# SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, D.C. 20549

# FORM 10-Q

(Check One)

| | [X] |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934
| | --- |  | ----------------------------------------------------------------------------------------

For the quarterly
period ended September 30, 2003

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

For the transition
period from ________________ to ________________

Commission file number
0-16577

# CYBEROPTICS
CORPORATION

(Exact name of
registrant as specified in its charter)

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

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

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

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

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

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

At November 11, 2003,
there were 8,286,151 shares of the registrant's Common Stock, no par value,
issued and outstanding.



---

PART I. FINANCIAL
INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL
STATEMENTS

CYBEROPTICS CORPORATION
                                                 CONSOLIDATED BALANCE SHEETS
                                                       (In thousands)

|                                            | September 30, 2003
(Unaudited) |  | DEC. 31, 2002
|------------------------------------------- | ------------------------------ |  | -------------
|                                           
|ASSETS                                     
|                                           
|Cash and cash equivalents                   |                                |  |              
|Marketable securities                       |                                |  |              
|Accounts receivable, net                    |                                |  |              
|Inventories                                 |                                |  |              
|Income tax receivable                       |                                |  |              
|Other current assets                        |                                |  |              
|                                           
|Total current assets                        |                                |  |              
|                                           
|Marketable securities                       |                                |  |              
|Equipment and leasehold improvements, net   |                                |  |              
|Intangible and other assets, net            |                                |  |              
|Goodwill, net                               |                                |  |              
|                                           
|Total assets                                |                                |  |              
|                                           
|                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY        |                                | 
|Accounts payable                            |                                |  |              
|Accrued expenses                            |                                |  |              
|                                           
|Total current liabilities                   |                                |  |              
|                                           
|Commitments and contingencies               |                                | 
|Stockholders' equity:                       |                                | 
|Preferred stock, no par value, 5,000 shares |                                | 
|authorized, none outstanding                |                                | 
|Common stock, no par value, 37,500 shares   |                                | 
|authorized, 8,282 and 8,190 shares issued   |                                | 
|and outstanding, respectively               |                                |  |              
|Retained earnings (deficit)                 |                                |  |              
|Accumulated other comprehensive loss        |                                |  |              
|                                           
|Total stockholders' equity                  |                                |  |              
|                                           
|Total liabilities and stockholders' equity  |                                |  |              
|                                           

SEE THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



---

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

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

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

SEE THE ACCOMPANYING NOTES TO
INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



---

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

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

SEE THE ACCOMPANYING NOTES TO
INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



---

CYBEROPTICS CORPORATION

NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS

1.            INTERIM
REPORTING:

The interim consolidated financial
statements presented herein as of September 30, 2003, and for the nine and three month
periods ended September 30, 2003 and 2002, are unaudited; however, in our opinion, the
interim consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of financial position,
results of operations and cash flows for the periods presented.

The results of operations for the
nine and three month periods ended September 30, 2003, do not necessarily indicate the
results to be expected for the full year. The December 31, 2002, consolidated balance
sheet data was derived from audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles. These
unaudited interim consolidated financial statements should be read in conjunction with
our consolidated financial statements and notes thereto, contained in our Annual Report
on Form 10-K for the year ended December 31, 2002.

2.    ACCOUNTING FOR STOCK-BASED
COMPENSATION:

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

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

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

In 2003 and 2002, no tax benefit
provision was applied to the fair value expense calculated under SFAS No. 123 due to
establishing valuation allowances on deferred tax assets during the three month period
ended September 30, 2002. The assumptions used to calculate the fair value of options
granted are evaluated and revised, as necessary, to reflect market conditions and our
experience.



---

3.  OTHER
FINANCIAL STATEMENT DATA (IN THOUSANDS):

Inventories consisted of the
following:

|                           | September 30,
2003 | December 31,
2002
|-------------------------- | ------------------ | -----------------
|
|Raw materials              |                    |                  
|Work in process            |                    |                  
|Finished goods             |                    |                  
|                           |                   
|Allowance for obsolescence |                    |                  
|                           |                   
|Total inventories          |                    |                  
|                           |                   

Intangible and other assets include
the following:

|                         | September 30,
2003 | December 31,
2002
|------------------------ | ------------------ | -----------------
|
|Gross intangibles:       |                    |                  
|Developed technology     |                    |                  
|Patents and trademarks   |                    |                  
|Customer Base            |                    |                  
|Other                    |                    |                  
|                         |                   
|                         |                    |                  
|                         |                   
|Accumulated amortization |                    |                  
|                         |                   
|Total intangibles        |                    |                  
|and other assets, net    |                    |                  
|                         |                   

During the third quarter of
2003, we accelerated the amortization of certain developed technology established as the
result of the acquisition of HAMA Laboratories, Inc. in 1999. The asset values were
originally established through an independent appraisal, and related to product lines and
core technologies that were determined to be non-strategic during the third quarter of
2003. These general-purpose sensor product lines will be discontinued over the next few
quarters, and consequently, amortization of the developed technology was accelerated. The
acceleration of the amortization resulted in approximately $632,000 of additional
amortization expense during the third quarter of 2003.

We provide for the estimated cost of
product warranties at the time revenue is recognized. While we engage in extensive
product quality programs and processes, including actively monitoring and evaluating the
quality of component suppliers, warranty obligations are affected by product failure
rates, material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery costs
differ from our estimates, revisions to the estimated warranty liability would be
required. At the end of each reporting period we revise our estimated warranty liability
based on these factors. A reconciliation of the changes in our estimated warranty
liability is as follows:

|                                   | 
|---------------------------------- | 
|
|                                  
|Nine months ended September 30,    | 
|                                  
|Balance at the beginning of period | 
|Accruals for Warranties            | 
|Settlements made during the period | 
|                                  
|Balance at the end of period       | 
|                                  



---

4.  GEOGRAPHIC REVENUE INFORMATION:

Export sales for the nine months
ended September 30, 2003 and the nine months ended September 30, 2002 amounted to 78% and
64% of revenues, respectively. For the three months ended September 30, 2003 and the
three months ended September 30, 2002, export sales amounted to 81% and 70% of revenues.
All or our export sales are negotiated, invoiced and paid in U.S. dollars. Export sales
by geographic area are summarized as follows:

|                   | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------ | -------------------------------- | -------------------------------
|
|                  
|Americas           |                                  |                                
|Europe             |                                  |                                
|Asia               |                                  |                                
|Other              |                                  |                                
|                  
|Total export sales |                                  |                                
|                  

5.  NET INCOME (LOSS) PER
SHARE:

Basic net income per share has been
computed using the weighted average number of shares outstanding during the period
presented. The diluted net income per share includes the effect of common stock
equivalents for each period. Weighted average options to purchase 398,400 and 178,400
shares of common stock were not included in the computation of diluted net loss per share
for the three and nine month periods ended September 30, 2003, and 87,900 and 358,800
weighted average options were not included in the computation of diluted net loss per
share for the three and nine month periods ended September 30, 2002, as their effect was
anti-dilutive due to our net loss. Weighted average shares for which the option price
exceeds the average market price were 1,131,000 and 1,395,000 for the three and nine
month periods ended September 30, 2003, respectively. Weighted average shares for which
the option price exceeds the average market price were 1,550,000 and 1,178,000 for the
three and nine month periods ended September 30, 2002, respectively.

6.            COMPREHENSIVE
INCOME (LOSS):

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

During the three and nine month
periods ended September 30, 2003, total comprehensive income (loss) amounted to
($877,000) and ($3,848,000), respectively. During the three and nine month periods ended
September 30, 2002, total comprehensive income (loss) amounted to ($5,351,000) and
($12,338,000), respectively. Accumulated other comprehensive loss at September 30, 2003
and December 31, 2002 was ($407,000) and ($92,000), respectively.

7.            INCOME
TAXES:

During the third quarter of 2002, we
concluded that a valuation allowance against all of our deferred tax assets was
appropriate. A deferred tax asset generally represents future tax benefits to be received
when certain expenses and losses previously recognized in our U.S. GAAP-based financial
statements become deductible under applicable income tax laws. Consequently, realization
of a deferred tax asset is dependent on future taxable income against which these
deductions can be applied. In accordance with Statement of Financial Accounting Standards
No. 109, as the result of cumulative U.S. based operating losses incurred over the past
three years and continued weakness in the markets we serve and the resulting impact on
order rates, we reduced our effective tax rate in the year ended December 31, 2002 to
reflect only a current benefit resulting from the ability to carry-back U.S. based
operating losses to prior periods and recorded a valuation allowance against deferred tax
assets.

During the three and nine month
periods ended September 30, 2003, we did not record a tax benefit on U.S. based operating
losses, and do not expect to record tax expense or benefits on U.S. based operating
results until we are consistently profitable on a quarterly basis. At that time, the
valuation allowance will be reassessed and could be eliminated, resulting in the
recognition of the deferred tax assets. Tax expense of $13,000 and $202,000 recorded
during the three and nine month periods ended September 30, 2003 relates to income
generated by foreign subsidiaries. During the three month period ended September 30, 2002
we recorded a tax provision of $3,331,000, primarily reflecting a valuation allowance
established against deferred tax assets. During the nine month period
ended September 30, 2002, we recorded a tax benefit of $649,000, reflecting the ability
to carry-back losses generated during 2002 to prior years.



---

8.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

We enter into foreign currency swap
agreements to hedge short term inter-company financing transactions with our subsidiary
in the United Kingdom. These currency swap agreements are structured to mature on the
last day of each quarter and are designated as cash flow hedges. At June 30, 2003,
CyberOptics had one open swap agreement that was purchased on that date. As a result,
there were no material unrealized gains or losses as of September 30, 2003. During the
nine month period ended September 30, 2003, we recognized a loss of approximately
$291,000 from the settlement of foreign currency swap agreements which offset the
$131,000 translation gain on the underlying inter-company balance.

Our foreign currency swap agreements
contain credit risk to the extent that our bank counter-parties may be unable to meet the
terms of the agreements. We minimize such risk by limiting our counter-parties to major
financial institutions. We do not expect material losses as a result of defaults by other
parties.

9.            RESTRUCTURING
AND SEVERANCE:

In September 2003, we incurred
approximately $463,000 of severance and costs associated with restructuring measures.
Cost reduction measures included workforce reductions associated with downsizing direct
sales and marketing resources in North America and Europe, the intended consolidation of
UK R&D operations into our Minneapolis headquarters and other general cost reduction
measures. Severance costs were associated with a planned workforce reduction of 20
people. Of these costs, approximately $27,000 were paid as of September 30, 2003.
Severance and associated costs of $436,000 were accrued as of September 30, 2003. The
majority of these costs will be paid during the fourth quarter of 2003 and the first
quarter of 2004. We anticipate that there will be an additional restructure charge in the
fourth quarter of 2003 related primarily to facility exit costs.

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

In January 2002, we incurred
approximately $847,000 of severance and costs associated with cost reduction measures.
Cost reduction measures included a workforce reduction, discretionary spending reductions
and the consolidation of semiconductor product manufacturing in Portland, Oregon.
Severance costs were associated with a workforce reduction of 22 people. Approximately
$655,000 of these costs were paid as of December 31, 2002. Substantially all of these
costs were paid as of January 31, 2003, when we bought-out the remaining obligation under
our Redwood City, California lease.

In June 2002, we incurred
approximately $800,000 of severance and related costs associated with cost reduction
measures. Cost reduction measures included a workforce reduction, and discretionary
spending reductions. Severance costs were associated with a workforce reduction of 48
people. Approximately $640,000 of these costs were paid as of December 31, 2002.
Substantially all of these costs were paid as of June 30, 2003.

10.            TECHNOLOGY
TRANSFER AND LICENSE AGREEMENT:

In March 2003, we transferred to the
Optical Gaging Products Division of Quality Vision International, Inc. (QVI) the rights
and technology necessary to manufacture our Digital Range Sensors (DRS). In addition, we
granted QVI a non-exclusive license to the intellectual property associated with this
product line and sold a portion of our inventory as part of this transaction. QVI had
been the primary customer for DRS sensors prior to this agreement as part of a separate
1999 agreement. As part of the agreement, QVI paid a one-time technology transfer fee and
a pre-paid non-refundable royalty fee covering a specified number of sensors built by OGP
for a period of five years from the effective date of the contract. As a result of this
transaction, we recorded a $645,000 gain in the three month period ended March 31, 2003.

11.            RECENT
ACCOUNTING DEVELOPMENTS:

In November 2002, the EITF reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliveries (EITF 00-21).
EITF 00-21 provides guidance on how to account for arrangements that involve the delivery
of performance of multiple products, services and/or rights to use assets. The provisions
of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Adoption of EITF 00-21 did not have a material impact on either our
financial position or results of operations.



---

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

CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS:

The following is managements
discussion and analysis of certain significant factors that have affected our results and
financial position during the periods included in the accompanying financial statements
or that could have an impact on future results. This discussion should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31, 2002 and
our interim consolidated financial statements and associated notes.

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

| | o |  | We
operate in a very cyclical market  the electronics capital equipment marketthat
has experienced a severe downturn during the past two and a half years. While market
conditions have improved during 2003, we are not able to predict when a sustainable
recovery will occur. If the market conditions deteriorate, we likely will not achieve our
operating objectives and may need to make further adjustments to our expenses and
operations to retain adequate cash to finance operations for the long term.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | o |  | We
are dependent on two original equipment manufacturer customers for a large portion of our
revenue. If those customers are unsuccessful selling the products into which our sensors
are incorporated, design their products to function without our sensors, purchase sensors
from other suppliers, or otherwise terminate their relationships with us, our results of
operations would be significantly negatively affected.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | During
the first nine months of 2003 approximately 29% (27% in fiscal 2002) of our total revenue
was generated by sales of a single SMT Systems product line, the SE 300. If we are not
successful in continuing to sell and differentiate this product line relative to our
competition, our results of operations would be significantly negatively affected.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | We
generate more than half of our revenue (approximately 78% in the first nine months of
2003 and 64% in fiscal 2002) from export sales. Our export sales are subject to many of
the risks of international operations, including changes in economic and business climate
in foreign countries that affect the business health of our customers, changes in
exchange rates that affect the willingness of customers to purchase our products,
different laws that may affect our ability to protect our intellectual property, and the
expense of long-distance commerce.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | o |  | Our
surface mount technology systems product group uses a different distribution network and
has different margins than our electronic assembly sensor product group and, to the
extent it constitutes a larger portion of our business, our profitability may be
affected.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | We
compete with large multinational systems companies in sales of our surface mount
technology systems products, many of which are able to take advantage of greater
financial resources and larger sales distribution networks.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | o |  | We
use outside contractors to manufacture the components used in some of our products and
some of the components we order require significant lead times that could effect our
ability to sell our products if not available.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | We
plan to introduce a number of new products during fiscal 2003 and 2004, and if those
introductions are delayed, our revenue and profitability could be negatively affected.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

CRITICAL ACCOUNTING POLICIES AND
ESTIMATES:

The preparation of the financial
information contained in this 10-Q requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We evaluate these estimates on an
ongoing basis, including those related to allowances for doubtful accounts, for warranty
expense, and for obsolete inventory, the carrying value and any impairment of intangible
assets, and the valuation allowance for deferred tax assets. These critical accounting
policies are discussed in more detail in the Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Form 10-K for the year
ended December 31, 2002.

We assess the carrying value of
long-lived assets, including developed technology, whenever events or changes in
circumstances indicate the carrying value may not be recoverable. During the three months
ended September 30, 2003, we determined that certain general-purpose sensor product lines
will be discontinued over the next few quarters and that the carrying value should be
adjusted. Consequently, we accelerated the amortization of these assets and will fully
amortize over the next two quarters as final revenues and gross profits are realized.

RESULTS OF OPERATIONS:

Revenues

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

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

Our revenues from EAS
products increased 102% during the nine months ended September 30, 2003 from the nine
months ended September 30, 2002 and increased 77% during the three months ended September
30, 2003 from the three months ended September 30, 2002. These increased revenues reflect
increased order rates from our two largest EAS customers. Although these order rates have
not returned to rates in place prior to the time these customers suspended or
significantly decreased their purchases in the second half of 2001, we believe they
reflect some improvement in the market for pick and place machines. Our two largest EAS
customers accounted for approximately 38% of total revenues for the nine months ended
September 30, 2003, and approximately 22% of revenues for the comparable period in 2002.
These customers accounted for approximately 39% of revenues in the third quarter of 2003,
compared to approximately 30% in the third quarter of 2002.

Our revenues from sales of
semiconductor products decreased 18% during the nine months ended September 30, 2003 from
the nine months ended September 30, 2002 and decreased 29% during the three months ended
September 30, 2003 from the three months ended September 30, 2002. Decreasing revenue in
2003 from 2002 is primarily due to the continuation of weak demand in the overall
semiconductor capital equipment market, which began in early 2001. However, decreased
revenues are also attributable to increased use by customers of alternative technologies
relative to our reflective wafer mapping and frame grabber products.

Our revenues from sale of end-user
systems increased 27% during the nine months ended September 30, 2003 from the nine
months ended September 30, 2002 and increased 50% during the three months ended September
30, 2003 from the three months ended September 30, 2002. The revenue improvements during
2003 are the result of several new inspection systems and enhancements that we have
released over the past 24 to 36 months and increased sales of products to Electronic
Manufacturing Services (EMS) and Original Design Manufacturing Services (ODM) customers
located in Asia  the largest market for new circuit board assembly production
capacity. During the three months ended September 30, 2003 our largest end-user systems
customer, located in Asia, significantly increased its order rate to expand production
capacity, which generated a significant portion of our revenue growth. In addition, we
continue to have success in selling end-user systems products to other new Asian EMS and
ODM customers. We do not anticipate orders from our largest customer to continue at third quarter levels in the fourth
quarter of 2003, and consequently, we would expect end-user systems revenues to be
somewhat lower in the fourth quarter of 2003 compared to the third quarter of 2003.



---

International revenues comprised
approximately 78% and 64% of total revenues during the nine month periods ended September
30, 2003 and 2002, respectively, and approximately 81% and 70% of revenues during the
three month periods ended September 30, 2003 and 2002, respectively. The international
markets in Asia, Japan and Europe account for a significant portion of the capital
equipment market for the manufacture of electronics, the primary market for our EAS
sensors and End-User systems product lines. Revenues generated from products used
primarily for SMT electronic assembly production (revenues from OEM sensors and End-User
systems) were approximately 83% and 72% of revenues for the nine month periods ended
September 30, 2003 and 2002, respectively, reflecting the level of orders from our two
largest EAS customers and growth in end-user Systems revenues.

Gross Margin

Gross margin for the nine months
ended September 30, 2003 increased as a percent of revenues to 50%, compared to 39%
during the nine months ended September 30, 2002. For the three months ended September 30,
2003, gross margin increased to 51% of revenues compared to 44% during the three months
ended September 30, 2002. Gross margin is highly dependent on the level of revenues and
resulting production levels over which to spread fixed manufacturing costs such as
facilities and other compensation and non-compensation expenses that do not vary with
activity levels. In addition, with higher production volumes, manufacturing processes
become more efficient and reduce the overall cost of producing products for sale. Revenue
levels were 36% higher in the nine month period ended September 30, 2003 than during the
same period in 2002, and 41% higher in the three month period ended September 30, 2003
than during the same period in 2002, and consequently, gross margins were favorably
impacted. In addition, increased revenues from EAS sensors as a percentage of total
revenues, significantly reduced obsolete inventory expense in the nine and three month
periods ended September 30, 2003 compared to the year earlier period and cost reduction
actions, including workforce reductions, contributed to higher gross margins.

Price pressure on both SMT systems
and EAS sensor products has had a negative impact on gross margins in 2003 compared to
2002. This price pressure is the result of weak market conditions in the SMT electronic
assembly capital equipment market resulting in many equipment suppliers competing for
fewer sales opportunities. There can be no assurance that selling prices will fully
recover when the electronic assembly market improves.

Research and Development

Research and development expenses
decreased 16% to $5.3 million during the nine months ended September 30, 2003 from the
nine months ended September 30, 2002 and were flat at 1.7 million in the three month
periods ended September 30, 2003 and 2002. As a percentage of revenue, research and
development expenses decreased to 22% during the nine months ended September 30, 2003
from 35% during the comparable period in 2002 and decreased to 16% in the third quarter
of 2003 compared to 23% in the same period in 2002. Research and development expenses
were maintained at relatively high levels during the first half of 2002 as we continued
to fund new product development on important new products even as revenue levels
declined. Cost reduction measures initiated in the second quarter of 2002 enabled us to
significantly reduce research and development expenses, which have since been maintained
at approximately current levels.

Research and development expenses
during the nine months ended September 30, 2003 were primarily focused on continued
engineering development of the new high speed solder paste inspection system, the SE 300,
and KS series AOI systems, next generation LaserAlign products, on-head linescan cameras,
enhancements to the semiconductor wafer mapping sensor product family and other new
sensors for the SMT and Semiconductor markets. Customer funded research and development
is recognized as a reduction of research and development expense. During the nine months
ended September 30, 2003, customer funded research and development recognized as a
reduction of research and development expense totaled approximately $14,000 compared to
approximately $75,000 during the nine months ended September 30, 2002.

Selling, General and Administrative
Expenses

Selling, general and administrative
expenses decreased 14% to $8.8 million during the nine month period ended September 30,
2003 compared to $10.3 million during the nine months ended September 30, 2002, and
increased 4% to $3.1 million during the three months ended September 30, 2003 from the
three months ended September 30, 2002. As a percentage of revenue, selling, general and
administrative expenses decreased to 36% during the nine month period ended September 30,
2003 from 57% in 2002, and for the third quarter decreased to 30% in 2003 from 40% in
2002. Decreased selling, general and administrative expenses during the first nine months
of 2003 as compared to 2002 are primarily the result of cost reduction measures
implemented in early 2002, which primarily included workforce reductions and related
costs and reductions in other discretionary spending. Increased selling, general and
administrative expenses during the third quarter of 2003 as compared to the third quarter
of 2002 are primarily due to increased variable selling costs associated with increased
end-user systems revenues.



---

Restructuring and Severance Costs

We have implemented a series of
workforce reductions, closed our facility in California, downsized other facilities and
made other reductions in discretionary spending designed to reduce the losses and
negative cash flow resulting from the severe decline in our revenues caused by the
depressed capital equipment markets for suppliers to electronics manufacturing. In
addition, we are in the process of implementing a planned consolidation of UK R&D
operations to our Minneapolis headquarters and making additional expense reductions, some
of which were recorded in September 2003 but more of which will be recorded as an
additional restructuring charge in the fourth quarter of 2003. Two of those workforce
reductions were completed during the year ended December 31, 2001 and four in 2002 and
2003 (discussed below):

In September 2003, we incurred
approximately $463,000 of severance and costs associated with restructuring measures.
Cost reduction measures included workforce reductions associated with downsizing direct
sales and marketing resources in North America and Europe, the intended consolidation of
UK R&D operations into our Minneapolis headquarters and other general cost reduction
measures. Severance costs were associated with a planned workforce reduction of 20
people. Of these costs, approximately $27,000 were paid as of September 30, 2003.
Severance and associated costs of $436,000 were accrued as of September 30, 2003. The
majority of these costs will be paid during the fourth quarter of 2003 and the first
quarter of 2004. We anticipate that there will be an additional restructure charge in the
fourth quarter of 2003 related primarily to facility exit costs.

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

In January 2002, we incurred
approximately $847,000 of severance and costs associated with cost reduction measures.
Cost reduction measures included a workforce reduction, discretionary spending reductions
and the consolidation of semiconductor product manufacturing in Portland, Oregon.
Severance costs were associated with a workforce reduction of 22 people. Approximately
$655,000 of these costs were paid as to December 31, 2002. Substantially all of these
costs were paid as of January 31, 2003, when we bought-out the remaining obligation under
our Redwood City, California lease.

In June 2002, we incurred
approximately $800,000 of severance and related costs associated with cost reduction
measures. Cost reduction measures included a workforce reduction, and discretionary
spending reductions. Severance costs were associated with a workforce reduction of 48
people. Approximately $640,000 of these costs were paid as of December 31, 2002.
Substantially all of these costs were paid as of June 30, 2003.

Amortization of Intangible Assets

Amortization of acquired intangible
assets was approximately $1.5 million in the nine month period ended September 30, 2003
compared to $843,000 in the nine month period ended September 30, 2002, and $913,000 in
the three month period ended September 30, 2003 compared to $281,000 in the three month
period ended September 30, 2002. The amortization expense was attributable to developed
technology, patents and trademarks and other assets acquired from HAMA Laboratories Inc.
during the second quarter of 1999 and from Imagenation Corporation during the fourth
quarter of 2000.

During the third quarter of 2003, we
accelerated the amortization of certain intangible assets established as the result of
the acquisition of HAMA Laboratories, Inc. in 1999. The asset values were originally
established through an independent appraisal, and related to product lines and core
technologies that were determined to be non-strategic during the third quarter of 2003.
These general-purpose sensor product lines will be discontinued over the next few
quarters, and consequently, amortization of the developed technology was accelerated. The
acceleration of the amortization resulted in approximately $632,000 of additional
amortization expense during the third quarter of 2003. Amortization of intangible assets
is expected to approximate $300,000 in the fourth quarter of 2003, $265,000 in the first
quarter of 2004 and approximately $207,000 per quarter beginning in the second quarter of
2004 and over the remaining life of the intangible assets. Amortization of the
intangibles during the next two quarters reflects anticipated final revenues and gross
profit from discontinued products.

Interest and Other

Interest income and other primarily
includes interest earned on investments. Interest income declined during the nine and
three month periods ended September 30, 2003 compared to the same nine and three month
periods in 2002 as a result of a lower investment balance and declining interest rates.
In addition, during the nine month period ended September 30, 2002, we reduced the
carrying value of a $1.5 million loan to Avanti Optics Corporation, a related party, by
our ownership percentage in the cumulative losses of Avanti, which resulted in a charge
of $1,055,000. Foreign currency translation charges and certain other expenses are also
included in interest income and other.



---

Provision for Income Taxes and
Effective Income Tax Rate

During the third quarter of 2002, we
concluded that a valuation allowance against all of our deferred tax assets was
appropriate. A deferred tax asset generally represents future tax benefits to be received
when expenses and losses previously recognized with respect to our US operations become
deductible under applicable income tax laws. Realization of a deferred tax asset is
dependent on future taxable income against which these deductions can be applied. In
accordance with Statement of Financial Accounting Standards No. 109, as the result of
cumulative U.S. based operating losses incurred over the past three years and continued
weakness in the markets we serve and the resulting impact on order rates, we reduced our
effective tax benefit rate in the year ended December 31, 2002 to reflect only a current
benefit resulting from the ability to carry-back U.S. based operating losses to prior
periods and recorded during the third quarter of 2002 a valuation allowance equal to the
entire balance of our deferred tax assets. Because we had no ability to carry-back losses
generated after December 31, 2002, during the nine months ended September 30, 2003, we
did not record a tax benefit on U.S. based operating losses, and do not expect to record
tax expense or benefits on U.S. based operating results until we are consistently
profitable on a quarterly basis. At that time, the valuation allowance will be reassessed
and could be eliminated, resulting in the recognition of the deferred tax assets as
income during the period the allowance is eliminated.

Tax expense of $13,000 and $202,000
recorded during the three and nine month periods ended September 30, 2003 relates to
income generated by foreign subsidiaries. During the three month period ended September
30, 2002 we recorded a tax provision of $3,331,000, primarily reflecting a valuation
allowance established against deferred tax assets. During the nine month period ended
September 30, 2002, we recorded a tax benefit of $649,000, reflecting the ability to
carry-back losses generated during 2002 to prior years.

Order Rate and Backlog

Our orders totaled $25.5 million
during the nine month period ended September 30, 2003 compared to $19.2 million during
the nine month period ended September 30, 2002. For the three month period ended
September 30, 2003, orders totaled $9.3 million compared to $7.0 million for the three
month period ended September 30, 2002. Backlog totaled $3.9 million and $4.3 million at
September 30, 2003 and 2002, respectively. The scheduled shipment of the September 30,
2003 backlog is as follows (in thousands):

|                           | 
|-------------------------- | 
|
|4th Quarter 2003           | 
|1st Quarter 2004 and after | 
|                           | 
|Total backlog              | 

LIQUIDITY AND
CAPITAL RESOURCES

Our cash and cash equivalents
decreased by $623,000 during the nine months ended September 30, 2003, primarily because
of the purchase of $3.0 million of marketable securities, net of maturities of marketable
securities during the nine month period offset by $1.4 million of cash generated by
operating activities and $582,000 of cash generated from financing activities. Our cash
and cash equivalents fluctuate in part because of maturities of marketable securities and
investment of cash balances resulting from those maturities, or from other sources of
cash, in additional marketable securities. Accordingly, we believe the combined balances
of cash and marketable securities provide a more reliable indication of our available
liquidity. Our combined balances of cash and marketable securities increased $2.4 million
to $23.2 million as of September 30, 2003 from $20.8 million as of December 31, 2002.

We generated $1.4 million of cash in
operations during the first nine months of 2003. We used cash in operations to fund a net
loss of $3.5 million, which included a $645,000 gain from a technology transfer and
license agreement and $3.2 million of non-cash expenses for depreciation and amortization
and other non-cash items, and to fund a $3.2 million increase in receivables and a
$117,000 increase in other assets.. These uses of cash were more than offset by a $2.8
million reduction in income taxes receivable, a $1.9 million reduction in inventory and a
$1.1 million increase in accounts payable and accrued expenses. Reduced income taxes
receivable are the result of refunds received during the third quarter of 2003 resulting
from the carrying back of 2002 losses to prior years. Reduced inventory, increased
accounts receivable and increased accounts payable are primarily the result of increased
revenue levels, as well as focused programs to bring down inventory balances. During the
first nine months of 2002, we used $8.4 million of cash from operations, primarily due to
a net loss of $11.9 million, which included $7.1 million of non-cash expenses. The first
nine months of 2002 also included a $3.5 million net use of cash from changes in
operating assets.



---

We used $6.1 million of cash in
investing activities during the nine months ended September 30, 2003 and compared to
generating $1.1 million during the same period in 2002. Changes in the level of
investment in marketable securities resulting from the purchases and maturities of those
securities used $3.0 million of cash in 2003 and generated $3.2 million of cash in 2002.
We generated $750,000 of cash from a technology transfer and license agreement and used
approximately $361,000 of cash for the purchase of fixed assets and the acquisition of
technology and other intangible assets during the nine months ended September 30, 2003.
In addition to applying $613,000 of cash for the purchase of fixed assets and technology
and other intangible assets during the first nine months of 2002 we used $1.5 million of
cash for a loan to a related party.

We generated $582,000 of cash from
financing activities during the nine months ended September 30, 2003 and generated
$678,000 cash from financing activities during the same period in 2002. Cash generated
from financing activities represents cash from stock option exercises and issuance of
common stock under the Employee Stock Purchase Plan, offset by $90,000 of cash used in
2003 for the repurchase of common stock.

In October 2002, our Board of
Directors authorized the repurchase of up to 1,000,000 shares of our common stock. At
September 30, 2003, we had repurchased 49,370 shares under this authorization which expired in October 2003.

We had no material
commitments for capital expenditures as of September 30, 2003. While there were
no material commitments, we routinely evaluate investment opportunities that
come to our attention and could make a significant commitment in the future. Our
cash and cash equivalents and investments totaled $23.2 million at September 30,
2003. With this level of cash and cash equivalents and investments, and the
reduced level of cash expenditures resulting from cost reduction actions over
the past two years, management believes that our cash and cash equivalents and
investments will be adequate to fund cash flow needs for at least 24 months,
even if the downturn in the electronics capital equipment industries experienced
over the last two years continues unabated. If the economic conditions appear to
be continuing or worsening over the next year, we may seek bank financing or
make other adjustments in expense levels.

At September 30, 2003, we did not
have any relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance of special purpose entities. As such, we
are not materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in off-balance sheet or other limited purpose financing
arrangements.

OTHER FACTORS

Changes in revenues have resulted
primarily from changes in the level of unit shipments and new product introductions. We
believe that inflation has not had any significant effect on operations. Most of our
international export sales are negotiated, invoiced and paid in U.S. dollars.
Accordingly, although currency fluctuations do not significantly affect our revenue and
income per unit, they can influence the price competitiveness of our products and the
willingness of existing and potential customers to purchase units.

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



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ITEM 4  CONTROLS AND PROCEDURES

|a. |  | Evaluation
of disclosure controls and procedures.
|-- |  | -------------------------------------------------

Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of the end of the
period covered by this quarterly report on form 10-Q. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information we are required to
disclose in the reports that we file or submit under the Exchange Act are recorded,
processed, summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms.

|b. |  | Changes
in internal controls.
|-- |  | -----------------------------

There were no changes made in our
internal controls over financial reporting during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.



PART II. OTHER INFORMATION

ITEM 6  EXHIBITS AND REPORTS ON 8-K

|a. |  | 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 (Furnished but not filed)
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|b. |  | Reports
on Form 8-K
|-- |  | -------------------

The following report on Form 8-K was
filed during the quarter ended September 30, 2003, or during the period from September
30, 2003 to the date of this quarterly report on Form 10-Q

| | -Form
8-K  CyberOptics Corporation published press release reporting third quarter and nine
months 2003 operating           results (10/30/03)
| | -----------------------------------------------------------------------------------------------------------------------------------------------



|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
                                     Kathleen P. Iverson,
President and Chief Executive Officer                           (Principal Executive
Officer and                                   Duly Authorized Officer)








/s/ Scott G. LarsonScott G. Larson, Chief Financial Officer
                                                      (Principal Accounting Officer and
                                                               Duly Authorized Officer)



Dated: November 11, 2003
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------