                                 | $ | 11,570 |   | $    | 18,091 |   | $ | 38,768 |  
|                               |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|Income
(loss) from operations: |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|Electronic
Assembly            |  | $                                | (1,599 | )                               | $ | (1,673 | ) | $    | (8,976 | ) | $ | (2,292 | )
|Semiconductor                  |  |                                  | (125   | )                               |   | (43    | ) |      | (699   | ) |   | 2      |  
|Total loss from operations     |  |                                  | (1,724 | )                               |   | (1,716 | ) |      | (9,675 | ) |   | (2,290 | )
|                               |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|Interest
income and other      |  |                                  | 92     |                                 |   | 276    |   |      | 450    |   |   | 1,039  |  
|Loss before taxes              |  | $                                | (1,632 | )                               | $ | (1,440 | ) | $    | (9,225 | ) | $ | (1,251 | )
|                               |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|Depreciation
and amortization: |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|Electronic
Assembly            |  | $                                | 536    |                                 | $ | 483    |   | $    | 1,554  |   | $ | 1,456  |  
|Semiconductor                  |  |                                  | 148    |                                 |   | 68     |   |      | 291    |   |   | 198    |  
|Total                          |  | $                                | 684    |                                 | $ | 551    |   | $    | 1,845  |   | $ | 1,654  |  

Export sales
were 84% of revenue in the three months ended September 30, 2009 and 79% of
revenue in the nine months ended September 30, 2009. Export sales were 84% of
revenue in the three months ended September 30, 2008 and 86% of revenue in the
nine months ended September 30, 2008. 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, |  
|(In
thousands)     |  | 2009                             |       | 2008                            |   | 2009  |  | 2008 |       
|                   |  |                                  |       |                                 |   |       |  |      |        |  |   |        | 
|Americas           |  | $                                | 89    |                                 | $ | 340   |  | $    | 639    |  | $ | 1,433  | 
|Europe             |  |                                  | 2,564 |                                 |   | 3,976 |  |      | 6,131  |  |   | 12,620 | 
|Asia               |  |                                  | 4,220 |                                 |   | 5,434 |  |      | 6,066  |  |   | 19,226 | 
|Other              |  |                                  | 305   |                                 |   | 6     |  |      | 1,404  |  |   | 10     | 
|                   |  |                                  |       |                                 |   |       |  |      |        |  |   |        | 
|Total export sales |  | $                                | 7,178 |                                 | $ | 9,756 |  | $    | 14,240 |  | $ | 33,289 | 

Historically,
we have been dependent upon two electronic assembly customers, Assembleon and
Juki, for a significant portion of our revenue. For the nine months ended
September 30, 2009, sales to Juki accounted for 5% of our total revenue and
sales to Assembleon accounted for 18% of our total revenue. For the year ended
December 31, 2008, sales to Juki accounted for 21% of our total revenue and sales
to Assembleon accounted for 15% of our total revenue.

10

---



We previously
disclosed in 2008 that Assembleon intended to start transitioning away from our
current alignment products when it introduced its next generation of equipment
in 2010. In September 2009 we announced that Assembleon has elected to continue
to use us as its sole supplier for the alignment products deployed on its
current and future pick-and-place platforms.

In the three
months ended June 30, 2009, we recorded an $800,000 provision for doubtful
accounts related to a key distributor of our SMT system products. The
distributor remains in business, and is committed to paying us the amount owed.

7. NET LOSS PER SHARE:

Basic and
diluted net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Potentially
dilutive common equivalent shares are excluded from the calculation of net loss
per diluted share due to their anti-dilutive effect. As a result, no common
equivalent shares were included in the calculation of net loss per diluted
share for the three and nine months ended September 30, 2009 or 2008.

The
calculation of diluted net loss per share excludes 617,000 potentially dilutive
shares for the three months ended September 30, 2009, 635,000 potentially
dilutive shares for the three months ended September 30, 2008, 698,000
potentially dilutive shares for the nine months ended September 30, 2009 and
643,000 potentially dilutive shares for the nine months ended September 30,
2008, because their effect would be anti-dilutive. Potentially dilutive common
equivalent shares consist of common shares to be issued upon exercise of stock
options, restricted stock units and from participation in our employee stock
purchase plan, as calculated using the treasury stock method.

8. COMPREHENSIVE LOSS:

Components of
comprehensive loss include our net loss, foreign-currency translation
adjustments, unrealized gains and losses on available-for-sale securities and
reclassification adjustments. Our total comprehensive loss amounted to $779,000
for the three months ended September 30, 2009 and $1,178,000 for the three
months ended September 30, 2008. Our total comprehensive loss amounted to
$5,438,000 for the nine months ended September 30, 2009 and $927,000 for the
nine months ended September 30, 2008.

At December
31, 2008 and September 30, 2009 components of accumulated other comprehensive
loss is as follows:

|                           |  |                              |      |                                         |   |                                      |   |   |      |  
|-------------------------- |  | ---------------------------- | ---- | --------------------------------------- | - | ------------------------------------ | - | - | ---- | -
|(In
thousands)             |  | Foreign
Currency
Translation |      | Unrealized Gains
(Losses) on
Securities |   | Accumulated
Other
Comprehensive
Loss |  
|                           |  |                              |      |                                         |   |                                      |   |   |      |  
|Balance
December 31, 2008  |  | $                            | (906 | )                                       | $ | 376                                  |   | $ | (530 | )
|Current
period change      |  |                              | (57  | )                                       |   | (184                                 | ) |   | (241 | )
|                           |  |                              |      |                                         |   |                                      |   |   |      |  
|Balance
September 30, 2009 |  | $                            | (963 | )                                       | $ | 192                                  |   | $ | (771 | )

Reclassification
adjustments in the three and nine months ended September 30, 2009 were not
significant. A reclassification adjustment was recognized in the nine months
ended September 30, 2008 for a $166,000 unrealized loss on an available for
sale equity security that was realized in connection with a decline in market
value which was determined to be other than temporary.

11

---



9. INCOME TAXES:

We recorded an
income tax benefit in the nine months ended September 30, 2009 at an effective
tax rate of 43.7%, compared to an effective tax rate of 50.9% in the nine
months ended September 30, 2008. Our recorded income tax benefit for the three
and nine months ended September 30, 2009 includes a $223,000 discrete benefit
from reversal of a portion of our reserve for income taxes resulting from the
closing of a domestic statute of limitations. Our recorded income tax benefit
for the nine months ended September 30, 2009 also includes a $547,000 discrete
benefit from reversal of a portion of our reserve for income taxes resulting
from settlement of Internal Revenue Service audits of our 2006 and 2007 federal
income tax returns. Our recorded income tax benefit for the three and nine
months ended September 30, 2008 includes a $257,000 discrete benefit from
reversal of a portion of our reserve for income taxes resulting from the
closing of a domestic statute of limitations. The change in the effective tax
rate for 2009 is due to the aforementioned discrete items, reductions in the
level of non-deductible expenses and a small benefit from the research and
experimentation (R&D) tax credit, offset by higher tax expense in foreign
tax jurisdictions with tax rates differing from the U.S federal statutory rate.
No benefit from the R&D tax credit was recognized in the nine months ended
September 30, 2008 because the R&D tax credit had not yet been signed into
law.

We file income tax returns
in the U.S. federal jurisdiction, and various state and foreign jurisdictions.
We are no longer subject to U.S. federal, state and local income tax
examinations by tax authorities for years before 2006. During the nine months ended September 30, 2009, the internal revenue
service completed audits of our 2006 and 2007 federal income tax
returns. Our settlement with the internal revenue service did not have a
material impact on our financial condition.

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

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

In analyzing
the need for valuation allowances we considered that we had positive cumulative
profit through 2008 even without the exclusion of the $2.9 million non-deductible
goodwill impairment in 2008. We also considered our forecasts of future
profitability, the duration of statutory carry forward periods and tax planning
alternatives. We further evaluated our past cycles which tend to average five
years in length (from peak to trough) and also considered our five year
cumulative results, which also had strong profits. Finally, we evaluated where
these cumulative five year measures might be at the end of 2009 and considered
other positive evidence to conclude no incremental valuation allowance was
needed at September 30, 2009.

While we have
a history of profits, our recent results have been impacted by the recent
global economic slowdown, and we incurred a loss in the United States in 2008
and the first nine months of 2009, where most of our net deferred tax assets
are recorded. Therefore, achievement of profitability in the United States will
be a significant factor in determining our continuing ability to carry these
deferred tax assets without recording a valuation allowance.

If future
results from our operations are less than projected, a valuation allowance may
be required to reduce the deferred tax assets. If we continue to incur losses,
and if our operations and outlook show no signs of further improvement by as
early as the fourth quarter of 2009, we may be required to record a full
valuation allowance against virtually all of our deferred tax assets, which
could have a material impact on our results of operations in the period in
which it is recorded.

Deferred tax
assets at September 30, 2009, include net operating loss carry forwards
incurred in the UK by CyberOptics Ltd., which was acquired in 1999. The
utilization of these net operating loss carry forwards is dependent on
CyberOptics Ltd.s ability to generate sufficient UK taxable income during the
carry forward period.

12

---



10. DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES:

We enter into
foreign currency swap agreements to hedge short term inter-company financing
transactions with our subsidiaries in the United Kingdom and Singapore. These
currency swap agreements are structured to mature near the last day of each
quarter, and are designated as cash flow hedges. At September 30, 2009, we had
two open swap agreements for £400,000 GBP and $1,250,000 SGD that were
purchased on September 30, 2009, the fair value of which was inconsequential.
Gains and losses from foreign currency transactions and foreign currency swap
agreements are recognized in interest income and other in our statement of
operations.

In the three months ended
September 30, 2009, we recognized net gains (losses) from settlement of foreign
currency swap agreements of $(28,000) that offset foreign currency transaction
gains (losses) on the underlying inter-company balances of $(29,000). In the
nine months ended September 30, 2009, we recognized net gains (losses) from
settlement of foreign currency swap agreements of $(211,000) that offset
foreign currency transactions gains (losses) on the underlying inter-company
balances of $116,000.

In
the three months ended September 30, 2008, we recognized net gains (losses)
from settlement of foreign currency swap agreements of $93,000 that offset
foreign currency transaction gains (losses) on the underlying inter-company
balances of $(139,000). In the nine months ended September 30, 2008, we
recognized net gains (losses) from settlement of foreign currency swap
agreements of $79,000 that offset foreign currency transaction gains (losses)
on the underlying inter-company balance of $(140,000).

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.

11. REPURCHASE OF COMMON STOCK:

No shares of
common stock were repurchased in the nine months ended September 30, 2009 and
no repurchase authorizations are currently in effect.

12. CONTINGENCIES:

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

In the normal
course of business to facilitate sales of our products and services, we at
times indemnify other parties, including customers, with respect to certain
matters. In these instances, we have agreed to hold the other parties harmless
against losses arising out of intellectual property infringement or other types
of claims. These agreements may limit the time within which 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.

13

---



13. SEVERANCE, RECRUITMENT AND
SINGAPORE TRANSITION:

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

Additional
severance costs were incurred in November 2008 when we reduced our workforce by
20 employees in response to the weak global economic conditions. In February
2009, we further reduced our workforce by 24 positions in response to weakening
conditions in the global economy, our transition to Singapore and our decision
to consolidate manufacturing for our semiconductor products in our Minneapolis
facility.

All
of the severance costs related to the February 2008 transition to Singapore,
and related to the November 2008 and February 2009 workforce reductions have
been classified as severance and recruitment in our statement of operations. We
recognized a $32,000 benefit in the three months ended September 30, 2009 from
the reversal of a portion of our severance accrual. Severance expenses related
to these actions were $363,000 in the nine months ended September 30, 2009.
Severance and recruitment expenses related to these actions were $98,000 in the
three months ended September 30, 2008 and $476,000 in the nine months ended
September 30, 2008.

A
summary of our severance accruals follows:

|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|---------------------------- |  | ------------------------- | ---- | ------------------------------------ | - | ------------------------------------ | - | ----- | --- | ------------------------------------ | - | ------------------------------------ | - | ----- | -- | ----- | - | ---- | - | - | ---- | - |  | ---- | -
|                             |  | Electronic
 Assembly      |      | Semiconductor                        |  
|                             |  |                           |      |                                      |  
|(In thousands)               |  | February
 2008
 Singapore |      | November
 2008
 workforce
 reduction |   | February
 2009
 workforce
 reduction |   | Total |     | November
 2008
 workforce
 reduction |   | February
 2009
 workforce
 reduction |   | Total |    | Total |  
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |  
|Balance,
 December 31, 2008  |  | $                         | 207  |                                      | $ | 104                                  |   | $     |    |                                      | $ | 311                                  |   | $     | 4  |       | $ |     |   | $ | 4    |   |  | 315  |  
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Cost
 incurred               |  |                           | 51   |                                      |   |                                     |   |       | 165 |                                      |   | 216                                  |   |       |   |       |   | 89   |   |   | 89   |   |  | 305  |  
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Payments
 made               |  |                           | (90  | )                                    |   | (104                                 | ) |       | (97 | )                                    |   | (291                                 | ) |       | (4 | )     |   | (8   | ) |   | (12  | ) |  | (303 | )
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Balance,
 March 31, 2009     |  | $                         | 168  |                                      | $ |                                     |   | $     | 68  |                                      | $ | 236                                  |   | $     |   |       | $ | 81   |   | $ | 81   |   |  | 317  |  
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Cost
 incurred               |  |                           | 29   |                                      |   |                                     |   |       | 36  |                                      |   | 65                                   |   |       |   |       |   | 25   |   |   | 25   |   |  | 90   |  
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Payments
 made               |  |                           | (131 | )                                    |   |                                     |   |       | (79 | )                                    |   | (210                                 | ) |       |   |       |   | (100 | ) |   | (100 | ) |  | (310 | )
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Balance,
 June 30, 2009      |  | $                         | 66   |                                      | $ |                                     |   | $     | 25  |                                      | $ | 91                                   |   | $     |   |       | $ | 6    |   | $ | 6    |   |  | 97   |  
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Cost
 incurred               |  |                           | (32  | )                                    |   |                                     |   |       |    |                                      |   | (32                                  | ) |       |   |       |   |     |   |   |     |   |  | (32  | )
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Payments
 made               |  |                           | (34  | )                                    |   |                                     |   |       | (2  | )                                    |   | (36                                  | ) |       |   |       |   | (1   | ) |   | (1   | ) |  | (37  | )
|                             |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Balance,
 September 30, 2009 |  | $                         |     |                                      | $ |                                     |   | $     | 23  |                                      | $ | 23                                   |   | $     |   |       | $ | 5    |   | $ | 5    |   |  | 28   |  

No
further severance or transition expenses are anticipated in the three months
ended December 31, 2009.

14

---



14. FAIR VALUE MEASUREMENTS:

We value our
cash equivalents and marketable securities based on a three-level fair value
hierarchy. The fair value hierarchy gives the highest priority to quoted prices
in active markets for identical assets or liabilities (Level 1). The next
highest priority is based on quoted prices for similar assets or liabilities in
active markets or quoted prices for identical or similar assets or liabilities
in non-active markets or other observable inputs (Level 2). The lowest priority
is given to unobservable inputs (Level 3).

The following
table provides information regarding fair value measurements for our cash
equivalents and marketable securities as of September 30, 2009 according to the
three-level fair value hierarchy:

|                                                       |  |                              |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|------------------------------------------------------ |  | ---------------------------- | ------ | ----------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                                       |  |                              |        |                                                                   | Fair Value Measurements at Reporting Date Using |                                                 
|(In
 thousands)                                        |  | Balance
 September 30,
 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                 | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                                       |  |                              |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|Cash equivalents                                       |  | $                            | 1,964  |                                                                   | $                                               |                                                 |  | $                                            | 1,964  |  | $ |  | 
|U.S. government and agency obligations                 |  |                              | 15,021 |                                                                   |                                                 |                                                 |  |                                              | 15,021 |  |   |  | 
|Corporate debt securities and certificates
 of deposit |  |                              | 2,747  |                                                                   |                                                 |                                                 |  |                                              | 2,747  |  |   |  | 
|Asset backed securities                                |  |                              | 238    |                                                                   |                                                 |                                                 |  |                                              | 238    |  |   |  | 
|Equity securities                                      |  |                              | 35     |                                                                   |                                                 | 35                                               |  |                                              |       |  |   |  | 
|Totals                                                 |  | $                            | 20,005 |                                                                   | $                                               | 35                                               |  | $                                            | 19,970 |  | $ |  | 

Our foreign currency swap
agreements are structured to mature on the last day of each quarter. The fair
value associated with these agreements is inconsequential and represents a
level 2 measurement..

15. RECENT ACCOUNTING DEVELOPMENTS:

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

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

In April 2009,
the FASB issued ASC No. 820-10-35, Fair
Value Measurements and Disclosures  Subsequent Measurement, which
discusses the provisions related to the determination of fair value when the
volume and level of activity for the asset or liability have significantly
decreased. Based on the guidance in ASC No. 820-10-35, if an entity determines
that the level of activity for an asset or liability has significantly
decreased and that a transaction is not orderly, further analysis of
transactions or quoted prices is needed, and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value..
The guidance in ASC No. 820-10-35 is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with
early adoption permitted for periods ending after March 15, 2009. Our
adoption of this guidance for our quarter ending June 30, 2009 had no
impact on our consolidated financial statements.

15

---



In April 2009,
the FASB issued ASC No. 320-10-65, Transition
Related to Recognition and Presentation of Other-Than-Temporary Impairments,
which applies to investments in debt securities for which other-than-temporary
impairments may be recorded. If an entitys management asserts that it does not
have the intent to sell a debt security and it is more likely than not that it
will not have to sell the security before recovery of its cost basis, then an
entity may separate other-than-temporary impairments into two components: 1)
the amount related to credit losses (recorded in earnings), and 2) all other
amounts (recorded in other comprehensive income). ASC No. 320-10-65 is
effective for interim and annual reporting periods ending after June 15, 2009.
Our adoption of this guidance for our quarter ending June 30, 2009 had no
material impact on our consolidated financial statements.

In
April 2009, the FASB issued ASC No. 825-10-65, Interim Disclosures about Fair Value of
Financial Instruments, which amends previous interim disclosure
requirements and requires an entity to provide disclosures about the fair value
of financial instruments in interim financial information. The guidance in ASC
No. 825-10-65 is to be applied prospectively and is effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. We included the required
disclosures in our financial statements for the quarter ending June 30,
2009.

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

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

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

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

16

---



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, and income taxes. 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, 2008.

FORWARD LOOKING
STATEMENTS:

The following
managements discussion and analysis contains a number of estimates and
predictions that are forward looking rather than based on historical fact.
Among other matters, we discuss (i) our expectations regarding the transfer of
our research and development and manufacturing operations for our systems
products to Singapore and the costs we expect to incur this year, and avoid in
the future, because of that transfer; (ii) our anticipated revenues and losses
for the fourth quarter of 2009; (iii) the potential margin improvement
resulting from our SE500 next-generation solder paste inspection system; (iv)
the timing of initial revenue and margin improvements from other new products
that we have under development or expect to introduce in 2009 and 2010; (v) our
expectations regarding market acceptance of WaferSenseTM and our other semiconductor products; (vi) our beliefs regarding
trends in the general economy and its impact on markets for our equipment; and
(vii) the impact of currency fluctuations on our operations. Although we have
made these statements based on our experience and best estimate of future
events, there may be events or factors that we have not anticipated, and the
accuracy of our statements and estimates are subject to a number of risks,
including those identified in Item 1A of this Form 10-Q and in our Annual
Report on Form 10-K.

RESULTS OF OPERATIONS:

General

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

Our results
were favorably impacted in 2006 and 2007 as the worldwide demand for cell
phones, laptops and other consumer electronics remained strong, driving the
need for increased production of printed circuit boards and memory modules, and
thereby increasing demand for our electronic assembly and semiconductor
products. After peaking in the third quarter of 2007, our revenue declined
sequentially each quarter through the first quarter of 2009, as our results
were negatively impacted by reduced levels of capital spending for electronics
manufacturing capacity brought about by the deepening weakness in the global
economy. New orders dropped off sharply late in the fourth quarter of 2008 as
the global economy fell into a severe recession. Our results for the nine
months ended September 30, 2009 continued to be adversely affected by ongoing
weakness in the global electronics market. Revenues were $8.6 million in the
quarter ended September 30, 2009, down 26% from $11.6 million in the same
period last year. We lost $1.7 million from operations in the quarter ended
September 30, 2009, approximately the same amount as the quarter ended
September 30, 2008 when $650,000 of extra costs where incurred to transition
our systems related product development and manufacturing to Singapore.

We are seeing
early signs of strengthening in the global electronics market. Manufacturers of
SMT assembly equipment, who did not place sensor orders in this years first
half, resumed ordering in the third quarter. In addition, demand for SE500
solder paste inspection and AOI systems is improving. For the quarter ending
December 31, 2009, we are forecasting revenue of $8.0-$9.0 million, up from
revenue of $6.7 million in the quarter ending December 31, 2008. We are however
still forecasting a loss for the quarter ending December 31, 2009.

17

---



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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In February
 2008, we announced plans to move a significant portion of our systems-related
 product development and manufacturing to Singapore. The transition of systems
 related product development to Singapore was substantially complete by the
 end of the fourth quarter of 2008 and transition of manufacturing for our
 system products was substantially complete by the end of the first quarter of
 2009. Remaining transition costs in 2009 are not expected to be significant.
 The realignment of our systems-related product development and manufacturing
 to Singapore has resulted in lower costs and a more focused R&D effort.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | In response
 to the significant weakness in our markets and the global economy, we
 implemented workforce reductions in November 2008 and February 2009. Additional
 cost savings measures were implemented in February 2009, including salary
 reductions, consolidation of manufacturing operations for our semiconductor
 products into our Minneapolis, Minnesota facility and reductions in spending
 for non-labor costs such as travel, supplies and the like.                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | From the
 start of the fourth quarter of 2008 through the end of the second quarter of
 2009, we will have reduced our workforce by 50 employees or approximately
 25%, resulting from the move to Singapore, relocation of manufacturing for
 our semiconductor operations, and the November 2008 and February 2009
 workforce reductions. We incurred a $363,000 charge for severance in the nine
 months ended September 30, 2009 related to these actions. We do not expect
 implementation of these cost reduction actions to impact our strategic growth
 programs.                                                                           

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In addition
 to signs of strengthening in the global electronics market, we announced in
 September 2009 that Assembleon has elected to continue to use us as its sole
 supplier for the alignment products deployed on its current and future
 pick-and-place platforms. We previously disclosed in 2008 that Assembleon
 intended to start transitioning away from our current alignment products when
 it introduced its next generation of equipment in 2010. Sales of new
 alignment sensors to Assembleon accounted for 10% of total revenue in 2008.                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | During 2008,
 we invested heavily in our recently introduced next-generation SE500 solder
 paste inspection system. Based on a new cost-reduced platform, we believe the
 SE500 is the fastest and most accurate solder paste inspection system
 available on the market. Given its industry-leading inspection capabilities,
 we believe the SE500 will command improved pricing in comparison to the
 existing SE300. We believe the SE500 has been favorably received in the
 market since its recent introduction and that it should enable us to gain a
 larger share of the global solder paste inspection market.                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Our strategy
 is based in large part on increasing the size of our addressable market for
 inspection solutions. The foundation of this strategy is a next-generation
 common hardware platform for inspection, whereby essentially the same sensor
 technology can be utilized across a variety of applications. We expect this
 initiative to enable us to remove significant cost from several new products,
 resulting in both improved margins and a menu of tiered offerings for
 automated optical inspection (AOI) and solder paste inspection systems at
 various price points for different market segments. By expanding our
 addressable market to electronics manufacturers requiring a lower-cost
 inspection solution and to those who currently do not use any form of
 inspection, we believe this highly targeted approach to our markets can yield
 significant long-term returns on our R&D investments.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Our
 next-generation AOI system, which will be introduced in November 2009, will
 be the first product utilizing our common hardware platform for inspection.
 In addition to its reduced cost, we believe this new product will exceed many
 of the performance metrics of our current AOI offering and those of our
 competitors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | We continue
 to pursue several promising growth opportunities for our next generation
 inspection technologies. Reflecting our progress with these R&D
 initiatives, we have signed two new OEM development contracts in the past
 year with manufacturers of electronic assembly equipment. One of these new
 products is based on our next-generation common hardware platform for
 inspection, while the other is based on our embedded process verification
 technology. Both of these products expand our addressable market for
 inspection solutions. Significant revenue from these products is not
 anticipated until 2010.                                                                                                                                                                                                                                                                                        

18

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| |   |                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We also
 recently signed a third OEM development contract for an embedded sensor for
 the photovoltaic solar market. This new product will further diversify our
 revenue base beyond the electronic assembly market. Initial revenue from this
 product is not anticipated until late 2010.

We believe our
strategy to increase the size of our addressable market for inspection
solutions, the revenue potential and improved margins from anticipated new
products, new OEM development contracts and our strategic repositioning in
Asia, will lead to improved operating results as the global electronics market
continues to recover from the current economic recession.

We have no
debt and our cash and marketable securities of $22.8 million at September 30,
2009 are more than adequate to fund our operations and various growth
opportunities for an extended period of time, even given our expectation for
continued weak financial results in the fourth quarter of 2009.

Segment Results

Operating
results for our electronic assembly and semiconductor segments for the three
and nine month periods ended September 30, 2009 and 2008 are as follows:

|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|-------------------------------------------- |  | -------------------------------------- | ------ | -------------------------------------- | - | ----- | - | -------------------- | ------ | ---------------- | - | ------ | - | - | ----- | - | - | ------ | -
|                                             |  | Three months ended September 30,
 2009 |        | Three months ended September 30,
 2008 |  
|(In
 thousands)                              |  | Electronic
 Assembly                   |        | Semi-
 Conductor                       |   | Total |   | Electronic
 Assembly |        | Semi-
 Conductor |   | Total  |  
|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|Revenues                                     |  | $                                      | 7,766  |                                        | $ | 784   |   | $                    | 8,550  |                  | $ | 10,312 |   | $ | 1,258 |   | $ | 11,570 |  
|Cost of revenues                             |  |                                        | 5,369  |                                        |   | 244   |   |                      | 5,613  |                  |   | 6,055  |   |   | 523   |   |   | 6,578  |  
|Gross margin                                 |  |                                        | 2,397  |                                        |   | 540   |   |                      | 2,937  |                  |   | 4,257  |   |   | 735   |   |   | 4,992  |  
|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|Research and development expenses            |  |                                        | 1,478  |                                        |   | 335   |   |                      | 1,813  |                  |   | 2,424  |   |   | 406   |   |   | 2,830  |  
|Selling, general and administrative expenses |  |                                        | 2,523  |                                        |   | 312   |   |                      | 2,835  |                  |   | 3,380  |   |   | 354   |   |   | 3,734  |  
|Severance and recruitment expenses           |  |                                        | (32    | )                                      |   |      |   |                      | (32    | )                |   | 98     |   |   |      |   |   | 98     |  
|Amortization of intangibles                  |  |                                        | 27     |                                        |   | 18    |   |                      | 45     |                  |   | 28     |   |   | 18    |   |   | 46     |  
|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|Loss from operations                         |  | $                                      | (1,599 | )                                      | $ | (125  | ) | $                    | (1,724 | )                | $ | (1,673 | ) | $ | (43   | ) | $ | (1,716 | )
|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|                                             |  | Nine months ended September 30, 2009   |        | Nine months ended September 30, 2008   |  
|(In thousands)                               |  | Electronic
 Assembly                   |        | Semi-
 Conductor                       |   | Total |   | Electronic
 Assembly |        | Semi-
 Conductor |   | Total  |  
|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|Revenue                                      |  | $                                      | 15,975 |                                        | $ | 2,116 |   | $                    | 18,091 |                  | $ | 34,764 |   | $ | 4,004 |   | $ | 38,768 |  
|Cost of revenue                              |  |                                        | 11,349 |                                        |   | 829   |   |                      | 12,178 |                  |   | 19,869 |   |   | 1,546 |   |   | 21,415 |  
|Gross profit                                 |  |                                        | 4,626  |                                        |   | 1,287 |   |                      | 5,913  |                  |   | 14,895 |   |   | 2,458 |   |   | 17,353 |  
|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|Research and development expenses            |  |                                        | 4,748  |                                        |   | 872   |   |                      | 5,620  |                  |   | 6,703  |   |   | 1,299 |   |   | 8,002  |  
|Selling, general and administrative expenses |  |                                        | 8,523  |                                        |   | 946   |   |                      | 9,469  |                  |   | 9,926  |   |   | 1,103 |   |   | 11,029 |  
|Severance and recruitment expenses           |  |                                        | 249    |                                        |   | 114   |   |                      | 363    |                  |   | 476    |   |   |      |   |   | 476    |  
|Amortization of intangibles                  |  |                                        | 82     |                                        |   | 54    |   |                      | 136    |                  |   | 82     |   |   | 54    |   |   | 136    |  
|                                             |  |                                        |        |                                        |   |       |   |                      |        |                  |   |        |   |   |       |   |   |        |  
|Income (loss) from operations                |  | $                                      | (8,976 | )                                      | $ | (699  | ) | $                    | (9,675 | )                | $ | (2,292 | ) | $ | 2     |   | $ | (2,290 | )

19

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Revenues

Our revenues
decreased by 26% to $8.6 million in the three months ended September 30, 2009
from $11.6 million in the three months ended September 30, 2008, and decreased
by 53% to $18.0 million in the nine months ended September 30, 2009 from $38.8
million in the nine months ended September 30, 2008. The following table sets
forth revenues by product line for the three and nine month periods ended
September 30, 2009 and 2008:

|                          |  |                                   |       |                                  |   |        |  |      |        |  |   |        | 
|------------------------- |  | --------------------------------- | ----- | -------------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                          |  | Three Months Ended
 September 30, |       | Nine Months Ended
 September 30, |  
|(In
 thousands)           |  | 2009                              |       | 2008                             |   | 2009   |  | 2008 |       
|                          |  |                                   |       |                                  |   |        |  |      |        |  |   |        | 
|Electronic
 Assembly      |  |                                   |       |                                  |   |        |  |      |        |  |   |        | 
|OEM Sensors               |  | $                                 | 2,599 |                                  | $ | 4,527  |  | $    | 5,243  |  | $ | 17,289 | 
|SMT Systems               |  |                                   | 5,167 |                                  |   | 5,785  |  |      | 10,732 |  |   | 17,475 | 
|Total Electronic Assembly |  |                                   | 7,766 |                                  |   | 10,312 |  |      | 15,975 |  |   | 34,764 | 
|Semiconductor             |  |                                   | 784   |                                  |   | 1,258  |  |      | 2,116  |  |   | 4,004  | 
|Total                     |  | $                                 | 8,550 |                                  | $ | 11,570 |  | $    | 18,091 |  | $ | 38,768 | 

Electronic Assembly

Revenues from our electronic assembly OEM sensors decreased by 43% to
$2.6 million in the three months ended September 30, 2009 from $4.5 million in
the three months ended September 30, 2008 and decreased by 70% to $5.2 million
in the nine months ended September 30, 2009 from $17.3 million in the nine
months ended September 30, 2008. Revenues from our SMT systems products, decreased by 11% to $5.2 million in the three
months ended September 30, 2009 from $5.8 million in the three months ended
September 30, 2008 and decreased by 39% to $10.7 million in the nine months
ended September 30, 2009 from $17.5 million in the nine months ended September
30, 2008.

The severe
weakness in the global economy and electronics markets experienced late in 2008
continued into the first nine months of 2009, causing the significant declines
in revenue from both our electronic assembly OEM sensors and SMT system
products when compared with the first nine months of 2008. We are seeing early
signs of strengthening in the global electronics market. Manufacturers of SMT
assembly equipment, who did not place sensor orders in this years first half,
resumed ordering in the third quarter. In addition, demand for SE500 solder
paste inspection and AOI systems from Asian original design manufacturers is
improving. We are forecasting higher levels of revenue for the quarter ending
December 31, 2009, when compared to the same period in 2008, primarily from
increased SMT system sales.

Export revenue from electronic assembly sensors and SMT systems totaled
$6.9 million or 88% of revenue in the three months ended September 30, 2009,
compared to $9.1 million or 88% of revenue in the three months ended September
30, 2008. Export revenue from electronic assembly sensors and SMT systems
totaled $13.6 million or 85% of revenue in the nine months ended September 30,
2009, compared to $31.5 million or 91% of revenue in the nine months ended
September 30, 2008. Sales to international customers continue to
be significant, as manufacturing of electronic components has migrated
offshore, particularly to China and other areas of Asia.

Although our
markets have contracted with decreased demand for consumer and commercial
electronics, we believe the trend toward automated inspection using SMT
inspection systems will continue due to ongoing miniaturization of SMT circuit
board components. Required for downsizing products, many SMT circuit board
components have become so small that it is now virtually impossible for the
human eye to inspect circuit boards for defects in solder paste quality,
component placement and solder joints. We believe, supported by increased
competition in our markets, that automated inspection has become the only viable
means for inspecting SMT circuit boards with such tiny components. Although we
will be required to continue to innovate to grow in this increasingly
competitive market, we believe that our SMT systems products will be one of our
primary growth drivers over the next few years.

Semiconductor

Revenues from
semiconductor products decreased by 38% to $784,000 in the three months ended
September 30, 2009 from $1.2 million in the three months ended September 30,
2008 and decreased by 47% to $2.1 million in the nine months ended September
30, 2009 from $4.0 million in the nine months ended September 30, 2008. The
decrease in revenue was due to severe weakness in the global economy, difficult
conditions in the market for semiconductor fabrication equipment and declining
revenue from our older wafer mapper and frame grabber products.

20

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Our wafer
mapper and frame grabber products are relatively mature. We anticipate that
future growth in our semiconductor revenues, exclusive of changes related to
capital procurement cycles, will come from our new WaferSense products.
WaferSense is a family of wireless, wafer like precision measurement tools for
in-situ setup, calibration and process optimization in semiconductor processing
equipment. We have recently introduced several new additions to the WaferSense
product line, including additional leveling sensors, along with new gapping,
teaching and vibration sensors.

Export revenue
from semiconductor products totaled $308,000 or 39% of revenue in the three
months ended September 30, 2009, compared to $651,000 or 52% of revenue in the
three months ended September 30, 2008. Export revenue from semiconductor
products totaled $636,000 or 30% of revenue in the nine months ended September
30, 2009, compared to $1.8 million or 45% of revenue in the nine months ended
September 30, 2008.

Cost of Revenue and Gross Margin

Electronic
Assembly

Gross margin
as a percentage of electronic assembly sales was 31% in the three months ended
September 30, 2009, compared to 42% in the three months ended September 30,
2008. Gross margin as a percentage of electronic assembly sales was 29% in the
nine months ended September 30, 2009, compared to 43% in the nine months ended
September 30, 2008. The reduction in gross margin percentage during the three
and nine months ended September 30, 2009 was due to significantly lower sales
of higher margin electronic assembly sensors, substantially lower production
volumes over which to spread fixed manufacturing overhead costs, continued
competitive pricing pressure for our products, particularly older generation
versions that are being replaced, and the overall impact of the global
recession. We believe the recession will continue to impact our ability to
market these products and margins will be depressed until the economy begins to
recover.

In response to
significant weakness in our markets resulting from the global recession, and
transition of manufacturing for our SMT system products to Singapore, we
reduced our manufacturing workforce by over 30 employees or 45% by the end of
the second quarter of 2009. In addition, by the end of the second quarter of
2009, we completed consolidating our Portland-based semiconductor manufacturing
into our Minneapolis facility, a move that has further streamlined our cost
structure. These actions have reduced our overall manufacturing costs and have
better leveraged our manufacturing operations, thereby favorably impacting our
gross margins not only in the second half of 2009, but also in future periods.
We estimate factory cost savings starting in the third quarter of 2009 from our
cost reduction actions and transition of systems-related manufacturing to
Singapore of close to $2.0 million per year.

We compensate
for pricing pressure by introducing new products with more features and
improved performance and through manufacturing cost reduction programs. For
example, we believe our recently introduced next-generation SE500 solder paste
inspection system, which is cost reduced and manufactured in Singapore, is the
fastest and most accurate solder paste inspection system available on the market.
Our next generation AOI system, that we expect to introduce in the fourth
quarter of 2009, utilizes our common hardware platform for inspection and
combines a reduction in cost with enhanced performance. We expect to introduce
several new products in the future based on our common hardware platform for
inspection that will allow for reduced cost, enhanced performance and
improvement in margins.

Semiconductor

Gross margin
as a percentage of semiconductor sales was 69% in the three months ended
September 30, 2009, compared to 58% in the three months ended September 30,
2008. Gross margin as a percentage of semiconductor sales was 61% in the nine
months ended September 30, 2009, compared to 61% in the nine months ended
September 30, 2008. Gross margin as a percentage of semiconductor sales
increased in the three months ended September 30, 2009 due to the cost benefit
from consolidation of manufacturing for our semiconductor products into our
Minneapolis, Minnesota headquarters facility.

Operating Expenses

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

21

---



In February
2008, we announced plans to move a significant portion of our systems-related
product development and manufacturing to Singapore. The transition of
systems-related product development to Singapore was substantially complete by
the end of the fourth quarter of 2008 and the transition of manufacturing for
our system products was substantially complete by the end of the first quarter
of 2009. Remaining transition costs in 2009 are not expected to be significant.
The realignment of our systems-related product development and manufacturing to
Singapore has resulted in lower costs and a more focused development effort.

In response to
the significant weakness in our markets and the global economy, and also due to
our transition of a significant portion of our operations to Singapore, we
reduced our workforce by 50 employees or 25% (over 30 in manufacturing and
approximately 20 in development, selling, general and administrative) from the
start of the fourth quarter of 2008 through the end of the second quarter of
2009. Other cost saving measures include salary reductions of 12% for all
officer and internal director level positions, 10% for other employees with
salaries exceeding $100,000 and a smaller percentage reduction for employees
with salaries ranging between $35,000 and $100,000. In addition, we have
reduced spending for non-labor costs such as travel, supplies and the like. We
anticipate that the workforce reductions, salary reductions and other cost
saving measures, combined with savings from our transition to Singapore will
provide aggregate annual expense savings of almost $5.0 million per year, of
which approximately $3.0 million will be operating expense savings and $2.0
million will be the factory cost savings discussed above under gross margin.

Implementation
of the cost reduction actions discussed above will not impact any of our
strategic growth programs; work on our common hardware platform for inspection,
next generation inspection technologies, or pursuit of new OEM contracts.

Electronic
Assembly

Research and
development expenses for our electronic assembly segment were $1.5 million in
the three months ended September 30, 2009, compared to $2.4 million in the
three months ended September 30, 2008. Research and development expenses for
our electronic assembly segment were $4.7 million in the nine months ended
September 30, 2009, compared to $6.7 million in the nine months ended September
30, 2008. The 39% and 29% decrease in research and development expenses in 2009
resulted from a more focused and efficient research and development effort due
to transition of systems related research and development to Singapore, as well
as transition costs incurred in 2008. Singapore transition costs classified as
research and development expense were $502,000 and $879,000 in the three and
nine months ended September 30, 2008. No transition costs were incurred in
2009. In addition, the cost reduction actions implemented in November 2008 and
February 2009 contributed to the lower level of spending in the three and nine
months ended September 30, 2009.

Selling,
general and administrative expenses for our electronic assembly segment were
$2.5 million in the three months ended September 30, 2009, compared to $3.4
million in the three months ended September 30, 2008. Selling, general and
administrative expenses for our electronic assembly segment were $8.5 million
in the nine months ended September 30, 2009, compared to $9.9 million in the
nine months ended September 30, 2008. Selling, general and administrative
expenses for the nine months ended September 30, 2009 includes an $800,000
provision for doubtful accounts related to a key distributor of our SMT system
products. The distributor remains in business, and is committed to paying us
the amount owed. The increase in the provision for doubtful accounts was mostly
offset by reductions in travel costs, commissions for third party sales
representatives resulting from the lower level of SMT system sales and lower
foreign sales office expenses resulting from favorable foreign exchange rates.

Semiconductor

Research and
development expenses for our semiconductor segment were $335,000 in the three
months ended September 30, 2009 compared to $406,000 in the three months ended
September 30, 2008. Research and development expenses for our semiconductor
segment were $872,000 in the nine months ended September 30, 2009 compared to
$1.3 million in the nine months ended September 30, 2008. The decline in
research and development expenses resulted from the cost reduction actions that
were implemented in November 2008 and February 2009, offset in part by a
$77,000 expense in the three and nine months ended September 30, 2009 for
abandoned patents.

22

---



Selling,
general and administrative expenses for our semiconductor segment were $312,000
in the three months ended September 30, 2009, compared to $354,000 in the three
months ended September 30, 2008. Selling, general and administrative expenses
for our semiconductor segment were $946,000 in the nine months ended September
30, 2009, compared to $1.1 million in the nine months ended September 30, 2008.
The decrease in selling, general and administrative expense in 2009 compared to
2008 was due to lower salary and consulting costs, and lower sales commissions
resulting from the reduced level of revenue.

Severance and Recruitment Costs

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

Additional
severance costs were incurred in November 2008 when we reduced our workforce by
20 employees in response to the weak global economic conditions. In February
2009, we further reduced our workforce by 24 positions in response to weakening
conditions in the global economy, our transition to Singapore and our decision
to consolidate manufacturing for our semiconductor products in our Minneapolis
facility.

All of the
severance costs related to the February 2008 transition to Singapore, and
related to the November 2008 and February 2009 workforce reductions have been
classified as severance and recruitment in our statement of operations. We
recognized a $32,000 benefit in the three months ended September 30, 2009 from
the reversal of a portion of our severance accrual. Severance expenses related
to these actions were $363,000 in the nine months ended September 30, 2009.
Severance and recruitment expenses related to these actions were $98,000 in the
three months ended September 30, 2008 and $476,000 in the nine months ended
September 30, 2008.

A summary of
our severance accruals follows:

|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|--------------------------- |  | ------------------------- | ---- | ------------------------------------ | - | ------------------------------------ | - | ----- | --- | ------------------------------------ | - | ------------------------------------ | - | ----- | -- | ----- | - | ---- | - | - | ---- | - |  | ---- | -
|                            |  | Electronic
 Assembly      |      | Semiconductor                        |  
|(In thousands)              |  | February
 2008
 Singapore |      | November
 2008
 workforce
 reduction |   | February
 2009
 workforce
 reduction |   | Total |     | November
 2008
 workforce
 reduction |   | February
 2009
 workforce
 reduction |   | Total |    | Total |  
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Balance, December 31, 2008  |  | $                         | 207  |                                      | $ | 104                                  |   | $     |    |                                      | $ | 311                                  |   | $     | 4  |       | $ |     |   | $ | 4    |   |  | 315  |  
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Cost incurred               |  |                           | 51   |                                      |   |                                     |   |       | 165 |                                      |   | 216                                  |   |       |   |       |   | 89   |   |   | 89   |   |  | 305  |  
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Payments made               |  |                           | (90  | )                                    |   | (104                                 | ) |       | (97 | )                                    |   | (291                                 | ) |       | (4 | )     |   | (8   | ) |   | (12  | ) |  | (303 | )
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Balance, March 31, 2009     |  | $                         | 168  |                                      | $ |                                     |   | $     | 68  |                                      | $ | 236                                  |   | $     |   |       | $ | 81   |   | $ | 81   |   |  | 317  |  
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Cost incurred               |  |                           | 29   |                                      |   |                                     |   |       | 36  |                                      |   | 65                                   |   |       |   |       |   | 25   |   |   | 25   |   |  | 90   |  
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Payments made               |  |                           | (131 | )                                    |   |                                     |   |       | (79 | )                                    |   | (210                                 | ) |       |   |       |   | (100 | ) |   | (100 | ) |  | (310 | )
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Balance, June 30, 2009      |  | $                         | 66   |                                      | $ |                                     |   | $     | 25  |                                      | $ | 91                                   |   | $     |   |       | $ | 6    |   | $ | 6    |   |  | 97   |  
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Cost incurred               |  |                           | (32  | )                                    |   |                                     |   |       |    |                                      |   | (32                                  | ) |       |   |       |   |     |   |   |     |   |  | (32  | )
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Payments made               |  |                           | (34  | )                                    |   |                                     |   |       | (2  | )                                    |   | (36                                  | ) |       |   |       |   | (1   | ) |   | (1   | ) |  | (37  | )
|                            |  |                           |      |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |      |   |   |      |   |  |      |  
|Balance, September 30, 2009 |  | $                         |     |                                      | $ |                                     |   | $     | 23  |                                      | $ | 23                                   |   | $     |   |       | $ | 5    |   | $ | 5    |   |  | 28   |  

No further
severance or transition expenses are anticipated in the three months ended
December 31, 2009.

23

---



Interest and Other

Interest
income and other includes interest earned on investments, realized gains and
losses from sales of investments and gains and losses associated with foreign
currency transactions and foreign currency swap agreements. Interest income and
other decreased in the three and nine months ended September 30, 2009 compared
to the same periods of 2008 due to lower rates of interest earned on invested
funds and lower invested balances of cash equivalents and marketable
securities, primarily resulting from repurchases of our common stock in 2008.
Interest income and other for the nine months ended September 30, 2008 also
includes a $166,000 unrealized loss on an available for sale equity security.
The decline in market value for this security was determined to be other than
temporary, resulting in recognition of the unrealized loss in our statement of
operations.

We anticipate
that interest income and other will decline in the fourth quarter of 2009,
compared to the same period of 2008, due to lower invested balances of cash and
marketable securities, as well as lower rates of interest earned on invested
funds.

Provision for Income Taxes and Effective
Income Tax Rate

We recorded an income tax benefit in the nine months ended September
30, 2009 at an effective tax rate of 43.7%, compared to an effective tax rate
of 50.9% in the nine months ended September 30, 2008. Our recorded income tax
benefit for the three and nine months ended September 30, 2009 includes a
$223,000 discrete benefit from reversal of a portion of our reserve for income
taxes resulting from the closing of a domestic statute of limitations. Our
recorded income tax benefit for the nine months ended September 30, 2009 also
includes a $547,000 discrete benefit from reversal of a portion of our reserve
for income taxes resulting from settlement of Internal Revenue Service audits
of our 2006 and 2007 federal income tax returns. Our recorded income tax
benefit for the three and nine months ended September 30, 2008 includes a
$257,000 discrete benefit from reversal of a portion of our reserve for income
taxes resulting from the closing of a domestic statute of limitations. The
change in the effective tax rate for 2009 is due to the aforementioned discrete
items, reductions in the level of non-deductible expenses and a small benefit
from the research and experimentation (R&D) tax credit, offset by higher
tax expense in foreign tax jurisdictions with tax rates differing from the U.S
federal statutory rate. No benefit from the R&D tax credit was recognized
in the nine months ended September 30, 2008 because the R&D tax credit had
not yet been signed into law.

We file income
tax returns in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. We are no longer subject to U.S. federal, state and local income
tax examinations by tax authorities for years before 2006. During the nine
months ended September 30, 2009, the internal revenue service completed audits
of our 2006 and 2007 federal income tax returns. Our settlement with the
internal revenue service did not have a material impact on our financial
condition.

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

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

In analyzing
the need for valuation allowances we considered that we had positive cumulative
profit through 2008 even without the exclusion of the $2.9 million
non-deductible goodwill impairment in 2008. We also considered our forecasts of
future profitability, the duration of statutory carry forward periods and tax
planning alternatives. We further evaluated our past cycles which tend to
average five years in length (from peak to trough) and also considered our five
year cumulative results, which also had strong profits. Finally, we evaluated
where these cumulative five year measures might be at the end of 2009 and
considered other positive evidence to conclude no incremental valuation
allowance was needed at September 30, 2009.

24

---



While we have
a history of profits, our recent results have been impacted by the recent global
economic slowdown, and we incurred a loss in the United States in 2008 and the
first nine months of 2009, where most of our net deferred tax assets are
recorded. Therefore, achievement of profitability in the United States will be
a significant factor in determining our continuing ability to carry these
deferred tax assets without recording a valuation allowance.

If future
results from our operations are less than projected, a valuation allowance may
be required to reduce the deferred tax assets. If we continue to incur losses,
and if our operations and outlook show no signs of further improvement by as
early as the fourth quarter of 2009, we may be required to record a full
valuation allowance against virtually all of our deferred tax assets, which could
have a material impact on our results of operations in the period in which it
is recorded.

Deferred tax
assets at September 30, 2009, include net operating loss carry forwards
incurred in the UK by CyberOptics Ltd., which was acquired in 1999. The utilization
of these net operating loss carry forwards is dependent on CyberOptics Ltd.s
ability to generate sufficient UK taxable income during the carry forward
period.

Order Rate and Backlog

Our orders
totaled $7.5 million in the three months ended September 30, 2009 compared to
$7.9 million in the three months ended June 30, 2009 and $11.3 million in the
three months ended September 30, 2008. Backlog totaled $5.4 million at
September 30, 2009, $6.4 million at June 30, 2009 and $5.2 million at September
30, 2008. The scheduled shipment (or estimated timing of revenue for systems
recognized upon acceptance) for backlog at September 30, 2009 is as follows:

|                            |  |         |       | 
|--------------------------- |  | ------- | ----- | 
|(In
 thousands)             |  | Backlog |      
|                            |  |         |       | 
|4th
 Quarter 2009           |  | $       | 3,741 | 
|1st
 Quarter 2010 and after |  |         | 1,611 | 
|Total
 backlog              |  | $       | 5,352 | 

LIQUIDITY AND CAPITAL RESOURCES

Our cash and
cash equivalents increased by $194,000 in the nine months ended September 30,
2009 primarily due to sales and maturities of marketable securities, net of
purchases, of $6.8 million and proceeds from issuance of common stock under our
employee stock purchase plan and exercise of stock options of $164,000, offset
in part by cash used by operating activities of $6.2 million, and capital
purchases of $630,000. 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 decreased
$7.0 million to $22.8 million as of September 30, 2009 from $29.8 million as of
December 31, 2008, resulting primarily from our losses from operations in the
nine months ended September 30, 2009. Nevertheless, our cash consumption
moderated to less than $700,000 during the three months ended September 30,
2009.

Operations
used $6.2 million of cash in the nine months ended September 30, 2009. Cash
used by operations included a net loss of $5.2 million, which included $1.1
million of net non-cash expenses for depreciation and amortization, provision
for doubtful accounts, deferred taxes, foreign currency transactions, stock
compensation costs and realized gains on available for sale securities. Changes
in operating assets and liabilities using cash included increases in accounts
receivable of $992,000 and other assets of $278,000 and decreases in accrued
expenses of $2.1 million. Changes in operating assets and liabilities providing
cash included decreases in inventories of $658,000 and increases in accounts
payable of $696,000. The increase in accounts receivable was due to higher
sales levels in the third quarter of 2009, compared to the fourth quarter of
2008. Other assets were higher due to anticipated income tax refunds resulting
from our losses in the first nine months of 2009. The decrease in accrued
expenses resulted from lower levels of income tax reserves resulting from the
closing of a domestic statute of limitations and settlement of Internal Revenue
Service audits of our 2006 and 2007 federal income tax returns, lower warranty
accruals resulting from the lower level of sales in the first nine months of
2009 and payment of accrued severance. Inventories were lower due to reduced
material purchases in the first half of the year in response to sharply lower
sales levels and the sharp 65% sequential increase in quarterly sales in the third
quarter of 2009. Accounts payable were higher due to the timing of inventory
purchases and a conscious effort on our part to extend the timing of vendor
payments.

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We used
$346,000 of cash from operations in the nine months ended September 30, 2008.
Cash used by operations included a net loss of $614,000, which included $2.3
million of net non-cash expenses for depreciation and amortization, provision
for doubtful accounts, foreign currency transactions, stock compensation
expense and an unrealized loss on an available for sale equity security.
Changes in operating assets and liabilities using cash included increases in
accounts receivable of $554,000 and other assets of $266,000, decreases in
accrued expenses of $660,000, accounts payable of $527,000 and advance customer
payments of $154,000, offset in part by a $139,000 decrease in inventory.

Investing
activities provided $6.2 million of cash in the nine months ended September 30,
2009 compared to $6.5 million of cash during the same period in 2008. Changes
in the level of investment in marketable securities resulting from purchases,
maturities and sales of those securities generated $6.8 million of cash in 2009
and $8.3 million of cash during the same period in 2008. We used $630,000 of
cash for the purchase of fixed assets and capitalized patent costs in the nine
months ended September 30, 2009, compared to using $1.8 million of cash for
these items in the nine months ended September 30, 2008.

Financing
activities provided $164,000 of cash in the nine months ended September 30,
2009 from issuance of common stock under our employee stock purchase plan and
the exercise of stock options. Financing activities used $20.7 million of cash
in the nine months ended September 30, 2008, mainly for the repurchase of our
common stock. Proceeds from the issuance of common stock under our employee
stock purchase plan and the exercise of stock options totaled $241,000 in the
nine months ended September 30, 2008.

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, 2008. The only significant change
to our contractual obligations in the nine months ended September 30, 2009 is
an $886,000 decrease in our reserve for income taxes resulting from settlement
of our 2006 and 2007 federal income tax audits, and expiration of a domestic
statute of limitations. At the present time, we have no material commitments for
capital expenditures. Purchase commitments for inventory can vary based on the
volume of revenue and resulting inventory requirements.

Our cash, cash
equivalents and marketable securities totaled $22.8 million at September 30,
2009. We believe that our available balances of cash, cash equivalents and
marketable securities will be adequate to fund our cash flow needs for the
foreseeable future.

At September
30, 2009, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the
purpose of establishing off-balance sheet arrangements or other contractually
narrow or limited purposes. 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

We believe
that inflation has not had any significant effect on operations. Virtually all
of our international export sales are negotiated, invoiced and paid in U.S.
dollars. Accordingly, although currency fluctuations do not significantly
affect our revenue and income, they can influence the price competitiveness of
our products and the willingness of existing and potential customers to
purchase our products.

26

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FAIR VALUE MEASUREMENTS

We value our
cash equivalents and marketable securities based on a three-level fair value
hierarchy. The fair value hierarchy gives the highest priority to quoted prices
in active markets for identical assets or liabilities (Level 1). The next
highest priority is based on quoted prices for similar assets or liabilities in
active markets or quoted prices for identical or similar assets or liabilities
in non-active markets or other observable inputs (Level 2). The lowest priority
is given to unobservable inputs (Level 3).

The following
table provides information regarding fair value measurements for our cash
equivalents and marketable securities as of September 30, 2009 according to the
three-level fair value hierarchy:

|                                                       |  |                              |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|------------------------------------------------------ |  | ---------------------------- | ------ | ----------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                                       |  |                              |        |                                                                   | Fair Value Measurements at Reporting Date Using |                                                 
|(In
 thousands)                                        |  | Balance
 September 30,
 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                 | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                                       |  |                              |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|Cash
 equivalents                                      |  | $                            | 1,964  |                                                                   | $                                               |                                                 |  | $                                            | 1,964  |  | $ |  | 
|U.S.
 government and agency obligations                |  |                              | 15,021 |                                                                   |                                                 |                                                 |  |                                              | 15,021 |  |   |  | 
|Corporate debt securities and certificates
 of deposit |  |                              | 2,747  |                                                                   |                                                 |                                                 |  |                                              | 2,747  |  |   |  | 
|Asset backed
 securities                               |  |                              | 238    |                                                                   |                                                 |                                                 |  |                                              | 238    |  |   |  | 
|Equity
 securities                                     |  |                              | 35     |                                                                   |                                                 | 35                                               |  |                                              |       |  |   |  | 
|Totals                                                 |  | $                            | 20,005 |                                                                   | $                                               | 35                                               |  | $                                            | 19,970 |  | $ |  | 

Our foreign
currency swap agreements are structured to mature on the last day of each
quarter. The fair value associated with these agreements is inconsequential and
represents a level 2 measurement.

RECENT ACCOUNTING DEVELOPMENTS

See Note 15 to
the accompanying interim condensed consolidated financial statements for a summary
of recent accounting developments.

ITEM 3 -
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not
applicable.

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, 2009, there has been no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

27

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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, 2008, which could materially
affect our business, financial condition or future results.

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             

28

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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:
 November 5, 2009 |                                                            

29

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