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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

|          |  | 
|--------- |  | 
|          |  | 
|          |  | 
|FORM 10-Q
|          |  | 
|          |  | 

(Check One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from ______ to ______

COMMISSION FILE NO. (0-16577)

| |  | 
| |  | 
| |  | 

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


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

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

| |  | 
| |  | 
| |  | 

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YesxNoo

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YesoNoo

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

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

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

Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date. At October 31, 2010, there were 6,882,549 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

|                                                                                                                                                             |  |                                  |        |                               |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | ----------------------------- | - | ------ | -
|(In
 thousands except share information)                                                                                                                     |  | (Unaudited)
 September 30,
 2010 |        | (Audited)
 December 31,
 2009 |  
|                                                                                                                                                             |  |                                  |        |                               |   |        |  
|ASSETS                                                                                                                                                       |  |                                  |        |                               |   |        |  
|                                                                                                                                                             |  |                                  |        |                               |   |        |  
|Cash and cash equivalents                                                                                                                                    |  | $                                | 7,070  |                               | $ | 4,177  |  
|Marketable securities                                                                                                                                        |  |                                  | 7,281  |                               |   | 14,557 |  
|Accounts receivable, less allowance for doubtful accounts of $1,055
 at September 30,                                                                        |  |                                  |        |                               |   |        |  
|2010 and $1,049 at December 31, 2009                                                                                                                         |  |                                  | 12,993 |                               |   | 8,389  |  
|Inventories                                                                                                                                                  |  |                                  | 14,761 |                               |   | 7,745  |  
|Income tax refunds receivable                                                                                                                                |  |                                  |       |                               |   | 2,499  |  
|Other current assets                                                                                                                                         |  |                                  | 1,602  |                               |   | 1,130  |  
|Deferred tax assets                                                                                                                                          |  |                                  | 2,040  |                               |   | 2,040  |  
|Total current assets                                                                                                                                         |  |                                  | 45,747 |                               |   | 40,537 |  
|                                                                                                                                                            
|Marketable securities                                                                                                                                        |  |                                  | 5,398  |                               |   | 3,145  |  
|Equipment and leasehold improvements, net                                                                                                                    |  |                                  | 2,121  |                               |   | 1,921  |  
|Intangible and other assets, net                                                                                                                             |  |                                  | 469    |                               |   | 642    |  
|Goodwill                                                                                                                                                     |  |                                  | 569    |                               |   | 569    |  
|Other assets                                                                                                                                                 |  |                                  | 170    |                               |   | 163    |  
|Deferred tax assets                                                                                                                                          |  |                                  | 4,112  |                               |   | 4,160  |  
|Total assets                                                                                                                                                 |  | $                                | 58,586 |                               | $ | 51,137 |  
|                                                                                                                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  |                                  |        |                               |   |        |  
|                                                                                                                                                             |  |                                  |        |                               |   |        |  
|Accounts payable                                                                                                                                             |  | $                                | 7,030  |                               | $ | 3,652  |  
|Advance customer payments                                                                                                                                    |  |                                  | 850    |                               |   | 657    |  
|Accrued expenses                                                                                                                                             |  |                                  | 2,928  |                               |   | 1,880  |  
|Total current liabilities                                                                                                                                    |  |                                  | 10,808 |                               |   | 6,189  |  
|                                                                                                                                                             |  |                                  |        |                               |   |        |  
|Other liabilities                                                                                                                                            |  |                                  | 575    |                               |   | 546    |  
|Total liabilities                                                                                                                                            |  |                                  | 11,383 |                               |   | 6,735  |  
|                                                                                                                                                             |  |                                  |        |                               |   |        |  
|Commitments and contingencies                                                                                                                                |  |                                  |       |                               |   |       |  
|                                                                                                                                                             |  |                                  |        |                               |   |        |  
|Stockholders equity:                                                                                                                                        |  |                                  |        |                               |   |        |  
|Preferred stock, no par value, 5,000,000 shares authorized, none
 outstanding                                                                                |  |                                  |       |                               |   |       |  
|Common stock, no par value, 25,000,000 shares authorized, 6,882,549
 shares issued and outstanding at September 30, 2010 and 6,828,616 at December
 31, 2009 |  |                                  | 30,231 |                               |   | 29,732 |  
|Accumulated other comprehensive loss                                                                                                                         |  |                                  | (630   | )                             |   | (768   | )
|Retained earnings                                                                                                                                            |  |                                  | 17,602 |                               |   | 15,438 |  
|                                                                                                                                                             |  |                                  |        |                               |   |        |  
|Total stockholders equity                                                                                                                                   |  |                                  | 47,203 |                               |   | 44,402 |  
|                                                                                                                                                            
|Total liabilities and stockholders equity                                                                                                                   |  | $                                | 58,586 |                               | $ | 51,137 |  

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

1

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CYBEROPTICS CORPORATION
(Unaudited)

|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | -------------------------------- | - | ------ | - | ---- | ------ |  | - | ------ | -
|                                               |  | Three Months Ended 
 September 30, |        | Nine Months Ended
 September 30, |  
|(In
 thousands, except per share amounts)      |  | 2010                               |        | 2009                             |   | 2010   |   | 2009 |       
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Revenues                                       |  | $                                  | 14,145 |                                  | $ | 8,550  |   | $    | 42,985 |  | $ | 18,091 |  
|Cost of
 revenues                              |  |                                    | 7,482  |                                  |   | 5,613  |   |      | 24,410 |  |   | 12,178 |  
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Gross margin                                   |  |                                    | 6,663  |                                  |   | 2,937  |   |      | 18,575 |  |   | 5,913  |  
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Research and
 development expenses             |  |                                    | 1,914  |                                  |   | 1,813  |   |      | 5,398  |  |   | 5,620  |  
|Selling,
 general and administrative expenses  |  |                                    | 3,530  |                                  |   | 2,835  |   |      | 10,421 |  |   | 9,469  |  
|Severance                                      |  |                                    |       |                                  |   | (32    | ) |      |       |  |   | 363    |  
|Amortization
 of intangibles                   |  |                                    | 45     |                                  |   | 45     |   |      | 136    |  |   | 136    |  
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Income
 (loss) from operations                 |  |                                    | 1,174  |                                  |   | (1,724 | ) |      | 2,620  |  |   | (9,675 | )
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Interest
 income and other                     |  |                                    | 61     |                                  |   | 92     |   |      | 151    |  |   | 450    |  
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Income
 (loss) before income taxes             |  |                                    | 1,235  |                                  |   | (1,632 | ) |      | 2,771  |  |   | (9,225 | )
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Income tax
 provision (benefit)                |  |                                    | 287    |                                  |   | (791   | ) |      | 607    |  |   | (4,028 | )
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Net income
 (loss)                             |  | $                                  | 948    |                                  | $ | (841   | ) | $    | 2,164  |  | $ | (5,197 | )
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Net income
 (loss) per share  Basic           |  |                                    | $0.14  |                                  |   | ($0.12 | ) |      | $0.32  |  |   | ($0.77 | )
|Net income
 (loss) per share  Diluted         |  |                                    | $0.14  |                                  |   | ($0.12 | ) |      | $0.31  |  |   | ($0.77 | )
|                                               |  |                                    |        |                                  |   |        |   |      |        |  |   |        |  
|Weighted
 average shares outstanding  Basic   |  |                                    | 6,871  |                                  |   | 6,801  |   |      | 6,853  |  |   | 6,785  |  
|Weighted
 average shares outstanding  Diluted |  |                                    | 6,919  |                                  |   | 6,801  |   |      | 6,901  |  |   | 6,785  |  

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)

|                                                                                      |  |                                 |         |      |   |        |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------ | -
|                                                                                      |  | Nine Months Ended September 30, |        
|(In
 thousands)                                                                       |  | 2010                            |         | 2009 |  
|                                                                                      |  |                                 |         |      |   |        |  
|CASH FLOWS
 FROM OPERATING ACTIVITIES:                                                |  |                                 |         |      |   |        |  
|Net income (loss)                                                                     |  | $                               | 2,164   |      | $ | (5,197 | )
|Adjustments to reconcile net income (loss)
 to net cash used by operating activities: |  |                                 |         |      |   |        |  
|Depreciation and amortization                                                         |  |                                 | 1,651   |      |   | 1,845  |  
|Provision for doubtful accounts                                                       |  |                                 | 24      |      |   | 804    |  
|Deferred taxes                                                                        |  |                                 | 99      |      |   | (1,807 | )
|Foreign currency transaction (gains) losses                                           |  |                                 | (35     | )    |   | (116   | )
|Stock compensation costs                                                              |  |                                 | 288     |      |   | 359    |  
|Realized gains on available for sale
 marketable securities                           |  |                                 |        |      |   | (26    | )
|Changes in operating assets and
 liabilities:                                         |  |                                 |         |      |   |        |  
|Accounts receivable                                                                   |  |                                 | (4,628  | )    |   | (992   | )
|Inventories                                                                           |  |                                 | (7,193  | )    |   | 658    |  
|Income tax refunds receivable                                                         |  |                                 | 2,499   |      |   | (435   | )
|Other current assets                                                                  |  |                                 | (282    | )    |   | (278   | )
|Accounts payable                                                                      |  |                                 | 3,248   |      |   | 696    |  
|Advance customer payments                                                             |  |                                 | 193     |      |   | (4     | )
|Accrued expenses                                                                      |  |                                 | 1,058   |      |   | (1,688 | )
|Net cash used by operating activities                                                 |  |                                 | (914    | )    |   | (6,181 | )
|                                                                                      |  |                                 |         |      |   |        |  
|CASH FLOWS
 FROM INVESTING ACTIVITIES:                                                |  |                                 |         |      |   |        |  
|Proceeds from maturities of available for
 sale marketable securities                 |  |                                 | 12,989  |      |   | 10,391 |  
|Proceeds from sales of available for sale
 marketable securities                      |  |                                 | 3,241   |      |   | 2,570  |  
|Purchases of available for sale marketable
 securities                                |  |                                 | (11,505 | )    |   | (6,142 | )
|Additions to equipment and leasehold
 improvements                                    |  |                                 | (996    | )    |   | (420   | )
|Additions to patents                                                                  |  |                                 | (134    | )    |   | (210   | )
|Net cash provided by investing activities                                             |  |                                 | 3,595   |      |   | 6,189  |  
|                                                                                      |  |                                 |         |      |   |        |  
|CASH FLOWS
 FROM FINANCING ACTIVITIES:                                                |  |                                 |         |      |   |        |  
|Proceeds from exercise of stock options                                               |  |                                 | 36      |      |   | 46     |  
|Proceeds from issuance of common stock
 under employee stock purchase plan            |  |                                 | 175     |      |   | 118    |  
|Net cash provided by financing activities                                             |  |                                 | 211     |      |   | 164    |  
|                                                                                      |  |                                 |         |      |   |        |  
|Effects of
 exchange rate changes on cash and cash equivalents                        |  |                                 | 1       |      |   | 22     |  
|                                                                                      |  |                                 |         |      |   |        |  
|Net increase
 in cash and cash equivalents                                            |  |                                 | 2,893   |      |   | 194    |  
|                                                                                      |  |                                 |         |      |   |        |  
|Cash and
 cash equivalents  beginning of period                                      |  |                                 | 4,177   |      |   | 4,516  |  
|                                                                                      |  |                                 |         |      |   |        |  
|Cash and
 cash equivalents  end of period                                            |  | $                               | 7,070   |      | $ | 4,710  |  

3

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NOTES TO THE
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION

1. INTERIM REPORTING:

The interim
condensed consolidated financial statements presented herein as of September
30, 2010, and for the three and nine month periods ended September 30, 2010 and
2009, are unaudited, but in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation
of financial position, results of operations and cash flows for the periods
presented.

The results of
operations for the three and nine month periods ended September 30, 2010 do not
necessarily indicate the results to be expected for the full year. The December
31, 2009 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,
2009.

2. MARKETABLE SECURITIES:

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

|                                                      |  |                    |       |                 |  |                  |  |            |     |   |   |       | 
|----------------------------------------------------- |  | ------------------ | ----- | --------------- |  | ---------------- |  | ---------- | --- | - | - | ----- | 
|                                                      |  | September 30, 2010 |      
|(In
 thousands)                                       |  | Cost               |       | UnrealizedGains |  | UnrealizedLosses |  | Fair Value |    
|                                                      |  |                    |       |                 |  |                  |  |            |     |   |   |       | 
|Short Term                                            |  |                    |       |                 |  |                  |  |            |     |   |   |       | 
|U.S. government and agency obligations                |  | $                  | 4,680 |                 |  | 30               |  |            |    |   | $ | 4,710 | 
|Corporate debt securities and certificates of deposit |  |                    | 2,570 |                 |  | 1                |  |            |    |   |   | 2,571 | 
|Marketable
 securities  short term                   |  | $                  | 7,250 |                 |  | 31               |  |            |    |   | $ | 7,281 | 
|                                                      |  |                    |       |                 |  |                  |  |            |     |   |   |       | 
|Long Term                                             |  |                    |       |                 |  |                  |  |            |     |   |   |       | 
|U.S. government and agency obligations                |  | $                  | 3,374 |                 |  | 21               |  |            |    |   | $ | 3,395 | 
|Corporate debt securities and certificates of deposit |  |                    | 1,738 |                 |  | 7                |  |            |    |   |   | 1,745 | 
|Asset backed securities                               |  |                    | 200   |                 |  | 6                |  |            |    |   |   | 206   | 
|Equity securities                                     |  |                    | 84    |                 |  |                 |  |            | (32 | ) |   | 52    | 
|Marketable
 securities  long term                    |  | $                  | 5,396 |                 |  | 34               |  |            | (32 | ) | $ | 5,398 | 

4

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|                                                      |  |                   |        |                   |  |                    |  |            |     |   |   |        | 
|----------------------------------------------------- |  | ----------------- | ------ | ----------------- |  | ------------------ |  | ---------- | --- | - | - | ------ | 
|                                                      |  | December 31, 2009 |       
|(In
 thousands)                                       |  | Cost              |        | Unrealized
 Gains |  | Unrealized
 Losses |  | Fair Value |    
|                                                      |  |                   |        |                   |  |                    |  |            |    
|Short Term                                            |  |                   |        |                   |  |                    |  |            |     |   |   |        | 
|U.S. government and agency obligations                |  | $                 | 11,199 |                   |  | 158                |  |            |    |   | $ | 11,357 | 
|Corporate debt securities and certificates of deposit |  |                   | 3,180  |                   |  | 20                 |  |            |    |   |   | 3,200  | 
|Marketable
 securities  short term                   |  | $                 | 14,379 |                   |  | 178                |  |            |    |   | $ | 14,557 | 
|                                                      |  |                   |        |                   |  |                    |  |            |     |   |   |        | 
|Long Term                                             |  |                   |        |                   |  |                    |  |            |     |   |   |        | 
|U.S. government and agency obligations                |  | $                 | 2,757  |                   |  | 47                 |  |            |    |   | $ | 2,804  | 
|Corporate debt securities                             |  |                   | 101    |                   |  |                   |  |            |    |   |   | 101    | 
|Asset backed securities                               |  |                   | 200    |                   |  | 10                 |  |            |    |   |   | 210    | 
|Equity securities                                     |  |                   | 84     |                   |  |                   |  |            | (54 | ) |   | 30     | 
|Marketable
 securities  long term                    |  | $                 | 3,142  |                   |  | 57                 |  |            | (54 | ) | $ | 3,145  | 

Our investment in equity
securities was in a $32,000 unrealized loss position at September 30, 2010 and
a $54,000 unrealized loss position at December 31, 2009 due to weak economic
and stock market conditions. We intend to hold this security indefinitely and
expect its value to recover given improved economic and market conditions.

Our
investments in marketable debt securities all have maturities of less than five
years. At September 30, 2010, marketable debt securities valued at
$12,075,000 were in an unrealized gain position totaling $65,000 and marketable
debt securities valued at $552,000 were in an insignificant unrealized loss
position totaling several hundred dollars. At December 31, 2009, marketable
debt securities valued at $16,463,000 were in an unrealized gain position
totaling $235,000 and marketable debt securities valued at $1,209,000 were in
an insignificant unrealized loss position totaling several hundred dollars (all
had been in an unrealized loss position for less than twelve months).

Net pre-tax unrealized gains
for marketable securities of $33,000 at September 30, 2010 and $182,000 at
December 31, 2009 were recorded as a component of accumulated other
comprehensive income (loss) in stockholders equity. In the three months ended
September 30, 2010 we received proceeds of $597,000 from the sale of marketable
securities. In the nine months ended September 30, 2010 we received proceeds of
$3,241,000 from the sale of marketable securities. No gain or loss was
recognized on any of the sales in 2010. In the three months ended September 30,
2009 we received proceeds of $92,000 from the sale of marketable securities and
recognized a gain of $2,000 from the sales. In the nine months ended September
30, 2009, we received proceeds of $2,570,000 from the sale of marketable
securities and recognized a gain of $26,000 from the sale.

3. FAIR VALUE MEASUREMENTS:

We determine
the fair value of our assets and liabilities based on the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value maximize the use of observable
inputs and minimize the use of unobservable inputs. We use a fair value hierarchy
with three levels of inputs, of which the first two are considered observable
and the last unobservable, to measure fair value: The fair value hierarchy
gives the highest priority to quoted prices in active markets for identical
assets or liabilities (Level 1). The next highest priority is based on
quoted prices for similar assets or liabilities in active markets or quoted
prices for identical or similar assets or liabilities in non-active markets or
other observable inputs (Level 2). The lowest priority is given to unobservable
inputs (Level 3).

5

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The following provides information regarding fair value measurements
for our cash equivalents and marketable securities as of September 30, 2010 and
December 31, 2009 according to the three-level fair value hierarchy:

|                                       |  |                              |        |                                                                   |   |                                                  |  |                                              |        |  |   |   | 
|-------------------------------------- |  | ---------------------------- | ------ | ----------------------------------------------------------------- | - | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                       |  |                              |        | Fair Value Measurements at September 30, 2010 Using               |  
|(In
 thousands)                        |  | Balance
 September 30,
 2010 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |   | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                       |  |                              |        |                                                                   |   |                                                  |  |                                              |        |  |   |   | 
|Cash equivalents                       |  | $                            | 2,613  |                                                                   | $ |                                                 |  | $                                            | 2,613  |  | $ |  | 
|U.S. government and agency obligations |  |                              | 8,105  |                                                                   |   |                                                 |  |                                              | 8,105  |  |   |  | 
|Corporate debt securities              |  |                              | 4,316  |                                                                   |   |                                                 |  |                                              | 4,316  |  |   |  | 
|Asset backed securities                |  |                              | 206    |                                                                   |   |                                                 |  |                                              | 206    |  |   |  | 
|Equity securities                      |  |                              | 52     |                                                                   |   | 52                                               |  |                                              |       |  |   |  | 
|Total                                  |  | $                            | 15,292 |                                                                   | $ | 52                                               |  | $                                            | 15,240 |  | $ |  | 

|                                       |  |                             |        |                                                                   |   |                                                  |  |                                              |        |  |   |   | 
|-------------------------------------- |  | --------------------------- | ------ | ----------------------------------------------------------------- | - | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                       |  |                             |        | Fair Value Measurements at December 31, 2009 Using                |  
|(In
 thousands)                        |  | Balance
 December 31,
 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |   | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                       |  |                             |        |                                                                   |   |                                                  |  |                                              |        |  |   |   | 
|Cash equivalents                       |  | $                           | 2,320  |                                                                   | $ |                                                 |  | $                                            | 2,320  |  | $ |  | 
|U.S. government and agency obligations |  |                             | 14,161 |                                                                   |   |                                                 |  |                                              | 14,161 |  |   |  | 
|Corporate debt securities              |  |                             | 3,301  |                                                                   |   |                                                 |  |                                              | 3,301  |  |   |  | 
|Asset backed securities                |  |                             | 210    |                                                                   |   |                                                 |  |                                              | 210    |  |   |  | 
|Equity securities                      |  |                             | 30     |                                                                   |   | 30                                               |  |                                              |       |  |   |  | 
|Total                                  |  | $                           | 20,022 |                                                                   | $ | 30                                               |  | $                                            | 19,992 |  | $ |  | 

During the nine months ended September 30, 2010 there were no
significant transfers to or from the three level hierarchy. The carrying
amounts of financial instruments such as cash equivalents, accounts receivable,
other assets, accounts payable, accrued expenses and other current liabilities
approximate the related fair values due to the short term maturities of these
instruments. Non-financial assets such as equipment and leasehold improvements,
goodwill and intangible assets are subject to nonrecurring fair value
measurements if they are deemed impaired. The impairment models used for these
assets are described in more detail in our Annual Report on Form 10-K for the
year ended December 31, 2009. Our foreign currency swap agreements are
structured to mature on the last day of each quarter. The fair value associated
with these agreements is inconsequential and represents a Level 2 measurement.

We consider all highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. At September 30, 2010, cash
and cash equivalents consist of funds maintained in demand deposit accounts,
money market accounts, corporate debt instruments and U.S. government backed
obligations. Some cash and cash equivalent balances may exceed federally
insured limits.

6

---



4. ACCOUNTING FOR STOCK-BASED COMPENSATION:

All equity-based payments to employees, including grants of employee
stock options, are recognized as an expense in our consolidated statement of
operations based on the grant date fair value of the award. 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 has been
determined using the Black-Scholes model. The compensation expense recognized
for all equity based awards is net of estimated forfeitures, which are based on
historical data. We have classified equity based compensation within our
statement of operations in the same manner as our cash based employee
compensation costs.

The fair value of the options granted to our employees was estimated on
the date of grant using the Black-Scholes model. Stock options for 47,000
shares of stock and restricted stock units for 350 shares of stock were granted
in the nine months ended September 30, 2010 to certain key employees. We issued
4,000 shares of common stock under our stock grant plan for non-employee
directors upon their re-election to the board of directors in May 2010. These
stock options, restricted stock units and share grants were valued at their
fair market value on the date of grant, with recognition of compensation
expense over the corresponding vesting period.

Equity based compensation expense in the three months ended September
30, 2010 totaled $93,000 and includes $50,000 for stock option awards, $24,000
for our employee stock purchase plan and $19,000 for unvested restricted stock
units. Equity based compensation expense in the nine months ended September 30,
2010 totaled $288,000 and includes $133,000 for stock option awards, $60,000
for our employee stock purchase plan, $57,000 for unvested restricted stock
units and $38,000 for shares issued to our non-employee directors upon their
re-election to our board in May 2010.

Equity based compensation expense in the three months ended September
30, 2009 totaled $97,000 and includes $59,000 for stock option awards, $17,000
for our employee stock purchase plan and $21,000 for unvested restricted stock
units. Equity based compensation expense in the nine months ended September 30,
2009 totaled $359,000 and includes $200,000 for stock option awards, $44,000
for our employee stock purchase plan, $51,000 for unvested restricted stock
units, $14,000 for shares issued to our non-employee directors and $50,000 for
shares issued to an officer under an incentive compensation arrangement.

At September 30, 2010, the total unrecognized compensation cost related
to non-vested equity based compensation arrangements was $632,000 and the
related weighted average period over which it is expected to be recognized is
1.96 years.

The Black Scholes valuation model incorporates ranges of assumptions
that are disclosed in the table below. The risk-free interest rate is based on
the United States Treasury yield curve at the time of grant with a remaining
term equal to the expected life of the awards. We estimated the expected term
for our graded vesting options, representing the length of time in years that
the options are expected to be outstanding, using the simplified method. We
continued to use the simplified method in 2010 because our historical exercise
experience is not expected to be representative of exercise patterns in the
future, due to our recent restructuring activities. Expected volatility was
computed based on historical fluctuations in the daily price of our common
stock.

For stock options granted during the nine months ending September 30,
2010, we utilized the fair value of our common stock on the date of grant and
employed the following key assumptions in computing fair value using the
Black-Scholes option-pricing model:

|                                           |  |                                        |               | 
|------------------------------------------ |  | -------------------------------------- | ------------- | 
|Black
 Scholes Assumptions:                |  | Nine Months Ending
 September 30, 2010 |              
|                                           |  |                                        |               | 
|Risk-free
 interest rates                  |  |                                        | 2.47% - 2.75% | 
|Expected
 life in years                    |  |                                        | 4.75          | 
|Expected
 volatility                       |  |                                        | 50% - 52%     | 
|Expected
 dividends                        |  |                                        | None          | 
|Weighted
 average fair value on grant date |  |                                        | $4.80         | 

7

---



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
825,709 shares of common stock reserved in the aggregate for issuance of
options and other stock based benefits under these plans, including restricted
stock units and share grants to employees, officers, non-employee directors and
others. Reserved shares underlying canceled options are available for future grant
under our active plans. Options are granted at an option price per share equal
to or greater than the market value on the date of grant. Generally, options
granted to employees vest over a four-year period and expire five, seven, or
ten years after the date of grant. Stock options for 47,000 shares of stock
were granted during the nine months ended September 30, 2010. As of September
30, 2010, there were 337,445 shares of common stock available under these plans
for future issuance to employees, officers and others. There are no options
available under these plans for future issuance to non-employee directors. In
addition, there are 50,000 shares reserved and included in the plan summaries
below that are not part of the three stock incentive plans.

The following
is a summary of stock option activity during the nine months ended September
30, 2010:

|                                 |  |                     |         |                                               |   |       | 
|-------------------------------- |  | ------------------- | ------- | --------------------------------------------- | - | ----- | 
|                                 |  | Options Outstanding |         | Weighted  Average
 Exercise Price Per
 Share |  
|Outstanding,
 December 31, 2009  |  |                     | 549,095 |                                               | $ | 10.04 | 
|Granted                          |  |                     | 47,000  |                                               |   | 10.70 | 
|Exercised                        |  |                     | (66,500 | )                                             |   | 5.97  | 
|Expired                          |  |                     | (14,500 | )                                             |   | 23.77 | 
|Forfeited                        |  |                     |        |                                               |   |      | 
|Outstanding,
 September 30, 2010 |  |                     | 515,095 |                                               | $ | 10.24 | 
|Exercisable,
 September 30, 2010 |  |                     | 342,578 |                                               | $ | 11.68 | 

The intrinsic value of an option is the amount by which the fair value
of the underlying stock exceeds its exercise price. The weighted average
remaining contractual term and aggregate intrinsic value for all options
outstanding at September 30, 2010 was 3.83 years and $604,000. The weighted
average remaining contractual term and aggregate intrinsic value of options
that were exercisable at September 30, 2010 was 2.98 years and $160,000. The
aggregate intrinsic value of stock options that were exercised in the nine
months ended September 30, 2010 was $113,000. During the nine months ended
September 30, 2010, we received total proceeds of $36,000 from the exercise of
stock options. The excess tax benefit associated with the exercise of stock
options in the three and nine months ended September 30, 2010 was
inconsequential.

Restricted Stock Units

Our 1998 Stock Incentive Plan also permits our Compensation Committee
to grant other stock-based benefits, including restricted stock units.
Restricted stock units are valued at a price equal to the fair market value of
our common stock on the date of grant, vest over a four year period and entitle
the holders to one share of our common stock for each restricted stock unit.
The aggregate fair value of outstanding restricted stock units as of September
30, 2010 was $211,000.

A summary of
activity in non-vested restricted stock units for the nine months ended
September 30, 2010 is as follows:

|                                   |  |        |        |                                           |   |      | 
|---------------------------------- |  | ------ | ------ | ----------------------------------------- | - | ---- | 
|Non vested
 restricted stock units |  | Shares |        | Weighted  Average
 Grant Date Fair Value |  
|Non vested
 at December 31, 2009   |  |        | 22,819 |                                           | $ | 6.79 | 
|Granted                            |  |        | 350    |                                           |   | 7.71 | 
|Vested                             |  |        |       |                                           |   |     | 
|Forfeited                          |  |        |       |                                           |   |     | 
|Non vested
 at September 30, 2010  |  |        | 23,169 |                                           | $ | 6.80 | 

8

---



Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan available to eligible U.S.
employees. Under terms of the plan, eligible employees may designate from 1% to
10% of their compensation to be withheld through payroll deductions, up to a
maximum of $6,500 in each plan year, for the purchase of common stock at 85% of
the lower of the market price on the first or last day of the offering period.
There were 30,658 shares issued under this plan in the nine months ended
September 30, 2010 and 20,810 shares issued in the nine months ended September
30, 2009. As of September 30, 2010, 61,344 shares remain available for future
issuance under this plan.

Stock Grant Plan for Non-Employee Directors

Our stock grant plan for non-employee directors provides for automatic
grants of 1,000 shares of our common stock to each of our non-employee
directors upon their re-election to the board of directors. The plan provides
for a total of 30,000 shares of our common stock for issuance to directors and
will expire on May 19, 2018. We issued a total of 4,000 shares of common stock
under this plan in connection with our annual meeting in May 2010, resulting in
$38,000 of stock compensation expense in the nine months ended September 30,
2010. There are presently 20,000 shares of common stock reserved in the
aggregate for future issuance under this plan.

5. INVENTORIES AND WARRANTIES:

Inventories
consist of the following:

|                                   |  |                    |        |                   |   |       | 
|---------------------------------- |  | ------------------ | ------ | ----------------- | - | ----- | 
|(In
 thousands)                    |  | September 30, 2010 |        | December 31, 2009 |  
|                                  
|Raw
 materials and purchased parts |  | $                  | 6,882  |                   | $ | 3,312 | 
|Work in
 process                   |  |                    | 1,702  |                   |   | 637   | 
|Finished
 goods                    |  |                    | 6,177  |                   |   | 3,796 | 
|                                   |  |                    |        |                   |   |       | 
|Total inventories                  |  | $                  | 14,761 |                   | $ | 7,745 | 

Warranty
costs:

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

|                                   |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|---------------------------------- |  | --------------------------------- | ---- | -------------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                   |  | Three Months Ended
 September 30, |      | Nine Months Ended
 September 30, |  
|(In
 thousands)                    |  | 2010                              |      | 2009                             |   | 2010 |   | 2009 |     
|                                  
|Balance at
 beginning of period    |  | $                                 | 607  |                                  | $ | 509  |   | $    | 488  |   | $ | 823  |  
|Accrual for warranties             |  |                                   | 370  |                                  |   | 115  |   |      | 875  |   |   | 313  |  
|Settlements made during the period |  |                                   | (183 | )                                |   | (225 | ) |      | (569 | ) |   | (737 | )
|                                   |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|Balance at
 end of period          |  | $                                 | 794  |                                  | $ | 399  |   | $    | 794  |   | $ | 399  |  

9

---



Extended
warranty:

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

|                                 |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|-------------------------------- |  | --------------------------------- | ---- | -------------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                 |  | Three Months Ended
 September 30, |      | Nine Months Ended
 September 30, |  
|(In
 thousands)                  |  | 2010                              |      | 2009                             |   | 2010 |   | 2009 |     
|                                 |  |                                   |      |                                  |   |      |   |      |     
|Balance at
 beginning of period  |  | $                                 | 875  |                                  | $ | 639  |   | $    | 636  |   | $ | 605  |  
|Revenue deferrals                |  |                                   | 80   |                                  |   | 163  |   |      | 546  |   |   | 369  |  
|Amortization of deferred revenue |  |                                   | (105 | )                                |   | (124 | ) |      | (332 | ) |   | (296 | )
|                                 |  |                                   |      |                                  |   |      |   |      |      |   |   |      |  
|Balance at
 end of period        |  | $                                 | 850  |                                  | $ | 678  |   | $    | 850  |   | $ | 678  |  

6. INTANGIBLE ASSETS:

Intangible
assets consist of the following:

|                        |  |                          |        |                           |   |         |   |                         |     |                           |   |        |  |   |        |   |   |     | 
|----------------------- |  | ------------------------ | ------ | ------------------------- | - | ------- | - | ----------------------- | --- | ------------------------- | - | ------ |  | - | ------ | - | - | --- | 
|                        |  | As of September 30, 2010 |        | As of December 31, 2009   |  
|(In
 thousands)         |  | Gross
 Carrying
 Amount  |        | Accumulated
 Amortization |   | Net     |   | Gross
 Carrying
 Amount |     | Accumulated
 Amortization |   | Net    | 
|                       
|Developed
 technology   |  | $                        | 7,775  |                           | $ | (7,621  | ) | $                       | 154 |                           | $ | 7,775  |  | $ | (7,485 | ) | $ | 290 | 
|Patents and
 trademarks |  |                          | 2,814  |                           |   | (2,499  | ) |                         | 315 |                           |   | 2,681  |  |   | (2,329 | ) |   | 352 | 
|Total                   |  | $                        | 10,589 |                           | $ | (10,120 | ) | $                       | 469 |                           | $ | 10,456 |  | $ | (9,814 | ) | $ | 642 | 

Amortization
expense for the three and nine month periods ended September 30, 2010 and 2009
is as follows:

|                        |  |                                   |     |                                  |   |      |  |      |     |  |   |     | 
|----------------------- |  | --------------------------------- | --- | -------------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                        |  | Three Months Ended
 September 30, |     | Nine Months Ended
 September 30, |  
|(In
 thousands)         |  | 2010                              |     | 2009                             |   | 2010 |  | 2009 |    
|                       
|Developed
 technology   |  | $                                 | 45  |                                  | $ | 45   |  | $    | 136 |  | $ | 136 | 
|Patents and
 trademarks |  |                                   | 56  |                                  |   | 192  |  |      | 170 |  |   | 348 | 
|                        |  |                                   |     |                                  |   |      |  |      |     |  |   |     | 
|Total                   |  | $                                 | 101 |                                  | $ | 237  |  | $    | 306 |  | $ | 484 | 

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

Amortization
of patents and trademarks has been classified as research and development
expense in the accompanying statement of operations. Estimated aggregate
amortization expense based on current intangibles for the next four years is
expected to be as follows: $101,000 for the remainder of 2010 and $293,000 in
2011, $57,000 in 2012, and $18,000 in 2013.

10

---



7. BUSINESS SEGMENTS
AND SIGNIFICANT CUSTOMERS:

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

|                                    |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|----------------------------------- |  | --------------------------------- | ------ | -------------------------------- | - | ------ | - | ---- | ------ |  | - | ------ | -
|                                    |  | Three Months Ended
 September 30, |        | Nine Months Ended
 September 30, |  
|(In
 thousands)                     |  | 2010                              |        | 2009                             |   | 2010   |   | 2009 |       
|                                    |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|Revenue:                            |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|Electronic
 Assembly                |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|OEM Sensors                         |  | $                                 | 6,896  |                                  | $ | 2,599  |   | $    | 18,500 |  | $ | 5,243  |  
|SMT Systems                         |  |                                   | 5,461  |                                  |   | 5,167  |   |      | 20,222 |  |   | 10,732 |  
|Total Electronic Assembly           |  |                                   | 12,357 |                                  |   | 7,766  |   |      | 38,722 |  |   | 15,975 |  
|                                    |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|Semiconductor                       |  |                                   | 1,788  |                                  |   | 784    |   |      | 4,263  |  |   | 2,116  |  
|Total                               |  | $                                 | 14,145 |                                  | $ | 8,550  |   | $    | 42,985 |  | $ | 18,091 |  
|                                    |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|Income
 (loss) from operations:     |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|Electronic
 Assembly                |  | $                                 | 562    |                                  | $ | (1,599 | ) | $    | 1,514  |  | $ | (8,976 | )
|Semiconductor                       |  |                                   | 612    |                                  |   | (125   | ) |      | 1,106  |  |   | (699   | )
|Total income (loss) from operations |  |                                   | 1,174  |                                  |   | (1,724 | ) |      | 2,620  |  |   | (9,675 | )
|Interest
 income and other          |  |                                   | 61     |                                  |   | 92     |   |      | 151    |  |   | 450    |  
|Income (loss) before taxes          |  | $                                 | 1,235  |                                  | $ | (1,632 | ) | $    | 2,771  |  | $ | (9,225 | )
|                                    |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|Depreciation
 and amortization:     |  |                                   |        |                                  |   |        |   |      |        |  |   |        |  
|Electronic
 Assembly                |  | $                                 | 559    |                                  | $ | 536    |   | $    | 1,479  |  | $ | 1,554  |  
|Semiconductor                       |  |                                   | 56     |                                  |   | 148    |   |      | 172    |  |   | 291    |  
|Total                               |  | $                                 | 615    |                                  | $ | 684    |   | $    | 1,651  |  | $ | 1,845  |  

Export sales
were 88% of revenue in the three months ended September 30, 2010 and 86% of
revenue in the nine months ended September 30, 2010. Export sales were 84% of
revenue in the three months ended September 30, 2009 and 79% of revenue in the
nine months ended September 30, 2009. Virtually all of our export sales are
negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area
are summarized as follows:

|                   |  |                                   |        |                                  |   |       |  |      |        |  |   |        | 
|------------------ |  | --------------------------------- | ------ | -------------------------------- | - | ----- |  | ---- | ------ |  | - | ------ | 
|                   |  | Three Months Ended
 September 30, |        | Nine Months Ended
 September 30, |  
|(In
 thousands)    |  | 2010                              |        | 2009                             |   | 2010  |  | 2009 |       
|                  
|Americas           |  | $                                 | 469    |                                  | $ | 89    |  | $    | 751    |  | $ | 639    | 
|Europe             |  |                                   | 4,401  |                                  |   | 2,564 |  |      | 11,071 |  |   | 6,131  | 
|Asia               |  |                                   | 7,312  |                                  |   | 4,220 |  |      | 24,763 |  |   | 6,066  | 
|Other              |  |                                   | 264    |                                  |   | 305   |  |      | 350    |  |   | 1,404  | 
|                   |  |                                   |        |                                  |   |       |  |      |        |  |   |        | 
|Total export sales |  | $                                 | 12,446 |                                  | $ | 7,178 |  | $    | 36,935 |  | $ | 14,240 | 

Historically,
we have been dependent upon two electronic assembly customers, Assembleon and
Juki, for a significant portion of our revenue. For the nine months ended
September 30, 2010, sales to Juki accounted for 20% of our total revenue and
sales to Assembleon accounted for 13% of our total revenue.

11

---



8. NET INCOME (LOSS)
PER SHARE:

Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Net
income (loss) per diluted share is computed by dividing net income (loss) by
the weighted average number of common and common equivalent shares outstanding
during the period. 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. All potentially dilutive common equivalent shares are
excluded from the calculation of net loss per diluted share due to their
anti-dilutive effect. As a result, no common equivalent shares were included in
the calculations of net loss per diluted share for the three or nine months
ended September 30, 2009. The components of net income (loss) per basic and
diluted share are as follows:

|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|-------------------------------------------- |  | ------------------ | ------ | ------------------------------------- |  | ----------------- |  | - | ----- | -
|(In
 thousands except per share amounts)     |  | Net income
 (loss) |        | Weighted
 Average Shares
 Outstanding |  | Per Share
 Amount | 
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|Three Months Ended September 30, 2010:       |  |                    |        |                                       |  |                   |  |   |       |  
|Basic                                        |  | $                  | 948    |                                       |  | 6,871             |  | $ | 0.14  |  
|Dilutive
 effect of common equivalent shares |  |                    |       |                                       |  | 48                |  |   |      |  
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|Dilutive                                     |  | $                  | 948    |                                       |  | 6,919             |  | $ | 0.14  |  
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|(In
 thousands except per share amounts)     |  | Net income
 (loss) |        | Weighted
 Average Shares
 Outstanding |  | Per Share
 Amount | 
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|Three Months Ended September 30, 2009:       |  |                    |        |                                       |  |                   |  |   |       |  
|Basic                                        |  | $                  | (841   | )                                     |  | 6,801             |  | $ | (0.12 | )
|Dilutive
 effect of common equivalent shares |  |                    |       |                                       |  |                  |  |   |      |  
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|Dilutive                                     |  | $                  | (841   | )                                     |  | 6,801             |  | $ | (0.12 | )
|                                             |  |                    |        |                                       |  |                   | 
|(In
 thousands except per share amounts)     |  | Net income
 (loss) |        | Weighted
 Average Shares
 Outstanding |  | Per Share
 Amount | 
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|Nine Months Ended September 30, 2010:        |  |                    |        |                                       |  |                   |  |   |       |  
|Basic                                        |  | $                  | 2,164  |                                       |  | 6,853             |  | $ | 0.32  |  
|Dilutive
 effect of common equivalent shares |  |                    |       |                                       |  | 48                |  |   | (0.01 | )
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|Dilutive                                     |  | $                  | 2,164  |                                       |  | 6,901             |  | $ | 0.31  |  
|                                             |  |                    |        |                                       |  |                   | 
|(In
 thousands except per share amounts)     |  | Net income
 (loss) |        | Weighted
 Average Shares
 Outstanding |  | Per Share
 Amount | 
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|Nine Months Ended September 30, 2009:        |  |                    |        |                                       |  |                   |  |   |       |  
|Basic                                        |  | $                  | (5,197 | )                                     |  | 6,785             |  | $ | (0.77 | )
|Dilutive
 effect of common equivalent shares |  |                    |       |                                       |  |                  |  |   |      |  
|                                             |  |                    |        |                                       |  |                   |  |   |       |  
|Dilutive                                     |  | $                  | (5,197 | )                                     |  | 6,785             |  | $ | (0.77 | )

12

---



The
calculation of diluted net income (loss) per common share excludes 306,000
potentially dilutive shares for the three months ended September 30, 2010,
617,000 potentially dilutive shares for the three months ended September 30,
2009, 300,000 potentially dilutive shares for the nine months ended September
30, 2010 and 698,000 potentially dilutive shares for the nine months ended
September 30, 2009, because their effect would be anti-dilutive.

9. COMPREHENSIVE INCOME
(LOSS):

Components of
comprehensive income (loss) include net income (loss), foreign-currency
translation adjustments, unrealized gains and losses on available-for-sale
securities and reclassification adjustments. Total comprehensive income (loss)
amounted to $1,117,000 for the three months ended September 30, 2010 and
$(779,000) for the three months ended September 30, 2009. Total comprehensive
income (loss) amounted to $2,302,000 for the nine months ended September 30,
2010 and $(5,438,000) for the nine months ended September 30, 2009.

At December
31, 2009 and September 30, 2010 components of accumulated other comprehensive
loss is as follows:

|                                                    |  |                                |      |                                           |   |                                         |   |   |      |  
|--------------------------------------------------- |  | ------------------------------ | ---- | ----------------------------------------- | - | --------------------------------------- | - | - | ---- | -
|(In
 thousands)                                     |  | Foreign
 Currency
 Translation |      | Unrealized Gains
 (Losses) on
 Securities |   | Accumulated
 Other
 Comprehensive
 Loss |  
|                                                    |  |                                |      |                                           |   |                                         |   |   |      |  
|Balance
 December 31, 2009                          |  | $                              | (887 | )                                         | $ | 119                                     |   | $ | (768 | )
|Unrealized losses on securities, net of tax
 of $51 |  |                                |     |                                           |   | (98                                     | ) |   | (98  | )
|Translation adjustments                             |  |                                | 236  |                                           |   |                                        |   |   | 236  |  
|                                                    |  |                                |      |                                           |   |                                         |   |   |      |  
|Balance
 September 30, 2010                         |  | $                              | (651 | )                                         | $ | 21                                      |   | $ | (630 | )

10. INCOME TAXES:

We recorded a
provision for income tax expense in the nine months ended September 30, 2010 at
an effective tax rate of 22.0%, compared to an income tax benefit in the nine months
ended September 30, 2009 at an effective tax rate of 43.7%. Our recorded income
tax benefit for the three and nine months ended September 30, 2009 includes a
$223,000 discrete benefit from reversal of a portion of our reserve for income
taxes resulting from the closing of a domestic statute of limitations. Our
recorded income tax benefit for the nine months ended September 30, 2009 also
includes a $547,000 discrete benefit from reversal of a portion of our reserve
for income taxes resulting from settlement of Internal Revenue Service audits
of our 2006 and 2007 federal income tax returns. These discrete benefits
resulted in a higher effective tax rate due to our pre-tax loss in 2009.
Discrete items impacting the effective tax rate in the nine months ended
September 30, 2010 were inconsequential. Other items impacting the effective
tax rate for 2010, compared to 2009, include the anticipated benefit from the
domestic manufacturers production incentive, additional tax expense in foreign
tax jurisdictions with lower tax rates than the U.S federal statutory rate and
recognition of the benefit from the revised Minnesota state R&D tax credit
that was signed into law during the second quarter of 2010.

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

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

13

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In analyzing
the need for valuation allowances, we first considered our history of
cumulative losses for U.S. income tax purposes over the past three years and
also gave significant consideration to our results for U.S. income tax purposes
over the past five years, as the economic cycles in our industry have tended to
average five years in length (from peak to trough). We also considered our
forecasts of future profitability, the duration of statutory carry forward
periods and tax planning alternatives. Finally, we considered the length and
severity of the recent global economic crisis, the impact that it had on our
operating results and our expectation for rebound given recent signs of
recovery in the global economy and more specifically in our markets. After
considering all of these factors, and after considering other significant
positive evidence, we concluded that a valuation allowance with respect to
substantially all of our U.S. based deferred tax assets was not required at
September 30, 2010.

Our results in
both 2008 and 2009 were negatively impacted by the recent global economic
slowdown, and we incurred a loss in the United States in both 2008 and 2009,
where most of our net deferred tax assets are recorded. Therefore, achievement
of profitability in the United States will be a significant factor in
determining our continuing ability to carry these deferred tax assets without
recording a valuation allowance. If future results from our operations are less
than projected, a valuation allowance may be required against virtually all of
our deferred tax assets, which could have a material impact on our results of
operations in the period in which it is recorded.

Deferred tax assets at
September 30, 2010, include net operating loss carry forwards incurred in the
UK by CyberOptics Ltd., which was acquired in 1999. The utilization of these
net operating loss carry forwards is dependent on CyberOptics Ltd.s ability to
generate sufficient UK taxable income during the carry forward period.

11. DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES:

We enter into
foreign currency swap agreements to hedge short term inter-company financing transactions
with our subsidiaries in the United Kingdom and Singapore. These currency swap
agreements are structured to mature near the last day of each quarter, and are
designated as cash flow hedges. At September 30, 2010, we had two open swap
agreements for £200,000 British Pounds Sterling and $1,000,000 Singapore
dollars that were purchased on September 30, 2010, the fair value of which was
inconsequential. Gains and losses from foreign currency transactions and
foreign currency swap agreements are recognized in interest income and other in
our statement of operations.

In the three months ended
September 30, 2010, we recognized net gains (losses) from settlement of foreign
currency swap agreements of $(63,000) in addition to foreign currency
transaction gains (losses) on the underlying inter-company balances of $90,000.
In the nine months ended September 30, 2010, we recognized net gains (losses)
from settlement of foreign currency swap agreements of $(32,500) that offset
foreign currency transactions gains (losses) on the underlying inter-company
balances of $35,000.

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

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.

14

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12. CONTINGENCIES:

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

In the normal
course of business to facilitate sales of our products and services, we at
times indemnify other parties, including customers, with respect to certain
matters. In these instances, we have agreed to hold the other parties harmless
against losses arising out of intellectual property infringement or other types
of claims. These agreements may limit the time within which an indemnification
claim can be made, and almost always limit the amount of the claim. It is not
possible to determine the maximum potential amount under these indemnification
agreements due to the limited history of prior indemnification claims and the
unique facts and circumstances involved in each particular agreement.
Historically, payments made, if any, under these agreements have not had a
material impact on our operating results, financial position or cash flows.

13. SEVERANCE
COSTS:

We
started to incur severance costs in February 2008 in connection with our
decision to move a significant portion of development and manufacturing for our
systems products to Singapore. The transition of systems-related product
development was substantially complete by the end of the fourth quarter of
2008, and the transition of systems-related manufacturing was substantially
complete by the end of the first quarter of 2009. Severance costs incurred in
connection with the February 2008 decision to move our systems related product
development and manufacturing to Singapore totaled $48,000 in the nine months
ended September 30, 2009. Our results for the three months ended September 30,
2009 include a $32,000 benefit from the reversal of a portion of a prior
severance accrual.

In
February 2009, we further reduced our workforce by 24 positions in response to
the weakening global economy, our transition to Singapore and our decision to
consolidate manufacturing for our semiconductor products in our Minneapolis
facility. Severance costs incurred in connection with the February 2009
workforce reduction totaled $315,000 in the nine months ended September 30,
2009. No severance costs were incurred in the three months ended September 30,
2009.

All
of the aforementioned severance costs incurred in 2009 were paid prior to
December 31, 2009. No severance costs were incurred in the three or nine months
ended September 30, 2010. All of the severance costs related to the February
2008 transition to Singapore, and the February 2009 workforce reduction have
been classified as severance in our statement of operations.

14. RECENT ACCOUNTING DEVELOPMENTS:

Prior to
January 1, 2010, we recognized revenue based on multiple element revenue
guidance which required the existence of vendor specific objective evidence of
fair value (VSOE) for the undelivered elements in an arrangement in order for
us to account for the elements separately. We utilized the residual method of
allocation to account for delivered elements.

In October
2009, the Financial Accounting Standards Board (FASB) amended guidance in FASB Accounting Standards CodificationTM (ASC) 605,
Revenue Recognition, 25,
Multiple-Element Arrangements, to (1) modify the separation criteria by
eliminating the criterion that requires objective and reliable evidence of fair
value for the undelivered item(s), and (2) eliminates the use of the
residual method of allocation and instead requires that arrangement consideration
be allocated, at the inception of the arrangement, to all deliverables based on
their relative selling price. The FASB also issued guidance to amend the scope
of ASC 985, Software, 605,
Revenue Recognition, to exclude arrangements with tangible products
containing both software and non-software components that function together to
deliver a products essential functionality.

15

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Under the
amended guidance, consideration is allocated to the deliverables at inception
of an arrangement using the relative selling price method. Selling price is
determined based on a selling price hierarchy, consisting of VSOE, third party
evidence or estimated selling price. Under the amended guidance, we determined
an estimated selling price for each of the elements in our multiple elements
sales based on the selling price hierarchy and allocated consideration to the
deliverables using the relative selling price method. We have adopted the
amended guidance effective January 1, 2010. The impact of adopting the amended
guidance was not material to our recognition of revenue in 2010 and would have
been insignificant in 2009.

In January
2010, the FASB issued ASU No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820)  Improving Disclosures
about Fair Value Measurements (ASU No. 2010-06). ASU No. 2010-06
requires new disclosures regarding significant transfers in and out of Levels 1
and 2, as well as information about activity in Level 3 fair value
measurements, including presenting information about purchases, sales,
issuances and settlements on a gross versus a net basis in the Level 3 activity
roll forward. In addition, ASU No. 2010-06 clarifies existing disclosures
regarding input and valuation techniques, as well as the level of
disaggregation for each class of assets and liabilities. ASU No. 2010-06
is effective for interim and annual periods beginning after December 15,
2009, except for the disclosures pertaining to purchases, sales, issuances and
settlements in the roll forward of Level 3 activity; those disclosures are
effective for interim and annual periods beginning after December 15,
2010. Our adoption of ASU No. 2010-06 effective January 1, 2010 had no current
impact on our consolidated financial position, results of operations or cash
flows.

16

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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, 2009.

FORWARD LOOKING
STATEMENTS:

The following
managements discussion and analysis contains a number of estimates and
predictions that are forward looking rather than based on historical fact.
Among other matters, we discuss (i) our level of anticipated revenues and net
income for the fourth quarter of 2010; (ii) the potential margin improvements
resulting from our next-generation solder paste and automated optical inspection
(AOI) systems; (iii) the timing of initial revenue and margin improvements from
other new products that we have under development, that have been recently
introduced or we anticipate introducing in the future; (iv) our expectations
regarding market acceptance of WaferSenseTM and our other semiconductor products; (v) our beliefs regarding
trends in the general economy and its impact on markets for our equipment; and
(vi) the impact of currency fluctuations on our operations. Although we have
made these statements based on our experience and best estimate of future
events, there may be events or factors that we have not anticipated, and the
accuracy of our statements and estimates are subject to a number of risks,
including those identified in our Annual Report on Form 10-K for the year ended
December 31, 2009.

RESULTS OF OPERATIONS:

General

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

Our results were favorably
impacted in 2006 and 2007 as the worldwide demand for cell phones, smart
phones, laptops and other consumer electronics remained strong, driving the
need for increased production of printed circuit boards and memory modules, and
thereby increasing demand for our electronic assembly and semiconductor
products. After peaking in the third quarter of 2007, our revenue declined
sequentially each quarter through the first quarter of 2009, as our results
were negatively impacted by reduced levels of capital spending for electronics
manufacturing capacity brought about by the deepening weakness in the global
economy. New orders dropped off sharply late in the fourth quarter of 2008 as
the global economy fell into a severe recession, and our results for
2009 were adversely affected by the ongoing weakness in the global electronics
market.

Even before
the recession, we worked to improve the efficiencies of our operations. In
February 2008, we commenced plans to move a significant portion of our
systems-related product development and manufacturing to Singapore. The
transition of these functions to Singapore was substantially complete by the end
of the first quarter of 2009 and has resulted in lower costs and a more focused
R&D effort. Further, in direct response to the recession, we implemented
workforce reductions in November 2008 and February 2009, including
consolidation of manufacturing operations for our semiconductor products into
our Minneapolis, Minnesota headquarters facility. Implementation of these cost
reduction actions has not impacted any of our strategic growth programs.

17

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We believe
that continued and timely development of new products and enhancements to
existing products is essential to growing our position in the market. We commit
substantial resources to research and development efforts, which play a
critical role in maintaining and advancing our position as a leading provider
of optical sensors and systems. During the past several years, research and
development efforts have been focused on a number of development activities
critical to our future growth and success, including the following:

| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our stand alone next generation
 SE500 solder paste inspection system and our new next generation QX500
 automated optical inspection (AOI) system.                                                                                                                   
| |   |                                                                                                                                                                                                                                                                       
| |  | A new mid-range SE350
 solder paste inspection system based on the 3D inspection technology used in
 the SE500. The SE350 is a lower cost system for customers that do not require
 the full inspection functionality of the SE500.                                   
| |   |                                                                                                                                                                                                                                                                       
| |  | Our common
 hardware platforms and sensor technology utilized in both our new QX500
 automated optical inspection (AOI) system and a new embedded inspection
 solution we have developed for DEK offering 100% 2D solder paste inspection
 with no cycle time penalty.
| |   |                                                                                                                                                                                                                                                                       
| |  | Our Embedded
 Process Verification (EPV®) technology.                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                       
| |  | A new solar wafer
 alignment camera capable of performing accurate high-speed alignment
 measurements within the wafer print nest, including traditional wafer edge
 alignment of both monocrystalline and polycrystalline wafer materials.                           
| |   |                                                                                                                                                                                                                                                                       
| |  | Continued investment in
 our highly profitable WaferSense line of products.                                                                                                                                                                                          

The global electronics market
strengthened significantly in 2010. We experienced particularly strong demand
in the second quarter of 2010, as pent-up demand and an improving economy led
to significantly increased sales of alignment sensors and our stand alone
solder paste inspection and AOI systems. Sales of sensors continued at these
strong levels into the third quarter, while systems sales moderated to more
normal levels, in part because of the delay in acceptance of a large order. We
nevertheless believe that improving market conditions, the efficiencies in
operations we have implemented, and the new products we have introduced and
anticipate introducing in the next year, will lead to improved operating results
in future periods. For the quarter ending September 30, 2010, we generated a
profit of $0.14 per share on revenue of $14.1 million, a significant
improvement when compared to the quarter ending September 30, 2009. In
addition, we are forecasting a profit of $0.07 to $0.11 per share in the fourth
quarter of 2010 on revenue of $13.0-$14.0 million, compared to the fourth
quarter of 2009 when we incurred a loss of $0.24 per share on revenue of $9.0
million.

18

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Segment Results

Operating
results for our electronic assembly and semiconductor segments for the three
and nine month periods ended September 30, 2010 and 2009 are as follows:

|                                              |  |                                       |        |                                       |   |       |  |                      |        |                |   |        |   |   |       |   |   |        |  
|--------------------------------------------- |  | ------------------------------------- | ------ | ------------------------------------- | - | ----- |  | -------------------- | ------ | -------------- | - | ------ | - | - | ----- | - | - | ------ | -
|                                              |  | Three months ended September 30, 2010 |        | Three months ended September 30, 2009 |  
|(In
 thousands)                               |  | Electronic
 Assembly                  |        | Semi-
 Conductor                      |   | Total |  | Electronic
 Assembly |        | Semi-Conductor |   | Total  |  
|                                              |  |                                       |        |                                       |   |       |  |                      |        |                |   |        |   |   |       |   |   |        |  
|Revenues                                      |  | $                                     | 12,357 |                                       | $ | 1,788 |  | $                    | 14,145 |                | $ | 7,766  |   | $ | 784   |   | $ | 8,550  |  
|Cost of revenues                              |  |                                       | 6,990  |                                       |   | 492   |  |                      | 7,482  |                |   | 5,369  |   |   | 244   |   |   | 5,613  |  
|Gross margin                                  |  |                                       | 5,367  |                                       |   | 1,296 |  |                      | 6,663  |                |   | 2,397  |   |   | 540   |   |   | 2,937  |  
|                                              |  |                                       |        |                                       |   |       |  |                      |        |                |   |        |   |   |       |   |   |        |  
|Research and development expenses             |  |                                       | 1,661  |                                       |   | 253   |  |                      | 1,914  |                |   | 1,478  |   |   | 335   |   |   | 1,813  |  
|Selling, general and administrative
 expenses |  |                                       | 3,117  |                                       |   | 413   |  |                      | 3,530  |                |   | 2,523  |   |   | 312   |   |   | 2,835  |  
|Severance                                     |  |                                       |       |                                       |   |      |  |                      |       |                |   | (32    | ) |   |      |   |   | (32    | )
|Amortization of intangibles                   |  |                                       | 27     |                                       |   | 18    |  |                      | 45     |                |   | 27     |   |   | 18    |   |   | 45     |  
|                                              |  |                                       |        |                                       |   |       |  |                      |        |                |   |        |   |   |       |   |   |        |  
|Income (loss) from operations                 |  | $                                     | 562    |                                       | $ | 612   |  | $                    | 1,174  |                | $ | (1,599 | ) | $ | (125  | ) | $ | (1,724 | )
|                                              |  |                                       |        |                                       |   |       |  |                      |        |                |   |        |   |   |       |   |   |        |  
|                                              |  | Nine months ended September 30, 2010  |        | Nine months ended September 30, 2009  |  
|(In thousands)                                |  | Electronic 
 Assembly                 |        | Semi-Conductor                        |   | Total |  | Electronic
 Assembly |        | Semi-Conductor |   | Total  |  
|                                              |  |                                       |        |                                       |   |       |  |                      |        |                |   |        |   |   |       |   |   |        |  
|Revenue                                       |  | $                                     | 38,722 |                                       | $ | 4,263 |  | $                    | 42,985 |                | $ | 15,975 |   | $ | 2,116 |   | $ | 18,091 |  
|Cost of revenue                               |  |                                       | 23,187 |                                       |   | 1,223 |  |                      | 24,410 |                |   | 11,349 |   |   | 829   |   |   | 12,178 |  
|Gross margin                                  |  |                                       | 15,535 |                                       |   | 3,040 |  |                      | 18,575 |                |   | 4,626  |   |   | 1,287 |   |   | 5,913  |  
|                                              |  |                                       |        |                                       |   |       |  |                      |        |                |   |        |   |   |       |   |   |        |  
|Research and development expenses             |  |                                       | 4,626  |                                       |   | 772   |  |                      | 5,398  |                |   | 4,748  |   |   | 872   |   |   | 5,620  |  
|Selling, general and administrative
 expenses |  |                                       | 9,313  |                                       |   | 1,108 |  |                      | 10,421 |                |   | 8,523  |   |   | 946   |   |   | 9,469  |  
|Severance                                     |  |                                       |       |                                       |   |      |  |                      |       |                |   | 249    |   |   | 114   |   |   | 363    |  
|Amortization of intangibles                   |  |                                       | 82     |                                       |   | 54    |  |                      | 136    |                |   | 82     |   |   | 54    |   |   | 136    |  
|                                              |  |                                       |        |                                       |   |       |  |                      |        |                |   |        |   |   |       |   |   |        |  
|Income (loss) from operations                 |  | $                                     | 1,514  |                                       | $ | 1,106 |  | $                    | 2,620  |                | $ | (8,976 | ) | $ | (699  | ) | $ | (9,675 | )

19

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Revenues

Our revenues
increased by 65% to $14.1 million in the three months ended September 30, 2010
from $8.6 million in the three months ended September 30, 2009, and increased
by 138% to $43.0 million in the nine months ended September 30, 2010 from $18.0
million in the nine months ended September 30, 2009. The following table sets
forth revenues by product line for the three and nine month periods ended
September 30, 2010 and 2009:

|                          |  |                                   |        |                                  |   |       |  |      |        |  |   |        | 
|------------------------- |  | --------------------------------- | ------ | -------------------------------- | - | ----- |  | ---- | ------ |  | - | ------ | 
|                          |  | Three Months Ended
 September 30, |        | Nine Months Ended
 September 30, |  
|(In
 thousands)           |  | 2010                              |        | 2009                             |   | 2010  |  | 2009 |       
|                          |  |                                   |        |                                  |   |       |  |      |        |  |   |        | 
|Electronic Assembly       |  |                                   |        |                                  |   |       |  |      |        |  |   |        | 
|OEM Alignment Sensors     |  | $                                 | 6,896  |                                  | $ | 2,599 |  | $    | 18,500 |  | $ | 5,243  | 
|SMT Inspection Systems    |  |                                   | 5,461  |                                  |   | 5,167 |  |      | 20,222 |  |   | 10,732 | 
|Total Electronic Assembly |  |                                   | 12,357 |                                  |   | 7,766 |  |      | 38,722 |  |   | 15,975 | 
|Semiconductor             |  |                                   | 1,788  |                                  |   | 784   |  |      | 4,263  |  |   | 2,116  | 
|Total                     |  | $                                 | 14,145 |                                  | $ | 8,550 |  | $    | 42,985 |  | $ | 18,091 | 

Electronic Assembly

Revenue from
sales of our OEM alignment sensors increased by $4.3 million or 165% in the
three months ended September 30, 2010 to $6.9 million, up from $2.6 million in
the three months ended September 30, 2009, and increased by 253% to $18.5
million in the nine months ended September 30, 2010, up from $5.2 million in
the nine months ended September 30, 2009. Revenue from sales of our stand alone
SMT inspection systems products increased by $294,000 or 6% to $5.5 million in
the three months ended September 30, 2010, up from $5.2 million in the three
months ended September 30, 2009 and increased by 88% to $20.2 million in the
nine months ended September 30, 2010, up from $10.7 million in the nine months
ended September 30, 2009.

The global
recession caused severe weakness and disruption in our electronics markets
starting late in 2008 and throughout all of 2009, resulting in very low levels
of revenue in 2009 from both our OEM alignment sensors and stand alone SMT
inspection systems products. The global electronics market strengthened in
2010.

Sales of
alignment sensors during the quarter ended September 30, 2010 increased 6% from
the strong level posted in the quarter ended June 30, 2010. Sales of inspection
systems during the quarter ended September 30, 2010 decreased 37% from the
quarter ended June 30, 2010, primarily because of delayed acceptance of a
significant order for our QX500 automated optical inspection (AOI) system by an
original design manufacturer (ODM), as well as more normalized levels of
customer demand. Although sales moderated overall in the third quarter of 2010
from the second quarter to more normal levels, we believe that this represents
some pent-up demand filled in the second quarter, the timing of acceptance and
other quarter to quarter variation.

In addition to
continued sales of our SE500 solder paste inspection (SPI) system, we recorded
solid sales of the SE350 SPI system that was introduced in this years first
quarter. Our third quarter revenue also benefited from continued shipments of
solar wafer alignment cameras to an equipment manufacturer for the photovoltaic
cell market, and we expect continued sales of this product in the fourth
quarter and into next year. We believe that improved market conditions,
combined with favorable market acceptance of the new products we have recently
introduced, resulted in the higher revenue levels in the three and nine months
ended September 30, 2010 compared to the same periods of 2009. We believe that
these new products, and that technology trends toward smaller components and
increased product speeds, will contribute to increased demand in 2011.

Export revenue
from OEM alignment sensors and SMT inspection systems totaled $11.8 million or
95% of electronic assembly revenue in the three months ended September 30,
2010, compared to $6.9 million or 88% of electronic assembly revenue in the
three months ended September 30, 2009. Export revenue from electronic assembly
OEM alignment sensors and SMT inspection systems totaled $35.4 million or 91%
of electronic assembly revenue in the nine months ended September 30, 2010,
compared to $13.6 million or 85% of electronic assembly revenue in the nine
months ended September 30, 2009. Sales to international customers continue to
be significant, as manufacturing of electronic components has migrated
offshore, particularly to China and other areas of Asia.

20

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Semiconductor

Revenues from
semiconductor products increased by 128% to $1.8 million in the three months
ended September 30, 2010 from $784,000 in the three months ended September 30,
2009, and increased by 101% to $4.3 million in the nine months ended September
30, 2010 from $2.1 million in the nine months ended September 30, 2009.
Revenues from semiconductor products in the three months ended September 30,
2010 also represented a sequential 38% increase from $1.3 million in the three
months ended June 30, 2010. The increase in revenue was due to improving
conditions in the market for semiconductor fabrication equipment, coupled with
favorable market acceptance of our new WaferSense products.

We anticipate
that future growth in our semiconductor revenues, exclusive of changes related
to capital procurement cycles will come from our new WaferSense products, a
family of wireless, wafer like precision measurement tools for in-situ setup,
calibration and process optimization in semiconductor processing equipment. We
have introduced a number of new WaferSense products in recent years, including
various leveling, gapping, teaching and vibration sensors. We anticipate formal
introduction of our new particle sensor in the next quarter. WaferSense revenue
increased to $1,186,000 in the three months ended September 30, 2010 from
$335,000 in the three months ended September 30, 2009 and increased by 173% to
$2.4 million in the nine months ended September 30, 2010 from $870,000 in the
nine months ended September 30, 2009.

Export revenue
from semiconductor products totaled $679,000 or 38% of revenue in the three
months ended September 30, 2010, compared to $308,000 or 39% of revenue in the
three months ended September 30, 2009. Export revenue from semiconductor
products totaled $1,545,000 or 36% of revenue in the nine months ended
September 30, 2010, compared to $636,000 or 30% of revenue in the nine months
ended September 30, 2009. The increase in the percentage of sales coming from
exports for our semiconductor products reflects proportionately higher
WaferSense revenue, as these products tend to have a higher concentration of
international sales.

Cost of Revenue and Gross Margin

Electronic
Assembly

Cost of
revenue for our electronic assembly segment increased by $1.6 million or 30% in
the three months ended September 30, 2010 and increased by $11.8 million or
104% in the nine months September 30, 2010 when compared to the same periods of
2009, due to the significantly higher sales in 2010. Gross margin as a
percentage of electronic assembly sales was 43% in the three months ended
September 30, 2010, compared to 31% in the three months ended September 30,
2009 and 38% in the three months ended June 30, 2010. Gross margin as a
percentage of electronic assembly sales was 40% in the nine months ended
September 30, 2010 compared to 29% in the nine months ended September 30, 2009.
The improvement in gross margin percentage was due to significantly increased
sales of higher margin OEM alignment sensors, better manufacturing leverage resulting
from substantially higher production volumes over which to spread fixed
manufacturing overhead costs, the favorable impact of cost reduction programs
and our new cost reduced SMT inspection system products. Our next generation
SE500 and new mid-range SE350 solder paste inspection systems, and our new
QX500 automated optical inspection (AOI) system are significantly cost reduced
when compared to our earlier generation inspection system products.

We anticipate
that gross margins as a percentage of electronic assembly sales in the fourth
quarter of 2010 will be at or slightly below the level in the three months
ended September 30, 2010, reflecting the negative impact of a slight change in
product mix and the strengthening Singapore currency on our costs, offset in
part by continued benefits from our cost reduction programs and new cost
reduced system platforms.

The electronic
assembly market is highly price competitive, resulting in continual pressure on
our gross margins. We compensate for pricing pressure by introducing new
products with more features and improved performance and through manufacturing
cost reduction programs. For example, we believe our next-generation SE500 and
SE350 solder paste inspection systems and QX500 automated optical inspection
(AOI) system combines a reduction in cost with enhanced performance. Other
recently introduced products including our solar wafer alignment camera,
embedded process verification (EPV) technology and the embedded solder paste
inspection solution we developed for DEK, have more favorable margins than our
existing products.

21

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Semiconductor

Cost of
revenue for our semiconductor segment increased by $248,000 or 102% in the
three months ended September 30, 2010 and increased by $394,000 or 48% in the
nine months ended September 30, 2010 when compared to the same periods of 2009, due
to the significantly higher sales in 2010. Gross margin as a percentage of
semiconductor sales was 72% in the three months ended September 30, 2010 and
71% in the nine months ended September 30, 2010, compared to 69% in the three
months ended September 30, 2009 and 61% in the nine months ended September 30,
2009. Gross margin as a percentage of semiconductor sales improved due to the
cost benefit from consolidation of manufacturing for our semiconductor products
into our Minneapolis, Minnesota headquarters, increased sales of higher margin
WaferSense products and from improved manufacturing leverage, resulting from
higher production volumes over which to spread fixed manufacturing overhead
costs.

Operating Expenses

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

In February
2008, we announced plans to move to Singapore a significant portion of our
systems-related product development and manufacturing. The transition of
systems-related product development to Singapore was substantially complete by
the end of the fourth quarter of 2008 and the transition of manufacturing for
our system products was substantially complete by the end of the first quarter
of 2009. The realignment of our systems-related product development and
manufacturing to Singapore has resulted in lower costs and a more focused
development effort.

In response to
the significant weakness in our markets and the global economy we reduced our
workforce by 50 employees (over 30 in manufacturing, including direct labor,
and approximately 20 in development, selling, general and administrative) from
the start of the fourth quarter of 2008 through the end of the second quarter
of 2009. Other cost saving measures implemented in 2009 include salary
reductions and reduced spending for non-labor costs such as travel, supplies
and the like. These cost saving measures, combined with savings from our
transition to Singapore, provided significant annual expense savings.
Implementation of the cost reduction actions discussed above had no impact on
any of our strategic growth programs; work on our common hardware platforms for
inspection, next generation inspection technologies, or pursuit of new OEM
contracts.

Due to the
improving economy, we elected to restore salary levels for our employees to
pre-reduction levels in 2010. We have also added headcount, including temporary
labor, since January 1, 2010 and anticipate that there will be other headcount
additions, and costs will increase as business activity picks up and revenue
returns to pre-recession levels. However, many of the cost savings measures
that were put in place during 2008 and 2009 will continue to provide meaningful
savings for the foreseeable future.

Electronic Assembly

Research and
development expenses for our electronic assembly segment were $1.7 million in
the three months ended September 30, 2010, compared to $1.5 million in the
three months ended September 30, 2009. Research and development expenses for
our electronic assembly segment were $4.6 million in the nine months ended
September 30, 2010, compared to $4.7 million in the nine months ended September
30, 2009. The decrease in research and development expenses in the nine months ended
September 30, 2010, compared to the same period of 2009, resulted from
completion of several R&D projects, including our next generation SE500
solder paste inspection system and improvements in focus and efficiency
resulting from transition of systems related research and development to
Singapore. The increase in research and development expenses for our electronic
assembly segment in the three months ended September 30, 2010, compared to the
same period of 2009, was due to additional proto-type expenditures for next
generation inspection technology and system platforms.

We anticipate
that research and development expenses in the fourth quarter of 2010 will be at
or slightly above the third quarter level.

22

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Selling,
general and administrative expenses for our electronic assembly segment were
$3.1 million in the three months ended September 30, 2010, compared to $2.5
million in the three months ended September 30, 2009. Selling, general and
administrative expenses for our electronic assembly segment were $9.3 million
in the nine months ended September 30, 2010, compared to $8.5 million in the
nine months ended September 30, 2009. Higher sales and marketing costs in the
three and nine months ended September 30, 2010, including commissions for third
party sales representatives resulting from higher levels of SMT inspection
system sales, were partially offset by lower expense for doubtful accounts.
Selling, general and administrative expenses for the nine months ended
September 30, 2009 includes an $800,000 provision for doubtful accounts related
to a key distributor of our SMT system products. The distributor remains in
business, and is committed to paying us the amount owed. We presently
anticipate that selling, general and administrative expenses in the fourth
quarter of 2010 will be at or near the third quarter level.

Semiconductor

Research and
development expenses for our semiconductor segment were $253,000 in the three
months ended September 30, 2010 compared to $335,000 in the three months ended
September 30, 2009. Research and development expenses for our semiconductor
segment were $772,000 in the nine months ended September 30, 2010 compared to
$872,000 in the nine months ended September 30, 2009. Research and development
expenses for our semiconductor segment in the three and nine months ended
September 30, 2009 included $77,000 of expense for abandoned patents. Research
and development expenses for our semiconductor segment principally reflect
ongoing investment in our WaferSense product line.

Selling, general
and administrative expenses for our semiconductor segment were $413,000 in the
three months ended September 30, 2010 compared to $312,000 in the three months
ended September 30, 2009. Selling, general and administrative expenses for our
semiconductor segment were $1,108,000 in the nine months ended September 30,
2010, compared to $946,000 in the nine months ended September 30, 2009. The
increase in the three and nine months ended September 30, 2010 reflects higher
third party commission payments attributable to the higher level of sales. No
significant changes are expected in the level of semiconductor operating
expenses in the fourth quarter of 2010.

Severance Costs

We started to
incur severance costs in February 2008 in connection with our decision to move
a significant portion of development and manufacturing for our systems products
to Singapore. The transition of systems-related product development was
substantially complete by the end of the fourth quarter of 2008, and the
transition of systems-related manufacturing was substantially complete by the
end of the first quarter of 2009. Severance costs incurred in connection with
the February 2008 decision to move our systems related product development and
manufacturing to Singapore totaled $48,000 in the nine months ended September
30, 2009. Our results for the three months ended September 30, 2009 include a
$32,000 benefit from the reversal of a portion of a prior severance accrual.

In February
2009, we further reduced our workforce by 24 positions in response to the
weakening global economy, our transition to Singapore and our decision to
consolidate manufacturing for our semiconductor products in our Minneapolis
facility. Severance costs incurred in connection with the February 2009
workforce reduction totaled $315,000 in the nine months ended September 30,
2009. No severance costs were incurred in the three months ended September 30,
2009.

All of the
aforementioned severance costs incurred in 2009 were paid prior to December 31,
2009. No severance costs were incurred in the three or nine months ended
September 30, 2010. All of the severance costs related to the February 2008
transition to Singapore, and the February 2009 workforce reduction have been
classified as severance in our statement of operations.

Interest and Other

Interest
income and other includes interest earned on investments and gains and losses
associated with foreign currency transactions and foreign currency swap
agreements. Interest income and other decreased in the three and nine months
ended September 30, 2010 compared to the same periods of 2009 due to lower
rates of interest earned on invested funds and lower invested balances of cash
equivalents and marketable securities.

23

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Provision for Income Taxes and Effective Income
Tax Rate

We recorded a
provision for income tax expense in the nine months ended September 30, 2010 at
an effective tax rate of 22.0%, compared to an income tax benefit in the nine
months ended September 30, 2009 at an effective tax rate of 43.7%. Our recorded
income tax benefit for the three and nine months ended September 30, 2009
includes a $223,000 discrete benefit from reversal of a portion of our reserve
for income taxes resulting from the closing of a domestic statute of
limitations. Our recorded income tax benefit for the three and nine months
ended September 30, 2009 also includes a $547,000 discrete benefit from
reversal of a portion of our reserve for income taxes resulting from settlement
of Internal Revenue Service audits of our 2006 and 2007 federal income tax
returns. These discrete benefits resulted in a higher effective tax rate due to
our pre-tax loss in 2009. Discrete items impacting the effective tax rate in
the nine months ended September 30, 2010 were inconsequential. Other items impacting
the effective tax rate for 2010, compared to 2009, include the anticipated
benefit from the domestic manufacturers production incentive, additional tax
expense in foreign tax jurisdictions with lower tax rates than the U.S federal
statutory rate and recognition of the benefit from the revised Minnesota state
R&D tax credit that was signed into law during the second quarter of 2010.

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

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

In analyzing
the need for valuation allowances, we first considered our history of
cumulative losses for U.S. income tax purposes over the past three years and
also gave significant consideration to our results for U.S. income tax purposes
over the past five years, as the economic cycles in our industry have tended to
average five years in length (from peak to trough). We also considered our
forecasts of future profitability, the duration of statutory carry forward
periods and tax planning alternatives. Finally, we considered the length and
severity of the recent global economic crisis, the impact that it had on our
operating results and our expectation for rebound given recent signs of recovery
in the global economy and more specifically in our markets. After considering
all of these factors, and after considering other significant positive
evidence, we concluded that a valuation allowance with respect to substantially
all of our U.S. based deferred tax assets was not required at September 30,
2010.

Our results in
both 2008 and 2009 were negatively impacted by the recent global economic
slowdown, and we incurred a loss in the United States in both 2008 and 2009,
where most of our net deferred tax assets are recorded. Therefore, achievement
of profitability in the United States will be a significant factor in
determining our continuing ability to carry these deferred tax assets without
recording a valuation allowance. The global electronics market has
significantly strengthened. We are seeing significant demand from manufacturers
of SMT assembly equipment who purchase our alignment sensor products, and for
our stand alone solder paste inspection and AOI systems. We believe that these
improving market conditions, the efficiencies in operations we have
implemented, and the new products we have introduced and anticipate introducing
in the next year, will lead to improved operating results and continued
profitability in future periods. If future results from our operations are less
than projected, a valuation allowance may be required against virtually all of
our deferred tax assets, which could have a material impact on our results of
operations in the period in which it is recorded.

Deferred tax assets
at September 30, 2010, include net operating loss carry forwards incurred in
the UK by CyberOptics Ltd., which was acquired in 1999. The utilization of
these net operating loss carry forwards is dependent on CyberOptics Ltd.s
ability to generate sufficient UK taxable income during the carry forward
period.

24

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Order Rate and Backlog

Our orders
totaled $14.0 million in the three months ended September 30, 2010, compared to
$17.7 million in the three months ended June 30, 2010 and $7.5 million in the
three months ended September 30, 2009. Backlog totaled $12.8 million at
September 30, 2010, $12.9 million at June 30, 2010 and $5.4 million at
September 30, 2009. The scheduled shipment (or estimated timing of revenue for
systems recognized upon acceptance) for backlog at September 30, 2010 is as
follows:

|                            |  |         |        | 
|--------------------------- |  | ------- | ------ | 
|(In
 thousands)             |  | Backlog |       
|                            |  |         |        | 
|4th
 Quarter 2010           |  | $       | 11,711 | 
|1st
 Quarter 2011 and after |  |         | 1,116  | 
|Total backlog               |  | $       | 12,827 | 

LIQUIDITY AND CAPITAL RESOURCES

Our cash and
cash equivalents increased by $2.9 million in the nine months ended September
30, 2010 resulting from $4.7 million of proceeds from maturities and sales of
marketable securities, net of purchases, offset in part by $914,000 of cash
used by operating activities and purchases of capital assets totaling $1.1
million. Our cash and cash equivalents fluctuate in part because of maturities
of marketable securities, and investment of cash balances in marketable
securities, 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. Combined balances of cash and marketable securities decreased by
$2.2 million to $19.7 million as of September 30, 2010 from $21.9 million as of
December 31, 2009.

Operating
activities used $914,000 of cash in the nine months ended September 30, 2010.
Cash provided by operations included net income of $2.2 million, which included
non-cash expenses totaling $2.0 million for depreciation and amortization,
deferred taxes, non-cash gains and losses from foreign currency transactions
and stock compensation costs.

Changes in
operating assets and liabilities using cash included increases in accounts receivable
of $4.6 million, inventories of $7.2 million and other assets of $282,000.
Changes in operating assets and liabilities providing cash included increases
in accounts payable of $3.2 million and accrued expenses and other liabilities
of $1.3 million and decreases in income tax refunds receivable of $2.5 million.
The increase in accounts receivable was due to higher sales levels in the third
quarter of 2010, compared to the fourth quarter of 2009. Inventories were
higher due to increased material purchases to support the higher level of sales
expected in the second half of 2010 and the delayed acceptance of customer
orders at September 30, 2010. The increase in accounts payable resulted from
increased material purchases and a conscious effort on our part to extend the
timing of vendor payments. Accrued expenses and other liabilities increased due
to higher warranty, commission and incentive compensation accruals, resulting
from higher sales levels and improved operating results. Income tax refunds receivable
decreased due to receipt of our anticipated tax refund resulting from carryback
of our 2009 net operating loss to prior periods.

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

25

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Investing
activities provided $3.6 million of cash in the nine months ended September 30,
2010 compared to providing $6.2 million of cash in the same period last year.
Changes in the level of investment in marketable securities, resulting from the
purchases, sales and maturities of those securities generated $4.7 million of
cash in the nine months ended September 30, 2010, compared to generating $6.8
million of cash in the same period last year. We used $1.1 million of cash in
the nine months ended September 30, 2010 and $630,000 of cash in the nine
months ended September 30, 2009 for the purchase of fixed asset and capitalized
patent costs.

Financing
activities provided $211,000 of cash in the nine months ended September 30,
2010 and $164,000 of cash in the nine months ended September 30, 2009 from the
issuance of common stock under our employee stock purchase plan and the
exercise of stock options.

At September
30, 2010, 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.

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, 2009. There were no significant
changes to our contractual obligations in the nine months ended September 30,
2010, other than a $7.5 million increase in our commitment for future inventory
purchases, to support our significant increase in recent sales activity. At the
present time, we have no material commitments for capital expenditures.
Purchase commitments for inventory will vary based on the volume of revenue and
resulting inventory requirements.

Our cash, cash
equivalents and marketable securities totaled $19.7 million at September 30,
2010. We believe that our available balances of cash, cash equivalents and
marketable securities will be adequate to fund our cash flow needs for the
foreseeable future.

Fair Value
Measurement

We determine
the fair value of our assets and liabilities based on the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value maximize the use of observable
inputs and minimize the use of unobservable inputs. We use a fair value
hierarchy with three levels of inputs, of which the first two are considered
observable and the last unobservable, to measure fair value: The fair value
hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1). The next highest priority is
based on quoted prices for similar assets or liabilities in active markets or
quoted prices for identical or similar assets or liabilities in non-active markets
or other observable inputs (Level 2). The lowest priority is given to
unobservable inputs (Level 3).

The following
provides information regarding fair value measurements for our cash equivalents
and marketable securities as of September 30, 2010 and December 31, 2009
according to the three-level fair value hierarchy:

|                                       |  |                            |        |                                                                   |   |                                                  |  |                                              |        |  |   |   | 
|-------------------------------------- |  | -------------------------- | ------ | ----------------------------------------------------------------- | - | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                       |  |                            |        | Fair Value Measurements at September
 30, 2010 Using              |  
|(In
 thousands)                        |  | Balance
 September 30,2010 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |   | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                       |  |                            |        |                                                                   |   |                                                  |  |                                              |       
|Cash equivalents                       |  | $                          | 2,613  |                                                                   | $ |                                                 |  | $                                            | 2,613  |  | $ |  | 
|U.S. government and agency obligations |  |                            | 8,105  |                                                                   |   |                                                 |  |                                              | 8,105  |  |   |  | 
|Corporate debt securities              |  |                            | 4,316  |                                                                   |   |                                                 |  |                                              | 4,316  |  |   |  | 
|Asset backed securities                |  |                            | 206    |                                                                   |   |                                                 |  |                                              | 206    |  |   |  | 
|Equity securities                      |  |                            | 52     |                                                                   |   | 52                                               |  |                                              |       |  |   |  | 
|Total                                  |  | $                          | 15,292 |                                                                   | $ | 52                                               |  | $                                            | 15,240 |  | $ |  | 

26

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|                                        |  |                           |        |                                                                   |   |                                                  |  |                                              |        |  |   |   | 
|--------------------------------------- |  | ------------------------- | ------ | ----------------------------------------------------------------- | - | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                        |  |                           |        | Fair Value Measurements at December 31,
 2009 Using               |  
|(In
 thousands)                         |  | Balance
 December 31,2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |   | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                        |  |                           |        |                                                                   |   |                                                  |  |                                              |       
|Cash
 equivalents                       |  | $                         | 2,320  |                                                                   | $ |                                                 |  | $                                            | 2,320  |  | $ |  | 
|U.S.
 government and agency obligations |  |                           | 14,161 |                                                                   |   |                                                 |  |                                              | 14,161 |  |   |  | 
|Corporate
 debt securities              |  |                           | 3,301  |                                                                   |   |                                                 |  |                                              | 3,301  |  |   |  | 
|Asset backed
 securities                |  |                           | 210    |                                                                   |   |                                                 |  |                                              | 210    |  |   |  | 
|Equity
 securities                      |  |                           | 30     |                                                                   |   | 30                                               |  |                                              |       |  |   |  | 
|Total                                   |  | $                         | 20,022 |                                                                   | $ | 30                                               |  | $                                            | 19,992 |  | $ |  | 

During the
nine months ended September 30, 2010 there were no significant transfers to or
from the three level hierarchy. The carrying amounts of financial instruments
such as cash equivalents, accounts receivable, other assets, accounts payable,
accrued expenses and other current liabilities approximate the related fair
values due to the short term maturities of these instruments. Non-financial
assets such as equipment and leasehold improvements, goodwill and intangible
assets are subject to nonrecurring fair value measurements if they are deemed
impaired. The impairment models used for these assets are described in more
detail in our Annual Report on Form 10-K for the year ended December 31, 2009.
Our foreign currency swap agreements are structured to mature on the last day
of each quarter. The fair value associated with these agreements is
inconsequential and represents a Level 2 measurement.

Inflation and Foreign Currency Transactions

Changes in our
revenues have resulted primarily because of 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 a significant effect on our operations.

Virtually all
of our international export sales are negotiated, invoiced and paid in U.S.
dollars. We manufacture our SMT systems products in Singapore and a portion of
our raw material purchases are denominated in Singapore dollars. We also have
R&D and sales personnel located in Singapore and sales offices located in
other parts of the world. Although currency fluctuations do not significantly
affect our revenue, they can impact our costs and influence the price competitiveness
of our products and the willingness of existing and potential customers to
purchase units. Recently, the Singapore dollar has strengthened in relation to
the U.S dollar and this factor could negatively impact our results in future
periods.

We enter into
foreign currency swap agreements to hedge short term inter-company financing
transactions with our subsidiaries in the United Kingdom and Singapore. These
currency swap agreements are structured to mature near the last day of each
quarter, and are designated as cash flow hedges. At September 30, 2010, we had
two open swap agreements that were purchased on that day. As a result, any
unrealized gains or losses as of September 30, 2010 were inconsequential.

In the three
months ended September 30, 2010, we recognized net gains (losses) from
settlement of foreign currency swap agreements of $(63,000) in addition to
foreign currency transaction gains (losses) on the underlying inter-company
balances of $90,000. In the nine months ended September 30, 2010, we recognized
net gains (losses) from settlement of foreign currency swap agreements of
$(32,500) that offset foreign currency transactions gains (losses) on the
underlying inter-company balances of $35,000.

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

27

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Recent Accounting Developments

Prior to January 1,
2010, we recognized revenue based on multiple element revenue guidance which
required the existence of vendor specific objective evidence of fair value
(VSOE) for the undelivered elements in an arrangement in order for us to
account for the elements separately. We utilized the residual method of
allocation to account for delivered elements.

In October
2009, the Financial Accounting Standards Board (FASB) amended guidance in FASB Accounting Standards CodificationTM
(ASC) 605, Revenue Recognition, 25,
Multiple-Element Arrangements, to (1) modify the separation criteria by
eliminating the criterion that requires objective and reliable evidence of fair
value for the undelivered item(s), and (2) eliminates the use of the
residual method of allocation and instead requires that arrangement
consideration be allocated, at the inception of the arrangement, to all
deliverables based on their relative selling price. The FASB also issued
guidance to amend the scope of ASC 985, Software, 605,
Revenue Recognition, to exclude arrangements with tangible products
containing both software and non-software components that function together to
deliver a products essential functionality.

Under the
amended guidance, consideration is allocated to the deliverables at inception
of an arrangement using the relative selling price method. Selling price is
determined based on a selling price hierarchy, consisting of VSOE, third party
evidence or estimated selling price. Under the amended guidance, we determined
an estimated selling price for each of the elements in our multiple elements
sales based on the selling price hierarchy and allocated consideration to the
deliverables using the relative selling price method. We have adopted the
amended guidance effective January 1, 2010. The impact of adopting the amended
guidance was not material to our recognition of revenue in 2010 and would have
been insignificant in 2009.

In January
2010, the FASB issued ASU No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820)  Improving Disclosures
about Fair Value Measurements (ASU No. 2010-06). ASU No. 2010-06
requires new disclosures regarding significant transfers in and out of Levels 1
and 2, as well as information about activity in Level 3 fair value
measurements, including presenting information about purchases, sales,
issuances and settlements on a gross versus a net basis in the Level 3 activity
roll forward. In addition, ASU No. 2010-06 clarifies existing disclosures
regarding input and valuation techniques, as well as the level of
disaggregation for each class of assets and liabilities. ASU No. 2010-06
is effective for interim and annual periods beginning after December 15,
2009, except for the disclosures pertaining to purchases, sales, issuances and
settlements in the roll forward of Level 3 activity; those disclosures are
effective for interim and annual periods beginning after December 15,
2010. Our adoption of ASU No. 2010-06 effective January 1, 2010 had no current
impact on our consolidated financial position, results of operations or cash
flows.

28

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Not applicable.

ITEM 4 
CONTROLS AND PROCEDURES

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

b. During the
quarter ended September 30, 2010, there has been no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 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, 2009, which could materially affect
our business, financial condition or future results.

ITEM 6 
EXHIBITS

|      |                                                                                                                                              
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------
|10.1: | Tenancy Agreement between NIDEC Component
 Technology Co. LTD and CyberOptics PTE LTD (Singapore) Term 15 May 2011 to 24 July 2013.          
|      |                                                                                                                                              
|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             

29

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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, Chief Executive
 Officer and Chair 
|                        | (Principal Executive Officer and Duly
 Authorized Officer) 
|                        |                                                            
|                        | /s/ Jeffrey A. Bertelsen                                   
|                        | By Jeffrey A. Bertelsen, Chief Financial
 Officer          
|                        | (Principal Accounting Officer and Duly
 Authorized Officer)
|                        |                                                            
|Dated: November 8, 2010 |                                                            

30

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