SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549





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FORM 10-Q

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(Check One)

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

For the quarterly period ended March 31, 2009

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

For the transition period from
______ to ______

COMMISSION FILE NO. (0-16577)



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

|                                                      |                    
|----------------------------------------------------- | -------------------
|Minnesota                                             | 41-1472057         
|(State or other jurisdiction of                       | (I.R.S. Employer   
|incorporation or organization)                        | Identification No.)
|                                                      |                    
|                                                      |                    
|5900
Golden Hills Drive                               |                    
|MINNEAPOLIS,
MINNESOTA                                | 55416              
|(Address of principal executive offices)              | (Zip Code)         
|                                                      |                    
|(763) 542-5000                                       
|(Registrants telephone number, including
 area code)



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

Indicate by
check mark whether the registrant 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 x | Non-accelerated filer o | Smaller Reporting Company o

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

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date. At April 30, 2009, there
were 6,780,070 shares of the registrants Common Stock, no par value, issued
and outstanding.





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PART
I. FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                                   |  |                 |        |                    |   |        |  
|---------------------------------------------------------------------------------- |  | --------------- | ------ | ------------------ | - | ------ | -
|(In
 thousands except share information)                                           |  | March 31,
 2009 |        | December 31,
 2008 |  
|                                                                                   |  |                 |        |                    |  
|ASSETS                                                                             |  |                 |        |                    |   |        |  
|                                                                                   |  |                 |        |                    |   |        |  
|Cash and
 cash equivalents                                                         |  | $               | 2,314  |                    | $ | 4,516  |  
|Marketable
 securities                                                             |  |                 | 12,461 |                    |   | 10,433 |  
|Accounts
 receivable, net                                                          |  |                 | 4,956  |                    |   | 6,951  |  
|Inventories                                                                        |  |                 | 10,514 |                    |   | 9,869  |  
|Other
 current assets                                                              |  |                 | 3,823  |                    |   | 2,579  |  
|Deferred tax
 assets                                                               |  |                 | 2,604  |                    |   | 2,604  |  
|Total current assets                                                               |  |                 | 36,672 |                    |   | 36,952 |  
|                                                                                   |  |                 |        |                    |   |        |  
|Marketable
 securities                                                             |  |                 | 11,458 |                    |   | 14,834 |  
|Equipment
 and leasehold improvements, net                                         |  |                 | 2,324  |                    |   | 2,615  |  
|Intangible
 and other assets, net                                                  |  |                 | 960    |                    |   | 956    |  
|Goodwill                                                                           |  |                 | 569    |                    |   | 569    |  
|Other assets                                                                       |  |                 | 182    |                    |   | 189    |  
|Deferred tax
 assets                                                               |  |                 | 2,834  |                    |   | 2,834  |  
|Total assets                                                                       |  | $               | 54,999 |                    | $ | 58,949 |  
|                                                                                   |  |                 |        |                    |   |        |  
|LIABILITIES
 AND STOCKHOLDERS EQUITY                                              |  |                 |        |                    |   |        |  
|                                                                                   |  |                 |        |                    |   |        |  
|Accounts
 payable                                                                  |  | $               | 1,774  |                    | $ | 2,753  |  
|Advance
 customer payments                                                         |  |                 | 650    |                    |   | 684    |  
|Accrued
 expenses                                                                  |  |                 | 2,543  |                    |   | 3,054  |  
|Total current liabilities                                                          |  |                 | 4,967  |                    |   | 6,491  |  
|                                                                                   |  |                 |        |                    |   |        |  
|Other
 liabilities                                                                 |  |                 | 1,592  |                    |   | 1,578  |  
|Total liabilities                                                                  |  |                 | 6,559  |                    |   | 8,069  |  
|                                                                                   |  |                 |        |                    |   |        |  
|Commitments
 and contingencies                                                     |  |                 |       |                    |   |       |  
|                                                                                   |  |                 |        |                    |   |        |  
|Stockholders
 equity:                                                             |  |                 |        |                    |   |        |  
|Preferred stock, no par value, 5,000,000
 shares authorized, none outstanding      |  |                 |       |                    |   |       |  
|Common stock, no par value, 37,500,000
 shares authorized, 6,780,070 shares issued |  |                 |        |                    |   |        |  
|outstanding at March 31, 2009 and 6,769,295
 at December 31, 2008                  |  |                 | 29,334 |                    |   | 29,156 |  
|Accumulated other comprehensive loss                                               |  |                 | (715   | )                  |   | (530   | )
|Retained earnings                                                                  |  |                 | 19,821 |                    |   | 22,254 |  
|                                                                                   |  |                 |        |                    |   |        |  
|Total stockholders equity                                                         |  |                 | 48,440 |                    |   | 50,880 |  
|                                                                                   |  |                 |        |                    |   |        |  
|Total liabilities and stockholders
equity                                         |  | $               | 54,999 |                    | $ | 58,949 |  

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

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CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
CYBEROPTICS CORPORATION
(Unaudited)

|                                                                     |  |                              |        |      |   |        | 
|-------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------ | 
|                                                                     |  | Three Months Ended March 31, |       
|(In
 thousands, except per share amount)                             |  | 2009                         |        | 2008 |  
|                                                                     |  |                              |        |      |   |        | 
|Revenues                                                             |  | $                            | 4,362  |      | $ | 13,807 | 
|Cost of
 revenues                                                    |  |                              | 2,984  |      |   | 7,368  | 
|                                                                     |  |                              |        |      |   |        | 
|Gross margin                                                         |  |                              | 1,378  |      |   | 6,439  | 
|                                                                     |  |                              |        |      |   |        | 
|Research and
 development expenses                                   |  |                              | 2,077  |      |   | 2,612  | 
|Selling,
 general and administrative expenses                        |  |                              | 2,932  |      |   | 3,430  | 
|Severance
 and recruitment                                           |  |                              | 305    |      |   | 193    | 
|Amortization
 of intangibles                                         |  |                              | 45     |      |   | 45     | 
|                                                                     |  |                              |        |      |   |        | 
|Income (loss) from operations                                        |  |                              | (3,981 | )    |   | 159    | 
|                                                                     |  |                              |        |      |   |        | 
|Interest
 income and other                                           |  |                              | 208    |      |   | 518    | 
|                                                                     |  |                              |        |      |   |        | 
|Income (loss) before income taxes                                    |  |                              | (3,773 | )    |   | 677    | 
|                                                                     |  |                              |        |      |   |        | 
|Provision
 (benefit) for income taxes                                |  |                              | (1,340 | )    |   | 250    | 
|                                                                     |  |                              |        |      |   |        | 
|Net income (loss)                                                    |  | $                            | (2,433 | )    | $ | 427    | 
|                                                                     |  |                              |        |      |   |        | 
|Net income
 (loss) per share  Basic                                 |  | $                            | (0.36  | )    | $ | 0.05   | 
|Net income
 (loss) per share  Diluted                               |  | $                            | (0.36  | )    | $ | 0.05   | 
|                                                                     |  |                              |        |      |   |        | 
|Weighted
 average shares outstanding  Basic                         |  |                              | 6,771  |      |   | 8,584  | 
|Weighted
 average and common equivalent shares outstanding  Diluted |  |                              | 6,771  |      |   | 8,623  | 

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)                                                                           |  | 2009                         |        | 2008 |  
|                                                                                          |  |                              |        |      |   |        |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                              |        |      |   |        |  
|Net income (loss)                                                                         |  | $                            | (2,433 | )    | $ | 427    |  
|Adjustments to reconcile net income to net
 cash provided (used) by operating activities: |  |                              |        |      |   |        |  
|Depreciation and amortization                                                             |  |                              | 587    |      |   | 540    |  
|Provision for doubtful accounts                                                           |  |                              | 4      |      |   | (15    | )
|Foreign currency transaction (gains)
losses                                               |  |                              | 43     |      |   | (3     | )
|Stock compensation costs                                                                  |  |                              | 178    |      |   | 119    |  
|Realized gains on available for sale
 marketable securities                               |  |                              | (11    | )    |   |       |  
|Changes in operating assets and
 liabilities:                                             |  |                              |        |      |   |        |  
|Accounts receivable                                                                       |  |                              | 1,991  |      |   | (279   | )
|Inventories                                                                               |  |                              | (804   | )    |   | (423   | )
|Other assets                                                                              |  |                              | (1,138 | )    |   | (633   | )
|Accounts payable                                                                          |  |                              | (968   | )    |   | 52     |  
|Advance customer payments                                                                 |  |                              | (34    | )    |   | (334   | )
|Accrued expenses                                                                          |  |                              | (489   | )    |   | (596   | )
|Net cash used by operating activities                                                     |  |                              | (3,074 | )    |   | (1,145 | )
|                                                                                          |  |                              |        |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                              |        |      |   |        |  
|Proceeds from maturities of available for
 sale marketable securities                     |  |                              | 2,905  |      |   | 3,394  |  
|Proceeds from sales of available for sale
 marketable securities                          |  |                              | 1,818  |      |   |       |  
|Purchases of available for sale marketable
 securities                                    |  |                              | (3,610 | )    |   | (5,743 | )
|Additions to equipment and leasehold
 improvements                                        |  |                              | (82    | )    |   | (56    | )
|Additions to patents                                                                      |  |                              | (125   | )    |   | (68    | )
|Net cash provided (used) by investing
 activities                                         |  |                              | 906    |      |   | (2,473 | )
|                                                                                          |  |                              |        |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                              |        |      |   |        |  
|Proceeds from exercise of stock options                                                   |  |                              |       |      |   | 12     |  
|Excess tax benefit from exercise of stock
 options                                        |  |                              |       |      |   | 2      |  
|Repurchase of common stock                                                                |  |                              |       |      |   | (3,890 | )
|Net cash provided (used) by financing
 activities                                         |  |                              |       |      |   | (3,876 | )
|                                                                                          |  |                              |        |      |   |        |  
|Effects of exchange rate changes on cash
 and cash equivalents                            |  |                              | (34    | )    |   | (23    | )
|                                                                                          |  |                              |        |      |   |        |  
|Net decrease in cash and cash equivalents                                                 |  |                              | (2,202 | )    |   | (7,517 | )
|                                                                                          |  |                              |        |      |   |        |  
|Cash and cash equivalents  beginning of
 period                                          |  |                              | 4,516  |      |   | 18,864 |  
|                                                                                          |  |                              |        |      |   |        |  
|Cash and cash equivalents  end of period                                                 |  | $                            | 2,314  |      | $ | 11,347 |  

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,
2009, and for the three month periods ended March 31, 2009 and 2008, are
unaudited, but in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for
the periods presented.

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

2. MARKETABLE SECURITIES:

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

|                                                      |  |                |        |                 |  |                  |  |               |     |   |  |        | 
|----------------------------------------------------- |  | -------------- | ------ | --------------- |  | ---------------- |  | ------------- | --- | - |  | ------ | 
|                                                      |  | March 31, 2009 |       
|(In
 thousands)                                       |  | Cost           |        | UnrealizedGains |  | UnrealizedLosses |  | RecordedBasis |    
|                                                     
|U.S. government and agency obligations                |  | $              | 10,828 |                 |  | 134              |  |               |    |   |  | 10,962 | 
|Corporate debt securities and certificates of deposit |  |                | 1,495  |                 |  | 6                |  |               | (2  | ) |  | 1,499  | 
|Marketable securities  short term                    |  | $              | 12,323 |                 |  | 140              |  |               | (2  | ) |  | 12,461 | 
|                                                      |  |                |        |                 |  |                  |  |               |     |   |  |        | 
|U.S. government and agency obligations                |  | $              | 9,167  |                 |  | 333              |  |               |    |   |  | 9,500  | 
|Corporate debt securities and certificates of deposit |  |                | 1,496  |                 |  |                 |  |               | (22 | ) |  | 1,474  | 
|Asset backed securities                               |  |                | 455    |                 |  | 5                |  |               |    |   |  | 460    | 
|Equity securities                                     |  |                | 84     |                 |  |                 |  |               | (60 | ) |  | 24     | 
|Marketable securities  long term                     |  | $              | 11,202 |                 |  | 338              |  |               | (82 | ) |  | 11,458 | 

At March 31,
2009, our investments in long term marketable debt securities all had
maturities of less than five years.

There were no other than
temporary impairments of marketable securities in the three months ended March
31, 2009 or 2008. Unrealized gains and losses in our available for sale
marketable securities are included in accumulated other comprehensive income
(loss).

4

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3. ACCOUNTING FOR STOCK-BASED COMPENSATION:

We account for
stock-based compensation in accordance with SFAS No. 123(R), applying the
modified prospective method. This statement requires all equity-based payments
to employees, including grants of employee stock options, to be recognized in
the consolidated statement of operations based on the grant date fair value of
the award. Under the modified prospective method, we are required to record
equity-based compensation expense for all awards granted after the date of
adoption, and for all unvested shares granted prior to the date of adoption. We
utilize the straight-line method of expense recognition over the awards
service period for our graded vesting options. The fair value of stock options,
granted before and after adoption of SFAS No. 123(R), has been determined using
the Black-Scholes model. The compensation expense recognized for all equity
based awards is net of estimated forfeitures, which were based on historical
data. We have classified equity based compensation within our statement of
operations in the same manner as our cash based employee compensation costs. No
stock options or restricted stock units were granted in the three months ended
March 31, 2009. We issued 10,775 shares of common stock in the three months
ended March 31, 2009 to one of our officers under an incentive compensation
arrangement. The shares 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.

The following
table sets forth compensation expense (pre-tax) by segment for our equity-based
awards for the three months ended March 31, 2009 and 2008:

|                                              |  |                              |     |                  |   |       |  |      |    |      |   |      |  |   |     |  |   |     | 
|--------------------------------------------- |  | ---------------------------- | --- | ---------------- | - | ----- |  | ---- | -- | ---- | - | ---- |  | - | --- |  | - | --- | 
|                                              |  | Three Months Ended March 31, |    
|(In thousands)                                |  | Electronic
 Assembly         |     | Semi-
 Conductor |   | Total | 
|                                              |  | 2009                         |     | 2008             |   | 2009  |  | 2008 |    | 2009 |   | 2008 | 
|Cost of
 revenues                             |  | $                            | 20  |                  | $ | 24    |  | $    | 3  |      | $ | 3    |  | $ | 23  |  | $ | 27  | 
|Research and
 development expenses            |  |                              | 18  |                  |   | 25    |  |      | 2  |      |   | 7    |  |   | 20  |  |   | 32  | 
|Selling,
 general and administrative expenses |  |                              | 128 |                  |   | 56    |  |      | 7  |      |   | 4    |  |   | 135 |  |   | 60  | 
|Total                                         |  | $                            | 166 |                  | $ | 105   |  | $    | 12 |      | $ | 14   |  | $ | 178 |  | $ | 119 | 

Pre-tax equity
based compensation expense totaled $178,000 in the three months ended March 31,
2009 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 the 10,775 shares issued under the incentive compensation arrangement.

Pre-tax equity
based compensation expense totaled $119,000 in the three months ended March 31,
2008 and includes $78,000 for stock option awards, $27,000 for our employee
stock purchase plan, and $14,000 for unvested restricted stock units.

At March 31,
2009, the total unrecognized compensation cost related to non vested equity
based compensation arrangements was $804,000 and the related weighted average
period over which it is expected to be recognized is 2.1 years.

Stock Options

We have three
stock incentive plans that are administered under the supervision of the
Compensation Committee of the Board of Directors. There are 925,255 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 at the date of grant. Generally, options granted
to employees vest over a four-year period and expire five, seven, or ten years
after the date of grant. No stock options were granted during the three months
ended March 31, 2009. As of March 31, 2009, there were 227,907 shares of common
stock available under these plans for future issuance to employees, officers
and others. There are no shares available under these plans for future issuance
to non-employee directors. In addition, there are 50,000 shares reserved and
included in the plan summaries below that are not part of the three stock
incentive plans.

5

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The following
is a summary of stock option activity during the three months ended March 31,
2009:

|                                |  |                     |         |                                             |   |       | 
|------------------------------- |  | ------------------- | ------- | ------------------------------------------- | - | ----- | 
|                                |  | Options Outstanding |         | Weighted Average
 Exercise Price Per
 Share |  
|                                |  |                     |         |                                             |  
|Outstanding,
 December 31, 2008 |  |                     | 715,646 |                                             | $ | 10.44 | 
|Granted                         |  |                     |        |                                             |   |      | 
|Exercised                       |  |                     |        |                                             |   |      | 
|Expired                         |  |                     |        |                                             |   |      | 
|Forfeited                       |  |                     | (9,825  | )                                           |   | 14.27 | 
|Outstanding,
 March 31, 2009    |  |                     | 705,821 |                                             | $ | 10.39 | 
|                                |  |                     |         |                                             |   |       | 
|Exercisable,
 March 31, 2009    |  |                     | 510,584 |                                             | $ | 11.54 | 

The intrinsic
value of an option is the amount by which the fair value of the underlying
stock exceeds its exercise price. The weighted average remaining contractual
term and aggregate intrinsic value for options outstanding at March 31, 2009
was 3.52 years and $10,000. The weighted average remaining contractual term and
aggregate intrinsic value of options exercisable at March 31, 2009 was 2.56
years and $10,000. There were no options exercised in the three months ended
March 31, 2009.

Restricted Stock Units

Our 1998 Stock
Incentive Plan also permits our Compensation Committee to grant other
stock-based benefits, including restricted stock units. Restricted stock units
are valued at a price equal to the fair market value of our common stock on the
date of grant, vest over a four year period and entitle the holders to one
share of our common stock for each restricted stock unit. The aggregate
intrinsic value of outstanding restricted stock units as of March 31, 2009 was
$204,000.

A summary of
activity in non vested restricted stock units for the three months ended March
31, 2009 is as follows:

|                                   |  |        |        |                                           |   |      | 
|---------------------------------- |  | ------ | ------ | ----------------------------------------- | - | ---- | 
|Non vested
 restricted stock units |  | Shares |        | Weighted  Average
 Grant Date Fair Value |  
|                                   |  |        |        |                                           |  
|Non vested
 at December 31, 2008   |  |        | 42,701 |                                           | $ | 7.05 | 
|Granted                            |  |        |       |                                           |   |     | 
|Vested                             |  |        |       |                                           |   |     | 
|Forfeited                          |  |        | (1,174 | )                                         |   | 6.17 | 
|Non vested
 at March 31, 2009      |  |        | 41,527 |                                           | $ | 7.07 | 

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, 2009 or
the three months ended March 31, 2008. As of March 31, 2009, 112,812 shares
remain available for future issuance under this plan.

Stock Grant Plan for Non-Employee Directors

Our stock
grant plan for non-employees 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,
2009.

6

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4.
CERTAIN BALANCE SHEET COMPONENTS:

Inventories consist of the
following:

|                                  |  |                |        |                   |   |       | 
|--------------------------------- |  | -------------- | ------ | ----------------- | - | ----- | 
|(In
 thousands)                   |  | March 31, 2009 |        | December 31, 2008 |  
|                                 
|Raw materials and purchased parts |  | $              | 3,740  |                   | $ | 3,442 | 
|Work in process                   |  |                | 637    |                   |   | 724   | 
|Finished goods                    |  |                | 6,137  |                   |   | 5,703 | 
|                                  |  |                |        |                   |   |       | 
|Total
 inventories                |  | $              | 10,514 |                   | $ | 9,869 | 

Warranty costs:

We provide for the estimated cost of product
warranties at the time revenue is recognized. While we engage in extensive
product quality programs and processes, including actively monitoring and
evaluating the quality of component suppliers, warranty obligations are
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
material usage or service delivery costs differ from our estimates, revisions
to the estimated warranty liability would be required. Our warranty liability
is included as a component of accrued expenses. 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)                    |  | 2009                          |      | 2008 |  
|                                   |  |                               |      |      |   |      |  
|Balance at beginning of
 period    |  | $                             | 823  |      | $ | 819  |  
|Accrual for warranties             |  |                               | 84   |      |   | 190  |  
|Settlements made during the period |  |                               | (271 | )    |   | (235 | )
|                                   |  |                               |      |      |   |      |  
|Balance at end of period           |  | $                             | 636  |      | $ | 774  |  

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)                  |  | 2009                          |     | 2008 |  
|                                
|Balance at beginning of
 period  |  | $                             | 605 |      | $ | 425 |  
|Revenue deferrals                |  |                               | 81  |      |   | 101 |  
|Amortization of deferred revenue |  |                               | (78 | )    |   | (66 | )
|                                 |  |                               |     |      |   |     |  
|Balance at end of period         |  | $                             | 608 |      | $ | 460 |  

7

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5.
INTANGIBLE ASSETS:

Intangible assets consist of the following:

|                       |  |                         |        |                           |   |        |   |                         |     |                           |   |        |  |   |        |   |   |     | 
|---------------------- |  | ----------------------- | ------ | ------------------------- | - | ------ | - | ----------------------- | --- | ------------------------- | - | ------ |  | - | ------ | - | - | --- | 
|                       |  | As of March 31, 2009    |        | As of December 31, 2008   |  
|(In
 thousands)        |  | Gross
 Carrying
 Amount |        | Accumulated
 Amortization |   | Net    |   | Gross
 Carrying
 Amount |     | Accumulated
 Amortization |   | Net    | 
|                      
|Developed technology   |  | $                       | 7,775  |                           | $ | (7,349 | ) | $                       | 426 |                           | $ | 7,775  |  | $ | (7,304 | ) | $ | 471 | 
|Patents and trademarks |  |                         | 2,855  |                           |   | (2,321 | ) |                         | 534 |                           |   | 2,730  |  |   | (2,245 | ) |   | 485 | 
|Total                  |  | $                       | 10,630 |                           | $ | (9,670 | ) | $                       | 960 |                           | $ | 10,505 |  | $ | (9,549 | ) | $ | 956 | 

Amortization expense for the three month periods ended
March 31, 2009 and 2008 is as follows:

|                       |  |                               |     |      |   |     | 
|---------------------- |  | ----------------------------- | --- | ---- | - | --- | 
|                       |  | Three Months Ended
 March 31, |    
|(In
 thousands)        |  | 2009                          |     | 2008 |  
|                      
|Developed technology   |  | $                             | 45  |      | $ | 45  | 
|Patents and trademarks |  |                               | 76  |      |   | 61  | 
|                       |  |                               |     |      |   |     | 
|Total                  |  | $                             | 121 |      | $ | 106 | 

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: $364,000 for the remainder of 2009 and $359,000 in
2010, $227,000 in 2011, and $10,000 in 2012.

8

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6.
BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS:

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

|                                     |  |                               |        |      |   |        |  
|------------------------------------ |  | ----------------------------- | ------ | ---- | - | ------ | -
|                                     |  | Three Months Ended
 March 31, |       
|(In
 thousands)                      |  | 2009                          |        | 2008 |  
|                                    
|Revenue                              |  |                               |        |      |   |        |  
|Electronic Assembly                  |  |                               |        |      |   |        |  
|OEM Sensors                          |  | $                             | 1,440  |      | $ | 6,831  |  
|SMT Systems                          |  |                               | 2,245  |      |   | 5,579  |  
|Total Electronic
 Assembly           |  |                               | 3,685  |      |   | 12,410 |  
|Semiconductor                        |  |                               | 677    |      |   | 1,397  |  
|Total                                |  | $                             | 4,362  |      | $ | 13,807 |  
|                                     |  |                               |        |      |   |        |  
|Income (loss) from operations        |  |                               |        |      |   |        |  
|Electronic Assembly                  |  | $                             | (3,624 | )    | $ | 177    |  
|Semiconductor                        |  |                               | (357   | )    |   | (18    | )
|Total income
 (loss) from operations |  |                               | (3,981 | )    |   | 159    |  
|Interest income and other            |  |                               | 208    |      |   | 518    |  
|Income (loss)
 before taxes          |  | $                             | (3,773 | )    | $ | 677    |  
|                                     |  |                               |        |      |   |        |  
|Depreciation and amortization:       |  |                               |        |      |   |        |  
|Electronic Assembly                  |  | $                             | 515    |      | $ | 479    |  
|Semiconductor                        |  |                               | 72     |      |   | 61     |  
|Total                                |  | $                             | 587    |      | $ | 540    |  

Export sales were 71% of revenue in the three months
ended March 31, 2009 and 89% of revenue in the three months ended March 31,
2008. All of our export sales are negotiated, invoiced and paid in U.S.
dollars. Export sales by geographic area are summarized as follows:

|                    |  |                               |       |      |   |        | 
|------------------- |  | ----------------------------- | ----- | ---- | - | ------ | 
|                    |  | Three Months Ended
 March 31, |      
|(In
 thousands)     |  | 2009                          |       | 2008 |  
|                   
|Americas            |  | $                             | 57    |      | $ | 695    | 
|Europe              |  |                               | 2,114 |      |   | 5,235  | 
|Asia                |  |                               | 937   |      |   | 6,350  | 
|Other               |  |                               |      |      |   | 4      | 
|                    |  |                               |       |      |   |        | 
|Total export
 sales |  | $                             | 3,108 |      | $ | 12,284 | 

9

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

7. NET INCOME (LOSS)
PER SHARE:

Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income (loss) by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of common shares to be issued upon
exercise of stock options, restricted stock units and from participation in our
employee stock purchase plan, as calculated using the treasury stock method.

Common
equivalent shares are excluded from the calculation of net loss per diluted
share due to their anti-dilutive effect. As a result, no common equivalent
shares were included in the calculation of net loss per diluted share for the
three months ended March 31, 2009. The calculation of diluted net income per
common share includes 39,000 common equivalent shares for the three months
ended March 31, 2008.

The
calculation of diluted net income (loss) per common share excludes 806,000
potentially dilutive shares for the three months ended March 31, 2009 and
509,000 potentially dilutive shares for the three months ended March 31, 2008,
because their effect would be anti-dilutive.

8. COMPREHENSIVE
INCOME:

Components of
comprehensive income (loss) include net income (loss), foreign-currency
translation adjustments, unrealized gains and losses on available-for-sale
securities and reclassification adjustments. Total comprehensive income (loss)
amounted to $(2,618,000) for the three months ended March 31, 2009 and $644,000
for the three months ended March 31, 2008. Reclassification adjustments in the
three months ended March 31, 2009 and 2008 were not significant.

At December
31, 2008 and March 31, 2009 components of accumulated other comprehensive loss
are as follows:

|                           |  |                                  |      |                                             |   |                                            |   |   |      |  
|-------------------------- |  | -------------------------------- | ---- | ------------------------------------------- | - | ------------------------------------------ | - | - | ---- | -
|(In
 thousands)            |  | Foreign 
 Currency 
 Translation |      | Unrealized Gains 
 (Losses) on 
 Securities |   | Accumulated 
 Other 
 Comprehensive 
 Loss |  
|                          
|Balance
 December 31, 2008 |  | $                                | (906 | )                                           | $ | 376                                        |   | $ | (530 | )
|Current
 period change     |  |                                  | (62  | )                                           |   | (123                                       | ) |   | (185 | )
|                           |  |                                  |      |                                             |   |                                            |   |   |      |  
|Balance
 March 31, 2009    |  | $                                | (968 | )                                           | $ | 253                                        |   | $ | (715 | )

9. INCOME TAXES:

We recorded an
income tax benefit in the three months ended March 31, 2009 at an effective tax
rate of 36%, compared to an effective tax rate of 37% in the three months ended
March 31, 2008. The change in the effective tax rate for 2009 is due to higher
tax expense in foreign tax jurisdictions with tax rates differing from the U.S
federal statutory rate, offset by reductions in the level of non-deductible
expenses for income tax purposes and a small benefit from the research and experimentation
(R&D) tax credit. No benefit from the R&D tax credit was recognized in
the three months ended March 31, 2008 because the R&D tax credit for 2008
had not yet been signed into law. Discrete items impacting the effective tax
rate in the three months ended March 31, 2009 and 2008 were inconsequential.

10

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We file income tax returns
in the U.S. federal jurisdiction, and various state and foreign jurisdictions.
We are no longer subject to U.S. federal, state and local income tax
examinations by tax authorities for years before 2005. Our 2006 and 2007 federal income tax
returns are being audited by the Internal Revenue Service. The audits are
progressing and we presently anticipate that any potential settlements
resulting from these audits will occur in the third quarter of 2009. At the
present time, we are not able to reliably estimate what impact, if any, the
audits may have on our future results of operations or financial condition.

We currently have
significant deferred tax assets as a result of temporary differences between
taxable income on our tax returns and income before income taxes under U.S.
generally accepted accounting principals, research and development tax credit
carry forwards and foreign net operating loss carry forwards. A deferred tax
asset generally represents future tax benefits to be received when temporary
differences previously reported in our financial statements become deductible
for income tax purposes, or when net operating loss carry forwards are applied
against future taxable income, or when tax credit carry forwards are applied
against future tax liabilities. We assess the realizability of our deferred tax
assets and the need for a valuation allowance based on Statement of Financial
Accounting Standards No. 109.

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

Our analysis
of the need for valuation allowances considered that we have positive cumulative
profit through 2008 even without the exclusion of the $2.9 million
non-deductible goodwill impairment in 2008. We also considered our forecasts of
future profitability, the duration of statutory carry forward periods and tax
planning alternatives. We further evaluated our past cycles which tend to
average five years in length (from peak to trough) and also considered our five
year cumulative results, which also had strong profits. Finally, we evaluated
where these cumulative three and five year measures might be at the end of 2009
and considered other positive evidence to conclude no incremental valuation
allowance was needed at March 31, 2009.

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

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

Deferred tax assets at March
31, 2009, include net operating loss carry forwards incurred in the UK by
CyberOptics Ltd., which was acquired in 1999. The utilization of these net
operating loss carry forwards is dependent on CyberOptics Ltd.s ability to
generate sufficient UK taxable income during the carry forward period.

10. DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES:

We enter into
foreign currency swap agreements to hedge short term inter-company financing
transactions with our subsidiary in the United Kingdom. These currency swap
agreements are structured to mature near the last day of each quarter, and are
designated as cash flow hedges. At March 31, 2009, we had one open swap
agreement for £625,000 GBP that was purchased on March 31, 2009, the fair value
of which was inconsequential. Gains and losses from foreign currency
transactions and foreign currency swap agreements are recognized in interest income
and other in our statement of operations. Foreign currency swap agreements and
the impact of currency fluctuations on the underlying inter-company balance
were insignificant in the three months ended March 31, 2009 and 2008.



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

11

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11. 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.

12. RECENT ACCOUNTING DEVELOPMENTS:

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

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

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

In December 2007, the
FASB issued SFAS No. 141(R), Business Combinations, which became
effective January 1, 2009 via prospective application to business
combinations. This Statement requires that the acquisition method of accounting
be applied to a broader set of business combinations, amends the definition of
a business combination, provides a definition of a business, requires an acquirer
to recognize an acquired business at its fair value at the acquisition date and
requires the assets and liabilities assumed in a business combination to be
measured and recognized at their fair values as of the acquisition date (with
limited exceptions). We adopted this Statement on January 1, 2009. There
was no impact upon adoption, and its effects on future periods will depend on
the nature and significance of business combinations subject to this statement.

In April 2009, the FASB
issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies. This FSP
requires that assets acquired and liabilities assumed in a business combination
that arise from contingencies be recognized at fair value if fair value can be
reasonably estimated. If fair
value cannot be reasonably estimated, the asset or liability would generally be
recognized in accordance with SFAS No. 5, Accounting for Contingencies
and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a
Loss. Further, the FASB removed the subsequent accounting guidance for assets
and liabilities arising from contingencies from SFAS No. 141(R).

12

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The requirements of this FSP
carry forward without significant revision the guidance on contingencies of
SFAS No. 141, Business Combinations, which was superseded by SFAS
No. 141(R) (see previous paragraph). The FSP also eliminates the
requirement to disclose an estimate of the range of possible outcomes of recognized
contingencies at the acquisition date. For unrecognized contingencies, the FASB
requires that entities include only the disclosures required by SFAS
No. 5. This FSP was adopted effective January 1, 2009. There was no
impact upon adoption, and its effects on future periods will depend on the
nature and significance of business combinations subject to this statement.

In April 2008, the FASB
issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets.
The FSP states that in developing assumptions about renewal or extension
options used to determine the useful life of an intangible asset, an entity
needs to consider its own historical experience adjusted for entity-specific
factors. In the absence of that experience, an entity shall consider the assumptions
that market participants would use about renewal or extension options. This FSP
is to be applied to intangible assets acquired after January 1, 2009. The
adoption of this FSP did not have an impact on the consolidated financial
statements.

In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities  an amendment of FASB Statement
No. 133. SFAS No. 161 expands the current disclosure requirements of
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, such that entities must now provide enhanced disclosures on an
interim basis and annual basis regarding how and why the entity uses
derivatives; how derivatives and related hedged items are accounted for under
SFAS No. 133 and how derivatives and related hedged items affect the
entitys financial position, financial results and cash flow. Pursuant to the
transition provisions of the Statement, we adopted SFAS No. 161 on
January 1, 2009. The required disclosures are presented in Note 10. This
Statement does not impact the consolidated financial results as it is
disclosure-only in nature.

In February 2008, the
FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157. FSP
FAS 157-2 delayed the effective date of SFAS No. 157 Fair Value
Measurements from 2008 to 2009 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The adoption of
the provisions of SFAS No. 157 related to non-financial assets and
non-financial liabilities on January 1, 2009 did not have a material
impact on the consolidated financial statements. See Note 15 for SFAS
No. 157 disclosures.

13. REPURCHASE OF COMMON STOCK:

No shares of common stock were repurchased in the three months ended
March 31, 2009 and no repurchase authorizations are currently in effect.

14. SEVERANCE,
RECRUITMENT AND SINGAPORE TRANSITION:

We
started to incur severance and recruitment costs in February 2008 in connection
with our decision to move a significant portion of development and
manufacturing for our systems products to Singapore. The transition of
systems-related product development was substantially complete by the fourth
quarter of 2008, and the transition of systems-related manufacturing was
substantially complete by the end of the first quarter of 2009. Any remaining transition costs in 2009 are not expected to
be significant.

Additional
severance costs were incurred in November 2008 when we reduced our workforce by
approximately 10% or 20 employees in response to the weak global economic
conditions. In February 2009, we further reduced our workforce by 24 positions
in response to weakening conditions in the global economy, our transition to Singapore
and our decision to consolidate manufacturing for our semiconductor products in
our Minneapolis facility. We anticipate that all of these employees will have
departed by the end of the second quarter of 2009. Severance expense related to
these actions of $305,000 was incurred in the three months ended March 31, 2009

All of the
severance costs related to the February 2008 transition to Singapore, November
2008 and February 2009 workforce reductions have been classified as severance
and recruitment in our statement of operations.

13

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A summary of
our severance accruals follows:

|                           |  |                           |     |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |    |   |   |     |   |  |      |  
|-------------------------- |  | ------------------------- | --- | ------------------------------------ | - | ------------------------------------ | - | ----- | --- | ------------------------------------ | - | ------------------------------------ | - | ----- | -- | ----- | - | -- | - | - | --- | - |  | ---- | -
|                           |  | Electronic
 Assembly      |     | Semiconductor                        |  
|                           |  |                           |     |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |  
|(In thousands)             |  | February
 2008
 Singapore |     | November
 2008
 workforce
 reduction |   | February
 2009
 workforce
 reduction |   | Total |     | November
 2008
 workforce
 reduction |   | February
 2009
 workforce
 reduction |   | Total |    | Total |  
|                           |  |                           |     |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |    |   |   |     |   |  |      |  
|Balance, December 31, 2008 |  | $                         | 207 |                                      | $ | 104                                  |   | $     |    |                                      | $ | 311                                  |   | $     | 4  |       | $ |   |   | $ | 4   |   |  | 315  |  
|                           |  |                           |     |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |    |   |   |     |   |  |      |  
|Cost incurred              |  |                           | 51  |                                      |   |                                     |   |       | 165 |                                      |   | 216                                  |   |       |   |       |   | 89 |   |   | 89  |   |  | 305  |  
|                           |  |                           |     |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |    |   |   |     |   |  |      |  
|Payments made              |  |                           | (90 | )                                    |   | (104                                 | ) |       | (97 | )                                    |   | (291                                 | ) |       | (4 | )     |   | (8 | ) |   | (12 | ) |  | (303 | )
|                           |  |                           |     |                                      |   |                                      |   |       |     |                                      |   |                                      |   |       |    |       |   |    |   |   |     |   |  |      |  
|Balance, March 31, 2009    |  | $                         | 168 |                                      | $ |                                     |   | $     | 68  |                                      | $ | 236                                  |   | $     |   |       | $ | 81 |   | $ | 81  |   |  | 317  |  

Additional
severance expense of approximately $100,000 is expected in the three months
ended June 30, 2009.

15. FAIR VALUE MEASUREMENTS:

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

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

|                                                       |  |                         |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|------------------------------------------------------ |  | ----------------------- | ------ | ----------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                                       |  |                         |        |                                                                   | Fair Value Measurements at Reporting Date Using |                                                 
|(In
 thousands)                                        |  | Balance
 March 31, 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                 | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                                       |  |                         |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|Cash equivalents                                       |  | $                       | 1,404  |                                                                   | $                                               |                                                 |  | $                                            | 1,404  |  | $ |  | 
|U.S. government and agency obligations                 |  | $                       | 20,462 |                                                                   | $                                               |                                                 |  | $                                            | 20,462 |  | $ |  | 
|Corporate debt securities and certificates
 of deposit |  | $                       | 2,973  |                                                                   | $                                               |                                                 |  | $                                            | 2,973  |  | $ |  | 
|Asset backed securities                                |  | $                       | 460    |                                                                   | $                                               |                                                 |  | $                                            | 460    |  | $ |  | 
|Equity securities                                      |  | $                       | 24     |                                                                   | $                                               | 24                                               |  | $                                            |       |  | $ |  | 

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

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, 2008.

FORWARD LOOKING STATEMENTS:

The following
managements discussion and analysis contains a number of estimates and
predictions that are forward looking rather than based on historical fact.
Among other matters, we discuss (i) our expectations regarding the transfer of
our research and development and manufacturing operations for our systems
products to Singapore and the costs we expect to incur this year, and avoid in
the future, because of that transfer; (ii) our anticipated revenues and losses
for the second quarter of 2009; (iii) the timing of introduction of and the
potential margin improvement resulting from our SE500 next-generation solder
paste inspection system; (iv) other new technologies that we have under development;
(v) the potential effect, if any, of our sensors not being used in the future
by a significant customer; (vi) our expectations regarding market acceptance of
WaferSense and our other semiconductor
products; (vii) our beliefs regarding trends in the general economy and its
impact on markets for our equipment; (viii) the impact of currency fluctuations
on our operations; and (iv) the potential impact, if any, of ongoing Internal
Revenue Service audits of our 2006 and 2007 federal income tax returns. Although
we have made these statements based on our experience and best estimate of
future events, there may be events or factors that we have not anticipated, and
the accuracy of our statements and estimates are subject to a number of risks,
including those identified in Item 1A of this Form 10-Q and in our Annual
Report on Form 10-K.

RESULTS OF OPERATIONS:

General

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

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

Our first
quarter results continued to be adversely affected by ongoing weakness in the
global electronics market, and we expect this trend to continue at least into
the second quarter of 2009. Revenues were $4.4 million in the quarter ended
March 31, 2009, down 68% from $13.8 million in the same period last year. We
lost $4.0 million from operations in the quarter ended March 31, 2009, down
from operating income of $159,000 in the quarter ended March 31, 2008. For the
quarter ending June 30, 2009, we are forecasting revenue of $4.5-$5.5 million
and another significant loss from operations. Revenue in the quarter ending
June 30, 2008 was $13.4 million.

15

---



Throughout 2008
and into the first quarter of 2009, we continued to invest in several strategic
research and development (R&D) projects, while also undertaking
restructuring actions to streamline our business, improve efficiency and reduce
costs in response to the severe global economic recession, including the
following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In February
 2008, we announced plans to move a significant portion of our systems-related
 product development and manufacturing to Singapore. The transition of systems
 related product development to Singapore was substantially complete by the
 end of the fourth quarter of 2008 and transition of manufacturing for our
 system products was substantially complete by the end of the first quarter of
 2009. Remaining transition costs in 2009 are not expected to be significant.
 The realignment of our systems-related product development and manufacturing
 to Singapore has resulted in lower costs and a more focused R&D effort.        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | In addition
 to the impact of global economic conditions on our sales, Assembleon notified
 us in 2008 that it intended to start transitioning away from our current
 alignment products when it introduced its next generation of equipment in
 2010, although the timing of this transition has become less clear as the
 economy has slowed. Approximately 10% of our revenue has historically been
 generated from new product sales to Assembleon, and although we would expect
 to continue to generate some repair work from Assembleon after the transition
 to new products, we expect most or all of this new product revenue will be
 eliminated.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | In response
 to the significant weakness in our markets and the global economy, we
 implemented workforce reductions in November 2008 and February 2009.
 Additional cost savings measures were implemented in February 2009, including
 salary reductions, consolidation of manufacturing operations for our
 semiconductor products into our Minneapolis, Minnesota facility and
 reductions in spending for non-labor costs such as travel, supplies and the
 like.                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | From the
 start of the fourth quarter of 2008 through the end of the second quarter of
 2009, we will have reduced our workforce by 50 employees or approximately
 25%, resulting from the move to Singapore, relocation of manufacturing for
 our semiconductor operations, and the November 2008 and February 2009
 workforce reductions. We incurred a $305,000 charge for severance in the
 three months ended March 31, 2009 related to these actions. We do not expect
 implementation of these cost reduction actions to impact our strategic growth
 programs.                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | During 2008,
 we invested heavily in our recently introduced next-generation SE500 solder
 paste inspection system. Based on a new cost-reduced platform, we believe the
 SE500 is the fastest and most accurate solder paste inspection system
 available on the market. Given its industry-leading inspection capabilities
 we believe the SE500 will command improved pricing in comparison to the
 existing SE300. We also believe the SE500 should enable us to gain a larger
 share of the global solder paste inspection market.                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | We continue
 to pursue several promising growth opportunities for our next generation
 inspection technology, which is aimed at lowering the cost of inspection, in
 addition to providing faster production through-put speeds, improved ease of
 use, and the higher resolution required for inspecting progressively smaller
 electronic components. Reflecting our progress with these R&D
 initiatives, we signed a new OEM contract in 2008 and a second OEM
 development contract with a manufacturer of electronic assembly equipment in
 the first quarter of 2009. Initial revenues from these projects are
 anticipated in 2010.                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | We believe
 our ongoing focus on R&D, combined with the revenue generating potential
 of our new SE500 solder paste inspection system and strategic repositioning
 in Asia, will lead to improved operating results as the global electronics
 market starts to recover from the current economic recession.                                                                                                                                                                                                                                                                                                                                                

We have no
debt and our cash and marketable securities of $26.2 million at March 31, 2009
are more than adequate to fund our operations and various growth opportunities
for an extended period of time, even given our expectation for weak financial
results through at least the first half of 2009, due to the severe global
economic recession.

16

---



Segment Results

Operating
results for our electronic assembly and semiconductor segments for the three
month periods ended March 31, 2009 and 2008 are as follows:

|                                              |  |                                   |        |                                   |   |       |   |                      |        |                  |   |        |  |   |       |   |   |        | 
|--------------------------------------------- |  | --------------------------------- | ------ | --------------------------------- | - | ----- | - | -------------------- | ------ | ---------------- | - | ------ |  | - | ----- | - | - | ------ | 
|                                              |  | Three months ended March 31, 2009 |        | Three months ended March 31, 2008 |  
|(In
 thousands)                               |  | Electronic
 Assembly              |        | Semi-
 Conductor                  |   | Total |   | Electronic
 Assembly |        | Semi-
 Conductor |   | Total  | 
|                                              |  |                                   |        |                                   |   |       |   |                      |        |                  |   |        |  |   |       |   |   |        | 
|Revenue                                       |  | $                                 | 3,685  |                                   | $ | 677   |   | $                    | 4,362  |                  | $ | 12,410 |  | $ | 1,397 |   | $ | 13,807 | 
|Cost of revenue                               |  |                                   | 2,676  |                                   |   | 308   |   |                      | 2,984  |                  |   | 6,860  |  |   | 508   |   |   | 7,368  | 
|Gross profit                                  |  |                                   | 1,009  |                                   |   | 369   |   |                      | 1,378  |                  |   | 5,550  |  |   | 889   |   |   | 6,439  | 
|                                              |  |                                   |        |                                   |   |       |   |                      |        |                  |   |        |  |   |       |   |   |        | 
|Research and development expenses             |  |                                   | 1,786  |                                   |   | 291   |   |                      | 2,077  |                  |   | 2,121  |  |   | 491   |   |   | 2,612  | 
|Selling, general and administrative
 expenses |  |                                   | 2,604  |                                   |   | 328   |   |                      | 2,932  |                  |   | 3,032  |  |   | 398   |   |   | 3,430  | 
|Severance and recruitment                     |  |                                   | 216    |                                   |   | 89    |   |                      | 305    |                  |   | 193    |  |   |      |   |   | 193    | 
|Amortization of intangibles                   |  |                                   | 27     |                                   |   | 18    |   |                      | 45     |                  |   | 27     |  |   | 18    |   |   | 45     | 
|                                              |  |                                   |        |                                   |   |       |   |                      |        |                  |   |        |  |   |       |   |   |        | 
|Income (loss) from operations                 |  | $                                 | (3,624 | )                                 | $ | (357  | ) | $                    | (3,981 | )                | $ | 177    |  | $ | (18   | ) | $ | 159    | 

Revenues

Our revenues
decreased by 68% to $4.4 million in the three months ended March 31, 2009 from
$13.8 million in the three months ended March 31, 2008. The following table
sets forth revenues by product line for the three month periods ended March 31,
2009 and 2008:

|                          |  |                               |       |      |   |        | 
|------------------------- |  | ----------------------------- | ----- | ---- | - | ------ | 
|                          |  | Three Months Ended
 March 31, |      
|(In thousands)            |  | 2009                          |       | 2008 |  
|                          |  |                               |       |      |   |        | 
|Electronic
 assembly      |  |                               |       |      |   |        | 
|OEM sensors               |  | $                             | 1,440 |      | $ | 6,831  | 
|SMT systems               |  |                               | 2,245 |      |   | 5,579  | 
|Total electronic assembly |  |                               | 3,685 |      |   | 12,410 | 
|Semiconductor             |  |                               | 677   |      |   | 1,397  | 
|Total                     |  | $                             | 4,362 |      | $ | 13,807 | 

Electronic Assembly

Revenues from
electronic assembly OEM sensors decreased by 79% to $1.4 million in the three
months ended March 31, 2009 from $6.8 million in the three months ended March
31, 2008. Revenues from electronic assembly SMT systems decreased by 60% to
$2.2 million in three months ended March 31, 2009 from $5.6 million in the
three months ended March 31, 2008.

The severe
weakness in the global economy and electronic markets experienced late in 2008
continued into the first quarter of 2009, causing the significant declines in
revenue from both our electronic assembly OEM sensors and SMT system products
when compared with the first quarter of 2008. We expect these trends to
continue into the second quarter of 2009.

Export revenue
from electronic assembly sensors and SMT systems totaled $2.9 million,
comprising 79% of electronic assembly revenue in the three months ended March
31, 2009, compared to $11.7 million or 95% of electronic assembly revenue in
the three months ended March 31, 2008. Sales to international customers
continue to be significant, as manufacturing of electronic components has
migrated offshore, particularly to China and other areas of Asia.

17

---



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

Semiconductor

Revenues from
semiconductor products decreased by $720,000 or 52% in the three months ended
March 31, 2009 from $1.4 million in the three months ended March 31, 2008. The
decrease in revenue was due to severe weakness in the global economy, difficult
conditions in the market for semiconductor fabrication equipment and declining
revenue from our older wafer mapper and frame grabber products.

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

Export revenue
from semiconductor products totaled $208,000, comprising 31% of semiconductor
revenue in the three months ended March 31, 2009, compared to $556,000 or 40%
of semiconductor revenue in the three months ended March 31, 2008.

Gross Margin

Electronic
Assembly

Gross margin
as a percentage of electronic assembly sales was 27% in the three months ended
March 31, 2009, compared to 45% in the three months ended March 31, 2008. The
reduction in gross margin percentage during the three months ended March 31,
2009 was due to significantly lower sales of higher margin electronic assembly
sensors, which were more severely impacted by the recession. Additionally, the
lower levels of revenue resulted in substantially lower production volumes over
which to spread fixed manufacturing overhead costs.

In response to significant weakness in our markets resulting from the
global recession, and transition of manufacturing for our SMT system products
to Singapore, we will have reduced our manufacturing workforce by over 30
employees or 45% by the end of the second quarter of 2009. Transition of
manufacturing for our SMT system products to Singapore was substantially
complete by the end of the first quarter of 2009. We will also consolidate
manufacturing for our semiconductor products with our sensor products in our
Minneapolis Minnesota headquarters facility by the end of the second quarter of
2009. These actions will allow us to reduce our overall manufacturing costs and
better leverage our manufacturing operations, thereby favorably impacting our
gross margins not only in the second half of 2009, but also in future periods.
We estimate factory cost savings by the middle of 2009 from our cost reduction
actions and transition of systems-related manufacturing to Singapore of
approximately $2.0 million per year.

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

18

---



Semiconductor

Gross margin
as a percentage of sales was 55% in the three months ended March 31, 2009,
compared to 64% in the three months ended March 31, 2008. Gross margin as a
percentage of semiconductor sales decreased due to lower levels of revenue,
resulting in substantially lower production volumes over which to spread fixed
manufacturing overhead costs. The consolidation of manufacturing for our
semiconductor products into our Minneapolis Minnesota headquarters facility
will start to have a favorable impact on semiconductor gross margins in the
second quarter of 2009, with the full benefit being realized starting in the
third quarter of 2009.

Operating Expenses

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

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

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

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

Electronic
Assembly

Research and
development expenses for our electronic assembly segment were $1.8 million in
the three months ended March 31, 2009, compared to $2.1 million in the three
months ended March 31, 2008. The 16% decrease in research and development
expenses in 2009 resulted from a more focused and efficient research and
development effort due to transition of systems related research and
development to Singapore. In addition, the cost reduction actions implemented
in November 2008 and February 2009 contributed to the lower level of spending
in the three months ended March 31, 2009. Singapore transition costs classified
as research and development expense in the three months ended March 31, 2008
were not significant.

Selling,
general and administrative expenses for our electronic assembly segment were
$2.6 million in the three months ended March 31, 2009 compared to $3.0 million
in the three months ended March 31, 2008. The decrease in selling, general and
administrative expenses in 2009 compared to 2008 was due to a reduction in
travel costs and commissions for third party sales representatives resulting
from the lower level of SMT system sales. Selling general and administrative
expense was positively impacted in 2009 due to lower foreign sales office
expenses resulting from favorable foreign exchange rates.

19

---



Semiconductor

Research and
development expenses for our semiconductor segment were $291,000 in the three
months ended March 31, 2009 compared to $491,000 in the three months ended
March 31, 2008. The decline in research and development expenses resulted from
the cost reduction actions that were implemented in November 2008 and February
2009.

Selling,
general and administrative expenses for our semiconductor segment were $328,000
in the three months ended March 31, 2009 compared to $398,000 in the three
months ended March 31, 2008. The decrease in selling, general and
administrative expense in 2009 compared to 2008 was due to a reduction in
salaries, consulting and sales commissions resulting from the lower level of revenue.

Severance and Recruitment Costs

We started to incur severance and recruitment costs in February 2008 in
connection with our decision to move a significant portion of development and
manufacturing for our systems products to Singapore. The transition of
systems-related product development was substantially complete by the fourth
quarter of 2008 and the transition of systems-related manufacturing was
substantially complete by the end of the first quarter of 2009. Any remaining transition
costs in 2009 are not expected to be significant.

Additional severance costs were incurred in November 2008 when we
reduced our workforce by approximately 10% or 20 employees in response to the
weak global economic conditions. In February 2009, we further reduced our workforce
by 24 positions in response to weakening conditions in the global economy, our
transition to Singapore and our decision to consolidate manufacturing for our
semiconductor products in our Minneapolis facility. We anticipate that all of
these employees will have departed by the end of the second quarter of 2009.
Severance expense related to these actions of $305,000 was incurred in the
three months ended March 31, 2009.

All of the severance costs related to the February 2008 transition to
Singapore, November 2008 and February 2009 workforce reductions have been
classified as severance and recruitment in our statement of operations.

A summary of our severance accruals follows:

|                            |  |                             |     |                                         |   |                                          |   |       |     |                                         |   |                                          |   |       |    |       |   |    |   |   |     |   |  |      |  
|--------------------------- |  | --------------------------- | --- | --------------------------------------- | - | ---------------------------------------- | - | ----- | --- | --------------------------------------- | - | ---------------------------------------- | - | ----- | -- | ----- | - | -- | - | - | --- | - |  | ---- | -
|                            |  | Electronic
 Assembly        |     | Semiconductor                           |  
|                           
|(In thousands)              |  | February 
 2008 
 Singapore |     | November 
 2008 
 workforce 
 reduction |   | February
 
 2009 
 workforce 
 reduction |   | Total |     | November 
 2008 
 workforce 
 reduction |   | February
 
 2009 
 workforce 
 reduction |   | Total |    | Total |  
|                           
|Balance,
 December 31, 2008 |  | $                           | 207 |                                         | $ | 104                                      |   | $     |    |                                         | $ | 311                                      |   | $     | 4  |       | $ |   |   | $ | 4   |   |  | 315  |  
|                           
|Cost
 incurred              |  |                             | 51  |                                         |   |                                         |   |       | 165 |                                         |   | 216                                      |   |       |   |       |   | 89 |   |   | 89  |   |  | 305  |  
|                           
|Payments
 made              |  |                             | (90 | )                                       |   | (104                                     | ) |       | (97 | )                                       |   | (291                                     | ) |       | (4 | )     |   | (8 | ) |   | (12 | ) |  | (303 | )
|                           
|Balance,
 March 31, 2009    |  | $                           | 168 |                                         | $ |                                         |   | $     | 68  |                                         | $ | 236                                      |   | $     |   |       | $ | 81 |   | $ | 81  |   |  | 317  |  

Additional severance expense of approximately $100,000 is expected in
the three months ended June 30, 2009.

20

---



Interest and Other

Interest
income and other includes interest earned on investments, realized gains and
losses from sales of investments and gains and losses associated with foreign
currency transactions and foreign currency swap agreements. Interest income and
other decreased in the three months ended March 31, 2009 compared to the same
period of 2008 due to lower rates of interest earned on invested funds and
lower invested balances of cash equivalents and marketable securities,
primarily resulting from repurchases of our common stock in 2008.

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

Provision for Income Taxes and Effective
Income Tax Rate

We recorded an
income tax benefit in the three months ended March 31, 2009 at an effective tax
rate of 36%, compared to an effective tax rate of 37% in the three months ended
March 31, 2008. The change in the effective tax rate for 2009 is due to higher
tax expense in foreign tax jurisdictions with tax rates differing from the U.S
federal statutory rate, offset by reductions in the level of non-deductible
expenses for income tax purposes and a small benefit from the research and
experimentation (R&D) tax credit. No benefit from the R&D tax credit
was recognized in the three months ended March 31, 2008 because the R&D tax
credit for 2008 had not yet been signed into law. Discrete items impacting the
effective tax rate in the three months ended March 31, 2009 and 2008 were
inconsequential.

We file income
tax returns in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. We are no longer subject to U.S. federal, state and local income
tax examinations by tax authorities for years before 2005. Our 2006 and 2007 federal income tax
returns are being audited by the Internal Revenue Service. The audits are
progressing and we presently anticipate that any potential settlements
resulting from these audits will occur in the third quarter of 2009. At the
present time, we are not able to reliably estimate what impact, if any, the
audits may have on our future results of operations or financial condition.

We currently
have significant deferred tax assets as a result of temporary differences
between taxable income on our tax returns and income before income taxes under
U.S. generally accepted accounting principals, research and development tax
credit carry forwards and foreign net operating loss carry forwards. A deferred
tax asset generally represents future tax benefits to be received when
temporary differences previously reported in our financial statements become
deductible for income tax purposes, or when net operating loss carry forwards
are applied against future taxable income, or when tax credit carry forwards
are applied against future tax liabilities. We assess the realizability of our
deferred tax assets and the need for a valuation allowance based on Statement
of Financial Accounting Standards No. 109.

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

Our analysis
of the need for valuation allowances considered that we have positive
cumulative profit through 2008 even without the exclusion of the $2.9 million
non-deductible goodwill impairment in 2008. We also considered our forecasts of
future profitability, the duration of statutory carry forward periods and tax
planning alternatives. We further evaluated our past cycles which tend to
average five years in length (from peak to trough) and also considered our five
year cumulative results, which also had strong profits. Finally, we evaluated
where these cumulative three and five year measures might be at the end of 2009
and considered other positive evidence to conclude no incremental valuation
allowance was needed at March 31, 2009.

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

21

---



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

Deferred tax
assets at March 31, 2009 include net operating loss carry forwards incurred in
the UK by CyberOptics Ltd., which was acquired in 1999. The utilization of
these net operating loss carry forwards is dependent on CyberOptics Ltd.s
ability to generate sufficient UK taxable income during the carry forward
period.

Order Rate and Backlog

Our orders
totaled $4.1 million in the three months ended March 31, 2009 compared to $5.4
million in the three months ended December 31, 2008 and $12.4 million in the
three months ended March 31, 2008. Backlog totaled $3.6 million at March 31,
2009, $3.9 million at December 31, 2008 and $4.7 million at March 31, 2008. The
scheduled shipment (or estimated timing of revenue for systems recognized upon
acceptance) for backlog at March 31, 2009 is as follows:

|                            |  |         |       | 
|--------------------------- |  | ------- | ----- | 
|(In
 thousands)             |  | Backlog |      
|                            |  |         |      
|2nd
 Quarter 2009           |  | $       | 2,946 | 
|3rd
 Quarter 2009 and after |  |         | 694   | 
|Total backlog               |  | $       | 3,640 | 

22

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LIQUIDITY AND CAPITAL RESOURCES

Our cash and
cash equivalents decreased by $2.2 million in the three month period ended
March 31, 2009 primarily due to cash used by operating activities of $3.1
million, and capital purchases of $207,000, offset in part by sales and
maturities of marketable securities, net of purchases of $1.1 million. Our cash
and cash equivalents fluctuate in part because of maturities of marketable
securities and investment of cash balances resulting from those maturities or
from other sources of cash in addition to marketable securities. Accordingly,
we believe the combined balances of cash and marketable securities provide a
more reliable indication of our available liquidity. Our combined balances of
cash and marketable securities decreased $3.6 million to $26.2 million as of
March 31, 2009 from $29.8 million as of December 31, 2008, resulting primarily
from our loss from operations in the three months ended March 31, 2009.

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 other assets 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. Other assets 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
recent 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.

We used $1.1
million of cash for operations in the three months ended March 31, 2008. Cash
used for operations primarily included net income of $427,000, which included
$641,000 of net non-cash expenses for depreciation and amortization, provision
for doubtful accounts, foreign currency transactions and stock compensation
expense. Changes in operating assets and liabilities included increases in
accounts receivable of $279,000, inventories of $423,000, other assets of
$633,000, decreases in accrued expenses of $596,000 and decreases in advance
customer payments of $334,000.

Investing
activities provided $906,000 of cash in the nine months ended March 31, 2009
compared to using $2.5 million of cash during the same period in 2008. Changes
in the level of investment in marketable securities resulting from purchases,
maturities and sales of those securities generated $1.1 million of cash in 2009
and used $2.3 million of cash during the same period of 2008. We used $207,000
of cash for the purchase of fixed assets and capitalized patent costs in the
three months ended March 31, 2009, compared to using $124,000 of cash for these
items in the three months ended March 31, 2008.

There were no financing
activities in the three months ended March 31, 2009. Financing activities used
$3.9 million of cash in the three months ended March 31, 2008, mainly for the
repurchase of our common stock. Proceeds from the exercise of stock options,
including excess tax benefits from the exercise of those options, totaled
$14,000 in the three months ended March 31, 2008.

A table of our
contractual obligations was provided in Item 7 in our Annual Report on Form
10-K for the fiscal year ended December 31, 2008. There have been no other
significant changes to our contractual obligations in the three months ended
March 31, 2009 or other material commitments for capital expenditures. Purchase
commitments for inventory can vary based on the volume of revenue and resulting
inventory requirements. While there are no material commitments, we evaluate
investment opportunities that come to our attention and could make a
significant commitment in the future.

Our cash, cash
equivalents and marketable securities totaled $26.2 million at March 31, 2009.
We believe that our available balances of cash, cash equivalents and marketable
securities will be adequate to fund our cash flow needs for the foreseeable
future.

23

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Our 2006 and
2007 federal income tax returns are currently being audited by the Internal
Revenue Service. The audits are progressing and we presently anticipate that
any potential payments resulting from these audits will occur in the third
quarter of 2009. We do not presently anticipate that the size of any payments
will have a material impact on our available balances of cash, cash equivalents
and marketable securities or liquidity.

At March 31,
2009, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the
purpose of establishing off-balance sheet arrangements or other contractually
narrow or limited purposes. As such, we are not exposed to the financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.

OTHER FACTORS

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

FAIR VALUE MEASUREMENTS

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

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

|                                                       |  |                         |        |                                                                   |                                                 |                                                  |  |                                              |        |  |   |   | 
|------------------------------------------------------ |  | ----------------------- | ------ | ----------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                                       |  |                         |        |                                                                   | Fair Value Measurements at Reporting Date Using |                                                 
|(In
 thousands)                                        |  | Balance
 March 31, 2009 |        | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                 | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                                       |  |                         |        |                                                                   |                                                 |                                                  |  |                                              |       
|Cash
 equivalents                                      |  | $                       | 1,404  |                                                                   | $                                               |                                                 |  | $                                            | 1,404  |  | $ |  | 
|U.S.
 government and agency obligations                |  | $                       | 20,462 |                                                                   | $                                               |                                                 |  | $                                            | 20,462 |  | $ |  | 
|Corporate
 debt securities and certificates of deposit |  | $                       | 2,973  |                                                                   | $                                               |                                                 |  | $                                            | 2,973  |  | $ |  | 
|Asset backed
 securities                               |  | $                       | 460    |                                                                   | $                                               |                                                 |  | $                                            | 460    |  | $ |  | 
|Equity
 securities                                     |  | $                       | 24     |                                                                   | $                                               | 24                                               |  | $                                            |       |  | $ |  | 

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

RECENT ACCOUNTING DEVELOPMENTS

See Note 12 to
the accompanying interim condensed consolidated financial statements for a
summary of recent accounting developments.

24

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ITEM 7A
- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest
excess funds not required for current operations in marketable securities. The
investment policy for these marketable securities is approved annually by the
Board of Directors and administered by management. The investment policy
dictates that marketable securities consist of U.S. Government or U.S.
Government agency securities, various tax exempt securities or certain approved
corporate instruments with maturities of five years or less and an average
portfolio maturity of not more than 18 months. The policy also provides for
investment in certain specified marketable equity securities. As of March 31,
2009, our portfolio of marketable securities had a weighted average maturity of
..95 years. All marketable securities are classified as available for sale and
carried at fair value. We estimate that a hypothetical 1% increase in market
interest rates would result in a decrease in the market value of the portfolio
of marketable securities of approximately $250,000. If such a rate increase
occurred, our net income would only be impacted if securities were sold prior
to maturity.

We enter into
foreign currency swap agreements to hedge short term inter-company financing
transactions with our subsidiary in the United Kingdom. These currency swap
agreements are structured to mature near the last day of each quarter, and are
designated as cash flow hedges. At March 31, 2009, we had one open swap
agreement for £625,000 GBP that was purchased on March 31, 2009, the fair value
of which was inconsequential.

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

ITEM 4 
CONTROLS AND PROCEDURES

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

b. During the
quarter ended March 31, 2009, there has been no change in our internal control
over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

25

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PART
II. OTHER INFORMATION

ITEM 1A
 RISK FACTORS

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

26

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ITEM 6 
EXHIBITS

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



27

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SIGNATURES

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

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

Dated: May 6,
2009

28

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