---

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SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C. 20549

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

(Check One)

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

For the quarterly period ended March 31, 2011

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

For the transition period from ______ to ______

COMMISSION
FILE NO. (0-16577)

| |  | 
| |  | 
| |  | 

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

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

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

| |  | 
| |  | 
| |  | 

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

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

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

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

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

Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date. At April
30, 2011, there were 6,891,350 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,
 2011 |        | December 31,
 2010 |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|ASSETS                                                                                                                                                   |  |                 |        |                    |   |        |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|Cash and cash equivalents                                                                                                                                |  | $               | 9,549  |                    | $ | 8,427  |  
|Marketable securities                                                                                                                                    |  |                 | 6,009  |                    |   | 6,384  |  
|Accounts receivable, less allowance for
 doubtful accounts of $1,005 at March 31, 2011 and December 31, 2010                                             |  |                 | 11,037 |                    |   | 11,296 |  
|Inventories                                                                                                                                              |  |                 | 14,540 |                    |   | 14,215 |  
|Income tax refunds receivable                                                                                                                            |  |                 | 400    |                    |   | 380    |  
|Other current assets                                                                                                                                     |  |                 | 1,147  |                    |   | 1,232  |  
|Deferred tax assets                                                                                                                                      |  |                 | 2,213  |                    |   | 2,317  |  
|Total current assets                                                                                                                                     |  |                 | 44,895 |                    |   | 44,251 |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|Marketable securities                                                                                                                                    |  |                 | 6,890  |                    |   | 7,289  |  
|Equipment and leasehold improvements, net                                                                                                                |  |                 | 1,651  |                    |   | 1,896  |  
|Intangible and other assets, net                                                                                                                         |  |                 | 360    |                    |   | 435    |  
|Goodwill                                                                                                                                                 |  |                 | 569    |                    |   | 569    |  
|Other assets                                                                                                                                             |  |                 | 175    |                    |   | 173    |  
|Deferred tax assets                                                                                                                                      |  |                 | 3,467  |                    |   | 3,621  |  
|Total assets                                                                                                                                             |  | $               | 58,007 |                    | $ | 58,234 |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                     |  |                 |        |                    |   |        |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|Accounts payable                                                                                                                                         |  | $               | 4,365  |                    | $ | 5,206  |  
|Advance customer payments                                                                                                                                |  |                 | 854    |                    |   | 1,152  |  
|Accrued expenses                                                                                                                                         |  |                 | 2,688  |                    |   | 2,873  |  
|Total current liabilities                                                                                                                                |  |                 | 7,907  |                    |   | 9,231  |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|Other liabilities                                                                                                                                        |  |                 | 725    |                    |   | 686    |  
|Total liabilities                                                                                                                                        |  |                 | 8,632  |                    |   | 9,917  |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|Commitments and contingencies                                                                                                                            |  |                 |       |                    |   |       |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|Stockholders equity:                                                                                                                                    |  |                 |        |                    |   |        |  
|Preferred stock, no par value, 5,000,000
 shares authorized, none outstanding                                                                            |  |                 |       |                    |   |       |  
|Common stock, no par value, 25,000,000
 shares authorized, 6,891,350 shares issued and outstanding at March 31, 2011
 and 6,891,262 at December 31, 2010 |  |                 | 30,436 |                    |   | 30,330 |  
|Accumulated other comprehensive loss                                                                                                                     |  |                 | (480   | )                  |   | (586   | )
|Retained earnings                                                                                                                                        |  |                 | 19,419 |                    |   | 18,573 |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|Total stockholders equity                                                                                                                               |  |                 | 49,375 |                    |   | 48,317 |  
|                                                                                                                                                         |  |                 |        |                    |   |        |  
|Total liabilities and stockholders equity                                                                                                               |  | $               | 58,007 |                    | $ | 58,234 |  

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

2

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CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS 
CYBEROPTICS CORPORATION 
(Unaudited)

|                                                                     |  |                              |        |      |   |        | 
|-------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------ | 
|                                                                     |  | Three Months Ended March 31, |       
|(In
 thousands, except per share amount)                             |  | 2011                         |        | 2010 |  
|                                                                     |  |                              |        |      |   |        | 
|Revenues                                                             |  | $                            | 13,350 |      | $ | 12,341 | 
|Cost of
 revenues                                                    |  |                              | 6,743  |      |   | 7,085  | 
|                                                                     |  |                              |        |      |   |        | 
|Gross margin                                                         |  |                              | 6,607  |      |   | 5,256  | 
|                                                                     |  |                              |        |      |   |        | 
|Research and
 development expenses                                   |  |                              | 1,818  |      |   | 1,777  | 
|Selling,
 general and administrative expenses                        |  |                              | 3,657  |      |   | 3,177  | 
|Amortization
 of intangibles                                         |  |                              | 45     |      |   | 45     | 
|                                                                     |  |                              |        |      |   |        | 
|Income from
 operations                                              |  |                              | 1,087  |      |   | 257    | 
|                                                                     |  |                              |        |      |   |        | 
|Interest
 income and other                                           |  |                              | 86     |      |   | 77     | 
|                                                                     |  |                              |        |      |   |        | 
|Income
 before income taxes                                          |  |                              | 1,173  |      |   | 334    | 
|                                                                     |  |                              |        |      |   |        | 
|Provision
 for income taxes                                          |  |                              | 327    |      |   | 87     | 
|                                                                     |  |                              |        |      |   |        | 
|Net income                                                           |  | $                            | 846    |      | $ | 247    | 
|                                                                     |  |                              |        |      |   |        | 
|Net income
 per share  Basic                                        |  | $                            | 0.12   |      | $ | 0.04   | 
|Net income
 per share  Diluted                                      |  | $                            | 0.12   |      | $ | 0.04   | 
|                                                                     |  |                              |        |      |   |        | 
|Weighted
 average shares outstanding  Basic                         |  |                              | 6,891  |      |   | 6,839  | 
|Weighted
 average and common equivalent shares outstanding  Diluted |  |                              | 6,935  |      |   | 6,871  | 

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

3

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CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS 
CYBEROPTICS CORPORATION 
(Unaudited)

|                                                                                   |  |                              |        |      |   |        |  
|---------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------ | -
|                                                                                   |  | Three Months Ended March 31, |       
|(In thousands)                                                                     |  | 2011                         |        | 2010 |  
|                                                                                   |  |                              |        |      |   |        |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                              |        |      |   |        |  
|Net income                                                                         |  | $                            | 846    |      | $ | 247    |  
|Adjustments to reconcile net income to net
 cash provided by operating activities: |  |                              |        |      |   |        |  
|Depreciation and amortization                                                      |  |                              | 643    |      |   | 487    |  
|Deferred tax provision                                                             |  |                              | 255    |      |   | 44     |  
|Foreign currency transaction (gains) losses                                        |  |                              | (80    | )    |   | 48     |  
|Stock compensation costs                                                           |  |                              | 106    |      |   | 74     |  
|Changes in operating assets and
 liabilities:                                      |  |                              |        |      |   |        |  
|Accounts receivable                                                                |  |                              | 260    |      |   | (2,080 | )
|Inventories                                                                        |  |                              | (359   | )    |   | (1,280 | )
|Income tax refunds receivable                                                      |  |                              | (19    | )    |   | (25    | )
|Other assets                                                                       |  |                              | 138    |      |   | (147   | )
|Accounts payable                                                                   |  |                              | (872   | )    |   | 2,934  |  
|Advance customer payments                                                          |  |                              | (298   | )    |   | 61     |  
|Accrued expenses                                                                   |  |                              | (160   | )    |   | 329    |  
|Net cash provided by operating activities                                          |  |                              | 460    |      |   | 692    |  
|                                                                                   |  |                              |        |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                              |        |      |   |        |  
|Proceeds from maturities of available for
 sale marketable securities              |  |                              | 3,735  |      |   | 4,909  |  
|Proceeds from sales of available for sale
 marketable securities                   |  |                              | 1,048  |      |   | 1,144  |  
|Purchases of available for sale marketable
 securities                             |  |                              | (4,040 | )    |   | (5,781 | )
|Additions to equipment and leasehold
 improvements                                 |  |                              | (76    | )    |   | (282   | )
|Additions to patents                                                               |  |                              | (29    | )    |   | (49    | )
|Net cash provided (used) by investing
 activities                                  |  |                              | 638    |      |   | (59    | )
|                                                                                   |  |                              |        |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                              |        |      |   |        |  
|Proceeds from exercise of stock options                                            |  |                              |       |      |   | 25     |  
|Net cash provided by financing activities                                          |  |                              |       |      |   | 25     |  
|                                                                                   |  |                              |        |      |   |        |  
|Effects of exchange rate changes on cash
 and cash equivalents                     |  |                              | 24     |      |   | (25    | )
|                                                                                   |  |                              |        |      |   |        |  
|Net increase in cash and cash equivalents                                          |  |                              | 1,122  |      |   | 633    |  
|                                                                                   |  |                              |        |      |   |        |  
|Cash and cash equivalents  beginning of
 period                                   |  |                              | 8,427  |      |   | 4,177  |  
|                                                                                   |  |                              |        |      |   |        |  
|Cash and cash equivalents  end of period                                          |  | $                            | 9,549  |      | $ | 4,810  |  

4

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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,
2011, and for the three month periods ended March 31, 2011 and 2010, are
unaudited, but in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for
the periods presented.

The results of
operations for the three month period ended March 31, 2011 do not necessarily
indicate the results to be expected for the full year. The December 31, 2010
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, 2010.

2. MARKETABLE SECURITIES:

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

|                                                       |  |                |       |                    |  |                     |  |            |     |   |   |       | 
|------------------------------------------------------ |  | -------------- | ----- | ------------------ |  | ------------------- |  | ---------- | --- | - | - | ----- | 
|                                                       |  | March 31, 2011 |      
|(In thousands)                                         |  | Cost           |       | Unrealized 
 Gains |  | Unrealized 
 Losses |  | Fair Value |    
|                                                       |  |                |       |                    |  |                     |  |            |     |   |   |       | 
|Short Term                                             |  |                |       |                    |  |                     |  |            |     |   |   |       | 
|U.S. government and agency obligations                 |  | $              | 3,172 |                    |  | 8                   |  |            |    |   | $ | 3,180 | 
|Corporate debt securities and certificates
 of deposit |  |                | 2,827 |                    |  | 2                   |  |            |    |   |   | 2,829 | 
|Marketable securities  short term                     |  | $              | 5,999 |                    |  | 10                  |  |            |    |   | $ | 6,009 | 
|                                                       |  |                |       |                    |  |                     |  |            |     |   |   |       | 
|Long Term                                              |  |                |       |                    |  |                     |  |            |     |   |   |       | 
|U.S. government and agency obligations                 |  | $              | 4,462 |                    |  | 11                  |  |            | (2  | ) | $ | 4,471 | 
|Corporate debt securities and certificates
 of deposit |  |                | 2,149 |                    |  | 4                   |  |            | (2  | ) |   | 2,151 | 
|Asset backed securities                                |  |                | 200   |                    |  | 1                   |  |            |    |   |   | 201   | 
|Equity securities                                      |  |                | 84    |                    |  |                    |  |            | (17 | ) |   | 67    | 
|Marketable securities  long term                      |  | $              | 6,895 |                    |  | 16                  |  |            | (21 | ) | $ | 6,890 | 

5

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|                                                       |  |                   |       |                    |  |                     |  |            |     |   |   |       | 
|------------------------------------------------------ |  | ----------------- | ----- | ------------------ |  | ------------------- |  | ---------- | --- | - | - | ----- | 
|                                                       |  | December 31, 2010 |      
|(In
 thousands)                                        |  | Cost              |       | Unrealized 
 Gains |  | Unrealized 
 Losses |  | Fair Value |    
|                                                       |  |                   |       |                    |  |                     |  |            |     |   |   |       | 
|Short Term                                             |  |                   |       |                    |  |                     |  |            |     |   |   |       | 
|U.S. government and agency obligations                 |  | $                 | 3,178 |                    |  | 7                   |  |            |    |   | $ | 3,185 | 
|Corporate debt securities and certificates
 of deposit |  |                   | 3,197 |                    |  | 2                   |  |            |    |   |   | 3,199 | 
|Marketable securities  short term                     |  | $                 | 6,375 |                    |  | 9                   |  |            |    |   | $ | 6,384 | 
|                                                       |  |                   |       |                    |  |                     |  |            |     |   |   |       | 
|Long Term                                              |  |                   |       |                    |  |                     |  |            |     |   |   |       | 
|U.S. government and agency obligations                 |  | $                 | 4,809 |                    |  | 17                  |  |            | (1  | ) | $ | 4,825 | 
|Corporate debt securities                              |  |                   | 2,208 |                    |  | 4                   |  |            | (3  | ) |   | 2,209 | 
|Asset backed securities                                |  |                   | 200   |                    |  | 3                   |  |            |    |   |   | 203   | 
|Equity securities                                      |  |                   | 84    |                    |  |                    |  |            | (32 | ) |   | 52    | 
|Marketable securities  long term                      |  | $                 | 7,301 |                    |  | 24                  |  |            | (36 | ) | $ | 7,289 | 

Our investment
in equity securities was in a $17,000 unrealized loss position at March 31,
2011, and a $32,000 unrealized loss position at December 31, 2010 due to weak
economic and stock market conditions. We intend to hold these securities
indefinitely and expect its value to recover given improved economic and market
conditions.

Our
investments in marketable debt securities all have maturities of less than five
years. At March 31, 2011, marketable debt securities valued at $10,843,000 were
in an unrealized gain position totaling $26,000 and marketable debt securities
valued at $1,989,000 were in an insignificant unrealized loss position totaling
$4,000. At December 31, 2010, marketable debt securities valued at $10,578,000
were in an unrealized gain position totaling $33,000 and marketable debt
securities valued at $3,043,000 were in an insignificant unrealized loss
position totaling $4,000 (all had been in an unrealized loss position for less
than twelve months).

Net pre-tax
unrealized gains for marketable securities of $7,000 at March 31, 2011 and net
pre-tax losses of $3,000 at December 31, 2010 were recorded as a component of
accumulated other comprehensive income (loss) in stockholders equity. In the
three months ended March 31, 2011 we received proceeds of $1,048,000 from the
sale of marketable securities. In the three months ended March 31, 2010 we
received proceeds of $1,144,000 from the sale of marketable securities. No gain
or loss was recognized from any of these sales in the three months ended March
31, 2011 or the three months ended March 31, 2010.

3. DERIVATIVES:

We enter into
foreign exchange forward contracts to hedge against the effect of exchange rate
fluctuations on cash flows denominated in foreign currencies and certain
intercompany financing transactions associated with our subsidiaries in the
United Kingdom and Singapore. These transactions are designated as cash flow
hedges. The effective portion of the gain or loss on the derivative is reported
as a component of other comprehensive income and reclassified into earnings in
the same period during which the hedged transaction affects earnings. Gains and
losses on the derivative representing either hedge ineffectiveness or hedge
components excluded from the assessment of effectiveness are recognized in
current earnings. Hedge ineffectiveness and the amount excluded from
effectiveness testing recognized in income on cash flow hedges were not
material for the three month periods ended March 31, 2011 and March 31, 2010.

The maximum
length of time over which we hedge our exposure to the variability in future
cash flows is 12 months. Accordingly, at March 31, 2011 and March 31, 2010, all
of our open foreign exchange forward contracts had maturities of one year or
less. The dollar equivalent gross notional amount of our foreign exchange
forward contracts designated as cash flow hedges was approximately $9.7 million
at March 31, 2011 and $1.0 million at March 31, 2010.

6

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The location
in the consolidated statements of operations and comprehensive income and
amounts of gains and losses related to derivative instruments designated as
cash flow hedges are as follows. Reclassifications of amounts from accumulated
other comprehensive income into income include accumulated gains (losses) at
the time earnings are impacted by the forecasted transaction.

|                                  |  |                                                                                                |   |                                                                                                                                                      |   |                                                                                                                   |   |   |   | 
|--------------------------------- |  | ---------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------- | - | - | - | 
|Three Months Ended March 31, 2011 | 
|(in
 thousands)                   |  | Pretax Gain (Loss)Recognized
 in OtherComprehensive
 Income on EffectivePortion of
 Derivative |   | Pretax
 Gain (Loss)
 Recognizedin Income on Effective
 Portion ofDerivative asa Result ofReclassification fromAccumulated OtherComprehensive
 Income |   | Ineffective
 Portion of Gain(Loss) on Derivative andAmount Excluded fromEffectiveness TestingRecognized in Income |  
|                                  |  |                                                                                                |   |                                                                                                                                                      |   |                                                                                                                   |   |   |   | 
|Cost of
 sales                    |  | $                                                                                              | 1 |                                                                                                                                                      | $ | 1                                                                                                                 |   | $ |  | 
|Research and
 development         |  |                                                                                                |  |                                                                                                                                                      |   | 1                                                                                                                 |   |   |  | 
|Sales and
 marketing              |  |                                                                                                |  |                                                                                                                                                      |   | 1                                                                                                                 |   |   |  | 
|Other income                      |  |                                                                                                |  |                                                                                                                                                      |   | (30                                                                                                               | ) |   |  | 
|Total                             |  | $                                                                                              | 1 |                                                                                                                                                      | $ | (27                                                                                                               | ) | $ |  | 

|                                  |  |                                                                                                |   |                                                                                                                                                     |   |                                                                                                                  |  |   |   | 
|--------------------------------- |  | ---------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------------------------------------- |  | - | - | 
|Three Months Ended March 31, 2010 | 
|(in thousands)                    |  | Pretax Gain (Loss)Recognized
 in OtherComprehensive
 Income on EffectivePortion of
 Derivative |   | Pretax Gain (Loss)
 Recognizedin Income on Effective
 Portion ofDerivative asa Result ofReclassification fromAccumulated OtherComprehensive
 Income |   | Ineffective Portion of Gain(Loss) on Derivative andAmount Excluded fromEffectiveness TestingRecognized in Income | 
|                                  |  |                                                                                                |   |                                                                                                                                                     |   |                                                                                                                  |  |   |   | 
|Cost of
 sales                    |  | $                                                                                              |  |                                                                                                                                                     | $ |                                                                                                                 |  | $ |  | 
|Research and
 development         |  |                                                                                                |  |                                                                                                                                                     |   |                                                                                                                 |  |   |  | 
|Sales and
 marketing              |  |                                                                                                |  |                                                                                                                                                     |   |                                                                                                                 |  |   |  | 
|Other income                      |  |                                                                                                |  |                                                                                                                                                     |   | 34                                                                                                               |  |   |  | 
|Total                             |  | $                                                                                              |  |                                                                                                                                                     | $ | 34                                                                                                               |  | $ |  | 

As of March
31, 2011, we had $1,000 recorded in accumulated other comprehensive income for
the after tax net unrealized gain associated with cash flow hedging
instruments. We expect to reclassify this amount to earnings over the next 12
months, with the impact offset by cash flows from underlying hedged items. At
March 31, 2011, the fair value of our foreign currency forward contracts in the
amount of $1,000 was recorded in other assets in the accompanying consolidated
balance sheet. The fair value of foreign exchange forward contracts and their
impact on accumulated other comprehensive income as of March 31, 2010 was
inconsequential.

Additional
information with respect to the impact of derivative instruments on other
comprehensive income is included in Note 10. Additional information with
respect to the fair value of derivative instruments is included in Note 4.

Our foreign exchange forward
contracts 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.

7

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4. FAIR VALUE MEASUREMENTS:

We determine
the fair value of our assets and liabilities based on the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value maximize the use of observable
inputs and minimize the use of unobservable inputs. We use a fair value
hierarchy with three levels of inputs, of which the first two are considered
observable and the last unobservable, to measure fair value: The fair value
hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1). The next highest priority is based
on quoted prices for similar assets or liabilities in active markets or quoted
prices for identical or similar assets or liabilities in non-active markets or
other observable inputs (Level 2). The lowest priority is given to unobservable
inputs (Level 3). The following provides information regarding fair value
measurements for our marketable securities and foreign exchange forward
contracts as of March 31, 2011 and December 31, 2010 according to the
three-level fair value hierarchy:

|                                                       |  |                         |        |                                                                    |   |                                                   |  |                                              |        |  |   |   | 
|------------------------------------------------------ |  | ----------------------- | ------ | ------------------------------------------------------------------ | - | ------------------------------------------------- |  | -------------------------------------------- | ------ |  | - | - | 
|                                                       |  |                         |        | Fair
 Value Measurements at March 31, 2011 Using                   |  
|                                                       |  |                         |        |                                                                    |   |                                                   |  |                                              |       
|(In
 thousands)                                        |  | Balance
 March 31, 2011 |        | Quoted
 Prices in
 Active Markets for
 Identical Assets
 (Level 1) |   | Significant
 Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                                       |  |                         |        |                                                                    |   |                                                   |  |                                              |       
|Marketable
 securities:                                |  |                         |        |                                                                    |   |                                                   |  |                                              |        |  |   |   | 
|U.S.
 government and agency obligations                |  | $                       | 7,651  |                                                                    | $ |                                                  |  | $                                            | 7,651  |  | $ |  | 
|Corporate
 debt securities and certificates of deposit |  |                         | 4,980  |                                                                    |   |                                                  |  |                                              | 4,980  |  |   |  | 
|Asset backed
 securities                               |  |                         | 201    |                                                                    |   |                                                  |  |                                              | 201    |  |   |  | 
|Equity
 securities                                     |  |                         | 67     |                                                                    |   | 67                                                |  |                                              |       |  |   |  | 
|Total                                                  |  | $                       | 12,899 |                                                                    | $ | 67                                                |  | $                                            | 12,832 |  | $ |  | 
|                                                       |  |                         |        |                                                                    |   |                                                   |  |                                              |        |  |   |   | 
|Derivative
 instruments - assets                       |  |                         |        |                                                                    |   |                                                   |  |                                              |        |  |   |   | 
|Foreign
 exchange forward contracts                    |  | $                       | 1      |                                                                    | $ |                                                  |  | $                                            | 1      |  | $ |  | 

|                                                       |  |                            |        |                                                                    |                                                     |                                                   |  |                                              |        |  |   |   | 
|------------------------------------------------------ |  | -------------------------- | ------ | ------------------------------------------------------------------ | --------------------------------------------------- | ------------------------------------------------- |  | -------------------------------------------- | ------ |  | - | - | 
|                                                       |  |                            |        |                                                                    | Fair
 Value Measurements at December 31, 2010 Using |                                                  
|                                                       |  |                            |        |                                                                    |                                                     |                                                   |  |                                              |        | 
|(In
 thousands)                                        |  | Balance
 December 31, 2010 |        | Quoted
 Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                                                     | Significant
 Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|                                                       |  |                            |        |                                                                    |                                                     |                                                   |  |                                              |        | 
|Marketable
 securities:                                |  |                            |        |                                                                    |                                                     |                                                   |  |                                              |        |  |   |   | 
|U.S.
 government and agency obligations                |  | $                          | 8,010  |                                                                    | $                                                   |                                                  |  | $                                            | 8,010  |  | $ |  | 
|Corporate
 debt securities and certificates of deposit |  |                            | 5,408  |                                                                    |                                                     |                                                  |  |                                              | 5,408  |  |   |   | 
|Asset backed
 securities                               |  |                            | 203    |                                                                    |                                                     |                                                  |  |                                              | 203    |  |   |  | 
|Equity
 securities                                     |  |                            | 52     |                                                                    |                                                     | 52                                                |  |                                              |       |  |   |  | 
|Total                                                  |  | $                          | 13,673 |                                                                    | $                                                   | 52                                                |  | $                                            | 13,621 |  | $ |  | 
|                                                       |  |                            |        |                                                                    |                                                     |                                                   |  |                                              |        |  |   |   | 
|Derivative
 instruments - assets                       |  |                            |        |                                                                    |                                                     |                                                   |  |                                              |        |  |   |   | 
|Foreign
 exchange forward contracts                    |  | $                          |       |                                                                    | $                                                   |                                                  |  | $                                            |       |  | $ |  | 

8

---



During the
three months ended March 31, 2011 there were no significant transfers to or
from the three level hierarchy. A significant transfer is recognized when the
inputs used to value a security have been changed which merit a transfer
between the disclosed levels of the valuation hierarchy.

The fair value
for our U.S. government and agency obligations, corporate debt securities and
certificates of deposit and asset backed securities are determined based on
valuations provided by external investment managers who obtain them from a
variety of industry standard data providers. The fair value for our equity
securities is based on a quoted market price obtained from an active market.

The fair value
for our foreign exchange forward contracts are based on foreign currency spot
and forward rates obtained from reputable financial institutions with resulting
valuations periodically validated by obtaining foreign currency spot rate and
forward quotes from other industry standard sources or third party or
counterparty quotes.

The carrying
amounts of financial instruments such as cash equivalents, accounts receivable,
other assets, accounts payable, accrued expenses and other current liabilities
approximate the related fair values due to the short-term maturities of these
instruments. Non-financial assets such as equipment and leasehold improvements,
goodwill and intangible assets are subject to non-recurring fair value
measurements if they are deemed impaired. We had no remeasurements of
non-financial assets to fair value during the three months ended March 31, 2011
or March 31, 2010.

5. ACCOUNTING FOR STOCK-BASED COMPENSATION:

All
equity-based payments to employees, including grants of employee stock options,
are recognized as an expense in our consolidated statement of operations based
on the grant date fair value of the award. We utilize the straight-line method
of expense recognition over the awards service period for our graded vesting
options. The fair value of stock options granted has been determined using the
Black-Scholes model. The compensation expense recognized for all equity based
awards is net of estimated forfeitures, which are based on historical data. We
have classified equity based compensation within our statement of operations in
the same manner as our cash based employee compensation costs. There were no
stock options or restricted stock units granted in the three months ended March
31, 2011.

Equity based
compensation expense in the three months ended March 31, 2011 totaled $106,000
and includes $57,000 for stock option awards, $26,000 for our employee stock
purchase plan and $23,000 for unvested restricted stock units. Equity based
compensation expense in the three months ended March 31, 2010 totaled $74,000
and includes $37,000 for stock option awards, $18,000 for our employee stock
purchase plan and $19,000 for unvested restricted stock units.

At March 31,
2011, the total unrecognized compensation cost related to non-vested equity
based compensation arrangements was $782,000 and the related weighted average
period over which it is expected to be recognized is 2.14 years.

Stock Options

We have two stock
incentive plans that are administered under the supervision of the Compensation
Committee of the Board of Directors. There are 756,079 shares of common stock
reserved in the aggregate for issuance of options and other stock based
benefits under these plans, including restricted stock units and share grants
to employees, officers, non-employee directors and others. Reserved shares
underlying canceled options are available for future grant under our active
plans. Options are granted at an option price per share equal to or greater
than the market value on the date of grant. Generally, options granted to
employees vest over a four-year period and expire five, seven, or ten years
after the date of grant. No stock options were granted during the three months ended
March 31, 2011. As of March 31, 2011, there were 245,535 shares of common stock
available under these plans for future issuance to employees, officers and
others. There are no options available under these plans for future issuance to
non-employee directors. In addition, there are 50,000 shares reserved and
included in the plan summaries below that are not part of the two stock
incentive plans.

9

---



The following
is a summary of stock option activity during the three months ended March 31,
2011:

|                                |  |                     |         |                                             |   |       | 
|------------------------------- |  | ------------------- | ------- | ------------------------------------------- | - | ----- | 
|                                |  | Options Outstanding |         | Weighted-Average
 Exercise Price Per
 Share |  
|                                |  |                     |         |                                             |   |       | 
|Outstanding,
 December 31, 2010 |  |                     | 531,137 |                                             | $ | 10.09 | 
|Granted                         |  |                     |        |                                             |   |      | 
|Exercised                       |  |                     |        |                                             |   |      | 
|Expired                         |  |                     | (3,150  | )                                           |   | 13.80 | 
|Forfeited                       |  |                     |        |                                             |   |      | 
|Outstanding,
 March 31, 2011    |  |                     | 527,987 |                                             | $ | 10.07 | 
|                                |  |                     |         |                                             |   |       | 
|Exercisable,
 March 31, 2011    |  |                     | 334,321 |                                             | $ | 11.41 | 

The intrinsic
value of an option is the amount by which the fair value of the underlying
stock exceeds its exercise price. The weighted average remaining contractual
term and aggregate intrinsic value for all options outstanding at March 31,
2011 was 3.84 years and $536,000. The weighted average remaining contractual
term and aggregate intrinsic value of options that were exercisable at March
31, 2011 was 2.77 years and $231,000. During the three months ended March 31,
2011, no proceeds were received from the exercise of stock options.

Restricted Stock Units

Our 1998 Stock
Incentive Plan also permits our Compensation Committee to grant other
stock-based benefits, including restricted stock units. Restricted stock units
are valued at a price equal to the fair market value of our common stock on the
date of grant, vest over a four year period and entitle the holders to one
share of our common stock for each restricted stock unit. The aggregate fair
value of outstanding restricted stock units as of March 31, 2011 was $282,000.

A summary of
activity in non-vested restricted stock units for the three months ended March
31, 2011 is as follows:

|                                   |  |        |        |                                           |   |      | 
|---------------------------------- |  | ------ | ------ | ----------------------------------------- | - | ---- | 
|Non vested
 restricted stock units |  | Shares |        | Weighted  Average
 Grant Date Fair Value |  
|                                   |  |        |        |                                           |   |      | 
|Non vested
 at December 31, 2010   |  |        | 32,645 |                                           | $ | 7.55 | 
|Granted                            |  |        |       |                                           |   |     | 
|Vested                             |  |        | (88    | )                                         |   | 7.71 | 
|Forfeited                          |  |        |       |                                           |   |     | 
|Non vested
 at March 31, 2011      |  |        | 32,557 |                                           | $ | 7.55 | 

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, 2011 or
the three months ended March 31, 2010. As of March 31, 2011, 61,344 shares
remain available for future issuance under this plan.

10

---



Stock Grant Plan for Non-Employee Directors

Our stock
grant plan for non-employee directors provides for automatic grants of 1,000
shares of our common stock to each of our non-employee directors upon their
re-election to the board of directors. The plan provides for a total of 30,000
shares of our common stock for issuance to directors and will expire on May 19,
2018. No shares were issued under this plan in the three months ended March 31,
2011 or the three months ended March 31, 2010. There are presently 20,000
shares of common stock reserved in the aggregate for future issuance under this
plan.

6. INVENTORIES AND WARRANTIES:

Inventories
consist of the following:

|                                   |  |                |        |                   |   |        | 
|---------------------------------- |  | -------------- | ------ | ----------------- | - | ------ | 
|(In
 thousands)                    |  | March 31, 2011 |        | December 31, 2010 |  
|                                   |  |                |        |                   |   |        | 
|Raw
 materials and purchased parts |  | $              | 6,797  |                   | $ | 6,895  | 
|Work in
 process                   |  |                | 1,475  |                   |   | 1,807  | 
|Finished
 goods                    |  |                | 6,268  |                   |   | 5,513  | 
|                                   |  |                |        |                   |   |        | 
|Total inventories                  |  | $              | 14,540 |                   | $ | 14,215 | 

Warranty
costs:

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

|                                   |  |                                |      |      |   |      |  
|---------------------------------- |  | ------------------------------ | ---- | ---- | - | ---- | -
|                                   |  | Three Months Ended 
 March 31, |     
|(In
 thousands)                    |  | 2011                           |      | 2010 |  
|                                   |  |                                |      |      |   |      |  
|Balance at
 beginning of period    |  | $                              | 702  |      | $ | 488  |  
|Accrual for warranties             |  |                                | 185  |      |   | 181  |  
|Settlements made during the period |  |                                | (191 | )    |   | (117 | )
|                                   |  |                                |      |      |   |      |  
|Balance at
 end of period          |  | $                              | 696  |      | $ | 552  |  

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)                  |  | 2011                           |      | 2010 |  
|                                 |  |                                |      |      |  
|Balance at
 beginning of period  |  | $                              | 787  |      | $ | 636  |  
|Revenue
 deferrals               |  |                                | 86   |      |   | 176  |  
|Amortization of deferred revenue |  |                                | (110 | )    |   | (115 | )
|                                 |  |                                |      |      |   |      |  
|Balance at end of period         |  | $                              | 763  |      | $ | 697  |  

11

---



7. INTANGIBLE ASSETS:

Intangible
assets consist of the following:

|                        |  |                           |        |                            |   |         |   |                           |     |                            |   |        |  |   |         |   |   |     | 
|----------------------- |  | ------------------------- | ------ | -------------------------- | - | ------- | - | ------------------------- | --- | -------------------------- | - | ------ |  | - | ------- | - | - | --- | 
|                        |  | As of March 31, 2011      |        | As of December 31, 2010    |  
|(In
 thousands)         |  | Gross 
 Carrying 
 Amount |        | Accumulated 
 Amortization |   | Net     |   | Gross 
 Carrying 
 Amount |     | Accumulated 
 Amortization |   | Net    | 
|                        |  |                           |        |                            |   |         |   |                           |     |                            |   |        |  |   |         |   |   |     | 
|Developed
 technology   |  | $                         | 7,775  |                            | $ | (7,711  | ) | $                         | 64  |                            | $ | 7,775  |  | $ | (7,666  | ) | $ | 109 | 
|Patents and
 trademarks |  |                           | 2,658  |                            |   | (2,362  | ) |                           | 296 |                            |   | 2,732  |  |   | (2,406  | ) |   | 326 | 
|Total                   |  | $                         | 10,433 |                            | $ | (10,073 | ) | $                         | 360 |                            | $ | 10,507 |  | $ | (10,072 | ) | $ | 435 | 

Amortization
expense for the three month period ended March 31, 2011 and 2010 is as follows:

|                        |  |                                |     |      |   |     | 
|----------------------- |  | ------------------------------ | --- | ---- | - | --- | 
|                        |  | Three Months Ended 
 March 31, |    
|(In
 thousands)         |  | 2011                           |     | 2010 |  
|                        |  |                                |     |      |   |     | 
|Developed
 technology   |  | $                              | 45  |      | $ | 45  | 
|Patents and
 trademarks |  |                                | 59  |      |   | 58  | 
|                        |  |                                |     |      |   |     | 
|Total                   |  | $                              | 104 |      | $ | 103 | 

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: $227,000 for the remainder of 2011, $100,000 in
2012, $31,000 in 2013 and $2,000 in 2014.

12

---



8. BUSINESS SEGMENTS AND SIGNIFICANT
CUSTOMERS:

Our electronic
assembly segment designs, manufactures and sells optical process control
sensors and inspection systems for the electronic assembly equipment market.
Our semiconductor segment designs, manufactures and sells 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)                 |  | 2011                           |        | 2010 |  
|                                |  |                                |        |      |   |        | 
|Revenue:                        |  |                                |        |      |   |        | 
|Electronic
 Assembly            |  |                                |        |      |   |        | 
|OEM Sensors                     |  | $                              | 6,092  |      | $ | 5,119  | 
|SMT Systems                     |  |                                | 5,379  |      |   | 6,045  | 
|Total Electronic Assembly       |  |                                | 11,471 |      |   | 11,164 | 
|                                |  |                                |        |      |   |        | 
|Semiconductor                   |  |                                | 1,879  |      |   | 1,177  | 
|Total                           |  | $                              | 13,350 |      | $ | 12,341 | 
|                                |  |                                |        |      |   |        | 
|Income from
 operations:        |  |                                |        |      |   |        | 
|Electronic
 Assembly            |  | $                              | 585    |      | $ | 65     | 
|Semiconductor                   |  |                                | 502    |      |   | 192    | 
|Total income from operations    |  |                                | 1,087  |      |   | 257    | 
|Interest
 income and other      |  |                                | 86     |      |   | 77     | 
|Income before taxes             |  | $                              | 1,173  |      | $ | 334    | 
|                                |  |                                |        |      |   |        | 
|Depreciation
 and amortization: |  |                                |        |      |   |        | 
|Electronic
 Assembly            |  | $                              | 586    |      | $ | 430    | 
|Semiconductor                   |  |                                | 57     |      |   | 57     | 
|Total                           |  | $                              | 643    |      | $ | 487    | 

Export sales
were 85% of revenue in the three months ended March 31, 2011 and 82% of revenue
in the three months ended March 31, 2010. Virtually all of our export sales are
negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area
are summarized as follows:

|                   |  |                                |        |      |   |        | 
|------------------ |  | ------------------------------ | ------ | ---- | - | ------ | 
|                   |  | Three Months Ended 
 March 31, |       
|(In
 thousands)    |  | 2011                           |        | 2010 |  
|                   |  |                                |        |      |   |        | 
|Americas           |  | $                              | 474    |      | $ | 203    | 
|Europe             |  |                                | 4,529  |      |   | 3,420  | 
|Asia               |  |                                | 6,161  |      |   | 6,499  | 
|Other              |  |                                | 196    |      |   | 30     | 
|                   |  |                                |        |      |   |        | 
|Total export sales |  | $                              | 11,360 |      | $ | 10,152 | 

We are
dependent upon three electronic assembly customers, Assembleon, DEK and Juki
for a significant portion of our total revenue. For the three months ended
March 31, 2011, sales to Assembleon accounted for 8% of our total revenue,
sales to DEK accounted for 15% of our total revenue and sales to Juki accounted
for 19% of our total revenue.

13

---



9. NET INCOME PER SHARE:

Basic net
income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Net income per diluted
share is computed by dividing net income 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. The components of
net income per basic and diluted share are as follows:

|                                             |  |            |     |                                       |  |                   |  |   |      | 
|-------------------------------------------- |  | ---------- | --- | ------------------------------------- |  | ----------------- |  | - | ---- | 
|(In
 thousands except per share amounts)     |  | Net income |     | Weighted
 Average Shares
 Outstanding |  | Per Share
 Amount | 
|                                             |  |            |     |                                       |  |                   |  |   |      | 
|Three Months Ended March 31, 2011:           |  |            |     |                                       |  |                   |  |   |      | 
|Basic                                        |  | $          | 846 |                                       |  | 6,891             |  | $ | 0.12 | 
|Dilutive
 effect of common equivalent shares |  |            |    |                                       |  | 44                |  |   |     | 
|                                             |  |            |     |                                       |  |                   |  |   |      | 
|Dilutive                                     |  | $          | 846 |                                       |  | 6,935             |  | $ | 0.12 | 
|                                             |  |            |     |                                       |  |                   |  |   |      | 

|                                             |  |            |     |                                         |  |                    |  |   |      | 
|-------------------------------------------- |  | ---------- | --- | --------------------------------------- |  | ------------------ |  | - | ---- | 
|(In
 thousands except per share amounts)     |  | Net income |     | Weighted 
 Average Shares 
 Outstanding |  | Per Share 
 Amount | 
|                                             |  |            |     |                                         |  |                    |  |   |      | 
|Three Months Ended March 31, 2010:           |  |            |     |                                         |  |                    |  |   |      | 
|Basic                                        |  | $          | 247 |                                         |  | 6,839              |  | $ | 0.04 | 
|Dilutive
 effect of common equivalent shares |  |            |    |                                         |  | 32                 |  |   |     | 
|                                             |  |            |     |                                         |  |                    |  |   |      | 
|Dilutive                                     |  | $          | 247 |                                         |  | 6,871              |  | $ | 0.04 | 

The
calculation of diluted net income per common share excludes 321,000 potentially
dilutive shares for the three months ended March 31, 2011 and 353,000
potentially dilutive shares for the three months ended March 31, 2010 because
their effect would be anti-dilutive.

14

---



10. COMPREHENSIVE INCOME:

Components of
comprehensive income include net income, foreign-currency translation
adjustments, unrealized gains and losses on available for sale securities,
unrealized gain and losses on the effective portion of foreign exchange forward
contracts and reclassification adjustments. Total comprehensive income amounted
to $952,000 for the three months ended March 31, 2011 and $245,000 for the
three months ended March 31, 2010. At December 31, 2010 and March 31, 2011
components of accumulated other comprehensive income (loss) is as follows:

|                                                                            |  |                                 |      |                                            |   |                                                                                             |   |                                         |   |  |   |      |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ---- | ------------------------------------------ | - | ------------------------------------------------------------------------------------------- | - | --------------------------------------- | - |  | - | ---- | -
|(In
 thousands)                                                             |  | Foreign 
 Currency
 Translation |      | Unrealized
 Gains
 (Losses) on
 Securities |   | Unrealized
 Gains (Losses)
 on Effective
 Portion of
 Foreign
 Exchange
 Forward
 Contracts |   | Accumulated
 Other
 Comprehensive
 Loss |  
|                                                                            |  |                                 |      |                                            |   |                                                                                             |   |                                         |   |  |   |      |  
|Balance December 31, 2010                                                   |  | $                               | (584 | )                                          | $ | (2                                                                                          | ) | $                                       |  |  | $ | (586 | )
|Unrealized gains on securities, net of tax
 of $3                           |  |                                 |     |                                            |   | 7                                                                                           |   |                                         |  |  |   | 7    |  
|Unrealized gains on effective portion of foreign exchange forward contracts |  |                                 |     |                                            |   |                                                                                            |   |                                         | 1 |  |   | 1    |  
|Translation adjustments                                                     |  |                                 | 98   |                                            |   |                                                                                            |   |                                         |  |  |   | 98   |  
|                                                                            |  |                                 |      |                                            |   |                                                                                             |   |                                         |   |  |   |      |  
|Balance March 31, 2011                                                      |  | $                               | (486 | )                                          | $ | 5                                                                                           |   | $                                       | 1 |  | $ | (480 | )

11. INCOME TAXES:

In the three months ended March 31, 2011, we recorded income tax
expense of $327,000, reflecting an effective tax rate of 28%, compared to
income tax expense of $87,000 in the three months ended March 31, 2010,
reflecting an effective tax rate of 26%. Our effective tax rate for 2011 and
2010 reflects the benefit of having a significant portion of our operations in
Singapore where corporate income tax rates are substantially lower than the
United States. Other items favorably impacting our income tax rate in 2011 and
2010 include small benefits from federal and state research and experimentation
(R&D) tax credits.

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

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

In analyzing
the need for valuation allowances, we first considered our history of
cumulative losses for U.S. income tax purposes over the past three years and
also gave significant consideration to our results for U.S. income tax purposes
over the past five years, as the economic cycles in our industry have tended to
average five years in length (from peak to trough). We also considered our
forecasts of future profitability, the duration of statutory carry forward
periods and tax planning alternatives. Finally, we considered the length and
severity of the recent global economic crisis, the impact that it had on our
operating results and our expectation for rebound given recent signs of
recovery in the global economy and more specifically in our markets. After
considering all of these factors, and after considering other significant
positive evidence, we concluded that a valuation allowance, with respect to
substantially all of our U.S. based deferred tax assets, was not required at
March 31, 2011.

15

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Our results in
both 2008 and 2009 were negatively impacted by the recent global economic
slowdown, and we incurred a loss in the United States in both 2008 and 2009,
where most of our net deferred tax assets are recorded. We recorded a profit in
2010. Achievement of ongoing profitability in the United States will be a
significant factor in determining our continuing ability to carry these
deferred tax assets without recording a valuation allowance. If future results
from our operations are less than projected, a valuation allowance may be
required against virtually all of our deferred tax assets, which could have a
material impact on our results of operations in the period in which it is
recorded.

Deferred tax assets at March
31, 2011, include net operating loss carry forwards incurred in the UK by
CyberOptics Ltd., which was acquired in 1999. The utilization of these net
operating loss carry forwards is dependent on CyberOptics Ltd.s ability to
generate sufficient UK taxable income during the carry forward period.

12. CONTINGENCIES:

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

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

13. RECENT ACCOUNTING DEVELOPMENTS:

In
December 2010, the Financial Accounting Standards Board (FASB) issued
amendments to the guidance on goodwill impairment testing. The amendments
modify Step 1 of the goodwill impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In making that determination, an entity
should consider whether there are any adverse qualitative factors indicating
that impairment may exist. The amendments were effective January 1, 2011
and had no impact on our consolidated financial position, results of operations
or cash flows.

In
January 2010, the FASB issued additional disclosure requirements for fair
value measurements which we included in our interim and annual financial
statements in 2010. Certain disclosure requirements relating to fair value
measurements using significant unobservable inputs (Level 3) were deferred
until January 1, 2011. These new requirements did not have any impact on
our consolidated financial positions, results of operations or cash flows as
they relate only to additional disclosures.

16

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

CRITICAL ACCOUNTING
POLICIES AND ESTIMATES:

The
preparation of the financial information contained in this 10-Q requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We evaluate these estimates on an ongoing basis, including
those related to allowances for doubtful accounts and returns, warranty
obligations, inventory valuation, the carrying value and any impairment of
intangible assets, and income taxes. These critical accounting policies are
discussed in more detail in the Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Form 10-K for
the year ended December 31, 2010.

FORWARD LOOKING STATEMENTS:

The following
managements discussion and analysis contains a number of estimates and
predictions that are forward looking rather than based on historical fact.
Among other matters, we discuss (i) our level of anticipated revenues and net
income for the second quarter and full year 2011; (ii) the potential margin
improvements resulting from our next-generation solder paste and automated
optical inspection (AOI) systems; (iii) the timing of initial revenue and
margin improvements from other new products that we have under development,
that have been recently introduced or we anticipate introducing in the future;
(iv) our expectations regarding market acceptance of WaferSense and our other semiconductor products; (v)
our beliefs regarding trends in the general economy and its impact on markets
for our equipment; and (vi) the impact of currency fluctuations on our
operations. Although we have made these statements based on our experience and
best estimate of future events, there may be events or factors that we have not
anticipated, and the accuracy of our statements and estimates are subject to a
number of risks, including those identified in our Annual Report on Form 10-K
for the year ended December 31, 2010.

RESULTS OF
OPERATIONS:

General

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

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

Even
before the recession, we worked to improve the efficiencies of our operations. In February 2008, we
commenced plans to move a significant portion of our systems-related product
development and final assembly and integration to Singapore. The transition of
these functions to Singapore was substantially complete by the end of the first
quarter of 2009 and has resulted in lower costs and a more focused R&D
effort. Further, we consolidated manufacturing operations for our semiconductor
products into our Minneapolis, Minnesota headquarters facility. Implementation
of these actions has improved the efficiency of our operations and has enhanced
our ability to focus on our growth programs.

17

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We believe
that continued and timely development of new products and enhancements to
existing products is essential to growing our position in the market. We commit
substantial resources to research and development efforts, which play a
critical role in maintaining and advancing our position as a leading provider
of optical sensors and systems.

The global
electronics market strengthened significantly in 2010. We experienced
particularly strong demand in the second quarter of 2010, as pent-up demand and
an improving economy led to significantly increased sales of alignment sensors
and our stand-alone solder paste inspection and AOI systems. Sales of sensors
continued at these strong levels throughout the remainder of 2010, while
systems sales moderated to more normal levels.

We believe
that there are a number of factors that will likely lead to improved operating
results over the next three quarters, including: (i) improving market
conditions, (ii) the efficiencies in operations we have implemented, (iii) the
new products we have introduced and expect to introduce in the next year, which
we anticipate will generate significant sales and improved margins, and allow
us to address the various price points desired by our customers within the
electronic assembly market and (iv) the greater efficiencies we are realizing
through our strategic repositioning in Asia.

Some of our
customers have indicated that they are starting to add production capacity and
we expect them to purchase some of our products during the periods that
coincide with our second and third quarters. For the second quarter of 2011
ending June 30, we are forecasting earnings of $0.17 to $0.21 per diluted share
on sales of $16 to $17 million. We are also forecasting full-year sales of $60
million to $65 million and earnings of $0.60 to $0.70 per diluted share.

Segment Results

Operating
results for our electronic assembly and semiconductor segments for the three
month periods ended March 31, 2011 and 2010 are as follows:

|                                              |  |                                   |        |                                   |   |       |  |                      |        |                  |   |        |  |   |       |  |   |        | 
|--------------------------------------------- |  | --------------------------------- | ------ | --------------------------------- | - | ----- |  | -------------------- | ------ | ---------------- | - | ------ |  | - | ----- |  | - | ------ | 
|                                              |  | Three months ended March 31, 2011 |        | Three months ended March 31, 2010 |  
|(In
 thousands)                               |  | Electronic
 Assembly              |        | Semi-
 Conductor                  |   | Total |  | Electronic
 Assembly |        | Semi-
 Conductor |   | Total  | 
|                                              |  |                                   |        |                                   |   |       |  |                      |        |                  |   |        |  |   |       |  |   |        | 
|Revenue                                       |  | $                                 | 11,471 |                                   | $ | 1,879 |  | $                    | 13,350 |                  | $ | 11,164 |  | $ | 1,177 |  | $ | 12,341 | 
|Cost of revenue                               |  |                                   | 6,143  |                                   |   | 600   |  |                      | 6,743  |                  |   | 6,742  |  |   | 343   |  |   | 7,085  | 
|Gross margin                                  |  |                                   | 5,328  |                                   |   | 1,279 |  |                      | 6,607  |                  |   | 4,422  |  |   | 834   |  |   | 5,256  | 
|                                              |  |                                   |        |                                   |   |       |  |                      |        |                  |   |        |  |   |       |  |   |        | 
|Research and development expenses             |  |                                   | 1,520  |                                   |   | 298   |  |                      | 1,818  |                  |   | 1,505  |  |   | 272   |  |   | 1,777  | 
|Selling, general and administrative
 expenses |  |                                   | 3,196  |                                   |   | 461   |  |                      | 3,657  |                  |   | 2,825  |  |   | 352   |  |   | 3,177  | 
|Amortization of intangibles                   |  |                                   | 27     |                                   |   | 18    |  |                      | 45     |                  |   | 27     |  |   | 18    |  |   | 45     | 
|                                              |  |                                   |        |                                   |   |       |  |                      |        |                  |   |        |  |   |       |  |   |        | 
|Income from operations                        |  | $                                 | 585    |                                   | $ | 502   |  | $                    | 1,087  |                  | $ | 65     |  | $ | 192   |  | $ | 257    | 

18

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Revenues

Our revenues
increased by 8% to $13.4 million in the three months ended March 31, 2011 from
$12.3 million in the three months ended March 31, 2010. The following table
sets forth revenues by product line for the three month periods ended March 31,
2011 and 2010:

|                           |  |                               |        |      |   |        | 
|-------------------------- |  | ----------------------------- | ------ | ---- | - | ------ | 
|                           |  | Three Months Ended
 March 31, |       
|(In
 thousands)            |  | 2011                          |        | 2010 |  
|                           |  |                               |        |      |   |        | 
|Electronic
 Assembly       |  |                               |        |      |   |        | 
|OEM Sensors                |  | $                             | 6,092  |      | $ | 5,119  | 
|SMT Systems                |  |                               | 5,379  |      |   | 6,045  | 
|Total
 Electronic Assembly |  |                               | 11,471 |      |   | 11,164 | 
|Semiconductor              |  |                               | 1,879  |      |   | 1,177  | 
|Total                      |  | $                             | 13,350 |      | $ | 12,341 | 

Electronic Assembly

Revenue from sales of our OEM alignment sensors increased by $1.0
million or 19% to $6.1 million in the three months ended March 31, 2011 from
$5.1 million in the three months ended March 31, 2010. Sales of
alignment sensors increased due to increased sales of our new solar wafer
alignment camera to DEK. Revenue from this product increased by $1.4 million in
the quarter ended March 31, 2011 from the quarter ended March 31, 2010 when we
recorded our initial sales of the solar wafer alignment camera. The decrease in
revenue from sales of other alignment sensor products was due to typical
quarterly fluctuations in the sale of these products to our OEM partners and
not due to any competitive factors resulting in a loss of sales or market
share.

Revenue from sales of our stand-alone SMT inspection systems products
decreased by $666,000 or 11% to $5.4
million in the three months ended March 31, 2011 from $6.0 million in the three
months ended March 31, 2010. Sales of
inspection systems decreased due to a 30% reduction in sales of our solder
paste inspection (SPI) systems, reflecting the challenging comparison with last
years first quarter when sales of our SE500 SPI system benefited from pent-up
demand as the global economy was emerging from the deep recession. Sales of
automated optical inspection (AOI) systems improved significantly in the three
months ended March 31, 2011, with sales of AOI systems increasing by 41% to
$2.2 million, when compared to the prior year quarter, led by our
next-generation QX500 AOI system, as we capitalized on our existing
relationships with several of the worlds largest original design manufacturers
(ODM). Featuring the fastest AOI inspection times currently available, the
QX500 is based upon a cost-reduced platform that we believe exceeds the
performance metrics of competitors systems. We believe the QX500 will continue
to receive favorable market acceptance, particularly in the ODM market segment
where we have established a large installed base of SPI systems and where the
fast inspection times of the QX500 are required.

We believe
that ongoing introduction of new system products, including those accommodating
dual production lanes, inspecting bigger circuit boards and addressing
different tiers of the market, will strengthen our competitive position in the
inspection market. Unlike revenue from our alignment sensors, which is closely
tied to the need for added production capacity for printed circuit boards, a
portion of our stand-alone SMT systems revenue is derived from the retro-fit of
existing production lines as companies seek to improve their production yields,
thereby reducing manufacturing costs.

In March 2011,
we entered into an OEM agreement with German-based Viscom AG, under which we
are integrating our SE500 sensor
technology into Viscoms SPI platforms. Given Viscoms strong customer base in
the automotive and industrial electronics markets, this partnership provides us
with increased access to large segments of the global SPI market. Production rollout
of the first Viscom SPI system equipped with our SE500 inspection sensor is
anticipated later in the second quarter of 2011.

We believe
that these new products, and technology trends toward smaller components and
increased production speeds, will contribute to increased demand and higher
revenue in 2011.

Export revenue from OEM alignment sensors and SMT inspection systems
totaled $10.5 million or 91% of electronic assembly revenue in the three months
ended March 31, 2011, compared to $9.8 million or 88% of electronic assembly
revenue in the three months ended March 31, 2010. Sales to international customers continue to
be significant, as manufacturing of high speed circuit board production has
migrated offshore, particularly to China and other areas of Asia.

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Semiconductor

Revenues from semiconductor
products increased by 60% to $1.9 million in the three months ended March 31,
2011 from $1.2 million in the three months ended March 31, 2010. The increase
in revenue was due to favorable market acceptance of our new WaferSense
products, coupled with improving conditions in the market for semiconductor
fabrication equipment. The increase in sales of our semiconductor products was
driven by a 134% growth in sales of our WaferSense product line to
approximately $1.2 million from $493,000 in the three months ended March 31,
2010.

We anticipate that future
growth in our semiconductor revenues, exclusive of changes related to capital
procurement cycles will come from our new WaferSense products, a family of
wireless, wafer like precision measurement tools for in-situ setup, calibration
and process optimization in semiconductor processing equipment. We have
introduced a number of new WaferSense products in recent years, including various
leveling, gapping, teaching and vibration sensors. We anticipate formal
introduction of our new particle sensor later in 2011.

Export revenue
from semiconductor products totaled $898,000 or 48% of revenue in the three
months ended March 31, 2011, compared to $365,000 or 31% of revenue in the
three months ended March 31, 2010. The increase in the percentage of sales
coming from exports for our semiconductor products reflects proportionately
higher WaferSense revenue, as these products tend to have a higher
concentration of international sales.

Cost of Revenue and
Gross Margin

Electronic Assembly

Cost of revenue for our
electronic assembly segment decreased by $599,000 or 9% in the three months
ended March 31, 2011, when compared to the three months ended March 31, 2010,
even though sales increased by 3% during this period. Gross margin as a
percentage of electronic assembly sales was 46% in the three months ended March
31, 2011, compared to 40% in the three months ended March 31, 2010.

The reduction in cost of
revenue and improvement in gross margin as a percentage of electronic assembly
sales was due to proportionately higher sales of alignment sensor products
which have a lower cost of revenue and higher gross margins than our SMT system
products, a better mix of higher margin alignment sensors, including our new
solar wafer alignment camera, proportionately higher sales of our new next
generation QX500 AOI system which costs less and carries a better gross margin
than our SPI system products and the favorable impact of cost reduction
programs across all of our electronic assembly products.

We anticipate that gross
margins as a percentage of electronic assembly sales in the second quarter of
2011 will be slightly below the level in the three months ended March 31, 2011,
reflecting our expectation for proportionately higher system sales.

The electronic
assembly market is highly price competitive, resulting in continual pressure on
our gross margins. We compensate for pricing pressure by introducing new
products with more features and improved performance and through manufacturing
cost reduction programs. For example, we believe our next-generation SE500 and
SE350 SPI systems and QX500 AOI system combines a reduction in cost with
enhanced performance. Other recently introduced products including our solar
wafer alignment camera, embedded process verification (EPV) technology and the
embedded 2D solder paste inspection solution we developed for DEK, have more
favorable margins than our existing products.

Semiconductor

Cost of revenue for our
semiconductor segment increased by $257,000 or 75% in the three months ended
March 31, 2011, when compared to the same period of 2010, due to the 60%
increase in semiconductor sales in the three months ended March 31, 2011. Gross
margin as a percentage of semiconductor sales was 68% in the three months ended
March 31, 2011, compared to 71% in the three months ended March 31,
2010. Gross margin as a
percentage of semiconductor sales declined slightly due to proportionately
higher scrap charges in the three months ended March 31, 2011, when compared to
the same period of 2010.

20

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Operating Expenses

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

Electronic Assembly

Research and
development expenses for our electronic assembly segment were $1.5 million in
the three months ended March 31, 2011 and the three months ended March 31,
2010. Lower proto-type costs in 2011were offset by additional expenditures for
wages and benefits resulting from higher headcount in the 2011 period. Further,
the weakening United States dollar increased the recorded value of costs
attributable to our research and development organization located in Singapore.
We anticipate that research and development expenses in the second quarter of
2011 will be at or slightly above the first quarter level as development continues on new products,
including those based on our embedded inspection technology and our stand-alone
inspection systems.

Selling, general and
administrative expenses for our electronic assembly segment were $3.2 million
in the three months ended March 31, 2011, compared to $2.8 million in the three
months ended March 31, 2010. The increase was primarily the result of an
increase in business development activities, including our hiring of a new
business development executive in May 2010, incurred higher costs for travel
and customer evaluations and the impact of the weakening United States dollar
on the recorded value of costs attributable to our foreign sales offices.

We presently anticipate that
selling, general and administrative expenses in the second quarter of 2011 will
be slightly above the first quarter level reflecting increased commissions on
higher sales.

Semiconductor

Research and development
expenses for our semiconductor segment were $298,000 in the three months ended
March 31, 2011 compared to $272,000 in the three months ended March 31, 2010.
Research and development for our semiconductor products remains focused on our
WaferSense family of precision measurement tools, including new automated
leveling, gapping, teaching, vibration and particle sensors to assist with
process optimization and yield improvement in the semiconductor fabrication
process.

Selling, general and
administrative expenses for our semiconductor segment were $461,000 in the
three months ended March 31, 2011 compared to $352,000 in the three months
ended March 31, 2010. The increase in the three months ended March 31, 2011
reflects higher third party commission payments attributable to the higher
level of sales. No significant changes are expected in the level of
semiconductor operating expenses in the second quarter of 2011.

Interest and Other

Interest
income and other includes interest earned on investments and gains and losses
associated with foreign currency transactions and foreign exchange forward
contracts. Interest income and other increased in the three months ended March
31, 2011, compared to the same period of 2010, reflecting higher foreign
exchange gains resulting from the favorable impact of the weakening United
States dollar on intercompany trade balances, offset in part by lower interest
income resulting from lower rates of interest earned on invested funds.

Provision for Income
Taxes and Effective Income Tax Rate

In the three months ended March 31, 2011, we recorded income tax
expense of $327,000, reflecting an effective tax rate of 28%, compared to
income tax expense of $87,000 in the three months ended March 31, 2010,
reflecting an effective tax rate of 26%. Our effective tax rate for 2011 and
2010 reflects the benefit of having a significant portion of our operations in
Singapore where corporate income tax rates are substantially lower than the
United States. Other items favorably impacting our income tax rate in 2011 and
2010 include small benefits from federal and state research and experimentation
(R&D) tax credits.

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Order Rate and
Backlog

Our orders
totaled $16.8 million in the three months ended March 31, 2011, compared to
$8.3 million in the three months ended December 31, 2010 and $17.0 million in
the three months ended March 31, 2010. Backlog totaled $10.6 million at March
31, 2011, $7.2 million at December 31, 2010 and $11.7 million at March 31,
2010. The scheduled shipment (or estimated timing of revenue for systems
recognized upon acceptance) for backlog at March 31, 2011 is as follows:

|                            |  |         |        | 
|--------------------------- |  | ------- | ------ | 
|(In
 thousands)             |  | Backlog |       
|                            |  |         |        | 
|2nd
 Quarter 2011           |  | $       | 9,401  | 
|3rd
 Quarter 2011 and after |  |         | 1,202  | 
|Total backlog               |  | $       | 10,603 | 

LIQUIDITY AND CAPITAL
RESOURCES

Our cash and cash
equivalents increased by $1.1 million in the three months ended March 31, 2011
resulting from $743,000 of proceeds from maturities and sales of marketable
securities, net of purchases, $460,000 of cash provided by operating
activities, offset in part by purchases of capital assets totaling $105,000.
Our cash and cash equivalents fluctuate in part because of maturities of
marketable securities, and investment of cash balances in marketable
securities, or from other sources of cash, in addition to marketable
securities. Accordingly, we believe the combined balances of cash and
marketable securities provide a more reliable indication of our available
liquidity. Combined balances of cash and marketable securities increased by
$348,000 to $22.4 million as of March 31, 2011 from $22.1 million as of
December 31, 2010.

Operating activities
provided $460,000 of cash in the three months ended March 31, 2011. Cash
provided by operations included net income of $846,000 and non-cash expenses
totaling $924,000 for depreciation and amortization, deferred taxes, non-cash
gains and losses from foreign currency transactions and stock compensation
costs.

Changes in
operating assets and liabilities using cash included increases in inventories
of $359,000 and decreases in accounts payable of $872,000, advance customer
payments of $298,000 and accrued expenses of $160,000. Changes in operating
assets and liabilities providing cash included decreases in accounts receivable
of $260,000 and other assets of $138,000. Inventories were higher due to
differences between actual and forecasted sales for varying types of alignment
sensors to specific OEM customers, and an increase in customer orders with
acceptance conditions at March 31, 2011 compared to December 31, 2010. The
decrease in accounts payable resulted from the timing of raw material purchases
and the need to pay for more purchases prior to March 31, 2011, as compared to
December 31, 2010. Advance customer payments decreased due to typical
fluctuations in the timing of customer prepayments. Accrued expenses and other
liabilities decreased due to payment of 2010 bonus accruals in the three months
ended March 31, 2011. Accounts receivable decreased slightly due to
proportionately higher sales of alignment sensors and semiconductor products,
as these customers tend to pay faster than our systems customers. Other assets
decreased due to collection of accrued interest receivable.

Operating activities
provided $633,000 of cash in the three months ended March 31, 2010. Cash
provided by operations included net income of $247,000, which included non-cash
expenses totaling $653,000 for depreciation and amortization, deferred taxes,
non-cash gains and losses from foreign currency transactions and stock
compensation expenses. Changes in operating assets and liabilities using
cash included increases in accounts receivable of $2.1 million, inventories of
$1.3 million and other assets of $147,000. Changes in operating assets and
liabilities providing cash included increases in accounts payable of $2.9
million and increases in accrued expenses and other liabilities of $390,000.
The increase in accounts receivable was due to higher sales levels in the first
quarter of 2010, compared to the fourth quarter of 2009. Inventories were
higher due to increased material purchases to support the higher level of sales
expected in the second quarter of 2010. The increase in accounts payable resulted
from increased material purchases and a conscious effort on our part to extend
the timing of vendor payments. Accrued expenses and other liabilities increased
due to higher warranty, commission and incentive compensation accruals,
resulting from higher sales levels and improved operating results.

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Investing activities
provided $638,000 of cash in the three months ended March 31, 2011 compared to
using $59,000 of cash in the same period last year. Changes in the level of
investment in marketable securities, resulting from the purchases, sales and
maturities of those securities generated $743,000 of cash in the three months
ended March 31, 2011, compared to generating $272,000 of cash in the same
period last year. We used
$105,000 of cash in the three months ended March 31, 2011 and $331,000 of cash
in the three months ended March 31, 2010 for the purchase of fixed assets and
capitalized patent costs.

There were no significant
financing activities in either the three months ended March 31, 2011 or the
three months ended March 31, 2010.

At March 31, 2011 we did not
have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of establishing
off-balance sheet arrangements or other contractually narrow or limited
purposes.

A table of our contractual
obligations was provided in Item 7 in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2010. We lease a 60,217 square foot mixed office
and warehouse facility built to our specifications in Golden Valley, Minnesota,
which functions as our corporate headquarters and primary manufacturing
facility for our sensor products, including the sensors used in our stand-alone
systems products and our semiconductor products. In March 2011 we finalized a
lease amendment for this facility that will become effective upon the June 30,
2011 expiration of the existing lease. The amendment provides that we will
lease approximately 50,762 square feet of the current facility, commencing on
July 1, 2011 and continuing through December 31, 2018. Future minimum lease
payments due under the lease amendment from July 1, 2011 through December 31,
2018 are approximately $5.1 million. We estimate a reduction in average annual
rental expense over the term of the new lease amendment of approximately
$270,000 per year. There have been no other significant changes to our
contractual obligations in the three months ended March 31, 2011. At the
present time, we have no material commitments for capital expenditures.
Purchase commitments for inventory will vary based on the volume of revenue and
resulting inventory requirements.

Our cash, cash
equivalents and marketable securities totaled $22.4 million at March 31, 2011.
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.

Inflation and Foreign Currency
Transactions

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

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

We enter into
foreign exchange forward contracts to hedge against the effect of exchange rate
fluctuations on cash flows denominated in foreign currencies and certain
intercompany financing transactions associated with our subsidiaries in the
United Kingdom and Singapore. These transactions are designated as cash flow
hedges. The effective portion of the gain or loss on the derivative is reported
as a component of other comprehensive income and reclassified into earnings in
the same period during which the hedged transaction affects earnings. The
maximum length of time over which we hedge our exposure to the variability in
future cash flows is 12 months and, accordingly, at March 31, 2011, all of our
open foreign exchange forward contracts had maturities of one year or less. The
dollar equivalent gross notional amount of our foreign exchange forward
contracts designated as cash flow hedges at March 31, 2011 was approximately
$9.7 million.

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Recent Accounting
Developments

In
December 2010, the Financial Accounting Standards Board (FASB) issued
amendments to the guidance on goodwill impairment testing. The amendments
modify Step 1 of the goodwill impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In making that determination, an entity
should consider whether there are any adverse qualitative factors indicating
that impairment may exist. The amendments were effective January 1, 2011
and had no impact on our consolidated financial position, results of operations
or cash flows.

In
January 2010, the FASB issued additional disclosure requirements for fair
value measurements which we included in our interim and annual financial
statements in 2010. Certain disclosure requirements relating to fair value
measurements using significant unobservable inputs (Level 3) were deferred
until January 1, 2011. These new requirements did not have any impact on
our consolidated financial positions, results of operations or cash flows as
they relate only to additional disclosures.

ITEM 3 -
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not
applicable.

ITEM 4  CONTROLS AND PROCEDURES

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

b. During the
quarter ended March 31, 2011, 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.

24

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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,
2010, which could materially affect our business, financial condition or future
results.

ITEM 6  EXHIBITS

|      |                                                                                                                                              
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------
|10.1: | First Amendment to Lease effective as of
 March 14, 2011, by and between Hines REIT Minneapolis Industrial, LLC and
 CyberOptics Corporation.
|      |                                                                                                                                              
|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             

25

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SIGNATURES

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

|                   |                                                                                                                      
|------------------ | ---------------------------------------------------------------------------------------------------------------------
|                   | CYBEROPTICS CORPORATION                                                                                              
|                   |                                                                                                                      
|                   | /s/ Kathleen P. Iverson                                                                                              
|                   | By Kathleen P. Iverson, Chief Executive
 Officer and Chair
 (Principal Executive Officer and Duly Authorized Officer)
|                   |                                                                                                                      
|                   | /s/ Jeffrey A. Bertelsen                                                                                             
|                   | By Jeffrey A. Bertelsen, Chief Financial
 Officer
 (Principal Accounting Officer and Duly Authorized Officer)        
|                   |                                                                                                                      
|Dated: May 9, 2011 |                                                                                                                      

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