SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

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(Check One)

x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) 
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
June 30, 2007

o
TRANSITION
PURSUANT TO SECTION 13 OR 15(D) 
OF THE SECURITIES EXCHANGE ACT

For the transition period from
______ to ______

COMMISSION FILE NO. (0-16577)

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

|                                                                 |  |                                       
|---------------------------------------------------------------- |  | --------------------------------------
|Minnesota                                                        |  | 41-1472057                            
|(State or other jurisdiction of
  incorporation or organization) |  | (I.R.S. Employer
  Identification No.)
|                                                                 |  |                                       
|5900 Golden Hills Drive
MINNEAPOLIS, MINNESOTA                   |  | 55416                                 
|(Address of principal executive offices)                         |  | (Zip Code)                            
|                                                                 |  |                                       

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

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

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

|Large accelerated filer o | Accelerated filer x | Non-accelerated filer o
|------------------------- | ------------------- | -----------------------

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 July
30, 2007, there were 8,903,696 shares of the registrants Common Stock, no par
value, issued and outstanding.





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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE
SHEETS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                                                                                  |  |                 |        |                     |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | ------------------- | - | ------ | -
|(In
  thousands except share information)                                                                                         |  | June 30,
  2007 |        | December 31,
  2006 |  
|                                                                                                                                  |  |                 |        |                     |  
|                                                                                                                                  |  |                 |        |                     |  
|ASSETS                                                                                                                            |  |                 |        |                     |   |        |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Cash and
  cash equivalents                                                                                                       |  | $               | 17,118 |                     | $ | 30,056 |  
|Marketable
  securities                                                                                                           |  |                 | 7,608  |                     |   | 12,175 |  
|Accounts
  receivable, net                                                                                                        |  |                 | 11,278 |                     |   | 10,471 |  
|Inventories                                                                                                                       |  |                 | 10,514 |                     |   | 8,357  |  
|Other
  current assets                                                                                                            |  |                 | 1,032  |                     |   | 868    |  
|Deferred tax
  assets                                                                                                             |  |                 | 2,572  |                     |   | 2,725  |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Total current assets                                                                                                              |  |                 | 50,122 |                     |   | 64,652 |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Marketable
  securities                                                                                                           |  |                 | 24,116 |                     |   | 6,776  |  
|Equipment
  and leasehold improvements, net                                                                                       |  |                 | 2,012  |                     |   | 1,814  |  
|Intangible
  and other assets, net                                                                                                |  |                 | 1,142  |                     |   | 1,214  |  
|Goodwill                                                                                                                          |  |                 | 5,216  |                     |   | 5,160  |  
|Deferred tax
  assets                                                                                                             |  |                 | 2,316  |                     |   | 2,394  |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Total assets                                                                                                                      |  | $               | 84,924 |                     | $ | 82,010 |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|LIABILITIES
  AND STOCKHOLDERS EQUITY                                                                                            |  |                 |        |                     |   |        |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Accounts
  payable                                                                                                                |  | $               | 3,501  |                     | $ | 3,783  |  
|Advance
  customer payments                                                                                                       |  |                 | 756    |                     |   | 76     |  
|Accrued
  expenses                                                                                                                |  |                 | 3,084  |                     |   | 5,131  |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Total current liabilities                                                                                                         |  |                 | 7,341  |                     |   | 8,990  |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Other liabilities                                                                                                                 |  |                 | 1,368  |                     |   |       |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Total liabilities                                                                                                                 |  |                 | 8,709  |                     |   | 8,990  |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Contingencies (Note 10)                                                                                                           |  |                 |       |                     |   |       |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Stockholders
  equity:                                                                                                           |  |                 |        |                     |   |        |  
|Preferred stock, no par value, 5,000,000
  shares authorized, none outstanding                                                    |  |                 |       |                     |   |       |  
|Common stock, no par value, 37,500,000
  shares authorized, 8,903,696 and 8,861,909 shares issued and outstanding,
  respectively |  |                 | 50,438 |                     |   | 49,544 |  
|Accumulated other comprehensive loss                                                                                              |  |                 | (471   | )                   |   | (453   | )
|Retained earnings                                                                                                                 |  |                 | 26,248 |                     |   | 23,929 |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Total stockholders equity                                                                                                        |  |                 | 76,215 |                     |   | 73,020 |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|                                                                                                                                  |  |                 |        |                     |   |        |  
|Total liabilities and stockholders equity                                                                                        |  | $               | 84,924 |                     | $ | 82,010 |  
|                                                                                                                                  |  |                 |        |                     |   |        |  

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

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CONDENSED CONSOLIDATED INCOME
STATEMENTS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|----------------------------------------------- |  | ------------------------------ | ------ | --------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                                                |  | Three Months Ended 
  June 30, |        | Six Months Ended
  June 30, |  
|                                                |  |                                |        |                             |  
|(In
  thousands, except per share amounts)      |  | 2007                           |        | 2006                        |   | 2007   |  | 2006 |       
|                                                |  |                                |        |                             |   |        |  |      |       
|                                                |  |                                |        |                             |   |        |  |      |       
|Revenues                                        |  | $                              | 13,974 |                             | $ | 14,551 |  | $    | 27,715 |  | $ | 29,269 | 
|Cost of
  revenues                              |  |                                | 6,880  |                             |   | 6,438  |  |      | 13,489 |  |   | 13,521 | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Gross profit                                    |  |                                | 7,094  |                             |   | 8,113  |  |      | 14,226 |  |   | 15,748 | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Research and
  development expenses             |  |                                | 2,201  |                             |   | 1,907  |  |      | 4,533  |  |   | 3,940  | 
|Selling,
  general and administrative expenses  |  |                                | 3,573  |                             |   | 3,565  |  |      | 7,154  |  |   | 7,118  | 
|Amortization
  of intangibles                   |  |                                | 46     |                             |   | 172    |  |      | 91     |  |   | 379    | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Income from operations                          |  |                                | 1,274  |                             |   | 2,469  |  |      | 2,448  |  |   | 4,311  | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Interest
  income and other                     |  |                                | 559    |                             |   | 418    |  |      | 1,118  |  |   | 812    | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Income before income taxes                      |  |                                | 1,833  |                             |   | 2,887  |  |      | 3,566  |  |   | 5,123  | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Income tax
  provision                          |  |                                | 635    |                             |   | 980    |  |      | 1,215  |  |   | 1,760  | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Net income                                      |  | $                              | 1,198  |                             | $ | 1,907  |  | $    | 2,351  |  | $ | 3,363  | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Net income
  per share  Basic                  |  | $                              | 0.13   |                             | $ | 0.21   |  | $    | 0.26   |  | $ | 0.38   | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Net income
  per share  Diluted                |  | $                              | 0.13   |                             | $ | 0.21   |  | $    | 0.26   |  | $ | 0.37   | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Weighted
  average shares outstanding  Basic   |  |                                | 8,901  |                             |   | 8,997  |  |      | 8,890  |  |   | 8,962  | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 
|Weighted
  average shares outstanding  Diluted |  |                                | 8,988  |                             |   | 9,100  |  |      | 8,980  |  |   | 9,072  | 
|                                                |  |                                |        |                             |   |        |  |      |        |  |   |        | 

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

2

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CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                                           |  |                           |         |      |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------------- | ------- | ---- | - | ------ | -
|                                                                                           |  | Six Months Ended June 30, |        
|                                                                                           |  |                           |        
|(In
  thousands)                                                                           |  | 2007                      |         | 2006 |  
|                                                                                           |  |                           |         |      |  
|                                                                                           |  |                           |         |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |  |                           |         |      |   |        |  
|Net income                                                                                 |  | $                         | 2,351   |      | $ | 3,363  |  
|Adjustments to reconcile net income to net
  cash provided (used) by operating activities: |  |                           |         |      |   |        |  
|Depreciation and amortization                                                              |  |                           | 880     |      |   | 1,013  |  
|Provision for doubtful accounts                                                            |  |                           | 25      |      |   | 46     |  
|Provision for inventory obsolescence                                                       |  |                           | 230     |      |   | 168    |  
|Foreign currency transaction (gain) loss                                                   |  |                           | (33     | )    |   | (175   | )
|Stock compensation costs                                                                   |  |                           | 418     |      |   | 497    |  
|Changes in operating assets and
  liabilities:                                             |  |                           |         |      |   |        |  
|Accounts receivable                                                                        |  |                           | (832    | )    |   | 1,196  |  
|Inventories                                                                                |  |                           | (2,636  | )    |   | (1,538 | )
|Other current assets                                                                       |  |                           | (163    | )    |   | 109    |  
|Accounts payable                                                                           |  |                           | (284    | )    |   | 581    |  
|Advance customer payments                                                                  |  |                           | 680     |      |   | (155   | )
|Accrued expenses                                                                           |  |                           | (481    | )    |   | 1,671  |  
|                                                                                           |  |                           |         |      |   |        |  
|Net cash provided by operating
activities                                                  |  |                           | 155     |      |   | 6,776  |  
|                                                                                           |  |                           |         |      |   |        |  
|                                                                                           |  |                           |         |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |  |                           |         |      |   |        |  
|                                                                                           |  |                           |         |      |   |        |  
|Proceeds from maturities of available for
  sale marketable securities                     |  |                           | 12,175  |      |   | 10,356 |  
|Purchases of available for sale marketable
  securities                                    |  |                           | (24,982 | )    |   | (4,432 | )
|Additions to equipment and leasehold
  improvements                                        |  |                           | (611    | )    |   | (671   | )
|Additions to patents                                                                       |  |                           | (139    | )    |   | (69    | )
|                                                                                           |  |                           |         |      |   |        |  
|Net cash (used) provided by investing
  activities                                         |  |                           | (13,557 | )    |   | 5,184  |  
|                                                                                           |  |                           |         |      |   |        |  
|                                                                                           |  |                           |         |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |  |                           |         |      |   |        |  
|Proceeds from exercise of stock options                                                    |  |                           | 607     |      |   | 1,230  |  
|Excess tax benefit from exercise of stock
  options                                        |  |                           | 28      |      |   | 167    |  
|Repurchase of common stock                                                                 |  |                           | (163    | )    |   |       |  
|                                                                                           |  |                           |         |      |   |        |  
|Net cash provided by financing
activities                                                  |  |                           | 472     |      |   | 1,397  |  
|                                                                                           |  |                           |         |      |   |        |  
|                                                                                           |  |                           |         |      |   |        |  
|Effects of exchange rate changes on cash
  and cash equivalents                            |  |                           | (8      | )    |   | (15    | )
|                                                                                           |  |                           |         |      |   |        |  
|                                                                                           |  |                           |         |      |   |        |  
|Net (decrease) increase in cash and cash
  equivalents                                     |  |                           | (12,938 | )    |   | 13,342 |  
|                                                                                           |  |                           |         |      |   |        |  
|Cash and cash equivalents  beginning of
  period                                          |  |                           | 30,056  |      |   | 19,592 |  
|                                                                                           |  |                           |         |      |   |        |  
|                                                                                           |  |                           |         |      |   |        |  
|Cash and cash equivalents  end of period                                                  |  | $                         | 17,118  |      | $ | 32,934 |  
|                                                                                           |  |                           |         |      |   |        |  

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

3

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

1. INTERIM
REPORTING:

The interim
condensed consolidated financial statements presented herein as of June 30, 2007, and for
the three and six month periods ended June 30, 2007 and 2006, are unaudited,
but in the opinion of our management, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of financial
position, results of operations and cash flows for the periods presented.

The results of
operations for the three and six month periods ended June 30, 2007 do not
necessarily indicate the results to be expected for the full year. The December
31, 2006, 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,
2006.

2. ACCOUNTING
FOR STOCK-BASED COMPENSATION:

Effective
January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, applying
the modified prospective method. This statement requires all equity-based
payments to employees, including grants of employee stock options, to be
recognized in the consolidated statement of earnings based on the grant date
fair value of the award. Under the modified prospective method, we are required
to record equity-based compensation expense for all awards granted after the
date of adoption, and for all unvested 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 of SFAS No. 123(R), 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 following
tables set forth compensation expense (pre-tax) by segment for our equity-based
awards for the three and six months ended June 30, 2007 and 2006 (in
thousands):

|                                               |  |                             |     |                   |   |       |  |      |    |      |   |      |  |   |     |  |   |    
|---------------------------------------------- |  | --------------------------- | --- | ----------------- | - | ----- |  | ---- | -- | ---- | - | ---- |  | - | --- |  | - | ---
|                                               |  | Three months ended June 30,
|                                               |  |                            
|(In
  thousands)                               |  | Electronic
  Assembly       |     | Semi-
  Conductor |   | Total
|                                               |  |                             |     |                   |   |      
|                                               |  | 2007                        |     | 2006              |   | 2007  |  | 2006 |    | 2007 |   | 2006
|                                               |  |                             |     |                   |   |       |  |      |    |      |   |     
|Cost of
  revenues                             |  | $                           | 26  |                   | $ | 27    |  | $    | 2  |      | $ | 3    |  | $ | 28  |  | $ | 30 
|Research and
  development expenses            |  |                             | 29  |                   |   | 32    |  |      | 6  |      |   | 2    |  |   | 35  |  |   | 34 
|Selling,
  general and administrative expenses |  |                             | 194 |                   |   | 232   |  |      | 6  |      |   | 9    |  |   | 200 |  |   | 241
|                                               |  |                             |     |                   |   |       |  |      |    |      |   |      |  |   |     |  |   |    
|Total                                          |  | $                           | 249 |                   | $ | 291   |  | $    | 14 |      | $ | 14   |  | $ | 263 |  | $ | 305
|                                               |  |                             |     |                   |   |       |  |      |    |      |   |      |  |   |     |  |   |    

|                                               |  |                           |     |                   |   |       |  |      |    |      |   |      |  |   |     |  |   |    
|---------------------------------------------- |  | ------------------------- | --- | ----------------- | - | ----- |  | ---- | -- | ---- | - | ---- |  | - | --- |  | - | ---
|                                               |  | Six months ended June 30,
|                                               |  |                          
|(In
  thousands)                               |  | Electronic
  Assembly     |     | Semi-
  Conductor |   | Total
|                                               |  |                           |     |                   |   |      
|                                               |  | 2007                      |     | 2006              |   | 2007  |  | 2006 |    | 2007 |   | 2006
|                                               |  |                           |     |                   |   |       |  |      |    |      |   |     
|Cost of
  revenues                             |  | $                         | 50  |                   | $ | 27    |  | $    | 6  |      | $ | 6    |  | $ | 56  |  | $ | 33 
|Research and
  development expenses            |  |                           | 65  |                   |   | 71    |  |      | 14 |      |   | 16   |  |   | 79  |  |   | 87 
|Selling,
  general and administrative expenses |  |                           | 271 |                   |   | 344   |  |      | 12 |      |   | 33   |  |   | 283 |  |   | 377
|                                               |  |                           |     |                   |   |       |  |      |    |      |   |      |  |   |     |  |   |    
|Total                                          |  | $                         | 386 |                   | $ | 442   |  | $    | 32 |      | $ | 55   |  | $ | 418 |  | $ | 497
|                                               |  |                           |     |                   |   |       |  |      |    |      |   |      |  |   |     |  |   |    

4

---

Total equity
based compensation expense in the three months ended June 30, 2007 includes
$230,000 for stock option awards, $24,000 for our employee stock purchase plan
and $9,000 for restricted stock units. Total equity based compensation
expense in the three months ended June 30, 2006 includes $289,000 for stock
option awards, and $16,000 for our employee stock purchase plan. Total equity
based compensation expense in the six months ended June 30, 2007 includes
$345,000 for stock option awards, $55,000 for our employee stock purchase plan,
and $18,000 for unvested restricted stock units. Total equity based
compensation expense in the six months ended June 30, 2006, includes $439,000
for stock option awards, and $58,000 for our employee stock purchase plan.

At June 30,
2007, the total unrecognized compensation cost related to non vested equity
based compensation arrangements was $885,000 and the related weighted average
period over which it is expected to be recognized is 1.5 years.

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 1,224,372 shares of
common stock reserved in the aggregate for issuance of options and other stock
based benefits, including restricted stock units, to employees, directors,
officers 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 at the date of grant.
Generally, options granted to employees vest over a four-year period and expire
five, seven or ten years after the date of grant. Each of our outside directors
receives a stock option grant with immediate vesting for 4,500 shares on the
day of our annual meeting. The plans allow for option holders to tender shares
of our common stock as consideration for the option price provided that the
tendered shares have been held by the option holder at least six months. The
only stock options granted during the six months ended June 30, 2007 were the
annual grants to our outside directors on May 21, 2007, aggregating 18,000
shares. As of June 30, 2007, there are 446,611 shares of common stock available
under these plans for future issuance to employees and 66,300 shares of common
stock available for future issuance to our outside 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.

The following is a summary of stock option activity during the six
months ended June 30, 2007:

|                               |  |                       |   |                                                 |      
|------------------------------ |  | --------------------- | - | ----------------------------------------------- | -----
|                               |  | Options
  Outstanding |   | Weighted
  Average
  Exercise Price Per
  Share
|                               |  |                       |   |                                                
|                               |  |                       |   |                                                 |      
|Outstanding, December 31, 2006 |  | 763,721               |   | $                                               | 12.11
|Granted                        |  | 18,000                |   | $                                               | 12.89
|Exercised                      |  | (55,125               | ) | $                                               | 11.08
|Forfeited or
  expired         |  | (26,875               | ) | $                                               | 11.03
|                               |  |                       |   |                                                 |      
|Outstanding,
  June 30, 2007   |  | 699,721               |   | $                                               | 12.25
|                               |  |                       |   |                                                 |      
|                               |  |                       |   |                                                 |      
|Exercisable,
  June 30, 2007   |  | 573,551               |   | $                                               | 12.16
|                               |  |                       |   |                                                 |      

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
options outstanding at June 30, 2007 was 3.56 years and $1,394,000. The
weighted average remaining contractual term and aggregate intrinsic value of
options exercisable at June 30, 2007 was 3.21 years and $1,256,000. The
aggregate intrinsic value of stock options exercised in the six months ended
June 30, 2007 was $130,000. During the six months ended June 30, 2007, we
received total proceeds of $607,000 from the exercise of stock options and the
excess tax benefit recognized as a credit to stockholders equity was $28,000.

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. In
December 2006, we awarded 11,740 restricted stock units to our officers and
certain key employees. The restricted stock units vest over a four year period
and entitle the holders to one share of our common stock for each restricted
unit. The fair value of each restricted stock unit on the date of grant was
$12.95, and the aggregate intrinsic value of outstanding restricted stock units
as of June 30, 2007 was $158,000. There were no grants or forfeitures of
restricted stock units in the six months ending June 30, 2007. As of June 30,
2007, none of the restricted stock units were vested.

5

---

A summary of activity in non vested restricted stock
units for the six months ended June 30, 2007 follows:

|                                  |  |        |        |                                              |   |       | 
|--------------------------------- |  | ------ | ------ | -------------------------------------------- | - | ----- | 
|Non vested restricted stock units |  | Shares |        | Weighted 
  Average
  Grant Date Fair Value |  
|                                  |  |        |        |                                              |  
|                                  |  |        |        |                                              |   |       | 
|Non vested at December 31, 2006   |  |        | 11,740 |                                              | $ | 12.95 | 
|Granted                           |  |        |       |                                              |   |      | 
|Vested                            |  |        |       |                                              |   |      | 
|Forfeited                         |  |        |       |                                              |   |      | 
|                                  |  |        |        |                                              |   |       | 
|Non vested at June 30, 2007       |  |        | 11,740 |                                              | $ | 12.95 | 
|                                  |  |        |        |                                              |   |       | 

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. Under the plan, 800,000 shares of common stock have
been reserved for issuance. There were no share issuances under this plan in
either the six months ended June 30, 2007 or the six months ended June 30, 2006.
As of June 30, 2007, 170,176 shares remain available for future issuance under
this plan.

3. CERTAIN BALANCE SHEET COMPONENTS:

Inventories consist of the
following:

|                                  |  |                 |        |                       |   |       | 
|--------------------------------- |  | --------------- | ------ | --------------------- | - | ----- | 
|(In thousands)                    |  | June 30,
  2007 |        | December
  31,
  2006 |  
|                                  |  |                 |        |                       |  
|                                  |  |                 |        |                       |  
|Raw materials and purchased parts |  | $               | 5,160  |                       | $ | 3,462 | 
|Work in process                   |  |                 | 1,133  |                       |   | 1,043 | 
|Finished goods                    |  |                 | 4,221  |                       |   | 3,852 | 
|                                  |  |                 |        |                       |   |       | 
|                                  |  |                 |        |                       |   |       | 
|Total
  inventories               |  | $               | 10,514 |                       | $ | 8,357 | 
|                                  |  |                 |        |                       |   |       | 

Warranty costs:

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

|                                   |  |                               |     |                             |   |      |   |      |      |   |   |      |  
|---------------------------------- |  | ----------------------------- | --- | --------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                   |  | Three Months Ended
  June 30, |     | Six Months Ended
  June 30, |  
|                                   |  |                               |     |                             |  
|(In
  thousands)                   |  | 2007                          |     | 2006                        |   | 2007 |   | 2006 |     
|                                   |  |                               |     |                             |   |      |   |      |     
|                                   |  |                               |     |                             |   |      |   |      |      |   |   |      |  
|Balance at beginning of
  period   |  | $                             | 810 |                             | $ | 654  |   | $    | 796  |   | $ | 558  |  
|Accrual for warranties             |  |                               | 119 |                             |   | 123  |   |      | 253  |   |   | 415  |  
|Settlements made during the period |  |                               | (24 | )                           |   | (123 | ) |      | (144 | ) |   | (319 | )
|                                   |  |                               |     |                             |   |      |   |      |      |   |   |      |  
|                                   |  |                               |     |                             |   |      |   |      |      |   |   |      |  
|Balance at end of period           |  | $                             | 905 |                             | $ | 654  |   | $    | 905  |   | $ | 654  |  
|                                   |  |                               |     |                             |   |      |   |      |      |   |   |      |  

6

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4. INTANGIBLE ASSETS and GOODWILL:

Intangible assets consist of the following:

|                       |  |                           |        |                            |   |        |   |                           |       |                            |   |        |  |   |        |   |   |       | 
|---------------------- |  | ------------------------- | ------ | -------------------------- | - | ------ | - | ------------------------- | ----- | -------------------------- | - | ------ |  | - | ------ | - | - | ----- | 
|                       |  | As of June 30, 2007       |        | As of December 31, 2006    |  
|                       |  |                           |        |                            |  
|(In
  thousands)       |  | Gross
  Carrying
  Amount |        | Accumulated
  Amortization |   | Net    |   | Gross
  Carrying
  Amount |       | Accumulated
  Amortization |   | Net    | 
|                       |  |                           |        |                            |   |        |   |                           |       |                            |   |        | 
|                       |  |                           |        |                            |   |        |   |                           |       |                            |   |        |  |   |        |   |   |       | 
|Developed technology   |  | $                         | 7,775  |                            | $ | (7,032 | ) | $                         | 743   |                            | $ | 7,775  |  | $ | (6,941 | ) | $ | 834   | 
|Patents and trademarks |  |                           | 2,504  |                            |   | (2,105 | ) |                           | 399   |                            |   | 2,365  |  |   | (1,985 | ) |   | 380   | 
|                       |  |                           |        |                            |   |        |   |                           |       |                            |   |        |  |   |        |   |   |       | 
|Total                  |  | $                         | 10,279 |                            | $ | (9,137 | ) | $                         | 1,142 |                            | $ | 10,140 |  | $ | (8,926 | ) | $ | 1,214 | 
|                       |  |                           |        |                            |   |        |   |                           |       |                            |   |        |  |   |        |   |   |       | 

Amortization expense for the three and six month
periods ended June 30, 2007 and 2006 is as follows:

|                       |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|---------------------- |  | ----------------------------- | --- | --------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                       |  | Three Months Ended
  June 30, |     | Six Months Ended
  June 30, |  
|                       |  |                               |     |                             |  
|(In
  thousands)       |  | 2007                          |     | 2006                        |   | 2007 |  | 2006 |    
|                       |  |                               |     |                             |   |      |  |      |    
|                       |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|Developed technology   |  | $                             | 46  |                             | $ | 169  |  | $    | 91  |  | $ | 373 | 
|Patents and trademarks |  |                               | 62  |                             |   | 50   |  |      | 120 |  |   | 99  | 
|                       |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|                       |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|Total                  |  | $                             | 108 |                             | $ | 219  |  | $    | 211 |  | $ | 472 | 
|                       |  |                               |     |                             |   |      |  |      |     |  |   |     | 

As required by SFAS 144, we periodically reassess the
carrying value, useful lives and classification of identifiable intangible
assets. Estimated aggregate amortization expense based on current intangibles
for the next five years is expected to be as follows: $207,000 for the
remainder of 2007 and $314,000 in 2008, $314,000 in 2009, $186,000 in 2010 and
$121,000 in 2011. The preceding expected amortization expense is an estimate. Actual amortization
 expense may differ from estimates due to additional intangible asset additions, impairment of
intangible assets, accelerated amortization of intangible assets and other events.

Goodwill related to our electronic assembly segment increased
by $56,000 in the six months ended June 30, 2007 as the result of the
translation impact on foreign denominated goodwill balances.

7

---

5. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS:

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

|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|------------------------------ |  | ----------------------------- | ------ | --------------------------- | - | ------ | - | ---- | ------ |  | - | ------ | -
|                               |  | Three Months Ended
  June 30, |        | Six Months Ended
  June 30, |  
|                               |  |                               |        |                             |  
|(In
  thousands)               |  | 2007                          |        | 2006                        |   | 2007   |   | 2006 |       
|                               |  |                               |        |                             |   |        |   |      |       
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Revenue                        |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Electronic Assembly            |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|OEM Sensors                    |  | $                             | 6,879  |                             | $ | 9,497  |   | $    | 14,684 |  | $ | 17,250 |  
|SMT Systems                    |  |                               | 5,677  |                             |   | 3,480  |   |      | 10,250 |  |   | 8,662  |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Total Electronic
  Assembly    |  |                               | 12,556 |                             |   | 12,977 |   |      | 24,934 |  |   | 25,912 |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Semiconductor                  |  |                               | 1,418  |                             |   | 1,574  |   |      | 2,781  |  |   | 3,357  |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Total                          |  | $                             | 13,974 |                             | $ | 14,551 |   | $    | 27,715 |  | $ | 29,269 |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Income (loss) from operations  |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Electronic Assembly            |  | $                             | 1,185  |                             | $ | 2,631  |   | $    | 2,397  |  | $ | 4,446  |  
|Semiconductor                  |  |                               | 89     |                             |   | (162   | ) |      | 51     |  |   | (135   | )
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Total income
  from operations |  |                               | 1,274  |                             |   | 2,469  |   |      | 2,448  |  |   | 4,311  |  
|Interest income and other      |  |                               | 559    |                             |   | 418    |   |      | 1,118  |  |   | 812    |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Income before
  taxes          |  | $                             | 1,833  |                             | $ | 2,887  |   | $    | 3,566  |  | $ | 5,123  |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Depreciation and amortization: |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Electronic Assembly            |  | $                             | 415    |                             | $ | 314    |   | $    | 770    |  | $ | 633    |  
|Semiconductor                  |  |                               | 56     |                             |   | 173    |   |      | 110    |  |   | 380    |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  
|Total                          |  | $                             | 471    |                             | $ | 487    |   | $    | 880    |  | $ | 1,013  |  
|                               |  |                               |        |                             |   |        |   |      |        |  |   |        |  

Export sales were 88% of revenue in the three and six
months ended June 30, 2007. Export sales were 89% of revenue in the three
months ended June 30, 2006 and 84% of revenue in the six months ended June 30,
2006. All of our export sales are negotiated, invoiced and paid in U.S.
dollars. Export sales by geographic area are summarized as follows:

|                     |  |                               |        |                             |   |        |  |      |        |  |   |        | 
|-------------------- |  | ----------------------------- | ------ | --------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                     |  | Three Months Ended
  June 30, |        | Six Months Ended
  June 30, |  
|                     |  |                               |        |                             |  
|(In
  thousands)     |  | 2007                          |        | 2006                        |   | 2007   |  | 2006 |       
|                     |  |                               |        |                             |   |        |  |      |       
|                     |  |                               |        |                             |   |        |  |      |        |  |   |        | 
|Americas             |  | $                             | 253    |                             | $ | 18     |  | $    | 903    |  | $ | 178    | 
|Europe               |  |                               | 4,056  |                             |   | 6,384  |  |      | 9,430  |  |   | 10,933 | 
|Asia                 |  |                               | 8,054  |                             |   | 6,542  |  |      | 14,113 |  |   | 13,566 | 
|Other                |  |                               |       |                             |   |       |  |      |       |  |   | 1      | 
|                     |  |                               |        |                             |   |        |  |      |        |  |   |        | 
|                     |  |                               |        |                             |   |        |  |      |        |  |   |        | 
|Total export
  sales |  | $                             | 12,363 |                             | $ | 12,944 |  | $    | 24,446 |  | $ | 24,678 | 
|                     |  |                               |        |                             |   |        |  |      |        |  |   |        | 

8

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6. NET INCOME PER SHARE:

Basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding.
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. The calculation
of diluted net income per common share includes 87,000 common equivalent shares
for the three months ended June 30, 2007 and 103,000 common equivalent shares
for the three months ended June 30, 2006. The calculation of diluted net income
per common share includes 90,000 common equivalent shares for the six months
ended June 30, 2007 and 110,000 common equivalent shares for the six months
ended June 30, 2006. The calculation of diluted net income per common share
excludes 323,000 potentially dilutive shares for the three months ended June
30, 2007 and 172,000 potentially dilutive shares for the three months ended
June 30, 2006. The calculation of diluted net income per common share excludes
313,000 potentially dilutive shares for the six months ended June 30, 2007 and
180,000 potentially dilutive shares for the six months ended June 30, 2006,
because their effect would be anti-dilutive.

7. COMPREHENSIVE INCOME:

Components of comprehensive income include net income,
foreign-currency translation adjustments and unrealized losses on our
available-for-sale marketable securities. Total comprehensive income amounted
to $1,117,000 for the three months ended June 30, 2007 and $1,911,000 for the
three months ended June 30, 2006. Total comprehensive income amounted to
$2,335,000 for the six months ended June 30, 2007 and $3,378,000 for the six
months ended June 30, 2006. At December 31, 2006 and June 30, 2007, components
of accumulated other comprehensive loss is as follows:

|                          |  |                                  |      |                                   |   |                                         |   |   |      |  
|------------------------- |  | -------------------------------- | ---- | --------------------------------- | - | --------------------------------------- | - | - | ---- | -
|(In
  thousands)          |  | Foreign
  Currency
  Translation |      | Unrealized Losses
  on Securities |   | AccumulatedOther
  Comprehensive
  Loss |  
|                          |  |                                  |      |                                   |   |                                         |  
|                          |  |                                  |      |                                   |   |                                         |   |   |      |  
|Balance December 31, 2006 |  | $                                | (441 | )                                 | $ | (12                                     | ) | $ | (453 | )
|Current year change       |  |                                  | 16   |                                   |   | (34                                     | ) |   | (18  | )
|                          |  |                                  |      |                                   |   |                                         |   |   |      |  
|                          |  |                                  |      |                                   |   |                                         |   |   |      |  
|Balance June 30, 2007     |  | $                                | (425 | )                                 | $ | (46                                     | ) | $ | (471 | )
|                          |  |                                  |      |                                   |   |                                         |   |   |      |  

8. INCOME TAXES:

Effective January 1, 2007,
we adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48 Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 Accounting for Income Taxes. FASB
Interpretation No. 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB
Statement No. 109. The Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. The Interpretation
also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition.

As a result of our adoption
of FIN 48, we recognized a $32,000 increase in our liability for unrecognized
income tax benefits with a corresponding decrease in beginning retained
earnings on January 1, 2007. At the adoption date of January 1, 2007, we had
$2,095,000 of gross unrecognized tax benefits, $1,246,000 of which would affect
our effective tax rate if recognized. At June 30, 2007, we have $2,216,000 of
gross unrecognized tax benefits. Consistent with the requirements of FIN 48,
our net unrecognized tax benefits have been classified as a long term liability
in our balance sheet.

We recognize interest and
penalties related to uncertain tax positions as a component of income tax
expense. At adoption of FIN 48 on January 1, 2007, we had approximately
$143,000 of accrued interest and penalties related to uncertain tax positions.
The tax years 2003-2006 remain open to examination by the major taxing
jurisdictions to which we are subject.

9

---

We recorded a tax provision
at a full rate of tax, approximating an estimated annual effective tax rate of
34.1% in the six months ended June 30, 2007 compared to an estimated annual
effective tax rate of 34.4% in the six months ended June 30, 2006. Discrete
items impacting the effective tax rate in the six months ended June 30, 2007
and 2006 were inconsequential.

9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

We enter into foreign currency swap agreements to
hedge short term inter-company financing transactions with our subsidiary in
the United Kingdom. These currency swap agreements are structured to mature on
or about the last day of each quarter, and are designated as cash flow hedges.
At June 30, 2007, we had one open swap agreement that was purchased on June 29,
2007, the fair value of which was inconsequential. The gains or losses from the
settlement of foreign currency swap agreements, and the impact of currency
fluctuations on the underlying inter-company balance, were insignificant in the
three and six months ended June 30, 2007.

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

10. 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.

11. RECENT ACCOUNTING
DEVELOPMENTS

In September 2006, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS No. 157 will apply whenever
another standard requires (or permits) assets or liabilities to be measured at
fair value. The standard does not expand the use of fair value to any new
circumstances, and is effective beginning after December 31, 2007. We are
currently evaluating the impact of adopting SFAS No. 157 on our financial
position and results of operations.

In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115, which permits
entities to choose to measure many financial instruments and certain other
items at fair value. SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year that begins after November 15, 2007. We are
currently evaluating the impact of adopting SFAS No. 159 on our financial
position and results of operations.

12. BOARD AUTHORIZATION OF
STOCK REPURCHASE

Our board of directors
approved a stock repurchase program, effective July 31, 2006 for a period of
one year, under which we were allowed to acquire up to 500,000 shares of our
common stock from time to time in open market transactions, block purchases and
other transactions. We adopted a structured trading plan to implement the
repurchase program. As of June 30, 2007 we have repurchased 223,464 shares of
our common stock at an average price of $12.27 per share under this
authorization. The stock repurchase program and structured trading plan have
now expired as required per the original term implemented in July 2006.

10

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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, 2006.

RESULTS
OF OPERATIONS:

General

Our
revenues decreased 4% to $14.0 million in the quarter ended June 30, 2007 and
decreased 5% to $27.7 million for the six months ended June 30, 2007 from the same
periods last year. Our income from operations decreased to $1.3 million in the
quarter ended June 30, 2007 from $2.4 million in the quarter ended June 30,
2006, and our income from operations decreased to $2.4 million in the six
months ended June 30, 2007 from $4.3 million in the six months ended June 30,
2006. Our revenues and results of operations for the three and six months ended
June 30, 2007 compared to the same periods of 2006 have been negatively
impacted by a sluggish global electronic assembly market for automated pick and
place machines.

Our
order rate increased 37% in the second quarter of 2007 to $17.0 million from
$12.4 million in the first quarter of 2007, and our backlog increased 54% to
$8.6 million at June 30, 2007 from $5.6 million at March 31, 2007. We believe
the increase in our order rate and backlog reflects the start of a general
upturn in the global electronic assembly market for automated pick and place
equipment, which has been sluggish throughout the past year. Also benefiting
our second quarter order rate and backlog was an order that we received for 37
SE 300 solder paste inspection systems, the largest such order in our history.
Approximately one-half of this order, which was placed by a major Asian
original design manufacturer, or ODM, was shipped in the quarter ending June
30, 2007, with the balance expected to ship in the third quarter. Worldwide
demand for cell phones, laptops and other consumer electronics remain strong,
along with the economies in the countries where most of our products are sold.
We are optimistic that these factors will continue to drive demand for our
electronic assembly and semiconductor products, and we will continue to see
strength in our global markets for electronic assembly and semiconductor
capital equipment.

Segment Results

Operating
results for our electronics assembly and semiconductor segments for the three
and six month periods ended June 30, 2007 and 2006 were as follows (in
thousands):

|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|-------------------------------------------- |  | -------------------------------- | ------ | -------------------------------- | - | ----- |  | ------------------ | ------ | -------------- | - | ------ |  | - | ----- | - | - | ------ | 
|                                             |  | Three months ended June 30, 2007 |        | Three months ended June 30, 2006 |  
|                                             |  |                                  |        |                                  |  
|(In
  thousands)                             |  | ElectronicAssembly               |        | Semi-Conductor                   |   | Total |  | ElectronicAssembly |        | Semi-Conductor |   | Total  | 
|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        | 
|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|Revenue                                      |  | $                                | 12,556 |                                  | $ | 1,418 |  | $                  | 13,974 |                | $ | 12,977 |  | $ | 1,574 |   | $ | 14,551 | 
|Cost of revenue                              |  |                                  | 6,380  |                                  |   | 500   |  |                    | 6,880  |                |   | 5,932  |  |   | 506   |   |   | 6,438  | 
|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|Gross profit                                 |  |                                  | 6,176  |                                  |   | 918   |  |                    | 7,094  |                |   | 7,045  |  |   | 1,068 |   |   | 8,113  | 
|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|Research and development expenses            |  |                                  | 1,795  |                                  |   | 406   |  |                    | 2,201  |                |   | 1,413  |  |   | 494   |   |   | 1,907  | 
|Selling, general and administrative expenses |  |                                  | 3,168  |                                  |   | 405   |  |                    | 3,573  |                |   | 2,974  |  |   | 591   |   |   | 3,565  | 
|Amortization of intangibles                  |  |                                  | 28     |                                  |   | 18    |  |                    | 46     |                |   | 27     |  |   | 145   |   |   | 172    | 
|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|Income (loss) from operations                |  | $                                | 1,185  |                                  | $ | 89    |  | $                  | 1,274  |                | $ | 2,631  |  | $ | (162  | ) | $ | 2,469  | 
|                                             |  |                                  |        |                                  |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 

11

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|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|-------------------------------------------- |  | ------------------------------ | ------ | ------------------------------ | - | ----- |  | ------------------ | ------ | -------------- | - | ------ |  | - | ----- | - | - | ------ | 
|                                             |  | Six months ended June 30, 2007 |        | Six months ended June 30, 2006 |  
|                                             |  |                                |        |                                |  
|(In
  thousands)                             |  | ElectronicAssembly             |        | Semi-Conductor                 |   | Total |  | ElectronicAssembly |        | Semi-Conductor |   | Total  | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|Revenue                                      |  | $                              | 24,934 |                                | $ | 2,781 |  | $                  | 27,715 |                | $ | 25,912 |  | $ | 3,357 |   | $ | 29,269 | 
|Cost of revenue                              |  |                                | 12,534 |                                |   | 955   |  |                    | 13,489 |                |   | 12,456 |  |   | 1,065 |   |   | 13,521 | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|Gross profit                                 |  |                                | 12,400 |                                |   | 1,826 |  |                    | 14,226 |                |   | 13,456 |  |   | 2,292 |   |   | 15,748 | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|Research and development expenses            |  |                                | 3,658  |                                |   | 875   |  |                    | 4,533  |                |   | 2,999  |  |   | 941   |   |   | 3,940  | 
|Selling, general and administrative expenses |  |                                | 6,290  |                                |   | 864   |  |                    | 7,154  |                |   | 5,957  |  |   | 1,161 |   |   | 7,118  | 
|Amortization of intangibles                  |  |                                | 55     |                                |   | 36    |  |                    | 91     |                |   | 54     |  |   | 325   |   |   | 379    | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|Income (loss) from operations                |  | $                              | 2,397  |                                | $ | 51    |  | $                  | 2,448  |                | $ | 4,446  |  | $ | (135  | ) | $ | 4,311  | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 
|                                             |  |                                |        |                                |   |       |  |                    |        |                |   |        |  |   |       |   |   |        | 

Revenues

Our
revenues decreased by 4% to $14.0 million in the three months ended June 30,
2007 from $14.6 million in the three months ended June 30, 2006, and decreased
by 5% to $27.7 million in the six months ended June 30, 2007 from $29.3 million
in the six months ended June 30, 2006. The following table sets forth revenues
by product line for the three and six month periods ended June 30, 2007 and
2006 (in thousands):

|                            |  |                            |        |                          |   |        |  |      |        |  |   |        | 
|--------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------ | 
|                            |  | Three Months EndedJune 30, |        | Six Months EndedJune 30, |  
|                            |  |                            |        |                          |  
|(In
  thousands)            |  | 2007                       |        | 2006                     |   | 2007   |  | 2006 |       
|                            |  |                            |        |                          |   |        |  |      |       
|                            |  |                            |        |                          |   |        |  |      |        |  |   |        | 
|Electronic Assembly         |  |                            |        |                          |   |        |  |      |        |  |   |        | 
|OEM Sensors                 |  | $                          | 6,879  |                          | $ | 9,497  |  | $    | 14,684 |  | $ | 17,250 | 
|SMT Systems                 |  |                            | 5,677  |                          |   | 3,480  |  |      | 10,250 |  |   | 8,662  | 
|                            |  |                            |        |                          |   |        |  |      |        |  |   |        | 
|Total Electronic
  Assembly |  |                            | 12,556 |                          |   | 12,977 |  |      | 24,934 |  |   | 25,912 | 
|Semiconductor               |  |                            | 1,418  |                          |   | 1,574  |  |      | 2,781  |  |   | 3,357  | 
|                            |  |                            |        |                          |   |        |  |      |        |  |   |        | 
|Total                       |  | $                          | 13,974 |                          | $ | 14,551 |  | $    | 27,715 |  | $ | 29,269 | 
|                            |  |                            |        |                          |   |        |  |      |        |  |   |        | 

Electronic
Assembly

Revenues
from our electronic assembly OEM sensors decreased by 28% to $6.9 million in
the three months ended June 30, 2007 from $9.5 million in the three months
ended June 30, 2006 and decreased by 15% to $14.7 million in the six months
ended June 30, 2007 from $17.3 million in the six months ended June 30, 2006.
Revenues from our electronic assembly sensors historically have been cyclical
in nature, with periods of 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 electronic 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. Sales of electronic assembly sensors have been somewhat
sluggish throughout the past year after peaking in the three months ended June
30, 2006, with sales of electronic assembly sensors for the three and six
months ended June 30, 2007 being comparable with sales levels in the third and
fourth quarters of 2006. Order rates and backlog for electronic assembly
sensors started to increase in the three months ended June 30, 2007. We
believe the increase in our order rate and backlog reflects the start of a
general upturn in the global electronic assembly market for automated pick and
place equipment.

Revenues
from our SMT systems products increased by 63% to $5.7 million in the three
months ended June 30, 2007 from $3.5 million in the three months ended June 30,
2006 and increased by 18% to $10.2 million in the six months ended June 30,
2007 from $8.7 million in the six months ended June 30, 2006. Revenue from SMT
systems products for the three

12

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and six months ended June 30, 2007 were favorably impacted by an order for
37 SE 300 Ultra solder paste inspection systems, the largest such order in our
history. Approximately one-half of this order, which was placed by a major
Asian original design manufacturer, or ODM, was shipped in the quarter ended
June 30, 2007, with the balance expected to ship in the third quarter. Revenue from SMT systems products in the six
months ending June 30, 2006 were positively impacted by a large sale to a
single customer in the first quarter of 2006 for 25 solder paste inspection
systems. During the past year we have invested heavily in the development and
enhancement of our SE 300 Ultra solder paste inspection system and Flex Ultra
automated optical inspection (AOI) system. We believe that these new product
developments and enhancements have led to higher revenue from sales of SMT
inspection systems in 2007 compared to 2006. In addition, we believe that
increased use of outsourcing for circuit board assembly, production difficulties
associated with smaller component sizes, increased production speeds and
increased cost pressure on companies manufacturing circuit boards has caused
increased demand for our inspection equipment.

Export
revenue from electronic assembly sensors and SMT systems totaled $11.9 million
or 95% of revenue in the three months ended June 30, 2007, compared to $12.4
million or 95% of revenue in the three months ended June 30, 2006. Export
revenue from electronic assembly sensors and SMT systems totaled $23.6 million
or 95% of revenue in the six months ended June 30, 2007, compared to $23.6
million or 91% of revenue in the six months ended June 30, 2006. The
international markets of China and the rest of Asia, Japan and Europe account
for a significant portion of the production capability of capital equipment for
the manufacture of electronics, the primary market for our electronic assembly
sensor and SMT system product lines. An increasing proportion of our sales have
been to international customers as manufacturing of electronic components has
migrated offshore, particularly to China and other areas of Asia.

Semiconductor

Revenues
from semiconductor products decreased by 10% to $1.4 million in the three
months ended June 30, 2007 from $1.6 million in the three months ended June 30,
2006 and decreased by 17% to $2.8 million in the six months ended June 30, 2007
from $3.4 million in the six months ended June 30, 2006. The decrease in the
three and six months ended June 30, 2007 was due to lower revenues from both
our wafer mapping sensors and frame grabber products reflecting overall weaker
market conditions in the semiconductor fabrication capital equipment market
compared to the same periods of 2006.

Our
wafer mapping and frame grabber products are relatively mature. We anticipate
that future growth in our semiconductor revenues exclusive of changes related
to capital procurement cycles will come from our new 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 are
currently developing, or recently introduced, several new additions to the
WaferSense product line, including additional leveling
sensors and new gapping and teaching sensors. Revenue from our new WaferSense
products increased to $0.4 million in the six months ended June 30, 2007 from
$0.2 million in the six months ended June 30, 2006.

Export
revenue as a percentage of semiconductor revenue totaled $0.4 million or 31% of
revenue in the three months ended June 30, 2007, compared to $0.6 million or 36%
of revenue in the three months ended June 30, 2006. Export revenue as a
percentage of semiconductor revenue totaled $0.8 million or 29% of revenue in
the six months ended June 30, 2007, compared to $1.0 million or 31% of revenue
in the six months ended June 30, 2006.

Gross Margin

Electronic
Assembly

Gross
margin as a percentage of electronic assembly sales was 49% in the three months
ended June 30, 2007, compared to 54% in the three months ended June 30, 2006.
Gross margin as a percentage of electronic assembly sales was 50% in the six
months ended June 30, 2007, compared to 52% in the six months ended June 30,
2006. The decrease in gross margin as a percentage of electronic assembly sales
in the three and six months ended June 30, 2007 compared to the prior year is
principally due to the mix of products sold, offset by a net $250,000 benefit from
a warranty recovery from one of our vendors. Higher margin electronic assembly sensors accounted for
57% and 55% of total electronic assembly sales in the three and six months
ended June 30, 2007, compared to 73% and 67% of total electronic assembly sales
in the three and six months ended June 30, 2006. Our gross margin as a
percentage of electronic assembly sales in 2007 was also somewhat negatively
affected by the large order that we received for 37 SE 300 Ultra solder paste
inspection systems, which was priced aggressively due to the number of systems
in the order, and because it was placed by our largest ODM customer. Larger
transactions tend to have lower gross margin percentages. During the first
quarter of 2006 we sold 25 solder paste inspection systems in a single transaction.

13

---

With
respect to our electronic assembly SMT system products, the number of machines
sold in a given transaction, the geographic area where the sale occurs, and
whether the product is sold direct to the end user customer or through a
distributor can impact our gross margins. The market for SMT inspection system
products, including both our solder paste and automated optical inspection
(AOI) system products is becoming increasingly competitive, both in terms of
technology and pricing. The increasing competition in the SMT system market has
had a negative impact on our SMT system gross margins compared to prior
periods, particularly for our solder paste inspection systems. We anticipate
that pricing pressures will continue throughout 2007 due to the heightened
competition in the marketplace.

Semiconductor

Gross
margin as a percentage of semiconductor sales was 65% in the three months ended
June 30, 2007, compared to 68% in the three months ended June 30, 2006. Gross
margin as a percentage of semiconductor sales was 66% in the six months ended
June 30, 2007, compared to 68% in the six months ended June 30, 2006. The
slight decrease in gross margin as a percentage of semiconductor sales in 2007,
compared to 2006, is due to a slight change in product mix, lower production
volumes over which to spread fixed manufacturing overhead costs that do not
vary with activity levels, and small initial costs associated with the
introduction of two new WaferSense products.

Operating Expenses

We
believe continued investment in research and development of new products,
coupled with continued investment and development of our sales channels, is
critical to future growth and profitability. We maintain research and
development and sales and marketing expenses at relatively high levels, even
during periods of downturn in our electronic assembly and semiconductor capital
equipment markets, as we continue to fund development of important new
products, and continue to invest in our sales channels and develop new sales
territories.

We
are currently expecting research and development, and selling, general and
administrative expenses to be higher in 2007, compared to 2006, as we increase
new product development efforts, and continue development of our sales channels
and new sales territories. We are continually evaluating existing and new
research and development projects, and may elect to increase or decrease
expenditures based on an assessment of the future revenue and profit potential
of these projects. Further, sales commissions and other selling, general and
administrative costs may be higher in 2007 compared to 2006, if revenue and
profit levels increase over 2006 levels.

We
presently plan to increase research and development in the second half of 2007,
when compared to the first six months of 2007, for next generation solder paste
and AOI SMT inspection systems. In addition, we will also incur the front end
costs associated with replacing some of our high cost U.S. based software
development contractors with a lower cost Indian based contractor.

Electronic Assembly

Research
and development expenses were $1.8 million or 14% of revenue in the three
months ended June 30, 2007, compared to $1.4 million or 11% of revenue in the
three months ended June 30, 2006. Research and development expenses were $3.7
million or 15% of revenue in the six months ended June 30, 2007, compared to
$3.0 million or 12% of revenue in the six months ended June 30, 2006. The 27%
and 22% increase in electronic assembly research and development expenses in
the three and six months ended June 30, 2007 compared to the same periods in 2006,
was due to increased third party contract labor for further R&D investment
in our SMT inspection system products, including additional features and
enhancements for both our SE 300 Ultra solder paste inspection system and our
Flex Ultra AOI system.

In
the three and six months ended June 30, 2007, we made R&D investments in
our next generation Flex Ultra HR (high resolution) system, which can inspect
components as small as 01005 English, with a forty percent improvement in image
resolution. We also invested in our first SE 300 Ultra solder paste inspection
system specifically modified for the Japanese market. Japan accounts for 25% of
total worldwide production of SMT circuit boards. As noted, we anticipate making further investments and increasing
research and development for our SMT inspection system products in the second
half of 2007.

14

---

Selling,
general and administrative expenses for electronic assembly were $3.2 million
or 25% of revenue in the three months ended June 30, 2007, compared to $3.0
million or 23% of revenue in the three months ended June 30, 2006. Selling,
general and administrative expenses for electronic assembly were $6.3 million
or 25% of revenue in the six months ended June 30, 2007, compared to $6.0
million or 23% of revenue in the six months ended June 30, 2006. The
approximate 6% increase in selling, general and administrative expenses in the
three and six months ended June 30, 2007, compared to the same periods in 2006,
was due to higher costs for sales commissions to third party sales
representatives who work on a commission basis for SMT Systems and other sales related costs,
offset by lower company wide incentive compensation due to the lower levels of
revenue and profit in 2007 compared to 2006.

Semiconductor

Research
and development expenses for semiconductor were $0.4 million or 29% of revenue
in the three months ended June 30, 2007, compared to $0.5 million or 31% of
revenue in the three months ended June 30, 2006. Research and development
expenses for semiconductor were $0.9 million or 31% of revenue in the six months
ended June 30, 2007, compared to $0.9 million or 28% of revenue in the six
months ended June 30, 2006. Research and development expenses in the three and
six months ended June 30, 2007 were down compared to the three and six months
ended June 30, 2006 due to lower costs for proto-types and company wide
incentives resulting from lower levels of revenue and profit in 2007 compared
to 2006. During 2007 and 2006, research and development efforts were primarily
focused on development of new products for the semiconductor market, including
enhancements to the WaferSense auto leveling sensor (ALS) first introduced in
late 2004 and extensions to the WaferSense family of products, including
gapping and teaching sensors.

Selling,
general and administrative expenses for semiconductor were $0.4 million or 29%
of revenue in the three months ended June 30, 2007, compared to $0.6 million or
38% of revenue in the three months ended June 30, 2006. Selling, general and
administrative expenses for semiconductor were $0.9 million or 31% of revenue in
the six months ended June 30, 2007, compared to $1.2 million or 35% of revenue
in the six months ended June 30, 2006. The decrease in selling, general and
administrative expenses in 2007, compared to 2006, was due to a planned
reduction in headcount and wage expense, and lower costs for company wide
incentive compensation resulting from lower levels of revenue and profit.

Amortization of Intangible Assets

Amortization
of acquired intangible assets related to our electronic assembly segment was
less than $0.1 million in the three and six months ended June 30, 2007 and did
not change compared to the same periods of 2006.

Amortization
of acquired intangible assets related to our semiconductor segment was less
than $0.1 million in the three and six months ended June 30, 2007. The decrease
in semiconductor amortization when comparing 2007 to 2006 was due to certain
acquired intangible assets becoming fully amortized during 2006.

Interest and Other

Interest
income and other primarily includes interest earned on investments and gains
and losses associated with foreign currency transactions. Interest income and
other increased during the three and six months ended June 30, 2007 compared to
the same period in 2006 as the result of additional invested funds and higher
rates of interest earned on those funds.

Provision for Income Taxes and Effective
Income Tax Rate

Effective
January 1, 2007, we adopted the provisions of the Financial Accounting
Standards Board (FASB) Interpretation No. 48 Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 Accounting for
Income Taxes. FASB Interpretation No. 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements
in accordance with FASB Statement No. 109. The Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. The Interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.

As a result
of our adoption of FIN 48, we recognized a $32,000 increase in our liability
for unrecognized income tax benefits with a corresponding decrease in beginning
retained earnings on January 1, 2007. At the adoption date of January 1, 2007,
we had $2,095,000 of gross unrecognized tax benefits, $1,246,000 of which would
affect our effective tax rate if recognized. At June 30, 2007, we have
$2,216,000 of gross unrecognized tax benefits. Consistent with the requirements
of FIN 48, our net unrecognized tax benefits have been classified as a long
term liability in our balance sheet.

15

---

We
recognize interest and penalties related to uncertain tax positions as a
component of income tax expense. At adoption of FIN 48 on January 1, 2007, we
had approximately $143,000 of accrued interest and penalties related to
uncertain tax positions. The tax years 2003-2006 remain open to examination by
the major taxing jurisdictions to which we are subject.

We recorded
a tax provision at a full rate of tax, approximating an estimated annual
effective tax rate of 34.1% in the six months ended June 30, 2007, compared to
an estimated annual effective tax rate of 34.4% in the six months ended June
30, 2006. Discrete items impacting the effective tax rate in the six months
ended June 30, 2007 and 2006 were inconsequential.

Order Rate and Backlog

Our
orders totaled $17.0 million in the three months ended June 30, 2007, compared
to $12.4 million in the three months ended March 31, 2007 and $14.2 million in
the three months ended June 30, 2006. Backlog totaled $8.6 million at June 30,
2007, $5.6 million at March 31, 2007 and $7.8 million at June 30, 2006. The
scheduled shipment (or estimated timing of revenue for systems recognized upon
acceptance) for backlog at June 30, 2007 is as follows:

|                           |  |         |       | 
|-------------------------- |  | ------- | ----- | 
|(In thousands)             |  | Backlog |      
|                           |  |         |      
|                          
|3rd Quarter 2007           |  | $       | 7,630 | 
|4th Quarter 2007 and after |  |         | 957   | 
|                           |  |         |       | 
|Total backlog              |  | $       | 8,587 | 
|                           |  |         |       | 

LIQUIDITY AND CAPITAL RESOURCES

Our
cash and cash equivalents decreased by $12.9 million in the six month period
ended June 30, 2007 due to purchases of $12.8 million of marketable securities,
net of maturities, capital purchases of $0.7 million, and $0.2 million used for
common stock repurchases, offset by $0.2 million of cash provided by operating
activities and $0.6 million of cash provided by stock option exercises. 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 $0.2 million to $48.8 million as of
June 30, 2007 from $49.0 million as of December 31, 2006.

Operations
generated $0.2 million of cash in the six months ended June 30, 2007. Cash provided by operations included net income of $2.4
million, which included $1.5 million of net non-cash expenses for depreciation and amortization, provisions for inventory
obsolescence and doubtful accounts, foreign currency transaction gains and stock compensation expense. Changes in operating assets
and liabilities included increases in accounts receivable of $0.8 million, inventories of $2.6 million, other assets of $0.2
million, decreases in accounts payable of $0.3 million and accrued expenses of $0.5 million. These uses of cash were partially
offset by increases in advance customer payments of $0.7 million. Increases in accounts receivable resulted from a slight increase
in the length of time required to receive customer payments. Inventories were up due to a shift in the mix of products sold in the
six months ending June 30, 2007 from what was originally anticipated at the start of the period, resulting in higher inventory
balances. Also, the inventory balance was higher at June 30, 2007 to support anticipated increases in third quarter sales. The $0.5
million decrease in accrued expenses resulted from payment of 2006 annual incentive compensation during the six months ended June
30, 2007. The increase in advance customer payments is due to more sales from customers who pay in advance of revenue recognition
from the related sale. The change in other assets and accounts payable in the six months ended June 30, 2007 resulted from the
timing of payments for various prepaid expenses or payments to vendors for inventory purchases.

We
generated $6.8 million of cash from operations during the six months ended June
30, 2006. Cash generated from operations primarily included net income of $3.4
million, which included $1.5 million of net non-cash expenses, and decreases in
accounts receivable of $1.2 million, increases in accounts payable of $0.6 million
and accrued expenses of $1.7 million. This cash generated more than offset
increases in inventory of $1.5 million.

16

---

We
used $13.6 million of cash for investing activities in the six months ended
June 30, 2007 compared to generating $5.2 million of cash from investing
activities during the same period in 2006. Changes in the level of investment
in marketable securities resulting from purchases and maturities of those
securities used $12.8 million of cash in 2007 and generated $5.9 million of
cash in 2006. We used $0.7 million of cash for the purchase of fixed assets and
capitalized patent costs in both the six months ended June 30, 2007 and 2006.

Financing
activities generated $0.5 million of cash in the six months ended June 30, 2007,
compared to generating $1.4 million of cash in the six months ended June 30,
2006. Proceeds from the exercise of stock options, including excess tax
benefits from the exercise of those options, totaled $0.6 million in the six
months ended June 30, 2007, compared to $1.4 million in the six months ended
June 30, 2006. We used $0.2 million of cash to repurchase 13,066 shares of our
common stock in the six months ended June 30, 2007.

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, 2006. There have
been no significant changes to our contractual obligations in the six months
ended June 30, 2007 and we have not entered into any material commitments for
capital expenditures outside of those normal contractual obligations. Purchase
commitments for inventory can vary based on the volume of revenue and resulting
inventory requirements. Our cash, cash equivalents and marketable securities
totaled $48.8 million at June 30, 2007. We believe that our available balances
of cash, cash equivalents and marketable securities, coupled with anticipated
cash flow from operations, will be adequate to fund our cash flow needs for the
foreseeable future.

At
June 30, 2007, we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the
purpose of establishing off-balance sheet arrangements or other contractually
narrow or limited purposes. As such, we are not exposed to the financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.

OTHER FACTORS

Changes
in revenues have resulted primarily from changes in the level of unit shipments
and the relative strength of the worldwide electronics and semiconductor
fabrication capital equipment markets. We believe that inflation has not had
any significant effect on operations. All of our international export sales are
negotiated, invoiced and paid in U.S. dollars. Accordingly, although currency
fluctuations do not significantly affect our revenue and income, they can
influence the price competitiveness of our products and the willingness of
existing and potential customers to purchase our products.

We
have sales offices located in the United Kingdom, Singapore and China. We do
not believe that currency fluctuations will have a material impact on our
consolidated financial statements.

RECENT ACCOUNTING DEVELOPMENTS

In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157 Fair Value Measurements, which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. SFAS
No. 157 will apply whenever another standard requires (or permits) assets or
liabilities to be measured at fair value. The standard does not expand the use
of fair value to any new circumstances, and is effective beginning after
December 31, 2007. We are currently evaluating the impact of adopting SFAS No.
157 on our financial position and results of operations.

In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities - Including an amendment of FASB Statement No. 115,
which permits entities to choose to measure many financial instruments and
certain other items at fair value. SFAS No. 159 is effective as of the
beginning of an entitys first fiscal year that begins after November 15, 2007.
We are currently evaluating the impact of adopting SFAS No. 159 on our
financial position and results of operations.

17

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ITEM 7A -
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest
excess funds not required for current operations in marketable securities. The
investment policy for these marketable securities is approved annually by the
Board of Directors and administered by management. A third party, approved by
our Board of Directors, manages the portfolio at the direction of management.
The investment policy dictates that marketable securities consist of U.S.
Government or U.S. Government agency securities or certain approved corporate
instruments with maturities of five years or less and an average portfolio
maturity of not more than 18 months. As of June 30, 2007, our portfolio of
marketable securities had an average term to maturity of approximately 15
months. All marketable securities are classified as available for sale and
carried at fair value. We estimate that a hypothetical 1% increase in market
interest rates would result in a decrease in the market value of the portfolio
of marketable securities of approximately $0.5 million. If such a rate increase
occurred, our net income would only be impacted if securities were sold prior
to maturity.

We
enter into foreign currency swap agreements to hedge short term inter-company
financing transactions with our subsidiary in the United Kingdom. These
currency swap agreements are structured to mature on or about the last day of
each quarter, and are designated as cash flow hedges. At June 30, 2007, we had
one open swap agreement that was purchased on June 29, 2007, the fair value of
which was inconsequential. The gains or losses from the settlement of foreign
currency swap agreements, and the impact of currency fluctuations on the
underlying inter-company balance, were insignificant in the three and six
months ended June 30, 2007.

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.

ITEM 4  CONTROLS AND PROCEDURES

a.       Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective in ensuring that
information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable rules and forms and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, in a manner that allows
timely decisions regarding required disclosure.

b.       During the
quarter ended June 30, 2007, 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.

18

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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, 2006, which could
materially affect our business, financial condition or future results.

ITEM 2  Unregistered
Sales of Equity Securities and Use of Proceeds

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

|                                |  |                                              |        |                                        |   |                                                                                                              |  |                                                                                                          |        |  |  |         | 
|------------------------------- |  | -------------------------------------------- | ------ | -------------------------------------- | - | ------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------- | ------ |  |  | ------- | 
|Period                          |  | (a)
  Total
  Number of
  Shares
  Purchased |        | (b)
  Average Price
  Paid per
  Share |   | (c)
  Total
  Number of
  Shares
  Purchased
  as Part of
  Publicly
  Announced
  Plans
  or Programs
  (1) |  | (d)
  Maximum
  Number of
  Shares that
  May
  Yet Be
  Purchased
  Under the
  Plans
  or Programs (1) |       
|                                |  |                                              |        |                                        |   |                                                                                                              |  |                                                                                                          |       
|April 1, 2007 to April 30, 2007 |  |                                              |       |                                        | $ |                                                                                                             |  |                                                                                                          |       |  |  | 289,602 | 
|May 1, 2007 to May 31, 2007     |  |                                              | 13,066 |                                        | $ | 12.50                                                                                                        |  |                                                                                                          | 13,066 |  |  | 276,536 | 
|June 1, 2007 to June 30, 2007   |  |                                              |       |                                        | $ |                                                                                                             |  |                                                                                                          |       |  |  | 276,536 | 
|                                |  |                                              |        |                                        |   |                                                                                                              |  |                                                                                                          |        |  |  |         | 
|                                |  |                                              |        |                                        |   |                                                                                                              |  |                                                                                                          |        |  |  |         | 
|Total                           |  |                                              | 13,066 |                                        | $ | 12.50                                                                                                        |  |                                                                                                          | 13,066 |  |  | 276,536 | 
|                                |  |                                              |        |                                        |   |                                                                                                              |  |                                                                                                          |        |  |  |         | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Prior to
  April 1, 2007, the Company had repurchased an aggregate of 210,398 shares of
  its common stock pursuant to the repurchase program that it publicly
  announced on July 26, 2006, providing for the repurchase of 500,000 shares,
  and with the repurchase of 13,066 shares in the second quarter of 2007, had
  repurchased an aggregate of 223,464 shares under that authorization. The
  Company previously adopted a 10b5-1 plan to facilitate the purchase of the
  shares during periods it might otherwise be prevented by insider trading laws
  from making such repurchases. Shares were purchased in open market transactions.
  The aforementioned repurchase program and 10b5-1 trading plan expired as
  required per the original term implemented on July 26, 2006.

19

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ITEM 4  SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS

The annual
meeting of shareholders of CyberOptics Corporation was held at 3:00 p.m. on
Monday, May 21, 2007. Shareholders holding 8,234,427 shares, or approximately
92% of the outstanding shares, were represented at the meeting by proxy or in
person. Matters submitted at the meeting for vote by the shareholders were as
follows:

a. Election of
Directors

The following
nominees were elected to serve as members of the Board of Directors until the
annual meeting in 2008 or until such time as a successor may be elected:

|                         |  |  |           |  |  |                   
|------------------------ |  |  | --------- |  |  | ------------------
|                         |  |  | For       |  |  | Withhold Authority
|                         |  |  |           |  |  |                   
|Steven K.
  Case         |  |  | 8,096,724 |  |  | 128,351           
|Alex B.
  Cimochowski    |  |  | 7,751,141 |  |  | 473,934           
|Kathleen P.
  Iverson    |  |  | 8,095,700 |  |  | 129,375           
|Erwin A.
  Kelen         |  |  | 8,086,144 |  |  | 138,931           
|Irene M.
  Qualters      |  |  | 8,093,144 |  |  | 131,931           
|Michael M.
  Selzer, Jr. |  |  | 8,094,294 |  |  | 130,781           

b. Amendment
to 1998 Stock Incentive Plan

Shareholders
approved an amendment to our 1998 Stock Incentive Plan that extends the
termination date to May 21, 2017 by a vote of 5,588,305 shares in favor,
319,535 shares against and 34,951 shares abstained. There were 2,282,284 broker
no-votes.

ITEM 6  EXHIBITS

|      |                                                                                                                                                
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------
|31.1: | Certification
  of Chief Executive Officer pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a))
  and Section 302 of the Sarbanes-Oxley Act of 2002
|      |                                                                                                                                                
|31.2: | Certification
  of Chief Financial Officer pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a))
  and Section 302 of the Sarbanes Oxley Act of 2002
|      |                                                                                                                                                
|32:   | Certification
  of Chief Executive Officer and Chief Financial Officer Pursuant to Section
  906 of the Sarbanes-Oxley Act of 2002             

20

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SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

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

Dated: August 6, 2007

21

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