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 June 30, 2009

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

For the transition period from
______ to ______

COMMISSION FILE NO. (0-16577)

| |  | 
| |  | 
|

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

|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Minnesota                                                       |  | 41-1472057                           
|(State or other jurisdiction 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. Yes x No o

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

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

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

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

Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date. At July
31, 2009, there were 6,803,880 shares of the registrants Common Stock, no par
value, issued and outstanding.







PART
I. FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED
CONSOLIDATED BALANCE SHEETS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                                                                                                   |  |                |        |                    |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------ | -
|(In
 thousands except share information)                                                                                                           |  | June 30,
 2009 |        | December 31,
 2008 |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|ASSETS                                                                                                                                             |  |                |        |                    |   |        |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|Cash and
 cash equivalents                                                                                                                         |  | $              | 1,719  |                    | $ | 4,516  |  
|Marketable
 securities                                                                                                                             |  |                | 14,219 |                    |   | 10,433 |  
|Accounts receivable, less allowance for
 doubtful accounts of $1,036 at June 30, 2009 and $250 at December 31, 2008                                |  |                | 4,793  |                    |   | 6,951  |  
|Inventories                                                                                                                                        |  |                | 10,335 |                    |   | 9,869  |  
|Other
 current assets                                                                                                                              |  |                | 3,931  |                    |   | 2,579  |  
|Deferred tax
 assets                                                                                                                               |  |                | 2,894  |                    |   | 2,604  |  
|Total current assets                                                                                                                               |  |                | 37,891 |                    |   | 36,952 |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|Marketable
 securities                                                                                                                             |  |                | 7,451  |                    |   | 14,834 |  
|Equipment
 and leasehold improvements, net                                                                                                         |  |                | 2,244  |                    |   | 2,615  |  
|Intangible
 and other assets, net                                                                                                                  |  |                | 894    |                    |   | 956    |  
|Goodwill                                                                                                                                           |  |                | 569    |                    |   | 569    |  
|Other assets                                                                                                                                       |  |                | 188    |                    |   | 189    |  
|Deferred tax
 assets                                                                                                                               |  |                | 3,875  |                    |   | 2,834  |  
|Total assets                                                                                                                                       |  | $              | 53,112 |                    | $ | 58,949 |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|LIABILITIES
 AND STOCKHOLDERS EQUITY                                                                                                              |  |                |        |                    |   |        |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|Accounts
 payable                                                                                                                                  |  | $              | 2,345  |                    | $ | 2,753  |  
|Advance
 customer payments                                                                                                                         |  |                | 766    |                    |   | 684    |  
|Accrued
 expenses                                                                                                                                  |  |                | 2,628  |                    |   | 3,054  |  
|Total current liabilities                                                                                                                          |  |                | 5,739  |                    |   | 6,491  |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|Other
 liabilities                                                                                                                                 |  |                | 911    |                    |   | 1,578  |  
|Total liabilities                                                                                                                                  |  |                | 6,650  |                    |   | 8,069  |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|Commitments
 and contingencies                                                                                                                     |  |                |       |                    |   |       |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|Stockholders
 equity:                                                                                                                             |  |                |        |                    |   |        |  
|Preferred stock, no par value, 5,000,000
 shares authorized, none outstanding                                                                      |  |                |       |                    |   |       |  
|Common stock, no par value, 37,500,000 shares authorized, 6,783,070
 shares issued outstanding at June 30, 2009 and 6,769,295 at December 31, 2008 |  |                | 29,397 |                    |   | 29,156 |  
|Accumulated other comprehensive loss                                                                                                               |  |                | (833   | )                  |   | (530   | )
|Retained earnings                                                                                                                                  |  |                | 17,898 |                    |   | 22,254 |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|Total stockholders equity                                                                                                                         |  |                | 46,462 |                    |   | 50,880 |  
|                                                                                                                                                   |  |                |        |                    |   |        |  
|Total liabilities and stockholders
equity                                                                                                         |  | $              | 53,112 |                    | $ | 58,949 |  

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

---



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
CYBEROPTICS CORPORATION
(Unaudited)

|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|---------------------------------------------- |  | ---------------------------- | ------ | -------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                                               |  | Three Months Ended
 June 30, |        | Six Months Ended
 June 30, |  
|(In thousands,
 except per share amounts)      |  | 2009                         |        | 2008                       |   | 2009   |   | 2008 |       
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Revenues                                       |  | $                            | 5,179  |                            | $ | 13,391 |   | $    | 9,541  |   | $ | 27,198 |  
|Cost of
 revenues                              |  |                              | 3,581  |                            |   | 7,469  |   |      | 6,565  |   |   | 14,837 |  
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Gross margin                                   |  |                              | 1,598  |                            |   | 5,922  |   |      | 2,976  |   |   | 12,361 |  
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Research and
 development expenses             |  |                              | 1,730  |                            |   | 2,560  |   |      | 3,807  |   |   | 5,172  |  
|Selling,
 general and administrative expenses  |  |                              | 3,702  |                            |   | 3,865  |   |      | 6,634  |   |   | 7,295  |  
|Severance
 and recruitment expenses            |  |                              | 90     |                            |   | 185    |   |      | 395    |   |   | 378    |  
|Amortization
 of intangibles                   |  |                              | 46     |                            |   | 45     |   |      | 91     |   |   | 90     |  
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Loss from operations                           |  |                              | (3,970 | )                          |   | (733   | ) |      | (7,951 | ) |   | (574   | )
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Interest
 income and other                     |  |                              | 150    |                            |   | 245    |   |      | 358    |   |   | 763    |  
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Income (loss) before income taxes              |  |                              | (3,820 | )                          |   | (488   | ) |      | (7,593 | ) |   | 189    |  
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Income tax
 provision (benefit)                |  |                              | (1,897 | )                          |   | (219   | ) |      | (3,237 | ) |   | 31     |  
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Net income (loss)                              |  | $                            | (1,923 | )                          | $ | (269   | ) | $    | (4,356 | ) | $ | 158    |  
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Net income
 (loss) per share  Basic           |  | $                            | (0.28  | )                          | $ | (0.03  | ) | $    | (0.64  | ) | $ | 0.02   |  
|Net income
 (loss) per share  Diluted         |  | $                            | (0.28  | )                          | $ | (0.03  | ) | $    | (0.64  | ) | $ | 0.02   |  
|                                               |  |                              |        |                            |   |        |   |      |        |   |   |        |  
|Weighted
 average shares outstanding  Basic   |  |                              | 6,781  |                            |   | 8,283  |   |      | 6,776  |   |   | 8,433  |  
|Weighted
 average shares outstanding  Diluted |  |                              | 6,781  |                            |   | 8,283  |   |      | 6,776  |   |   | 8,471  |  

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

2

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CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                                                 |  |                           |        |      |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------- | ------ | ---- | - | ------- | -
|                                                                                                 |  | Six Months Ended June 30, |       
|(In
 thousands)                                                                                  |  | 2009                      |        | 2008 |  
|                                                                                                 |  |                           |        |      |   |         |  
|CASH FLOWS
 FROM OPERATING ACTIVITIES:                                                           |  |                           |        |      |   |         |  
|Net
 income (loss)                                                                               |  | $                         | (4,356 | )    | $ | 158     |  
|Adjustments to reconcile net income (loss)
 to net cash provided (used) by operating activities: |  |                           |        |      |   |         |  
|Depreciation and amortization                                                                    |  |                           | 1,161  |      |   | 1,103   |  
|Provision for doubtful accounts                                                                  |  |                           | 804    |      |   | (30     | )
|Deferred tax benefit                                                                             |  |                           | (1,351 | )    |   |        |  
|Foreign currency transaction (gains)
losses                                                      |  |                           | (145   | )    |   | 2       |  
|Stock compensation costs                                                                         |  |                           | 262    |      |   | 255     |  
|Realized gains on available for sale
 marketable securities                                      |  |                           | (24    | )    |   |        |  
|Unrealized loss on available for sale
 marketable equity security                                |  |                           |       |      |   | 166     |  
|Changes in operating assets and
 liabilities:                                                    |  |                           |        |      |   |         |  
|Accounts receivable                                                                              |  |                           | 1,354  |      |   | (980    | )
|Inventories                                                                                      |  |                           | (678   | )    |   | 44      |  
|Other current assets                                                                             |  |                           | (1,242 | )    |   | (734    | )
|Accounts payable                                                                                 |  |                           | (427   | )    |   | 714     |  
|Advance customer payments                                                                        |  |                           | 82     |      |   | (301    | )
|Accrued expenses                                                                                 |  |                           | (1,101 | )    |   | (194    | )
|Net cash provided (used) by operating
 activities                                                |  |                           | (5,661 | )    |   | 203     |  
|                                                                                                 |  |                           |        |      |   |         |  
|CASH FLOWS
 FROM INVESTING ACTIVITIES:                                                           |  |                           |        |      |   |         |  
|Proceeds from maturities of available for
 sale marketable securities                            |  |                           | 5,612  |      |   | 9,207   |  
|Proceeds from sales of available for sale
 marketable securities                                 |  |                           | 2,478  |      |   |        |  
|Purchases of available for sale marketable
 securities                                           |  |                           | (4,759 | )    |   | (10,086 | )
|Additions to equipment and leasehold
 improvements                                               |  |                           | (296   | )    |   | (808    | )
|Additions to patents                                                                             |  |                           | (184   | )    |   | (203    | )
|Net cash provided (used) by investing
 activities                                                |  |                           | 2,851  |      |   | (1,890  | )
|                                                                                                 |  |                           |        |      |   |         |  
|CASH FLOWS
 FROM FINANCING ACTIVITIES:                                                           |  |                           |        |      |   |         |  
|Proceeds from exercise of stock options                                                          |  |                           |       |      |   | 12      |  
|Excess tax benefit from exercise of stock
 options                                               |  |                           |       |      |   | 2       |  
|Repurchase of common stock                                                                       |  |                           |       |      |   | (5,854  | )
|Net cash provided (used) by financing
 activities                                                |  |                           |       |      |   | (5,840  | )
|                                                                                                 |  |                           |        |      |   |         |  
|Effects of
 exchange rate changes on cash and cash equivalents                                   |  |                           | 13     |      |   | (28     | )
|                                                                                                 |  |                           |        |      |   |         |  
|Net decrease
 in cash and cash equivalents                                                       |  |                           | (2,797 | )    |   | (7,555  | )
|                                                                                                 |  |                           |        |      |   |         |  
|Cash and
 cash equivalents  beginning of period                                                 |  |                           | 4,516  |      |   | 18,864  |  
|                                                                                                 |  |                           |        |      |   |         |  
|Cash and
 cash equivalents  end of period                                                       |  | $                         | 1,719  |      | $ | 11,309  |  

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

3

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NOTES TO THE
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION

1. INTERIM REPORTING:

The interim
condensed consolidated financial statements presented herein as of June 30,
2009, and for the three and six month periods ended June 30, 2009 and 2008, are
unaudited, but in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation
of financial position, results of operations and cash flows for the periods
presented. Certain reclassification of previously reported amounts have been
made to conform that presentation to the current period presentation.

The results of
operations for the three and six month periods ended June 30, 2009 do not
necessarily indicate the results to be expected for the full year. The December
31, 2008 consolidated balance sheet data was derived from audited consolidated
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. These
unaudited interim condensed consolidated financial statements should be read in
conjunction with our consolidated financial statements and notes thereto,
contained in our Annual Report on Form 10-K for the year ended December 31,
2008.

We evaluated
subsequent events (see Note 15) through August 12, 2009, the issuance date of
our consolidated financial statements for the period ended June 30, 2009,
as this is the date on which we filed such financial statements on
Form 10-Q with the SEC.

2. MARKETABLE SECURITIES:

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

|                                                      |  |                 |        |                   |  |                    |  |            |     |   |  |        | 
|----------------------------------------------------- |  | --------------- | ------ | ----------------- |  | ------------------ |  | ---------- | --- | - |  | ------ | 
|                                                      |  | June 30, 2009   |       
|(In
 thousands)                                       |  | Amortized
 Cost |        | Unrealized
 Gains |  | Unrealized
 Losses |  | Fair Value |    
|                                                      |  |                 |        |                   |  |                    |  |            |     |   |  |        | 
|Short Term                                            |  |                 |        |                   |  |                    |  |            |     |   |  |        | 
|U.S. government and agency obligations                |  | $               | 11,484 |                   |  | 193                |  |            |    |   |  | 11,677 | 
|Corporate debt securities and certificates of
deposit |  |                 | 2,535  |                   |  | 7                  |  |            |    |   |  | 2,542  | 
|Marketable securities  short term                    |  | $               | 14,019 |                   |  | 200                |  |            |     |   |  | 14,219 | 
|                                                      |  |                 |        |                   |  |                    |  |            |     |   |  |        | 
|Long Term                                             |  |                 |        |                   |  |                    |  |            |     |   |  |        | 
|U.S. government and agency obligations                |  | $               | 6,159  |                   |  | 215                |  |            |    |   |  | 6,374  | 
|Corporate debt securities and certificates of
deposit |  |                 | 690    |                   |  | 18                 |  |            |    |   |  | 708    | 
|Asset backed securities                               |  |                 | 318    |                   |  | 11                 |  |            |    |   |  | 329    | 
|Equity securities                                     |  |                 | 84     |                   |  |                   |  |            | (44 | ) |  | 40     | 
|Marketable securities  long term                     |  | $               | 7,251  |                   |  | 244                |  |            | (44 | ) |  | 7,451  | 

4

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

Our investment in equity
securities was in a $44,000 unrealized loss position at June 30, 2009 and a
$54,000 unrealized loss position at December 31, 2008 due to weak economic and
stock market conditions. In the three months ended June 30, 2008, we recognized
a $166,000 impairment charge for this security resulting from a decline in
market value which we determined to be other than temporary. We intend to hold
this security indefinitely. No other impairment charges were recognized for
marketable securities in 2008 or the six months ended June 30, 2009.

Our investments in long term
marketable debt securities all have maturities of less than five years. At June
30, 2009, marketable debt securities valued at $21,630,000 were in an
unrealized gain position totaling $444,000. No marketable debt securities were
in an unrealized loss position. At December 31, 2008, marketable debt
securities valued at $23,645,000 were in an unrealized gain position totaling
$647,000. All remaining marketable debt securities at December 31, 2008, valued
at $1,592,000, were in an unrealized loss position totaling $12,000 (all had
been in an unrealized loss position for less than twelve months).

Net pre-tax unrealized gains
for marketable securities of $400,000 at June 30, 2009 and $581,000 at December
31, 2008 were recorded as a component of accumulated other comprehensive income
(loss) in stockholders equity. In the six months ended June 30, 2009, we
recognized a gain of $24,000 from the sale of marketable debt securities and
received sale proceeds totaling $2,478,000. There were no sales of marketable
securities in the six months ended June 30, 2008.

3. ACCOUNTING FOR STOCK-BASED COMPENSATION:

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

The fair value of the
options granted to our employees were estimated on the date of grant using the
Black-Scholes model. Stock options for 35,000 shares of stock and restricted
stock units for 4,000 shares of stock were granted in the six months ended June
30, 2009 to certain officers and key employees. We issued 3,000 shares of
common stock under our stock grant plan for non-employee directors upon their
re-election to the board of directors in May 2009. We also issued 10,775 shares
of common stock in the three months ended March 31, 2009 to one of our officers
under an incentive compensation arrangement. These share grants and stock
options were valued at their fair market value on the date of grant, with
recognition of compensation expense over the corresponding vesting period.

5

---



Equity based compensation
expense in the three months ended June 30, 2009 totaled $84,000 and includes
$49,000 for stock option awards, $11,000 for our employee stock purchase plan,
$10,000 for unvested restricted stock units and $14,000 for shares issued to
our non-employee directors. Equity based compensation expense in the three
months ended June 30, 2008 totaled $136,000 and includes $74,000 for stock
option awards, $21,000 for our employee stock purchase plan, $14,000 for
unvested restricted stock units and $27,000 for shares issued to our
non-employee directors.

Equity based compensation
expense in the six months ended June 30, 2009 totaled $262,000 and includes
$141,000 for stock option awards, $27,000 for our employee stock purchase plan,
$30,000 for unvested restricted stock units, $14,000 for shares issued to our
non-employee directors and $50,000 for shares issued to an officer under an
incentive compensation arrangement. Equity based compensation expense in the
six months ended June 30, 2008 totaled $255,000 and includes $152,000 for stock
option awards, $48,000 for our employee stock purchase plan, $28,000 for
unvested restricted stock units and $27,000 for shares issued to our
non-employee directors. Common stock was reduced by $20,000 in the six months
ended June 30, 2009 due to a deferred tax shortfall related to stock options
and restricted stock units.

At June 30, 2009, the total
unrecognized compensation cost related to non vested equity based compensation
arrangements was $603,000 and the related weighted average period over which it
is expected to be recognized is 2.3 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 as specified in Staff Accounting
Bulletin No. 107, Valuation of Share-Based Payment Arrangements for Public
Companies. We continued to use the simplified method in 2009 because our
historical exercise experience is not expected to be representative of exercise
patterns in the future, due to our recent restructuring activities. Expected
volatility was computed based on historical fluctuations in the daily price of
our common stock.

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

|                                           |  |                                  |   |      |   | 
|------------------------------------------ |  | -------------------------------- | - | ---- | - | 
|Black
 Scholes Assumptions:                |  | Six Months Ending
 June 30, 2009 |  
|                                           |  |                                  |   |      |   | 
|Risk-free interest rates                   |  |                                  |   | 2.09 | % | 
|Expected life in years                     |  |                                  |   | 4.75 |   | 
|Expected volatility                        |  |                                  |   | 49   | % | 
|Expected dividends                         |  |                                  |   | None |   | 
|Weighted average fair
 value on grant date |  |                                  | $ | 1.91 |   | 

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 920,629 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 35,000 shares of stock were granted
during the six months ended June 30, 2009. As of June 30, 2009, there were
349,645 shares of common stock available under these plans for future issuance
to employees, officers and others. There are no shares available under these
plans for future issuance to non-employee directors. In addition, there are
50,000 shares reserved and included in the plan summaries below that are not
part of the three stock incentive plans.

6

---



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

|                                |  |                     |          |                                             |   |       | 
|------------------------------- |  | ------------------- | -------- | ------------------------------------------- | - | ----- | 
|                                |  | Options Outstanding |          | Weighted Average
 Exercise Price Per
 Share |  
|                                |  |                     |          |                                             |   |       | 
|Outstanding, December 31,
 2008 |  |                     | 715,646  |                                             | $ | 10.44 | 
|Granted                         |  |                     | 35,000   |                                             |   | 4.80  | 
|Exercised                       |  |                     |         |                                             |   |      | 
|Expired                         |  |                     | (114,426 | )                                           |   | 11.93 | 
|Forfeited                       |  |                     | (51,725  | )                                           |   | 7.34  | 
|Outstanding, June 30, 2009      |  |                     | 584,495  |                                             | $ | 10.09 | 
|                                |  |                     |          |                                             |   |       | 
|Exercisable, June 30, 2009      |  |                     | 413,836  |                                             | $ | 11.48 | 

The intrinsic value of an
option is the amount by which the fair value of the underlying stock exceeds
its exercise price. The weighted average remaining contractual term and
aggregate intrinsic value for options outstanding at June 30, 2009 was 3.84
years and $123,546. The weighted average remaining contractual term and
aggregate intrinsic value of options exercisable at June 30, 2009 was 2.89 years
and $22,750. There were no options exercised in the six months ended June 30,
2009.

Restricted Stock Units

Our 1998 Stock Incentive
Plan also permits our Compensation Committee to grant other stock-based
benefits, including restricted stock units. Restricted stock units are valued
at a price equal to the fair market value of our common stock on the date of
grant, vest over a four year period and entitle the holders to one share of our
common stock for each restricted stock unit. The aggregate intrinsic value of
outstanding restricted stock units as of June 30, 2009 was $208,000.

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

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

Employee Stock Purchase Plan

We have an Employee Stock
Purchase Plan available to eligible U.S. employees. Under terms of the plan,
eligible employees may designate from 1% to 10% of their compensation to be
withheld through payroll deductions, up to a maximum of $6,500 in each plan
year, for the purchase of common stock at 85% of the lower of the market price
on the first or last day of the offering period. There were no shares issued
under this plan in the six months ended June 30, 2009 or the six months ended June
30, 2008. As of June 30, 2009, 112,812 shares remain available for future
issuance under this plan.

Stock Grant Plan for Non-Employee Directors

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

7

---



4. CERTAIN BALANCE SHEET COMPONENTS:

Inventories consist of the
following:

|                                   |  |               |        |                   |   |       | 
|---------------------------------- |  | ------------- | ------ | ----------------- | - | ----- | 
|(In
 thousands)                    |  | June 30, 2009 |        | December 31, 2008 |  
|                                   |  |               |        |                   |   |       | 
|Raw materials and
 purchased parts |  | $             | 4,070  |                   | $ | 3,442 | 
|Work in process                    |  |               | 794    |                   |   | 724   | 
|Finished goods                     |  |               | 5,471  |                   |   | 5,703 | 
|                                   |  |               |        |                   |   |       | 
|Total inventories                  |  | $             | 10,335 |                   | $ | 9,869 | 

Warranty costs:

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

|                                   |  |                              |      |                            |   |      |   |      |      |   |   |      |  
|---------------------------------- |  | ---------------------------- | ---- | -------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                   |  | Three Months Ended
 June 30, |      | Six Months Ended
 June 30, |  
|(In
 thousands)                    |  | 2009                         |      | 2008                       |   | 2009 |   | 2008 |     
|                                   |  |                              |      |                            |   |      |   |      |      |   |   |      |  
|Balance at beginning of
 period    |  | $                            | 636  |                            | $ | 774  |   | $    | 823  |   | $ | 819  |  
|Accrual for warranties             |  |                              | 114  |                            |   | 248  |   |      | 198  |   |   | 438  |  
|Settlements made during the period |  |                              | (241 | )                          |   | (271 | ) |      | (512 | ) |   | (506 | )
|                                   |  |                              |      |                            |   |      |   |      |      |   |   |      |  
|Balance at end of period           |  | $                            | 509  |                            | $ | 751  |   | $    | 509  |   | $ | 751  |  

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
 June 30, |     | Six Months Ended
 June 30, |  
|(In
 thousands)                  |  | 2009                         |     | 2008                       |   | 2009 |   | 2008 |     
|                                 |  |                              |     |                            |   |      |   |      |      |   |   |      |  
|Balance at beginning of
 period  |  | $                            | 608 |                            | $ | 460  |   | $    | 605  |   | $ | 425  |  
|Revenue deferrals                |  |                              | 125 |                            |   | 166  |   |      | 206  |   |   | 267  |  
|Amortization of deferred revenue |  |                              | (94 | )                          |   | (63  | ) |      | (172 | ) |   | (129 | )
|                                 |  |                              |     |                            |   |      |   |      |      |   |   |      |  
|Balance at end of period         |  | $                            | 639 |                            | $ | 563  |   | $    | 639  |   | $ | 563  |  

8

---



5. INTANGIBLE ASSETS:

Intangible assets consist of
the following:

|                       |  |                         |        |                           |   |        |   |                         |     |                           |   |        |  |   |        |   |   |     | 
|---------------------- |  | ----------------------- | ------ | ------------------------- | - | ------ | - | ----------------------- | --- | ------------------------- | - | ------ |  | - | ------ | - | - | --- | 
|                       |  | As of June 30, 2009     |        | As of December 31, 2008   |  
|(In
 thousands)        |  | Gross
 Carrying
 Amount |        | Accumulated
 Amortization |   | Net    |   | Gross
 Carrying
 Amount |     | Accumulated
 Amortization |   | Net    | 
|                       |  |                         |        |                           |   |        |   |                         |     |                           |   |        |  |   |        |   |   |     | 
|Developed technology   |  | $                       | 7,775  |                           | $ | (7,395 | ) | $                       | 380 |                           | $ | 7,775  |  | $ | (7,304 | ) | $ | 471 | 
|Patents and trademarks |  |                         | 2,914  |                           |   | (2,400 | ) |                         | 514 |                           |   | 2,730  |  |   | (2,245 | ) |   | 485 | 
|Total                  |  | $                       | 10,689 |                           | $ | (9,795 | ) | $                       | 894 |                           | $ | 10,505 |  | $ | (9,549 | ) | $ | 956 | 

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

|                       |  |                              |     |                            |   |      |  |      |     |  |   |     | 
|---------------------- |  | ---------------------------- | --- | -------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                       |  | Three Months Ended
 June 30, |     | Six Months Ended
 June 30, |  
|(In
 thousands)        |  | 2009                         |     | 2008                       |   | 2009 |  | 2008 |    
|                       |  |                              |     |                            |   |      |  |      |     |  |   |     | 
|Developed technology   |  | $                            | 46  |                            | $ | 45   |  | $    | 91  |  | $ | 90  | 
|Patents and trademarks |  |                              | 80  |                            |   | 70   |  |      | 156 |  |   | 131 | 
|                       |  |                              |     |                            |   |      |  |      |     |  |   |     | 
|Total                  |  | $                            | 126 |                            | $ | 115  |  | $    | 247 |  | $ | 221 | 

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:
$246,000 for the remainder of 2009 and $353,000 in 2010, $285,000 in 2011, and
$10,000 in 2012.

9

---



6. BUSINESS SEGMENTS AND SIGNIFICANT
CUSTOMERS:

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

|                                    |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|----------------------------------- |  | ----------------------------- | ------ | --------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                                    |  | Three Months Ended 
 June 30, |        | Six Months Ended 
 June 30, |  
|(In
 thousands)                     |  | 2009                          |        | 2008                        |   | 2009   |   | 2008 |       
|                                    |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|Revenue:                            |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|Electronic
 Assembly                |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|OEM Sensors                         |  | $                             | 1,204  |                             | $ | 5,931  |   | $    | 2,644  |   | $ | 12,762 |  
|SMT Systems                         |  |                               | 3,320  |                             |   | 6,111  |   |      | 5,565  |   |   | 11,690 |  
|Total Electronic Assembly           |  |                               | 4,524  |                             |   | 12,042 |   |      | 8,209  |   |   | 24,452 |  
|                                    |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|Semiconductor                       |  |                               | 655    |                             |   | 1,349  |   |      | 1,332  |   |   | 2,746  |  
|Total                               |  | $                             | 5,179  |                             | $ | 13,391 |   | $    | 9,541  |   | $ | 27,198 |  
|                                    |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|Income (loss)
 from operations:     |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|Electronic
 Assembly                |  | $                             | (3,753 | )                           | $ | (796   | ) | $    | (7,377 | ) | $ | (619   | )
|Semiconductor                       |  |                               | (217   | )                           |   | 63     |   |      | (574   | ) |   | 45     |  
|Total income (loss) from operations |  |                               | (3,970 | )                           |   | (733   | ) |      | (7,951 | ) |   | (574   | )
|Interest
 income and other          |  |                               | 150    |                             |   | 245    |   |      | 358    |   |   | 763    |  
|Income (loss) before taxes          |  | $                             | (3,820 | )                           | $ | (488   | ) | $    | (7,593 | ) | $ | 189    |  
|                                    |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|Depreciation
 and amortization:     |  |                               |        |                             |   |        |   |      |        |   |   |        |  
|Electronic
 Assembly                |  | $                             | 503    |                             | $ | 494    |   | $    | 1,018  |   | $ | 973    |  
|Semiconductor                       |  |                               | 71     |                             |   | 69     |   |      | 143    |   |   | 130    |  
|Total                               |  | $                             | 574    |                             | $ | 563    |   | $    | 1,161  |   | $ | 1,103  |  

Export sales
were 76% of revenue in the three months ended June 30, 2009 and 74% of revenue
in the six months ended June 30, 2009. Export sales were 84% of revenue in the
three months ended June 30, 2008 and 87% of revenue in the six months ended
June 30, 2008. All of our export sales are negotiated, invoiced and paid in
U.S. dollars. Export sales by geographic area are summarized as follows:

|                   |  |                               |       |                             |   |        |  |      |       |  |   |        | 
|------------------ |  | ----------------------------- | ----- | --------------------------- | - | ------ |  | ---- | ----- |  | - | ------ | 
|                   |  | Three Months Ended 
 June 30, |       | Six Months Ended 
 June 30, |  
|(In
 thousands)    |  | 2009                          |       | 2008                        |   | 2009   |  | 2008 |      
|                   |  |                               |       |                             |   |        |  |      |       |  |   |        | 
|Americas           |  | $                             | 493   |                             | $ | 398    |  | $    | 550   |  | $ | 1,093  | 
|Europe             |  |                               | 1,453 |                             |   | 3,409  |  |      | 3,567 |  |   | 8,644  | 
|Asia               |  |                               | 909   |                             |   | 7,442  |  |      | 1,846 |  |   | 13,792 | 
|Other              |  |                               | 1,099 |                             |   |       |  |      | 1,099 |  |   | 4      | 
|                   |  |                               |       |                             |   |        |  |      |       |  |   |        | 
|Total export sales |  | $                             | 3,954 |                             | $ | 11,249 |  | $    | 7,062 |  | $ | 23,533 | 

Historically,
we have been dependent upon two electronic assembly customers, Assembleon and
Juki, for a significant portion of our revenue. For the year ended December 31,
2008, sales to Juki accounted for 21% of our total revenue and sales to
Assembleon accounted for 15% of our total revenue. Assembleon notified us in 2008
that it intended to start transitioning away from our current alignment
products when it introduced its next generation of equipment in 2010, although
the timing of this transition became less clear as the economy slowed.
Approximately 10% of our revenue has historically been generated from new
product sales to Assembleon, and most or all of this revenue would be
eliminated should Assembleon ultimately transition from our current alignment
products.

10

---



Sales to a
single customer of our SMT system products accounted for 21% of our total
revenue in the three months ended June 30, 2009 and 12% of our total revenue in
the six months ended June 30, 2009.

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

7. NET 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. Diluted
net income (loss) per 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.

Common
equivalent shares are excluded from the calculation of net loss per diluted
share due to their anti-dilutive effect. As a result, no common equivalent
shares were included in the calculation of net loss per diluted share for the
three and six months ended June 30, 2009 or the three months ended June 30,
2008. The calculation of diluted net income per common share for the six months
ended June 30, 2008 includes 38,000 common equivalent shares.

The
calculation of diluted net income (loss) per common share excludes 671,000
potentially dilutive shares for the three months ended June 30, 2009, 643,000
potentially dilutive shares for the three months ended June 30, 2008, 739,000
potentially dilutive shares for the six months ended June 30, 2009 and 511,000
potentially dilutive shares for the six months ended June 30, 2008, because
their effect would be anti-dilutive.

8. COMPREHENSIVE INCOME:

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 $(2,041,000) for the three months ended June 30, 2009 and
$(553,000) for the three months ended June 30, 2008. Total comprehensive income
(loss) amounted to $(4,659,000) for the six months ended June 30, 2009 and
$201,000 for the six months ended June 30, 2008.

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

|                           |  |                                |        |                                           |   |                                         |   |   |      |  
|-------------------------- |  | ------------------------------ | ------ | ----------------------------------------- | - | --------------------------------------- | - | - | ---- | -
|(In
 thousands)            |  | Foreign
 Currency
 Translation |        | Unrealized Gains
 (Losses) on
 Securities |   | Accumulated
 Other
 Comprehensive
 Loss |  
|                           |  |                                |        |                                           |   |                                         |   |   |      |  
|Balance
 December 31, 2008 |  | $                              | (906   | )                                         | $ | 376                                     |   | $ | (530 | )
|Current
 period change     |  |                                | (122   | )                                         |   | (181                                    | ) |   | (303 | )
|                           |  |                                |        |                                           |   |                                         |   |   |      |  
|Balance June
 30, 2009     |  | $                              | (1,028 | )                                         | $ | 195                                     |   | $ | (833 | )

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

11

---



9. INCOME TAXES:

We recorded an
income tax benefit in the six months ended June 30, 2009 at an effective tax
rate of 42.6%, compared to an effective tax rate of 16.4% in the six months
ended June 30, 2008. Our recorded income tax benefit for the three and six
months ended June 30, 2009 includes a $537,000 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. Discrete items impacting the effective tax rate in the six months
ended June 30, 2008 were inconsequential. The change in the effective tax rate
for 2009 is due to the aforementioned discrete item, reductions in the level of
non-deductible expenses and a small benefit from the research and
experimentation (R&D) tax credit, offset by higher tax expense in foreign
tax jurisdictions with tax rates differing from the U.S federal statutory rate.
No benefit from the R&D tax credit was recognized in the six months ended
June 30, 2008 because the R&D tax credit had not yet been signed into law.

We file income
tax returns in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. We are no longer subject to U.S. federal, state and local income
tax examinations by tax authorities for years before 2005. During the three
months ended June 30, 2009, the internal revenue service completed audits of
our 2006 and 2007 federal income tax returns. Our settlement with the internal
revenue service will not have a material impact on our financial condition.

We currently
have significant deferred tax assets as a result of temporary differences
between taxable income on our tax returns and income before income taxes under
U.S. generally accepted accounting principals, research and development tax
credit carry forwards and 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
are applied against future taxable income, or when tax credit carry forwards
are applied against future tax liabilities. We assess the realizability of our
deferred tax assets and the need for a valuation allowance based on Statement
of Financial Accounting Standards No. 109.

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

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

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

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

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

12

---



10. DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES:

We enter into
foreign currency swap agreements to hedge short term inter-company financing
transactions with our subsidiaries in the United Kingdom and Singapore. These
currency swap agreements are structured to mature near the last day of each
quarter, and are designated as cash flow hedges. At June 30, 2009, we had two
open swap agreements for £500,000 GBP and $1,900,000 SGD that were purchased on
June 30, 2009, the fair value of which was inconsequential. Gains and losses
from foreign currency transactions and foreign currency swap agreements are
recognized in interest income and other in our statement of operations.

In the three
months ended June 30, 2009, we recognized net gains (losses) from settlement of
foreign currency swap agreements of $(192,000) that offset foreign currency
transaction gains (losses) on the underlying inter-company balances of
$188,000. In the six months ended June 30, 2009, we recognized net gains
(losses) from settlement of foreign currency swap agreements of $(182,000) that
offset foreign currency transactions gains (losses) on the underlying
inter-company balances of $145,000.

Foreign
currency swap agreements and the impact of currency fluctuations on the
underlying inter-company balances were insignificant in the three and six
months ended June 30, 2008.

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

11. REPURCHASE OF COMMON STOCK:

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

12. CONTINGENCIES:

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

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

13

---



13. SEVERANCE, RECRUITMENT AND SINGAPORE
TRANSITION:

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

Additional
severance costs were incurred in November 2008 when we reduced our workforce by
approximately 10% or 20 employees in response to the weak global economic
conditions. In February 2009, we further reduced our workforce by 24 positions
in response to weakening conditions in the global economy, our transition to
Singapore and our decision to consolidate manufacturing for our semiconductor
products in our Minneapolis facility.

All of the
severance costs related to the February 2008 transition to Singapore, November
2008 and February 2009 workforce reductions have been classified as severance
and recruitment in our statement of operations. Severance expenses related to
these actions were $90,000 in the three months ended June 30, 2009 and $395,000
in the six months ended June 30, 2009. Severance and recruitment expenses
related to these actions were $185,000 in the three months ended June 30, 2008
and $378,000 in the six months ended June 30, 2008.

A summary of
our severance accruals follows:

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

No further
severance or transition expenses are anticipated in the three months ended
September 30, 2009.

14

---



14. FAIR VALUE MEASUREMENTS:

In accordance
with SFAS No. 157, we value our cash equivalents and marketable securities
based on a three-level fair value hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or
liabilities (Level 1). The next highest priority is based on quoted prices for
similar assets or liabilities in active markets or quoted prices for identical
or similar assets or liabilities in non-active markets or other observable
inputs (Level 2). The lowest priority is given to unobservable inputs (Level
3).

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

|                                                       |  |                        |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|------------------------------------------------------ |  | ---------------------- | ------ | ----------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                                       |  |                        |        |                                                                   | Fair Value Measurements at Reporting Date Using |                                                 
|(In
 thousands)                                        |  | Balance
 June 30, 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                 | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                                       |  |                        |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|Cash equivalents                                       |  | $                      | 429    |                                                                   | $                                               |                                                 |  | $                                            | 429    |  | $ |  | 
|U.S. government and agency obligations                 |  |                        | 18,051 |                                                                   |                                                 |                                                 |  |                                              | 18,051 |  |   |  | 
|Corporate debt securities and certificates
 of deposit |  |                        | 3,250  |                                                                   |                                                 |                                                 |  |                                              | 3,250  |  |   |  | 
|Asset backed securities                                |  |                        | 329    |                                                                   |                                                 |                                                 |  |                                              | 329    |  |   |  | 
|Equity securities                                      |  |                        | 40     |                                                                   |                                                 | 40                                               |  |                                              |       |  |   |  | 
|Totals                                                 |  | $                      | 22,099 |                                                                   | $                                               | 40                                               |  | $                                            | 22,059 |  | $ |  | 

Our foreign
currency swap agreements are structured to mature on the last day of each
quarter. As a result, the fair value associated with these agreements is
inconsequential.

15. RECENT ACCOUNTING DEVELOPMENTS:

In April 2009,
the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) Financial Accounting Standard (FAS) 157-4 Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. Based on the
guidance, if an entity determines that the level of activity for an asset or
liability has significantly decreased and that a transaction is not orderly,
further analysis of transactions or quoted prices is needed, and a significant
adjustment to the transaction or quoted prices may be necessary to estimate
fair value in accordance with Statement of Financial Accounting Standards
(SFAS) No. 157 Fair Value Measurements. This FSP is to be applied
prospectively and is effective for interim and annual periods ending after June
15, 2009 with early adoption permitted for periods ending after March 15, 2009.
We adopted this FSP for our quarter ending June 30, 2009. There was no impact
on our consolidated financial statements.

In April 2009,
the FASB issued FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of
Other-Than-Temporary Impairments. The guidance applies to investments in debt
securities for which other-than-temporary impairments may be recorded. If an
entitys management asserts that it does not have the intent to sell a debt
security and it is more likely than not that it will not have to sell the
security before recovery of its cost basis, then an entity may separate
other-than-temporary impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other amounts (recorded in
other comprehensive income). This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. We adopted this FSP
for our quarter ending June 30, 2009. There was no impact on our consolidated
financial statements.

In April 2009,
the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1
Interim Disclosures about Fair Value of Financial Instruments. The FSP amends
SFAS No. 107 Disclosures about Fair Value of Financial Instruments to require
an entity to provide disclosures about fair value of financial instruments in
interim financial information. This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. We have included
the required disclosures in our financial statements for the quarter ending
June 30, 2009.

15

---



In May 2009,
the FASB issued SFAS No. 165, Subsequent Events, which requires an entity to
disclose the date through which it has evaluated subsequent events and the
basis for that date, whether that date represents the date the financial
statements were issued or were available to be issued. The FSP is effective for
interim and annual reporting periods ending after June 15, 2009. We adopted
SFAS No. 165 on June 30, 2009 with no material impact on our consolidated
financial statements (see Note 1).

In June 2009,
the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles - A Replacement of
FASB Statement No. 162. The objective is to replace SFAS No. 162 and to
establish the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative GAAP for SEC
registrants. SFAS No. 168 does not change GAAP. SFAS No. 168 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of SFAS No. 168 will have no material impact
on our consolidated financial statements.

16

---



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

CRITICAL ACCOUNTING
POLICIES AND ESTIMATES:

The
preparation of the financial information contained in this 10-Q requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We evaluate these estimates on an ongoing basis, including
those related to allowances for doubtful accounts and returns, warranty
obligations, inventory valuation, the carrying value and any impairment of
intangible assets, and income taxes. These critical accounting policies are
discussed in more detail in the Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Form 10-K for
the year ended December 31, 2008.

FORWARD LOOKING
STATEMENTS:

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

RESULTS OF
OPERATIONS:

General

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

Our results were favorably
impacted in 2006 and 2007 as the worldwide demand for cell phones, laptops and
other consumer electronics remained strong, driving the need for increased
production of printed circuit boards and memory modules, and thereby increasing
demand for our electronic assembly and semiconductor products. After peaking in
the third quarter of 2007, our revenue declined sequentially each quarter
through the first quarter of 2009, as our results were negatively impacted by
reduced levels of capital spending for electronics manufacturing capacity
brought about by the deepening weakness in the global economy. New orders
dropped off sharply late in the fourth quarter of 2008 as the global economy
fell into a severe recession. Our results for the six months ended June
30, 2009 continued to be adversely affected by ongoing weakness in the global
electronics market. Revenues were $5.2 million in the quarter ended June 30,
2009, down 61% from $13.4 million in the same period last year. We lost $4.0
million from operations in the quarter ended June 30, 2009, down from an
operating loss of $733,000 in the quarter ended June 30, 2008.

For the
quarter ending September 30, 2009 we are forecasting revenue of $6.5-$7.5
million, down from revenue of $11.6 million in the quarter ending September 30,
2008. Although we expect revenue for the third quarter of 2009 to be down when
compared to last year, we are seeing early signs of strengthening in the global
electronics market. Manufacturers of SMT assembly equipment, who did not place
sensor orders in this years first half, have notified us they will resume
ordering in the third quarter. In addition, demand for SE500 solder paste
inspection and AOI systems from Asian original design manufacturers is
improving, particularly those involved with producing SMT circuit boards for
laptop computers. Reflecting these developments, we ended the second quarter
with an order backlog of $6.4 million, of which $4.0 million is scheduled for
shipment or customer acceptance in the third quarter ending September 30, 2009.
This backlog is up 76% from the level at the end of this years first quarter.

17

---



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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In February 2008, we
 announced plans to move a significant portion of our systems-related product
 development and manufacturing to Singapore. The transition of systems related
 product development to Singapore was substantially complete by the end of the
 fourth quarter of 2008 and transition of manufacturing for our system
 products was substantially complete by the end of the first quarter of 2009.
 Remaining transition costs in 2009 are not expected to be significant. The
 realignment of our systems-related product development and manufacturing to
 Singapore has resulted in lower costs and a more focused R&D effort.                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In addition
 to the impact of global economic conditions on our sales, Assembleon notified
 us in 2008 that it intended to start transitioning away from our current
 alignment products when it introduced its next generation of equipment in
 2010, although the timing of this transition became less clear as the economy
 slowed. Approximately 10% of our revenue has historically been generated from
 new product sales to Assembleon, and most or all of this revenue would be
 eliminated should Assembleon ultimately transition away from our current
 alignment products.                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | In response to the
 significant weakness in our markets and the global economy, we implemented
 workforce reductions in November 2008 and February 2009. Additional cost
 savings measures were implemented in February 2009, including salary
 reductions, consolidation of manufacturing operations for our semiconductor
 products into our Minneapolis, Minnesota facility and reductions in spending
 for non-labor costs such as travel, supplies and the like.                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | From the start of the
 fourth quarter of 2008 through the end of the second quarter of 2009, we will
 have reduced our workforce by 50 employees or approximately 25%, resulting
 from the move to Singapore, relocation of manufacturing for our semiconductor
 operations, and the November 2008 and February 2009 workforce reductions. We
 incurred a $395,000 charge for severance in the six months ended June 30,
 2009 related to these actions. We do not expect implementation of these cost
 reduction actions to impact our strategic growth programs.                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | During 2008,
 we invested heavily in our recently introduced next-generation SE500 solder
 paste inspection system. Based on a new cost-reduced platform, we believe the
 SE500 is the fastest and most accurate solder paste inspection system
 available on the market. Given its industry-leading inspection capabilities,
 we believe the SE500 will command improved pricing in comparison to the
 existing SE300. We also believe the SE500 should enable us to gain a larger
 share of the global solder paste inspection market.                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | We continue
 to pursue several promising growth opportunities for our next generation
 inspection technology, which is aimed at lowering the cost of inspection, in
 addition to providing faster production through-put speeds, improved ease of
 use, and the higher resolution required for inspecting progressively smaller
 electronic components. Reflecting our progress with these R&D
 initiatives, we have signed two new OEM development contracts in the past year
 with manufacturers of electronic assembly equipment for our embedded
 inspection technology. Following these two earlier contracts, we recently
 signed a third OEM development contract for an embedded sensor for the
 photovoltaic solar market. Initial revenues from these projects are
 anticipated in 2010.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | We believe
 our ongoing focus on R&D, combined with the revenue generating potential
 of our new SE500 solder paste inspection system, new OEM development
 contracts and strategic repositioning in Asia, will lead to improved
 operating results as the global electronics market starts to recover from the
 current economic recession.                                                                                                                                                                                                                                                                                                                                                                                                                                                      

We have no
debt and our cash and marketable securities of $23.4 million at June 30, 2009
are more than adequate to fund our operations and various growth opportunities
for an extended period of time, even given our expectation for weak financial
results through at least the third quarter of 2009, due to the severe global
economic recession.

18

---



Segment Results

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

|                                              |  |                                  |        |                                  |   |       |   |                      |        |                  |   |        |   |   |       |  |   |        |  
|--------------------------------------------- |  | -------------------------------- | ------ | -------------------------------- | - | ----- | - | -------------------- | ------ | ---------------- | - | ------ | - | - | ----- |  | - | ------ | -
|                                              |  | Three months ended June 30, 2009 |        | Three months ended June 30, 2008 |  
|(In thousands)                                |  | Electronic
 Assembly             |        | Semi-
 Conductor                 |   | Total |   | Electronic
 Assembly |        | Semi-
 Conductor |   | Total  |  
|                                              |  |                                  |        |                                  |   |       |   |                      |        |                  |   |        |   |   |       |  |   |        |  
|Revenues                                      |  | $                                | 4,524  |                                  | $ | 655   |   | $                    | 5,179  |                  | $ | 12,042 |   | $ | 1,349 |  | $ | 13,391 |  
|Cost of revenues                              |  |                                  | 3,304  |                                  |   | 277   |   |                      | 3,581  |                  |   | 6,954  |   |   | 515   |  |   | 7,469  |  
|Gross margin                                  |  |                                  | 1,220  |                                  |   | 378   |   |                      | 1,598  |                  |   | 5,088  |   |   | 834   |  |   | 5,922  |  
|                                              |  |                                  |        |                                  |   |       |   |                      |        |                  |   |        |   |   |       |  |   |        |  
|Research and development expenses             |  |                                  | 1,484  |                                  |   | 246   |   |                      | 1,730  |                  |   | 2,158  |   |   | 402   |  |   | 2,560  |  
|Selling, general and administrative
 expenses |  |                                  | 3,396  |                                  |   | 306   |   |                      | 3,702  |                  |   | 3,514  |   |   | 351   |  |   | 3,865  |  
|Severance and recruitment expenses            |  |                                  | 65     |                                  |   | 25    |   |                      | 90     |                  |   | 185    |   |   |      |  |   | 185    |  
|Amortization of intangibles                   |  |                                  | 28     |                                  |   | 18    |   |                      | 46     |                  |   | 27     |   |   | 18    |  |   | 45     |  
|                                              |  |                                  |        |                                  |   |       |   |                      |        |                  |   |        |   |   |       |  |   |        |  
|Income (loss) from operations                 |  | $                                | (3,753 | )                                | $ | (217  | ) | $                    | (3,970 | )                | $ | (796   | ) | $ | 63    |  | $ | (733   | )
|                                              |  |                                  |        |                                  |   |       |   |                      |        |                  |   |        |   |   |       |  |   |        |  
|                                              |  | Six months ended June 30, 2009   |        | Six months ended June 30, 2008   |  
|(In thousands)                                |  | Electronic
 Assembly             |        | Semi-
 Conductor                 |   | Total |   | Electronic
 Assembly |        | Semi-
 Conductor |   | Total  |  
|                                              |  |                                  |        |                                  |   |       |   |                      |        |                  |   |        |   |   |       |  |   |        |  
|Revenue                                       |  | $                                | 8,209  |                                  | $ | 1,332 |   | $                    | 9,541  |                  | $ | 24,452 |   | $ | 2,746 |  | $ | 27,198 |  
|Cost of revenue                               |  |                                  | 5,980  |                                  |   | 585   |   |                      | 6,565  |                  |   | 13,814 |   |   | 1,023 |  |   | 14,837 |  
|Gross profit                                  |  |                                  | 2,229  |                                  |   | 747   |   |                      | 2,976  |                  |   | 10,638 |   |   | 1,723 |  |   | 12,361 |  
|                                              |  |                                  |        |                                  |   |       |   |                      |        |                  |   |        |   |   |       |  |   |        |  
|Research and development expenses             |  |                                  | 3,270  |                                  |   | 537   |   |                      | 3,807  |                  |   | 4,279  |   |   | 893   |  |   | 5,172  |  
|Selling, general and administrative
 expenses |  |                                  | 6,000  |                                  |   | 634   |   |                      | 6,634  |                  |   | 6,546  |   |   | 749   |  |   | 7,295  |  
|Severance and recruitment expenses            |  |                                  | 281    |                                  |   | 114   |   |                      | 395    |                  |   | 378    |   |   |      |  |   | 378    |  
|Amortization of intangibles                   |  |                                  | 55     |                                  |   | 36    |   |                      | 91     |                  |   | 54     |   |   | 36    |  |   | 90     |  
|                                              |  |                                  |        |                                  |   |       |   |                      |        |                  |   |        |   |   |       |  |   |        |  
|Income (loss) from operations                 |  | $                                | (7,377 | )                                | $ | (574  | ) | $                    | (7,951 | )                | $ | (619   | ) | $ | 45    |  | $ | (574   | )

19

---



Revenues

Our revenues
decreased by 61% to $5.2 million in the three months ended June 30, 2009 from
$13.4 million in the three months ended June 30, 2008, and decreased by 65% to
$9.5 million in the six months ended June 30, 2009 from $27.2 million in the
six months ended June 30, 2008. The following table sets forth revenues by
product line for the three and six month periods ended June 30, 2009 and 2008:

|                          |  |                              |       |                            |   |        |  |      |       |  |   |        | 
|------------------------- |  | ---------------------------- | ----- | -------------------------- | - | ------ |  | ---- | ----- |  | - | ------ | 
|                          |  | Three Months Ended
 June 30, |       | Six Months Ended
 June 30, |  
|(In
 thousands)           |  | 2009                         |       | 2008                       |   | 2009   |  | 2008 |      
|                          |  |                              |       |                            |   |        |  |      |       |  |   |        | 
|Electronic
 Assembly      |  |                              |       |                            |   |        |  |      |       |  |   |        | 
|OEM Sensors               |  | $                            | 1,204 |                            | $ | 5,931  |  | $    | 2,644 |  | $ | 12,762 | 
|SMT Systems               |  |                              | 3,320 |                            |   | 6,111  |  |      | 5,565 |  |   | 11,690 | 
|Total Electronic Assembly |  |                              | 4,524 |                            |   | 12,042 |  |      | 8,209 |  |   | 24,452 | 
|Semiconductor             |  |                              | 655   |                            |   | 1,349  |  |      | 1,332 |  |   | 2,746  | 
|Total                     |  | $                            | 5,179 |                            | $ | 13,391 |  | $    | 9,541 |  | $ | 27,198 | 

Electronic
Assembly

Revenues from our electronic assembly OEM sensors decreased by 80% to
$1.2 million in the three months ended June 30, 2009 from $5.9 million in the
three months ended June 30, 2008 and decreased by 79% to $2.6 million in the
six months ended June 30, 2009 from $12.8 million in the six months ended June
30, 2008. Revenues from our SMT systems products, decreased by 46% to $3.3 million in the three
months ended June 30, 2009 from $6.1 million in the three months ended June 30,
2008 and decreased by 52% to $5.6 million in the six months ended June 30, 2009
from $11.7 million in the six months ended June 30, 2008.

The severe weakness in the
global economy and electronics markets experienced late in 2008 continued into
the first half of 2009, causing the significant declines in revenue from both
our electronic assembly OEM sensors and SMT system products when compared with
the first half of 2008. Although we expect revenue for the third quarter
of 2009 to be down when compared to last year, we are seeing early signs of
strengthening in the global electronics market. Manufacturers of SMT assembly
equipment, who did not place sensor orders in this years first half, have
notified us they will resume ordering in the third quarter. In addition, demand
for SE500 solder paste inspection and AOI systems from Asian original design
manufacturers is improving, particularly those involved with producing SMT
circuit boards for laptop computers.

Export revenue from electronic assembly sensors and SMT systems totaled
$3.8 million or 85% of revenue in the three months ended June 30, 2009,
compared to $10.6 million or 88% of revenue in the three months ended June 30,
2008. Export revenue from electronic assembly sensors and SMT systems totaled
$6.7 million or 82% of revenue in the six months ended June 30, 2009, compared
to $22.3 million or 91% of revenue in the six months ended June 30, 2008. Sales to international customers continue to
be significant, as manufacturing of electronic components has migrated
offshore, particularly to China and other areas of Asia.

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

Semiconductor

Revenues from
semiconductor products decreased by 51% to $655,000 in the three months ended
June 30, 2009 from $1.3 million in the three months ended June 30, 2008 and
decreased by 51% to $1.3 million in the six months ended June 30, 2009 from
$2.7 million in the six months ended June 30, 2008. The decrease in revenue
was due to severe weakness in the global economy, difficult conditions in the
market for semiconductor fabrication equipment and declining revenue from our
older wafer mapper and frame grabber products.

20

---



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

Export revenue
from semiconductor products totaled $120,000 or 18% of revenue in the three
months ended June 30, 2009, compared to $604,000 or 45% of revenue in the three
months ended June 30, 2008. Export revenue from semiconductor products totaled
$328,000 or 25% of revenue in the six months ended June 30, 2009, compared to
$1.2 million or 42% of revenue in the six months ended June 30, 2008.

Gross Margin

Electronic
Assembly

Gross margin
as a percentage of electronic assembly sales was 27% in the three months ended
June 30, 2009, compared to 42% in the three months ended June 30, 2008. Gross
margin as a percentage of electronic assembly sales was 27% in the six months
ended June 30, 2009, compared to 44% in the six months ended June 30, 2008. The
reduction in gross margin percentage during the three and six months ended June
30, 2009 was due to significantly lower sales of higher margin electronic
assembly sensors, which were more severely impacted by the recession.
Additionally, the lower levels of revenue resulted in substantially lower
production volumes over which to spread fixed manufacturing overhead costs.

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

The market for
automated inspection has become increasingly competitive, causing us to
decrease the selling prices of our existing products in some markets. We
compensate for this pricing pressure by introducing new products with more
features and improved performance and through manufacturing cost reduction
programs. For example, we believe our recently introduced next-generation SE500
solder paste inspection system, which is manufactured in Singapore, is the
fastest and most accurate solder paste inspection system available on the
market. Although we expect to introduce several new systems platforms in the
future based on new technology that will also allow for reduced cost and
improvement in margins, we anticipate that the global recession will impact our
ability to market these products and that margins will be depressed until the
economy begins to recover.

Semiconductor

Gross margin as
a percentage of semiconductor sales was 58% in the three months ended June 30,
2009, compared to 62% in the three months ended June 30, 2008. Gross margin as
a percentage of semiconductor sales was 56% in the six months ended June 30,
2009, compared to 63% in the six months ended June 30, 2008. Gross margin as a
percentage of semiconductor sales decreased due to lower levels of revenue,
resulting in substantially lower production volumes over which to spread fixed
manufacturing overhead costs. The full benefit from consolidation of
manufacturing for our semiconductor products into our Minneapolis, Minnesota
headquarters facility will be realized starting in the third quarter of 2009.

Operating Expenses

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

21

---



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

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

We are
continually evaluating existing and new research and development projects, and
may elect to increase or decrease expenditures based on an assessment of the
future revenue and profit potential of these projects. Implementation of the
cost reduction actions discussed above will not impact any of our strategic
growth programs; work on next generation inspection technologies or pursuit of
new OEM contracts.

Electronic
Assembly

Research and
development expenses for our electronic assembly segment were $1.5 million in
the three months ended June 30, 2009, compared to $2.2 million in the three
months ended June 30, 2008. Research and development expenses for our
electronic assembly segment were $3.3 million in the six months ended June 30,
2009, compared to $4.3 million in the six months ended June 30, 2008. The 31%
and 24% decrease in research and development expenses in 2009 resulted from a
more focused and efficient research and development effort due to transition of
systems related research and development to Singapore, as well as transition
costs incurred in 2008. Singapore transition costs classified as research and
development expense were $325,000 and $374,000 in the three and six months
ended June 30, 2008. No transition costs were incurred in 2009. In addition,
the cost reduction actions implemented in November 2008 and February 2009
contributed to the lower level of spending in the three and six months ended
June 30, 2009.

Selling,
general and administrative expenses for our electronic assembly segment were
$3.4 million in the three months ended June 30, 2009, compared to $3.5 million
in the three months ended June 30, 2008. Selling, general and administrative
expenses for our electronic assembly segment were $6.0 million for both the six
months ended June 30, 2009 and the six months ended June 30, 2008. Selling,
general and administrative expenses for the three and six months ended June 30,
2009 includes an $800,000 provision for doubtful accounts related to a key
distributor of our SMT system products. The distributor remains in business,
and is committed to paying us the amount owed. The increase in the provision
for doubtful accounts was mostly offset by reductions in travel costs,
commissions for third party sales representatives resulting from the lower
level of SMT system sales and lower foreign sales office expenses resulting
from favorable foreign exchange rates.

Semiconductor

Research and
development expenses for our semiconductor segment were $246,000 in the three
months ended June 30, 2009 compared to $402,000 in the three months ended June
30, 2008. Research and development expenses for our semiconductor segment were
$537,000 in the six months ended June 30, 2009 compared to $893,000 in the
six months ended June 30, 2008. The decline in research and development
expenses resulted from the cost reduction actions that were implemented in
November 2008 and February 2009.

Selling,
general and administrative expenses for our semiconductor segment were $306,000
in the three months ended June 30, 2009, compared to $351,000 in the three
months ended June 30, 2008. Selling, general and administrative expenses for
our semiconductor segment were $634,000 in the six months ended June 30, 2009,
compared to $749,000 in the six months ended June 30, 2008. The decrease in
selling, general and administrative expenses in 2009 compared to 2008 was due to
lower salary and consulting costs, and lower sales commissions resulting from
the reduced level of revenue.

22

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Severance and Recruitment Costs

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

Additional severance costs were incurred in November 2008 when we
reduced our workforce by approximately 10% or 20 employees in response to the
weak global economic conditions. In February 2009, we further reduced our
workforce by 24 positions in response to weakening conditions in the global
economy, our transition to Singapore and our decision to consolidate
manufacturing for our semiconductor products in our Minneapolis facility.

All of the severance costs related to the February 2008 transition to
Singapore, November 2008 and February 2009 workforce reductions have been
classified as severance and recruitment in our statement of operations.
Severance expenses related to these actions were $90,000 in the three months
ended June 30, 2009 and $395,000 in the six months ended June 30, 2009.
Severance and recruitment expenses related to these actions were $185,000 in
the three months ended June 30, 2008 and $378,000 in the six months ended June
30, 2008.

A summary of
our severance accruals follows:

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

No further severance or transition expenses are anticipated in the
three months ended September 30, 2009.

Interest and Other

Interest
income and other includes interest earned on investments, realized gains and
losses from sales of investments and gains and losses associated with foreign
currency transactions and foreign currency swap agreements. Interest income and
other in 2008 also includes a $166,000 unrealized loss on an available for sale
equity security. The decline in market value for this security was determined
to be other than temporary, resulting in recognition of the unrealized loss in
our statement of operations.

Interest
income and other decreased in the three and six months ended June 30, 2009
compared to the same periods of 2008 due to lower rates of interest earned on
invested funds and lower invested balances of cash equivalents and marketable
securities, primarily resulting from repurchases of our common stock in 2008.

We anticipate
that interest income and other will decline throughout 2009 due to lower
invested balances of cash and marketable securities, as well as lower rates of
interest earned on invested funds.

23

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Provision for Income Taxes and Effective
Income Tax Rate

We recorded an
income tax benefit in the six months ended June 30, 2009 at an effective tax
rate of 42.6%, compared to an effective tax rate of 16.4% in the six months
ended June 30, 2008. Our recorded income tax benefit for the three and six
months ended June 30, 2009 includes a $537,000 discrete benefit from the
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. Discrete items impacting the effective tax rate in the six months
ended June 30, 2008 were inconsequential. The change in the effective tax rate
for 2009 is due to the aforementioned discrete item, reductions in the level of
non-deductible expenses for income tax purposes and a small benefit from the
research and experimentation (R&D) tax credit, offset by higher tax expense
in foreign tax jurisdictions with tax rates differing from the U.S federal
statutory rate. No benefit from the R&D tax credit was recognized in the
six months ended June 30, 2008 because the R&D tax credit for 2008 had not
yet been signed into law.

We file income
tax returns in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. We are no longer subject to U.S. federal, state and local income
tax examinations by tax authorities for years before 2005. During the three months ended June 30, 2009,
the internal revenue service completed audits of our 2006 and 2007
federal income tax returns. Our settlement with the internal revenue service will
not have a material impact on our financial condition.

We currently
have significant deferred tax assets as a result of temporary differences
between taxable income on our tax returns and income before income taxes under
U.S. generally accepted accounting principals, research and development tax
credit carry forwards and 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
are applied against future taxable income, or when tax credit carry forwards
are applied against future tax liabilities. We assess the realizability of our
deferred tax assets and the need for a valuation allowance based on Statement
of Financial Accounting Standards No. 109.

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

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

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

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

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

24

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Order Rate and Backlog

Our orders
totaled $7.9 million in the three months ended June 30, 2009 compared to $4.1
million in the three months ended March 31, 2009 and $14.2 million in the three
months ended June 30, 2008. Backlog totaled $6.4 million at June 30, 2009, $3.6
million at March 31, 2009 and $5.5 million at June 30, 2008. The scheduled
shipment (or estimated timing of revenue for systems recognized upon
acceptance) for backlog at June 30, 2009 is as follows:

|                            |  |         |       | 
|--------------------------- |  | ------- | ----- | 
|(In
 thousands)             |  | Backlog |      
|                            |  |         |       | 
|3rd
 Quarter 2009           |  | $       | 3,989 | 
|4th
 Quarter 2009 and after |  |         | 2,404 | 
|Total backlog               |  | $       | 6,393 | 

LIQUIDITY AND CAPITAL RESOURCES

Our cash and
cash equivalents decreased by $2.8 million in the six month period ended June
30, 2009 primarily due to cash used by operating activities of $5.7 million,
and capital purchases of $480,000, offset in part by sales and maturities of
marketable securities, net of purchases, of $3.3 million. Our cash and cash
equivalents fluctuate in part because of maturities of marketable securities
and investment of cash balances resulting from those maturities or from other
sources of cash in addition to marketable securities. Accordingly, we believe
the combined balances of cash and marketable securities provide a more reliable
indication of our available liquidity. Our combined balances of cash and
marketable securities decreased $6.4 million to $23.4 million as of June 30,
2009 from $29.8 million as of December 31, 2008, resulting primarily from our
loss from operations in the six months ended June 30, 2009.

Operations
used $5.7 million of cash in the six months ended June 30, 2009. Cash used by
operations included a net loss of $4.4 million which included $707,000 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 inventories of $678,000
and other assets of $1.2 million and decreases in accounts payable of $427,000
and accrued expenses of $1.1 million. Changes in operating assets and
liabilities providing cash included decreases in accounts receivable of $1.4
million and advance customer payments of $82,000. The increase in inventory was
due to lower sales resulting from the sluggish global economy and additional
inventory purchases to manufacture our recently introduced SE500 solder paste
inspection system. Other assets were higher due to anticipated income tax
refunds resulting from our losses in the first six months of 2009. Accounts
payable were lower due to the timing of inventory purchases and vendor
payments, reflecting our expectation for lower sales levels in 2009. The
decrease in accrued expenses resulted from lower warranty accruals resulting
from the lower level of sales and reductions in compensation related accruals
due to our recent workforce reduction. The decrease in accounts receivable was
due to the lower level of sales in the second quarter of 2009 compared to the
fourth quarter of 2008 and an $800,000 increase in the provision for doubtful
accounts.

We generated
$203,000 of cash from operations in the six months ended June 30, 2008. Cash
provided by operations included net income of $158,000, which included $1.5
million of net non-cash expenses for depreciation and amortization, provision
for doubtful accounts, foreign currency transactions, stock compensation expense
and an unrealized loss on an available for sale equity security. Changes in
operating assets and liabilities using cash included increases in accounts
receivable of $980,000 and other assets of $734,000, decreases in accrued
expenses of $194,000 and advance customer payments of $301,000, offset in part
by a $714,000 increase in accounts payable.

Investing
activities provided $2.9 million of cash in the six months ended June 30, 2009
compared to using $1.9 million of cash during the same period in 2008. Changes
in the level of investment in marketable securities resulting from purchases,
maturities and sales of those securities generated $3.3 million of cash in 2009
and used $879,000 of cash during the same period of 2008. We used $480,000 of
cash for the purchase of fixed assets and capitalized patent costs in the six
months ended June 30, 2009, compared to using $1.0 million of cash for these
items in the six months ended June 30, 2008.

There were no
financing activities in the six months ended June 30, 2009. Financing
activities used $5.8 million of cash in the six months ended June 30, 2008,
mainly for the repurchase of our common stock. Proceeds from the exercise of
stock options, including excess tax benefits from the exercise of those
options, totaled $14,000 in the six months ended June 30, 2008.

25

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A table of our
contractual obligations was provided in Item 7 in our Annual Report on Form
10-K for the fiscal year ended December 31, 2008. The only significant change
to our contractual obligations in the six months ended June 30, 2009 is a
$667,000 decrease in our reserve for income taxes resulting from settlement of
our 2006 and 2007 federal income tax audits. At the present time, we have no
material commitments for capital expenditures. Purchase commitments for
inventory can vary based on the volume of revenue and resulting inventory
requirements. While there are no material commitments, we evaluate investment
opportunities that come to our attention and could make a significant
commitment in the future.

Our cash, cash
equivalents and marketable securities totaled $23.4 million at June 30, 2009.
We believe that our available balances of cash, cash equivalents and marketable
securities will be adequate to fund our cash flow needs for the foreseeable
future.

At June 30,
2009, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the
purpose of establishing off-balance sheet arrangements or other contractually
narrow or limited purposes. As such, we are not exposed to the financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.

OTHER FACTORS

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

FAIR VALUE MEASUREMENTS

In accordance with SFAS No. 157, we value our cash equivalents and
marketable securities based on a three-level fair value hierarchy. The fair
value hierarchy gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level 1). The next highest priority
is based on quoted prices for similar assets or liabilities in active markets
or quoted prices for identical or similar assets or liabilities in non-active
markets or other observable inputs (Level 2). The lowest priority is given to
unobservable inputs (Level 3).

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

|                                                       |  |                         |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|------------------------------------------------------ |  | ----------------------- | ------ | ----------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                                       |  |                         |        |                                                                   | Fair Value Measurements at Reporting Date Using |                                                 
|(In
 thousands)                                        |  | Balance 
 June 30, 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                 | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                                       |  |                         |        |                                                                   |                                                 |                                                  |  |                                              |       
|Cash equivalents                                       |  | $                       | 429    |                                                                   | $                                               |                                                 |  | $                                            | 429    |  | $ |  | 
|U.S. government and agency obligations                 |  |                         | 18,051 |                                                                   |                                                 |                                                 |  |                                              | 18,051 |  |   |  | 
|Corporate debt securities and certificates
 of deposit |  |                         | 3,250  |                                                                   |                                                 |                                                 |  |                                              | 3,250  |  |   |  | 
|Asset backed securities                                |  |                         | 329    |                                                                   |                                                 |                                                 |  |                                              | 329    |  |   |  | 
|Equity securities                                      |  |                         | 40     |                                                                   |                                                 | 40                                               |  |                                              |       |  |   |  | 
|Totals                                                 |  | $                       | 22,099 |                                                                   | $                                               | 40                                               |  | $                                            | 22,059 |  | $ |  | 

Our foreign currency swap
agreements are structured to mature on the last day of each quarter. As a
result, the fair value associated with these agreements is inconsequential.

RECENT ACCOUNTING DEVELOPMENTS

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

26

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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 June 30, 2009, there has been no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

PART
II. OTHER INFORMATION

ITEM 1A
 RISK FACTORS

In addition to
the other information set forth in this report, you should carefully consider
the factors discussed in Part I  Item 1A. Risk Factors in our Annual Report
on Form 10-K for the year ended December 31, 2008, which could materially
affect our business, financial condition or future results.

ITEM 4 
SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

The annual
meeting of shareholders of CyberOptics Corporation was held at 3:00 p.m. on
Monday, May 18, 2009. Shareholders holding 5,926,839 shares, or approximately
87% of the outstanding shares, were represented at the meeting by proxy or in
person. Matters submitted at the meeting for vote by the shareholders were as
follows:

a. Election of
Directors

The following
nominees were elected to serve as members of the Board of Directors until the
annual meeting in 2010 or until such time as a successor may be elected:

|                        |  |           |  |                   
|----------------------- |  | --------- |  | ------------------
|                        |  | For       |  | Withhold Authority
|Steven K.
 Case         |  | 5,742,027 |  | 184,812           
|Alex B.
 Cimochowski    |  | 5,720,572 |  | 206,267           
|Kathleen P.
 Iverson    |  | 5,722,091 |  | 204,745           
|Irene M.
 Qualters      |  | 5,825,344 |  | 101,945           
|Michael M.
 Selzer, Jr. |  | 5,820,641 |  | 106,198           

On June 17,
2009, CyberOptics filed a Form 8-K announcing that its founder and Chairman
Steve K. Case had been killed in a private plane crash on June 16, 2009.

ITEM 5 
OTHER INFORMATION

(a) On August 5, 2009, our Board of Directors elected Kathleen P.
Iverson as Chairman of the Board of Directors, in addition to her positions as
President and Chief Executive Officer, to fill the vacancy in that position
caused by the death of Dr. Steven K. Case. At the same meeting, our Board of
Directors appointed Irene M. Qualters, an independent director within the
meaning of Nasdaq rules, as Lead Director.

27

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ITEM 6 
EXHIBITS

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

28

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SIGNATURES

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

|                       |  |                                                            
|---------------------- |  | -----------------------------------------------------------
|                       |  | CYBEROPTICS CORPORATION                                    
|                       |  |                                                            
|                       |  | /s/ Kathleen P. Iverson                                    
|                       |  | By Kathleen P. Iverson, President and CEO                  
|                       |  | (Principal Executive Officer and Duly
 Authorized Officer) 
|                       |  |                                                            
|                       |  | /s/ Jeffrey A. Bertelsen                                   
|                       |  | By Jeffrey A. Bertelsen, Chief Financial
 Officer          
|                       |  | (Principal Accounting Officer and Duly
 Authorized Officer)
|                      
|Dated: August 12, 2009 |  |                                                            

29

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