SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549


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|FORM 10-Q
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(Check One)

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

For the quarterly period ended March 31, 2010

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

For the transition period from
______ to ______

COMMISSION FILE NO. (0-16577)

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

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

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

|
|
|

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 April 30, 2010, there
were 6,845,391 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)                                                                                                             |  | March 31,
 2010 |        | December 31,
 2009 |  
|                                                                                                                                                    
|ASSETS                                                                                                                                               |  |                 |        |                    |   |        |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|Cash and cash equivalents                                                                                                                            |  | $               | 4,810  |                    | $ | 4,177  |  
|Marketable securities                                                                                                                                |  |                 | 13,761 |                    |   | 14,557 |  
|Accounts receivable, less allowance for
 doubtful accounts of $1,031 at March 31, 2010 and $1,049 at December 31, 2009                               |  |                 | 10,469 |                    |   | 8,389  |  
|Inventories                                                                                                                                          |  |                 | 8,923  |                    |   | 7,745  |  
|Income tax refunds and deposits                                                                                                                      |  |                 | 2,524  |                    |   | 2,499  |  
|Other current assets                                                                                                                                 |  |                 | 1,303  |                    |   | 1,130  |  
|Deferred tax assets                                                                                                                                  |  |                 | 2,040  |                    |   | 2,040  |  
|Total current assets                                                                                                                                 |  |                 | 43,830 |                    |   | 40,537 |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|Marketable securities                                                                                                                                |  |                 | 3,582  |                    |   | 3,145  |  
|Equipment and leasehold improvements, net                                                                                                            |  |                 | 1,939  |                    |   | 1,921  |  
|Intangible and other assets, net                                                                                                                     |  |                 | 588    |                    |   | 642    |  
|Goodwill                                                                                                                                             |  |                 | 569    |                    |   | 569    |  
|Other assets                                                                                                                                         |  |                 | 163    |                    |   | 163    |  
|Deferred tax assets                                                                                                                                  |  |                 | 4,137  |                    |   | 4,160  |  
|Total assets                                                                                                                                         |  | $               | 54,808 |                    | $ | 51,137 |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                 |  |                 |        |                    |   |        |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|Accounts payable                                                                                                                                     |  | $               | 6,593  |                    | $ | 3,652  |  
|Advance customer payments                                                                                                                            |  |                 | 718    |                    |   | 657    |  
|Accrued expenses                                                                                                                                     |  |                 | 2,203  |                    |   | 1,880  |  
|Total current liabilities                                                                                                                            |  |                 | 9,514  |                    |   | 6,189  |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|Other liabilities                                                                                                                                    |  |                 | 549    |                    |   | 546    |  
|Total liabilities                                                                                                                                    |  |                 | 10,063 |                    |   | 6,735  |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|Commitments and contingencies                                                                                                                        |  |                 |       |                    |   |       |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|Stockholders equity:                                                                                                                                |  |                 |        |                    |   |        |  
|Preferred stock, no par value, 5,000,000
 shares authorized, none outstanding                                                                        |  |                 |       |                    |   |       |  
|Common stock, no par value, 25,000,000
 shares authorized, 6,845,391 shares issued outstanding at March 31, 2010 and
 6,828,616 at December 31, 2009 |  |                 | 29,831 |                    |   | 29,732 |  
|Accumulated other comprehensive loss                                                                                                                 |  |                 | (771   | )                  |   | (768   | )
|Retained earnings                                                                                                                                    |  |                 | 15,685 |                    |   | 15,438 |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|Total stockholders equity                                                                                                                           |  |                 | 44,745 |                    |   | 44,402 |  
|                                                                                                                                                     |  |                 |        |                    |   |        |  
|Total liabilities and stockholders equity                                                                                                           |  | $               | 54,808 |                    | $ | 51,137 |  

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

---



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS 
CYBEROPTICS CORPORATION 
(Unaudited)

|                                                                     |  |                              |        |      |   |        |  
|-------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------ | -
|                                                                     |  | Three Months Ended March 31, |       
|(In
 thousands, except per share amount)                             |  | 2010                         |        | 2009 |  
|                                                                    
|Revenues                                                             |  | $                            | 12,341 |      | $ | 4,362  |  
|Cost of
 revenues                                                    |  |                              | 7,085  |      |   | 2,984  |  
|                                                                     |  |                              |        |      |   |        |  
|Gross margin                                                         |  |                              | 5,256  |      |   | 1,378  |  
|                                                                     |  |                              |        |      |   |        |  
|Research and
 development expenses                                   |  |                              | 1,777  |      |   | 2,077  |  
|Selling,
 general and administrative expenses                        |  |                              | 3,177  |      |   | 2,932  |  
|Severance                                                            |  |                              |       |      |   | 305    |  
|Amortization
 of intangibles                                         |  |                              | 45     |      |   | 45     |  
|                                                                     |  |                              |        |      |   |        |  
|Income (loss) from operations                                        |  |                              | 257    |      |   | (3,981 | )
|                                                                     |  |                              |        |      |   |        |  
|Interest
 income and other                                           |  |                              | 77     |      |   | 208    |  
|                                                                     |  |                              |        |      |   |        |  
|Income (loss) before income taxes                                    |  |                              | 334    |      |   | (3,773 | )
|                                                                     |  |                              |        |      |   |        |  
|Provision
 (benefit) for income taxes                                |  |                              | 87     |      |   | (1,340 | )
|                                                                     |  |                              |        |      |   |        |  
|Net income (loss)                                                    |  | $                            | 247    |      | $ | (2,433 | )
|                                                                     |  |                              |        |      |   |        |  
|Net income
 (loss) per share  Basic                                 |  | $                            | 0.04   |      | $ | (0.36  | )
|Net income
 (loss) per share  Diluted                               |  | $                            | 0.04   |      | $ | (0.36  | )
|                                                                     |  |                              |        |      |   |        |  
|Weighted
 average shares outstanding  Basic                         |  |                              | 6,839  |      |   | 6,771  |  
|Weighted
 average and common equivalent shares outstanding  Diluted |  |                              | 6,871  |      |   | 6,771  |  

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)

|                                                                                                 |  |                              |        |      |   |        |  
|------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------ | ---- | - | ------ | -
|                                                                                                 |  | Three Months Ended March 31, |       
|(In
 thousands)                                                                                  |  | 2010                         |        | 2009 |  
|                                                                                                
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                            |  |                              |        |      |   |        |  
|Net income (loss)                                                                                |  | $                            | 247    |      | $ | (2,433 | )
|Adjustments to reconcile net income (loss)
 to net cash provided (used) by operating activities: |  |                              |        |      |   |        |  
|Depreciation and amortization                                                                    |  |                              | 487    |      |   | 587    |  
|Provision for doubtful accounts                                                                  |  |                              |       |      |   | 4      |  
|Deferred tax provision                                                                           |  |                              | 44     |      |   |       |  
|Foreign currency transaction losses                                                              |  |                              | 48     |      |   | 43     |  
|Stock compensation costs                                                                         |  |                              | 74     |      |   | 178    |  
|Realized gains on available for sale marketable securities                                       |  |                              |       |      |   | (11    | )
|Changes in operating assets and liabilities:                                                     |  |                              |        |      |   |        |  
|Accounts receivable                                                                              |  |                              | (2,080 | )    |   | 1,991  |  
|Inventories                                                                                      |  |                              | (1,280 | )    |   | (804   | )
|Refundable income taxes and deposits                                                             |  |                              | (25    | )    |   | (1,123 | )
|Other assets                                                                                     |  |                              | (147   | )    |   | (15    | )
|Accounts payable                                                                                 |  |                              | 2,934  |      |   | (968   | )
|Advance customer payments                                                                        |  |                              | 61     |      |   | (34    | )
|Accrued expenses                                                                                 |  |                              | 329    |      |   | (489   | )
|Net cash provided (used) by operating
 activities                                                |  |                              | 692    |      |   | (3,074 | )
|                                                                                                 |  |                              |        |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                            |  |                              |        |      |   |        |  
|Proceeds from maturities of available for
 sale marketable securities                            |  |                              | 4,909  |      |   | 2,905  |  
|Proceeds from sales of available for sale
 marketable securities                                 |  |                              | 1,144  |      |   | 1,818  |  
|Purchases of available for sale marketable
 securities                                           |  |                              | (5,781 | )    |   | (3,610 | )
|Additions to equipment and leasehold
 improvements                                               |  |                              | (282   | )    |   | (82    | )
|Additions to patents                                                                             |  |                              | (49    | )    |   | (125   | )
|Net cash provided (used) by investing
 activities                                                |  |                              | (59    | )    |   | 906    |  
|                                                                                                 |  |                              |        |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                            |  |                              |        |      |   |        |  
|Proceeds from exercise of stock options                                                          |  |                              | 25     |      |   |       |  
|Net cash provided by financing activities                                                        |  |                              | 25     |      |   |       |  
|                                                                                                 |  |                              |        |      |   |        |  
|Effects of exchange rate changes on cash
 and cash equivalents                                   |  |                              | (25    | )    |   | (34    | )
|                                                                                                 |  |                              |        |      |   |        |  
|Net increase (decrease) in cash and cash
 equivalents                                            |  |                              | 633    |      |   | (2,202 | )
|                                                                                                 |  |                              |        |      |   |        |  
|Cash and cash equivalents  beginning of
 period                                                 |  |                              | 4,177  |      |   | 4,516  |  
|                                                                                                 |  |                              |        |      |   |        |  
|Cash and cash equivalents  end of period                                                        |  | $                            | 4,810  |      | $ | 2,314  |  

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 March 31,
2010, and for the three month periods ended March 31, 2010 and 2009, are
unaudited, but in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for
the periods presented.

The results of
operations for the three month period ended March 31, 2010 do not necessarily
indicate the results to be expected for the full year. The December 31, 2009
consolidated balance sheet data was derived from audited consolidated financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. These unaudited
interim condensed consolidated financial statements should be read in
conjunction with our consolidated financial statements and notes thereto,
contained in our Annual Report on Form 10-K for the year ended December 31,
2009.

2. MARKETABLE SECURITIES:

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

|                                                      |  |                |        |                   |  |                    |  |            |     |   |  |        | 
|----------------------------------------------------- |  | -------------- | ------ | ----------------- |  | ------------------ |  | ---------- | --- | - |  | ------ | 
|                                                      |  | March 31, 2010 |       
|(In
 thousands)                                       |  | Cost           |        | Unrealized
 Gains |  | Unrealized
 Losses |  | Fair Value |    
|                                                     
|Short Term                                            |  |                |        |                   |  |                    |  |            |     |   |  |        | 
|U.S. government and agency obligations                |  | $              | 10,144 |                   |  | 123                |  |            |    |   |  | 10,267 | 
|Corporate debt securities and certificates of deposit |  |                | 3,480  |                   |  | 14                 |  |            |    |   |  | 3,494  | 
|Marketable securities  short term                    |  | $              | 13,624 |                   |  | 137                |  |            |    |   |  | 13,761 | 
|                                                     
|Long Term                                             |  |                |        |                   |  |                    |  |            |     |   |  |        | 
|U.S. government and agency obligations                |  | $              | 3,009  |                   |  | 2                  |  |            | (1  | ) |  | 3,010  | 
|Corporate debt securities and certificates of deposit |  |                | 306    |                   |  |                   |  |            |    |   |  | 306    | 
|Asset backed securities                               |  |                | 200    |                   |  | 10                 |  |            |    |   |  | 210    | 
|Equity securities                                     |  |                | 84     |                   |  |                   |  |            | (28 | ) |  | 56     | 
|Marketable securities  long term                     |  | $              | 3,599  |                   |  | 12                 |  |            | (29 | ) |  | 3,582  | 

4

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

Our investment in equity
securities was in a $28,000 unrealized loss position at March 31, 2010 and a
$54,000 unrealized loss position at December 31, 2009 due to weak economic and
stock market conditions. We intend to hold this security indefinitely and
expect its value to recover given improved economic and market conditions.

Our
investments in long term marketable debt securities all have maturities of less
than five years. At March 31, 2010, marketable debt securities valued at
$15,157,000 were in an unrealized gain position totaling $149,000. Marketable
debt securities valued at $2,129,000 were in an insignificant unrealized loss
position totaling less than $1,500 (all had been in an unrealized loss position
for less than twelve months). At December 31, 2009, marketable debt securities
valued at $16,463,000 were in an unrealized gain position totaling $235,000.
Marketable debt securities valued at $1,209,000 were in an insignificant
unrealized loss position totaling several hundred dollars (all had been in an
unrealized loss position for less than twelve months).

Net pre-tax unrealized gains
for marketable securities of $121,000 at March 31, 2010 and $182,000 at
December 31, 2009 were recorded as a component of accumulated other
comprehensive income (loss) in stockholders equity. In the three months ended
March 31, 2010 we received proceeds of $1,144,000 from the sale of marketable
securities. No gain or loss was recognized from these sales. In the three
months ended March 31, 2009, we recognized a gain of $11,000 from the sale of
marketable debt securities and received sale proceeds totaling $1,818,000.

3. FAIR VALUE MEASUREMENTS:

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

5

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

|                                        |  |                         |        |                                                                   |                                                  |                                                  |  |                                              |        |  |   |   | 
|--------------------------------------- |  | ----------------------- | ------ | ----------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                        |  |                         |        |                                                                   | Fair Value Measurements at March 31,
 2010 Using |                                                 
|(In
 thousands)                         |  | Balance
 March 31, 2010 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                  | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                        |  |                         |        |                                                                   |                                                  |                                                  |  |                                              |        |  |   |   | 
|Cash
 equivalents                       |  | $                       | 2,763  |                                                                   | $                                                |                                                 |  | $                                            | 2,763  |  | $ |  | 
|U.S.
 government and agency obligations |  |                         | 13,277 |                                                                   |                                                  |                                                 |  |                                              | 13,277 |  |   |  | 
|Corporate
 debt securities              |  |                         | 3,800  |                                                                   |                                                  |                                                 |  |                                              | 3,800  |  |   |  | 
|Asset backed
 securities                |  |                         | 210    |                                                                   |                                                  |                                                 |  |                                              | 210    |  |   |  | 
|Equity
 securities                      |  |                         | 56     |                                                                   |                                                  | 56                                               |  |                                              |       |  |   |  | 
|Total                                   |  | $                       | 20,106 |                                                                   | $                                                | 56                                               |  | $                                            | 20,050 |  | $ |  | 

During the three months
ended March 31, 2010 there were no significant transfers to or from the three
level hierarchy. Our foreign currency swap agreements are structured to mature
on the last day of each quarter. The fair value associated with these
agreements is inconsequential and represents a Level 2 measurement.

We consider all highly
liquid investments purchased with an original maturity of 90 days or less to be
cash equivalents. At March 31, 2010, cash and cash equivalents consist of funds
maintained in demand deposit accounts, money market accounts, corporate debt
instruments and U.S. government backed obligations. Some cash and cash
equivalent balances may exceed federally insured limits.

4. ACCOUNTING FOR STOCK-BASED COMPENSATION:

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

The fair value
of the options granted to our employees was estimated on the date of grant
using the Black-Scholes model. Stock options for 4,000 shares of stock and
restricted stock units for 350 shares of stock were granted in the three months
ended March 31, 2010 to certain key employees. These stock options and
restricted stock units were valued at their fair market value on the date of
grant, with recognition of compensation expense over the corresponding vesting
period.

Equity based
compensation expense in the three months ended March 31, 2010 totaled $74,000
and includes $37,000 for stock option awards, $18,000 for our employee stock
purchase plan and $19,000 for unvested restricted stock units.

Equity based
compensation expense in the three months ended March 31, 2009 totaled $178,000
and includes $92,000 for stock option awards, $16,000 for our employee stock
purchase plan, $20,000 for unvested restricted stock units and $50,000 for
10,775 shares issued to one of our officers under an incentive compensation
arrangement. The shares issued under the incentive compensation arrangement
were valued at their fair market value on the date of grant, and corresponding
general and administrative expense of $50,000 was recorded in the three months
ended March 31, 2009.

At March 31,
2010, the total unrecognized compensation cost related to non vested equity
based compensation arrangements was $467,000 and the related weighted average
period over which it is expected to be recognized is 2.1 years.

6

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

For stock options granted
during the three months ending March 31, 2010, we utilized the fair value of
our common stock on the date of grant and employed the following key
assumptions in computing fair value using the Black-Scholes
option-pricing model:

|                                           |  |                                    
|------------------------------------------ |  | -----------------------------------
|Black
 Scholes Assumptions:                |  | Three Months Ending
 March 31, 2010
|                                           |  |                                    
|Risk-free interest rates                   |  | 2.65%                              
|Expected life in years                     |  | 4.75                               
|Expected volatility                        |  | 52%                                
|Expected dividends                         |  | None                               
|Weighted average fair
 value on grant date |  | $3.09                              

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 845,709 shares of
common stock reserved in the aggregate for issuance of options and other stock
based benefits under these plans, including restricted stock units and share
grants to employees, officers, non-employee directors and others. Reserved
shares underlying canceled options are available for future grant under our
active plans. Options are granted at an option price per share equal to or
greater than the market value on the date of grant. Generally, options granted
to employees vest over a four-year period and expire five, seven, or ten years
after the date of grant. Stock options for 4,000 shares of stock were granted
during the three months ended March 31, 2010. As of March 31, 2010, there were
359,445 shares of common stock available under these plans for future issuance
to employees, officers and others. There are no options available under these
plans for future issuance to non-employee directors. In addition, there are
50,000 shares reserved and included in the plan summaries below that are not
part of the three stock incentive plans.

The following is a summary of stock option activity during the three
months ended March 31, 2010:

|                               |  |                     |         |                                             |   |       | 
|------------------------------ |  | ------------------- | ------- | ------------------------------------------- | - | ----- | 
|                               |  | Options Outstanding |         | Weighted Average
 Exercise Price Per
 Share |  
|                              
|Outstanding, December 31, 2009 |  |                     | 549,095 |                                             | $ | 10.04 | 
|Granted                        |  |                     | 4,000   |                                             |   | 6.63  | 
|Exercised                      |  |                     | (64,000 | )                                           |   | 6.02  | 
|Expired                        |  |                     |        |                                             |   |      | 
|Forfeited                      |  |                     |        |                                             |   |      | 
|Outstanding,
 March 31, 2010   |  |                     | 489,095 |                                             | $ | 10.54 | 
|                               |  |                     |         |                                             |   |       | 
|Exercisable,
 March 31, 2010   |  |                     | 348,328 |                                             | $ | 12.34 | 

The intrinsic
value of an option is the amount by which the fair value of the underlying
stock exceeds its exercise price. The
weighted average remaining contractual term and aggregate intrinsic value for
all options outstanding at March 31, 2010 was 3.77 years and $639,000. The
weighted average remaining contractual term and aggregate intrinsic value of
options that were exercisable at March 31, 2010 was 2.99 years and $131,000.
The aggregate intrinsic value of stock options that were exercised in the three
months ended March 31, 2010 was $104,000. During the three months ended March
31, 2010, we received total proceeds of $25,000 from the exercise of stock
options. The excess tax benefit associated with the exercise of stock options
in the three months ended March 31, 2010 was inconsequential.

7

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Restricted Stock Units

Our 1998 Stock
Incentive Plan also permits our Compensation Committee to grant other
stock-based benefits, including restricted stock units. Restricted stock units
are valued at a price equal to the fair market value of our common stock on the
date of grant, vest over a four year period and entitle the holders to one
share of our common stock for each restricted stock unit. The aggregate fair
value of outstanding restricted stock units as of March 31, 2010 was $214,000.

A summary of
activity in non vested restricted stock units for the three months ended March
31, 2010 is as follows:

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

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 three months ended March 31,
2010 or the three months ended March 31, 2009. As of March 31, 2010, 92,002
shares remain available for future issuance under this plan.

Stock Grant Plan for Non-Employee
Directors

Our stock
grant plan for non-employee directors provides for automatic grants of 1,000
shares of our common stock to each of our non-employee directors upon their
re-election to the board of directors. The plan provides for a total of 30,000
shares of our common stock for issuance to directors and will expire on May 19,
2018. No shares were issued under this plan
in the three months ended March 31, 2010 or the three months ended March 31,
2009. There are presently 24,000 shares of common stock reserved in the
aggregate for future issuance under this plan.

5. INVENTORIES AND WARRANTIES:

Inventories consist of the following:

|                                   |  |                |       |                   |   |       | 
|---------------------------------- |  | -------------- | ----- | ----------------- | - | ----- | 
|(In
 thousands)                    |  | March 31, 2010 |       | December 31, 2009 |  
|                                   |  |                |       |                   |   |       | 
|Raw materials
 and purchased parts |  | $              | 4,227 |                   | $ | 3,312 | 
|Work in
 process                   |  |                | 797   |                   |   | 637   | 
|Finished
 goods                    |  |                | 3,899 |                   |   | 3,796 | 
|                                   |  |                |       |                   |   |       | 
|Total
 inventories                 |  | $              | 8,923 |                   | $ | 7,745 | 

8

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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
 March 31, |     
|(In
 thousands)                    |  | 2010                          |      | 2009 |  
|                                   |  |                               |      |      |   |      |  
|Balance at
 beginning of period    |  | $                             | 488  |      | $ | 823  |  
|Accrual for warranties             |  |                               | 181  |      |   | 84   |  
|Settlements made during the period |  |                               | (117 | )    |   | (271 | )
|                                   |  |                               |      |      |   |      |  
|Balance at
 end of period          |  | $                             | 552  |      | $ | 636  |  

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
 March 31, |     
|(In
 thousands)                  |  | 2010                          |      | 2009 |  
|                                 |  |                               |      |      |   |     |  
|Balance at beginning of period   |  | $                             | 636  |      | $ | 605 |  
|Revenue deferrals                |  |                               | 176  |      |   | 81  |  
|Amortization of deferred revenue |  |                               | (115 | )    |   | (78 | )
|                                 |  |                               |      |      |   |     |  
|Balance at end of period         |  | $                             | 697  |      | $ | 608 |  

6. INTANGIBLE ASSETS:

Intangible
assets consist of the following:

|                        |  |                         |        |                           |   |        |   |                         |     |                           |   |        |  |   |        |   |   |     | 
|----------------------- |  | ----------------------- | ------ | ------------------------- | - | ------ | - | ----------------------- | --- | ------------------------- | - | ------ |  | - | ------ | - | - | --- | 
|                        |  | As of March 31, 2010    |        | As of December 31, 2009   |  
|(In thousands)          |  | Gross
 Carrying
 Amount |        | Accumulated
 Amortization |   | Net    |   | Gross
 Carrying
 Amount |     | Accumulated
 Amortization |   | Net    | 
|                        |  |                         |        |                           |   |        |   |                         |     |                           |   |        |  |   |        |   |   |     | 
|Developed
 technology   |  | $                       | 7,775  |                           | $ | (7,530 | ) | $                       | 245 |                           | $ | 7,775  |  | $ | (7,485 | ) | $ | 290 | 
|Patents and
 trademarks |  |                         | 2,730  |                           |   | (2,387 | ) |                         | 343 |                           |   | 2,681  |  |   | (2,329 | ) |   | 352 | 
|Total                   |  | $                       | 10,505 |                           | $ | (9,917 | ) | $                       | 588 |                           | $ | 10,456 |  | $ | (9,814 | ) | $ | 642 | 

9

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Amortization
expense for the three month periods ended March 31, 2010 and 2009 is as
follows:

|                        |  |                               |     |      |   |     | 
|----------------------- |  | ----------------------------- | --- | ---- | - | --- | 
|                        |  | Three Months Ended
 March 31, |    
|(In
 thousands)         |  | 2010                          |     | 2009 |  
|                        |  |                               |     |      |   |     | 
|Developed
 technology   |  | $                             | 45  |      | $ | 45  | 
|Patents and
 trademarks |  |                               | 58  |      |   | 76  | 
|                        |  |                               |     |      |   |     | 
|Total                   |  | $                             | 103 |      | $ | 121 | 

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: $311,000 for the remainder of 2010 and $223,000 in 2011, $50,000 in
2012, and $4,000 in 2013.

7. BUSINESS SEGMENTS AND SIGNIFICANT
CUSTOMERS:

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

|                                    |  |                               |        |      |   |        |  
|----------------------------------- |  | ----------------------------- | ------ | ---- | - | ------ | -
|                                    |  | Three Months Ended
 March 31, |       
|(In
 thousands)                     |  | 2010                          |        | 2009 |  
|                                    |  |                               |        |      |   |        |  
|Revenue                             |  |                               |        |      |   |        |  
|Electronic Assembly                 |  |                               |        |      |   |        |  
|OEM Sensors                         |  | $                             | 5,119  |      | $ | 1,440  |  
|SMT Systems                         |  |                               | 6,045  |      |   | 2,245  |  
|Total Electronic Assembly           |  |                               | 11,164 |      |   | 3,685  |  
|Semiconductor                       |  |                               | 1,177  |      |   | 677    |  
|Total                               |  | $                             | 12,341 |      | $ | 4,362  |  
|                                    |  |                               |        |      |   |        |  
|                                    |  |                               |        |      |   |        |  
|Income (loss) from operations       |  |                               |        |      |   |        |  
|Electronic Assembly                 |  | $                             | 65     |      | $ | (3,624 | )
|Semiconductor                       |  |                               | 192    |      |   | (357   | )
|Total income (loss) from operations |  |                               | 257    |      |   | (3,981 | )
|Interest income and other           |  |                               | 77     |      |   | 208    |  
|Income (loss) before taxes          |  | $                             | 334    |      | $ | (3,773 | )
|                                    |  |                               |        |      |   |        |  
|                                    |  |                               |        |      |   |        |  
|Depreciation and amortization:      |  |                               |        |      |   |        |  
|Electronic Assembly                 |  | $                             | 430    |      | $ | 515    |  
|Semiconductor                       |  |                               | 57     |      |   | 72     |  
|Total                               |  | $                             | 487    |      | $ | 587    |  

10

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Export sales
were 82% of revenue in the three months ended March 31, 2010 and 71% of revenue
in the three months ended March 31, 2009. Virtually all of our export sales are
negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area
are summarized as follows:

|                   |  |                               |        |      |   |       | 
|------------------ |  | ----------------------------- | ------ | ---- | - | ----- | 
|                   |  | Three Months Ended
 March 31, |       
|(In thousands)     |  | 2010                          |        | 2009 |  
|                  
|Americas           |  | $                             | 203    |      | $ | 57    | 
|Europe             |  |                               | 3,420  |      |   | 2,114 | 
|Asia               |  |                               | 6,499  |      |   | 937   | 
|Other              |  |                               | 30     |      |   |      | 
|                   |  |                               |        |      |   |       | 
|Total export sales |  | $                             | 10,152 |      | $ | 3,108 | 

Historically,
we have been dependent upon two electronic assembly customers, Assembleon and
Juki, for a significant portion of our revenue. For the three months ended
March 31, 2010, sales to Juki accounted for 22% of our total revenue and sales
to Assembleon accounted for 11% of our total revenue.

8. NET INCOME (LOSS) PER SHARE:

Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Net
income (loss) per diluted share is computed by dividing net income (loss) by
the weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of common shares to be
issued upon exercise of stock options, restricted stock units and from
participation in our employee stock purchase plan, as calculated using the
treasury stock method. Potentially dilutive common equivalent shares are
excluded from the calculation of net loss per diluted share due to their
anti-dilutive effect. As a result, no common equivalent shares were included in
the calculation of net loss per diluted share for the three months ended March
31, 2009.

The
calculation of diluted net income (loss) per share excludes 353,000 potentially
dilutive shares for the three months ended March 31, 2010 and 806,000 potentially
dilutive shares for the three months ended March 31, 2009 because their effect
would be anti-dilutive.

9.
COMPREHENSIVE INCOME (LOSS):

Components of
comprehensive income (loss) include our net income (loss), foreign-currency
translation adjustments, unrealized gains and losses on available-for-sale
securities and reclassification adjustments. Total comprehensive income
amounted to $245,000 for the three months ended March 31, 2010 and total
comprehensive loss amounted to $2,618,000 for the three months ended March 31,
2009.

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

|                                                    |  |                                |      |                                           |   |                                         |   |   |      |  
|--------------------------------------------------- |  | ------------------------------ | ---- | ----------------------------------------- | - | --------------------------------------- | - | - | ---- | -
|(In
 thousands)                                     |  | Foreign
 Currency
 Translation |      | Unrealized Gains
 (Losses) on
 Securities |   | Accumulated
 Other
 Comprehensive
 Loss |  
|                                                   
|Balance
 December 31, 2009                          |  | $                              | (887 | )                                         | $ | 119                                     |   | $ | (768 | )
|Unrealized losses on securities, net of tax
 of $21 |  |                                |     |                                           |   | (40                                     | ) |   | (40  | )
|Translation adjustments                             |  |                                | 37   |                                           |   |                                        |   |   | 37   |  
|                                                    |  |                                |      |                                           |   |                                         |   |   |      |  
|Balance
 March 31, 2010                             |  | $                              | (850 | )                                         | $ | 79                                      |   | $ | (771 | )

11

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10. INCOME TAXES:

We recorded a
provision for income tax expense in the three months ended March 31, 2010 at an
effective tax rate of 26%, compared to an income tax benefit in the three
months ended March 31, 2009 at an effective tax rate of 36%. The change in the
effective tax rate for 2010 is due to the anticipated benefit from the domestic
manufacturers production incentive and by lower tax expense in foreign tax
jurisdictions with tax rates differing from the U.S federal statutory rate. No
benefit from the federal R&D tax credit was recognized in the three months
ended March 31, 2010 because the federal R&D tax credit had not yet been
signed into law. Changes in our reserve for income taxes were inconsequential
in the three months ended March 31, 2010 and 2009.

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

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

In analyzing
the need for valuation allowances, we first considered our history of
cumulative losses for U.S. income tax purposes over the past three years and
also gave significant consideration to our results for U.S. income tax purposes
over the past five years, as the economic cycles in our industry have tended to
average five years in length (from peak to trough). We also considered our
forecasts of future profitability, the duration of statutory carry forward
periods and tax planning alternatives. Finally, we considered the length and
severity of the recent global economic crisis, the impact that it had on our
operating results and our expectation for rebound given recent signs of
recovery in the global economy and more specifically in our markets. After
considering all of these factors, and after considering other significant
positive evidence, we concluded that a valuation allowance with respect to
substantially all of our U.S. based deferred tax assets was not required at
March 31, 2010.

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

Deferred tax
assets at March 31, 2010, include net operating loss carry forwards incurred in
the UK by CyberOptics Ltd., which was acquired in 1999. The utilization of
these net operating loss carry forwards is dependent on CyberOptics Ltd.s
ability to generate sufficient UK taxable income during the carry forward
period.

11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

We enter into
foreign currency swap agreements to hedge short term inter-company financing
transactions with our subsidiaries in the United Kingdom and Singapore. These
currency swap agreements are structured to mature near the last day of each quarter,
and are designated as cash flow hedges. At March 31, 2010, we had two open swap
agreements for £275,000 GBP and $750,000 SGD that were purchased on March 31,
2010, the fair value of which was inconsequential. Gains and losses from
foreign currency transactions and foreign currency swap agreements are
recognized in interest income and other in our statement of operations.

In the three
months ended March 31, 2010, we recognized net gains from settlement of foreign
currency swap agreements of $34,000 that offset foreign currency transaction
losses on the underlying inter-company balances of $48,000. In the three months
ended March 31, 2009, we recognized net gains from settlement of foreign
currency swap agreements of $10,000 that offset foreign currency transactions
losses on the underlying inter-company balances of $43,000.

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

12

---



12. CONTINGENCIES:

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

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

13. SEVERANCE COSTS:

We started to
incur severance costs in February 2008 in connection with our decision to move
a significant portion of development and manufacturing for our systems products
to Singapore. The transition of systems-related product development was
substantially complete by the end of the fourth quarter of 2008, and the
transition of systems-related manufacturing was substantially complete by the
end of the first quarter of 2009. Severance costs incurred in the three months
ended March 31, 2009 in connection with the February 2008 decision to move our
systems related product development and manufacturing to Singapore totaled
$51,000.

In February
2009, we further reduced our workforce by 24 positions in response to the
weakening global economy, our transition to Singapore and our decision to
consolidate manufacturing for our semiconductor products in our Minneapolis
facility. Severance costs incurred in the three months ended March 31, 2009
related to the February 2009 workforce reduction totaled $254,000.

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

14. RECENT ACCOUNTING DEVELOPMENTS:

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

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

Under the
amended guidance, consideration is allocated to the deliverables at inception
of an arrangement using the relative selling price method. Selling price is
determined based on a selling price hierarchy, consisting of VSOE, third party
evidence or estimated selling price. Under the amended guidance, we determined
an estimated selling price for each of the elements in our multiple elements
sales based on the selling price hierarchy and allocated consideration to the
deliverables using the relative selling price method. We have adopted the
amended guidance effective January 1, 2010. The impact of adopting the amended
guidance had the effect of increasing our revenue by less than $35,000 in the
three months ended March 31, 2010. The impact of adopting the amended guidance
on our results for 2009 would have been insignificant.

13

---



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

14

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

CRITICAL ACCOUNTING
POLICIES AND ESTIMATES:

The
preparation of the financial information contained in this 10-Q requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We evaluate these estimates on an ongoing basis, including
those related to allowances for doubtful accounts and returns, warranty
obligations, inventory valuation, the carrying value and any impairment of
intangible assets, and income taxes. These critical accounting policies are
discussed in more detail in the Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Form 10-K for
the year ended December 31, 2009.

FORWARD LOOKING
STATEMENTS:

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

RESULTS OF
OPERATIONS:

General

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

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

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

15

---



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

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

The global
electronics market is starting to strengthen. We are seeing significant demand
from manufacturers of SMT assembly equipment who purchase our alignment sensor
products, and for our stand alone solder paste inspection and AOI systems,
particularly from large original design manufacturers in China. We believe that
these improving market conditions, the efficiencies in operations we have
implemented, and the new products we have introduced and anticipate introducing
in 2010, will lead to improved operating results and a return to profitability
over the coming year. For the quarter ending March 31, 2010, we generated a
profit of $0.04 per share on revenue of $12.3 million, a significant
improvement when compared to the quarter ending March 31, 2009. In addition, we
are forecasting a profit of $0.12 to $0.17 per share in the second quarter of
2010 on revenue of $16.0-$17.0 million.

Segment Results

Operating
results for our electronic assembly and semiconductor segments for the three
month periods ended March 31, 2010 and 2009 are as follows:

|                                              |  |                                   |        |                                   |   |       |  |                      |        |                  |   |        |   |   |      |   |   |        |  
|--------------------------------------------- |  | --------------------------------- | ------ | --------------------------------- | - | ----- |  | -------------------- | ------ | ---------------- | - | ------ | - | - | ---- | - | - | ------ | -
|                                              |  | Three months ended March 31, 2010 |        | Three months ended March 31, 2009 |  
|(In
 thousands)                               |  | Electronic
 Assembly              |        | Semi-
 Conductor                  |   | Total |  | Electronic
 Assembly |        | Semi-
 Conductor |   | Total  |  
|                                             
|Revenue                                       |  | $                                 | 11,164 |                                   | $ | 1,177 |  | $                    | 12,341 |                  | $ | 3,685  |   | $ | 677  |   | $ | 4,362  |  
|Cost of revenue                               |  |                                   | 6,742  |                                   |   | 343   |  |                      | 7,085  |                  |   | 2,676  |   |   | 308  |   |   | 2,984  |  
|Gross margin                                  |  |                                   | 4,422  |                                   |   | 834   |  |                      | 5,256  |                  |   | 1,009  |   |   | 369  |   |   | 1,378  |  
|                                              |  |                                   |        |                                   |   |       |  |                      |        |                  |   |        |   |   |      |   |   |        |  
|Research and development expenses             |  |                                   | 1,505  |                                   |   | 272   |  |                      | 1,777  |                  |   | 1,786  |   |   | 291  |   |   | 2,077  |  
|Selling, general and administrative
 expenses |  |                                   | 2,825  |                                   |   | 352   |  |                      | 3,177  |                  |   | 2,604  |   |   | 328  |   |   | 2,932  |  
|Severance                                     |  |                                   |       |                                   |   |      |  |                      |       |                  |   | 216    |   |   | 89   |   |   | 305    |  
|Amortization of intangibles                   |  |                                   | 27     |                                   |   | 18    |  |                      | 45     |                  |   | 27     |   |   | 18   |   |   | 45     |  
|                                              |  |                                   |        |                                   |   |       |  |                      |        |                  |   |        |   |   |      |   |   |        |  
|Income (loss) from operations                 |  | $                                 | 65     |                                   | $ | 192   |  | $                    | 257    |                  | $ | (3,624 | ) | $ | (357 | ) | $ | (3,981 | )

16

---



Revenues

Our revenues
increased by 183% to $12.3 million in the three months ended March 31, 2010
from $4.4 million in the three months ended March 31, 2009. The following table
sets forth revenues by product line for the three month periods ended March 31,
2010 and 2009:

|                          |  |                               |        |      |   |       | 
|------------------------- |  | ----------------------------- | ------ | ---- | - | ----- | 
|                          |  | Three Months Ended
 March 31, |       
|(In
 thousands)           |  | 2010                          |        | 2009 |  
|                         
|Electronic
 Assembly      |  |                               |        |      |   |       | 
|OEM Sensors               |  | $                             | 5,119  |      | $ | 1,440 | 
|SMT Systems               |  |                               | 6,045  |      |   | 2,245 | 
|Total Electronic Assembly |  |                               | 11,164 |      |   | 3,685 | 
|Semiconductor             |  |                               | 1,177  |      |   | 677   | 
|Total                     |  | $                             | 12,341 |      | $ | 4,362 | 

Electronic
Assembly

Revenue from sales of our OEM alignment sensors increased by $3.7
million or 255% in the three months ended March 31, 2010 to $5.1 million, up
from $1.4 million in the three months ended March 31, 2009. Revenue from sales
of our stand alone SMT inspection systems products increased by $3.8 million or 169% in the three
months ended March 31, 2010 to $6.0 million, up from $2.2 million in the three
months ended March 31, 2009.

The global
recession caused severe weakness and disruption in our electronics markets
starting late in 2008 and throughout all of 2009, resulting in very low levels
of revenue in 2009 from both our OEM alignment sensors and stand alone SMT
inspection systems products. The global electronics market is now starting to
strengthen. We are seeing significant demand from manufacturers of SMT assembly
equipment who purchase our alignment sensor products, and for our stand alone
solder paste inspection and AOI systems, particularly from large original
design manufacturers in China. We believe that these improving market
conditions, combined with favorable market acceptance of the new products we
have recently introduced, resulted in the higher revenue levels in the three
months ended March 31, 2010 compared to the same period of 2009.

We believe that increased
use of outsourcing for circuit board assembly, production difficulties
associated with smaller component sizes, increased production speeds and
increased cost pressure on companies manufacturing circuit boards caused
increased demand for our inspection equipment prior to the recent global
economic recession and will increase demand in the future as the recession
eases and our markets strengthen. However, our electronic assembly revenue has
been, and will continue to be impacted by increasing competition and price
pressure, particularly for stand alone SMT inspection systems products sold in
Asia.

Export revenue from OEM
alignment sensors and stand alone SMT inspection systems totaled $9.8 million,
or 88% of electronic assembly revenue in three months ended March 31, 2010,
compared to $2.9 million, or 79% of electronic assembly revenue in the three
months ended March 31, 2009. Sales to international customers continue to be
significant, as manufacturing of electronic components has migrated offshore,
particularly to China and other areas of Asia.

Semiconductor

Revenues from semiconductor
products increased by $500,000 or 74% to $1.2 million in the three months ended
March 31, 2010, up from $677,000 in the three months ended March 31, 2009. The
increase in revenue was due to improving conditions in the market for
semiconductor fabrication equipment, coupled with favorable market acceptance
of our new WaferSense products. WaferSense revenue increased to $493,000 in
the three months ended March 31, 2010 from $230,000 in the three months ended
March 31, 2009.

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, 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, or will be introducing, several new additions to the WaferSense
product line, including additional leveling sensors, along with new gapping,
teaching, vibration and particle sensors.

17

---



Export revenue from
semiconductor products totaled $365,000 or 31% of total semiconductor revenue
in the three months ended March 31, 2010, compared to $208,000 or 31% of total
semiconductor revenue in the three months ended March 31, 2009.

Cost of Revenue and
Gross Margin

Electronic
Assembly

Gross margin as a percentage
of electronic assembly sales was 40% in the three months ended March 31, 2010,
compared to 27% in the three months ended March 31, 2009. The improvement in
gross margin percentage was due to significantly increased sales of higher
margin OEM alignment sensors, better manufacturing leverage resulting from
substantially higher production volumes over which to spread fixed
manufacturing overhead costs, and the favorable impact of our new cost reduced
SMT inspection system products, particularly our next generation SE500 solder
paste inspection system. We anticipate that gross margins as a percentage of
electronic assembly sales in the second quarter of 2010 will be at or near the
level in the three months ended March 31, 2010, as continued benefits from our
new cost reduced system platforms are expected to offset some of the margin
pressure associated with large unit sales of lower price inspection systems in
China.

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

Semiconductor

Gross margin as a percentage
of semiconductor sales was 71% in three months ended March 31, 2010 compared to
55% in the three months ended March 31, 2009. Gross margin as a percentage of
semiconductor sales improved due to the cost benefit from consolidation of
manufacturing for our semiconductor products into our Minneapolis, Minnesota
headquarters. Semiconductor gross margins will also continue to benefit in 2010
from improved manufacturing leverage, resulting from higher production volumes
over which to spread fixed manufacturing overhead costs.

Operating Expenses

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

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

In response to the
significant weakness in our markets and the global economy we reduced our
workforce by 50 employees or 25% (over 30 in manufacturing and approximately 20
in development, selling, general and administrative) from the start of the
fourth quarter of 2008 through the end of the second quarter of 2009. Other
cost saving measures implemented in 2009 include salary reductions and reduced
spending for non-labor costs such as travel, supplies and the like. These cost
saving measures, combined with savings from our transition to Singapore, have
provided significant annual expense savings. Implementation of the cost
reduction actions discussed above had no impact on any of our strategic growth
programs; work on our common hardware platforms for inspection, next generation
inspection technologies, or pursuit of new OEM contracts.

18

---



As a result of signs of an
improving economy, we elected to restore salary levels for our employees to
pre-reduction levels in 2010. In addition, we anticipate that there will be
some headcount additions and our costs will increase as business activity picks
up and revenue returns to pre-recession levels. However, many of the cost
savings measures that were put in place during 2008 and 2009 will continue to
provide meaningful savings for the foreseeable future.

Electronic
Assembly

Research and development
expenses for our electronic assembly segment were $1.5 million or 13% of
revenue in the three months ended March 31, 2010, compared to $1.8 million or
48% of revenue in the three months ended March 31, 2009. The 16% decrease in
research and development expenses in the three months ended March 31, 2010
compared to the same period of 2009 resulted from completion of several R&D
projects, including our next generation SE500 solder paste inspection system
and improvements in focus and efficiency resulting from transition of systems
related research and development to Singapore. We anticipate that research and
development expenses in the second quarter of 2010 will be at or slightly above
the first quarter level as we expect to add additional engineering resources to
invest in product development initiatives to meet the needs of our growing base
of inspection customers.

Selling, general and
administrative expenses for our electronic assembly segment were $2.8 million
in the three months ended March 31, 2010 compared to $2.6 million in the three
months ended March 31, 2009. The increase in selling, general and
administrative expense for the three months ended March 31, 2010 compared to
the same period of 2009 is due to higher sales and marketing costs, including
commissions for third party sales representatives, resulting from higher levels
of SMT inspection system sales. We presently anticipate that selling, general
and administrative expenses in the second quarter of 2010 will be above the
level recorded in the three months ended March 31, 2010 due to the higher level
of expected revenue and costs associated with the annual retainer we pay to our
outside board members.

Semiconductor

Research and development
expenses for our semiconductor segment were $272,000 in the three months ended
March 31, 2010 compared to $291,000 in the same period last year. Selling,
general and administrative expenses for our semiconductor segment were $352,000
in the three months ended March 31, 2010 compared to $328,000 in the same
period last year. No significant changes are expected in the level of
semiconductor operating expenses in the second quarter of 2010.

Severance Costs

We started to incur
severance costs in February 2008 in connection with our decision to move a
significant portion of development and manufacturing for our systems products
to Singapore. The transition of systems-related product development was
substantially complete by the end of the fourth quarter of 2008, and the
transition of systems-related manufacturing was substantially complete by the
end of the first quarter of 2009. Severance costs incurred in the three months
ended March 31, 2009 in connection with the February 2008 decision to move our
systems related product development and manufacturing to Singapore totaled
$51,000.

In February 2009, we further
reduced our workforce by 24 positions in response to the weakening global
economy, our transition to Singapore and our decision to consolidate
manufacturing for our semiconductor products in our Minneapolis facility.
Severance costs incurred in the three months ended March 31, 2009 related to
the February 2009 workforce reduction totaled $254,000.

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

Interest and Other

Interest
income and other includes interest earned on investments and gains and losses
associated with foreign currency transactions and foreign currency swap
agreements. Interest income and other decreased in the three months ended March
31, 2010 compared to the same period of 2009 due to lower rates of interest
earned on invested funds and lower invested balances of cash equivalents and
marketable securities.

19

---



Provision for Income
Taxes and Effective Income Tax Rate

We recorded a
provision for income tax expense in the three months ended March 31, 2010 at an
effective tax rate of 26%, compared to an income tax benefit in the three
months ended March 31, 2009 at an effective tax rate of 36%. The change in the
effective tax rate for 2010 is due to the anticipated benefit from the domestic
manufacturers production incentive and by lower tax expense in foreign tax
jurisdictions with tax rates differing from the U.S federal statutory rate.
Also, no benefit from the federal R&D tax credit was recognized in the
three months ended March 31, 2010 because the federal R&D tax credit had
not yet been signed into law. Changes in our reserve for income taxes were
inconsequential in the three months ended March 31, 2010 and 2009.

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

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

In analyzing
the need for valuation allowances, we first considered our history of
cumulative losses for U.S. income tax purposes over the past three years and
also gave significant consideration to our results for U.S. income tax purposes
over the past five years, as the economic cycles in our industry have tended to
average five years in length (from peak to trough). We also considered our
forecasts of future profitability, the duration of statutory carry forward
periods and tax planning alternatives. Finally, we considered the length and
severity of the recent global economic crisis, the impact that it had on our
operating results and our expectation for rebound given recent signs of
recovery in the global economy and more specifically in our markets. After
considering all of these factors, and after considering other significant
positive evidence, we concluded that a valuation allowance with respect to
substantially all of our U.S. based deferred tax assets was not required at
March 31, 2010.

Our results in
both 2008 and 2009 were negatively impacted by the recent global economic
slowdown, and we incurred a loss in the United States in both 2008 and 2009,
where most of our net deferred tax assets are recorded. Therefore, achievement
of profitability in the United States will be a significant factor in
determining our continuing ability to carry these deferred tax assets without
recording a valuation allowance. The global electronics market is starting to
strengthen. We are seeing significant demand from manufacturers of SMT assembly
equipment who purchase our alignment sensor products, and for our stand alone
solder paste inspection and AOI systems, particularly from large original
design manufacturers in China. We believe that these improving market
conditions, the efficiencies in operations we have implemented, and the new
products we have introduced and anticipate introducing in 2010, will lead to
improved operating results and a return to profitability over the coming year.
If future results from our operations are less than projected, a valuation
allowance may be required against virtually all of our deferred tax assets, which
could have a material impact on our results of operations in the period in
which it is recorded.

Deferred tax assets at March
31, 2010, include net operating loss carry forwards incurred in the UK by
CyberOptics Ltd., which was acquired in 1999. The utilization of these net
operating loss carry forwards is dependent on CyberOptics Ltd.s ability to
generate sufficient UK taxable income during the carry forward period.

Order Rate and
Backlog

Our orders
totaled $17.0 million in the three months ended March 31, 2010, compared to
$10.7 million in the three months ended December 31, 2009 and $4.1 million in
the three months ended March 31, 2009. Backlog totaled $11.7 million at March
31, 2010, $7.1 million at December 31, 2009 and $3.6 million at March 31, 2009.
The scheduled shipment (or estimated timing of revenue for systems recognized
upon acceptance) for backlog at March 31, 2010 is as follows:

|                            |  |         |        | 
|--------------------------- |  | ------- | ------ | 
|(In
 thousands)             |  | Backlog |       
|                            |  |         |        | 
|2nd
 Quarter 2010           |  | $       | 9,263  | 
|3rd
 Quarter 2010 and after |  |         | 2,437  | 
|Total
 backlog              |  | $       | 11,700 | 

20

---



LIQUIDITY AND CAPITAL
RESOURCES

Our cash and cash
equivalents increased by $633,000 in the three months ended March 31, 2010
resulting from $692,000 of cash provided by operating activities, $272,000 of
proceeds from maturities and sales of marketable securities, net of purchases,
offset in part by purchases of capital assets of $331,000. Our cash and cash
equivalents fluctuate in part because of maturities of marketable securities,
and investment of cash balances in marketable securities, or from other sources
of cash, in addition to marketable securities. Accordingly, we believe the
combined balances of cash and marketable securities provide a more reliable
indication of our available liquidity. Combined balances of cash and marketable
securities increased by $274,000 to $22.2 million as of March 31, 2010 from
$21.9 million as of December 31, 2009.

Operating activities
provided $692,000 of cash in the three months ended March 31, 2010. Cash
provided by operations included net income of $247,000, which included non-cash
expenses totaling $653,000 for depreciation and amortization, deferred taxes,
non-cash gains and losses from foreign currency transactions and stock
compensation expenses.

Changes in
operating assets and liabilities using cash included increases in accounts
receivable of $2.1 million, inventories of $1.3 million and other assets of
$172,000. Changes in operating assets and liabilities providing cash included
increases in accounts payable of $2.9 million and increases in accrued expenses
and other liabilities of $390,000. The increase in accounts receivable was due
to higher sales levels in the first quarter of 2010, compared to the fourth
quarter of 2009. Inventories were higher due to increased material purchases to
support the higher level of sales expected in the second quarter of 2010. The
increase in accounts payable resulted from increased material purchases and a
conscious effort on our part to extend the timing of vendor payments. Accrued expenses
and other liabilities increased due to higher warranty, commission and
incentive compensation accruals, resulting from higher sales levels and
improved operating results.

Operations
used $3.1 million of cash in the three months ended March 31, 2009. Cash used
by operations included a net loss of $2.4 million which included $801,000 of
net non-cash expenses for depreciation and amortization, provision for doubtful
accounts, foreign currency transactions and stock compensation costs. Changes
in operating assets and liabilities using cash included increases in
inventories of $804,000 and income tax refunds and deposits of $1.1 million and
decreases in accounts payable of $968,000, advance customer payments of $34,000
and accrued expenses of $489,000. Accounts receivable decreased by $2.0 million
in the three months ended March 31, 2009. 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. Income tax refunds and deposits were higher due to anticipated income
tax refunds resulting from our first quarter loss. Accounts payable were lower
due to a reduction in recent inventory purchases and the timing of 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
workforce reduction. The decrease in accounts receivable was due to the lower
level of sales in the first quarter of 2009 compared to the fourth quarter of
2008.

Investing activities used
$59,000 of cash in the three months ended March 31, 2010 compared to generating
$906,000 of cash from investing activities in the same period last year.
Changes in the level of investment in marketable securities, resulting from the
purchases, sales and maturities of those securities generated $272,000 of cash
in the three months ended March 31, 2010, compared to generating $1.1 million
of cash in the same period last year. We used $331,000 of cash in the three months ended March 31, 2010 and
$207,000 of cash in the three months ended March 31, 2009 for the purchase of
fixed asset and capitalized patent costs.

Financing activities
provided $25,000 of cash in the three months ended March 31, 2010 from the
exercise of employee stock options. There were no financing activities in the
three months ended March 31, 2009.

We presently expect to use
cash for working capital requirements, including inventory purchases and
accounts receivable, in the second quarter of 2010 to finance anticipated
growth in revenue levels.

At March 31, 2010, we did
not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
establishing off-balance sheet arrangements or other contractually narrow or
limited purposes.

A table of our
contractual obligations was provided in Item 7 in our Annual Report on Form
10-K for the fiscal year ended December 31, 2009. There were no significant
changes to our contractual obligations in the three months ended March 31, 2010.
At the present time, we have no material commitments for capital expenditures.
Purchase commitments for inventory will vary based on the volume of revenue and
resulting inventory requirements.

21

---



Our cash, cash
equivalents and marketable securities totaled $22.2 million at March 31, 2010.
We believe that our available balances of cash, cash equivalents and marketable
securities will be adequate to fund our cash flow needs for the foreseeable
future.

Fair Value Measurements

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

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

|                                       |  |                         |        |                                                                   |                                                  |                                                  |  |                                              |        |  |   |   | 
|-------------------------------------- |  | ----------------------- | ------ | ----------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                       |  |                         |        |                                                                   | Fair Value Measurements at March 31,
 2010 Using |                                                 
|(In
 thousands)                        |  | Balance
 March 31, 2010 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                  | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                       |  |                         |        |                                                                   |                                                  |                                                  |  |                                              |        |  |   |   | 
|Cash equivalents                       |  | $                       | 2,763  |                                                                   | $                                                |                                                 |  | $                                            | 2,763  |  | $ |  | 
|U.S. government and agency obligations |  | $                       | 13,277 |                                                                   | $                                                |                                                 |  | $                                            | 13,277 |  | $ |  | 
|Corporate debt securities              |  | $                       | 3,800  |                                                                   | $                                                |                                                 |  | $                                            | 3,800  |  | $ |  | 
|Asset backed securities                |  | $                       | 210    |                                                                   | $                                                |                                                 |  | $                                            | 210    |  | $ |  | 
|Equity securities                      |  | $                       | 56     |                                                                   | $                                                | 56                                               |  | $                                            |       |  | $ |  | 
|Total                                  |  | $                       | 20,106 |                                                                   | $                                                | 56                                               |  | $                                            | 20,050 |  | $ |  | 

During the three months
ended March 31, 2010 there were no significant transfers to or from the three
level hierarchy. Our foreign currency swap agreements are structured to mature
on the last day of each quarter. The fair value associated with these
agreements is inconsequential and represents a Level 2 measurement.

Inflation and Foreign Currency
Transactions

Changes in our revenues have
resulted primarily because of changes in the level of unit shipments and the
relative strength of the worldwide electronics and semiconductor fabrication
capital equipment markets. We believe that inflation has not had a significant
effect on our operations.

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

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 March 31, 2010, we had two
open swap agreements that were purchased on that day. As a result, any
unrealized gains or losses as of March 31, 2010 were inconsequential.

In the three months ended
March 31, 2010, we recognized net gains from settlement of foreign currency
swap agreements of $34,000 that offset foreign currency transaction losses on
the underlying inter-company balances of $48,000. In the three months ended
March 31, 2009, we recognized net gains from settlement of foreign currency
swap agreements of $10,000 that offset foreign currency transactions losses on
the underlying inter-company balances of $43,000.

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Recent Accounting
Developments

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

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

Under the
amended guidance, consideration is allocated to the deliverables at inception
of an arrangement using the relative selling price method. Selling price is
determined based on a selling price hierarchy, consisting of VSOE, third party
evidence or estimated selling price. Under the amended guidance, we determined
an estimated selling price for each of the elements in our multiple elements
sales based on the selling price hierarchy and allocated consideration to the
deliverables using the relative selling price method. We have adopted the
amended guidance effective January 1, 2010. The impact of adopting the amended
guidance had the effect of increasing our revenue by less than $35,000 in the
three months ended March 31, 2010. The impact of adopting the amended guidance
on our results for 2009 would have been insignificant.

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

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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 March 31, 2010, there has been no change in our internal control
over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A  RISK FACTORS

In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I  Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31,
2009, which could materially affect our business, financial condition or future
results.

ITEM 6  EXHIBITS

|      |                                                                                                                                              
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------
|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             

24

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SIGNATURES

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

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

Dated: May 10, 2010

25

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