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 June 30, 2010  oTRANSITION PURSUANT TO SECTION 13 OR 15(D) 
OF THE SECURITIES EXCHANGE ACT  For the transition period from ______ to ______ COMMISSION FILE NO. (0-16577)   CYBEROPTICS CORPORATION (Exact name of registrant as specified in its charter)  Minnesota
     41-1472057(State or other jurisdiction of
incorporation or organization)
     (I.R.S. Employer
 Identification No.)5900 Golden Hills Drive
MINNEAPOLIS, MINNESOTA
     55416(Address of principal executive offices)
     (Zip Code)
  (763) 542-5000 (Registrants telephone number, including area code)    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
YesxNoo  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YesoNoo  Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer or large accelerated filer in Rule 12b-2 of the Exchange Act.  Large accelerated filero
     
     Accelerated filero
     
     Non-accelerated filero
     
     Smaller Reporting Companyx
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).YesoNox  Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.At July 31, 2010, there were 6,880,049 shares of the registrants Common Stock, no par value, issued and outstanding.


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PART I.  FINANCIAL INFORMATION  ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONDENSED CONSOLIDATED BALANCE SHEETS 
CYBEROPTICS CORPORATION  (In thousands except share information)
     
     (Unaudited)June 30,
2010
     
     (Audited)December 31, 
2009ASSETSCash and cash equivalents
     
     $
     6,170
     
     $
     4,177Marketable securities
     
     
     8,148
     
     
     14,557Accounts receivable, less allowance for doubtful accounts of $1,045 at June 30, 2010 and $1,049 at December 31, 2009
     
     
     14,751
     
     
     8,389Inventories
     
     
     12,371
     
     
     7,745Income tax refunds and deposits
     
     
     2,694
     
     
     2,499Other current assets
     
     
     1,471
     
     
     1,130Deferred tax assets
     
     
     2,040
     
     
     2,040Total current assets
     
     
     47,645
     
     
     40,537Marketable securities
     
     
     4,133
     
     
     3,145Equipment and leasehold improvements, net
     
     
     2,076
     
     
     1,921Intangible and other assets, net
     
     
     524
     
     
     642Goodwill
     
     
     569
     
     
     569Other assets
     
     
     163
     
     
     163Deferred tax assets
     
     
     4,099
     
     
     4,160Total assets
     
     $
     59,209
     
     $
     51,137LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
     
     $
     9,231
     
     $
     3,652Advance customer payments
     
     
     875
     
     
     657Accrued expenses
     
     
     2,725
     
     
     1,880Total current liabilities
     
     
     12,831
     
     
     6,189Other liabilities
     
     
     573
     
     
     546Total liabilities
     
     
     13,404
     
     
     6,735Commitments 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, 6,849,391 shares issued
and outstanding at June 30, 2010 and 6,828,616 at December 31, 2009
     
     
     29,951
     
     
     29,732Accumulated other comprehensive loss
     
     
     (800
     )
     
     (768
     )Retained earnings
     
     
     16,654
     
     
     15,438Total stockholders equity
     
     
     45,805
     
     
     44,402Total liabilities and stockholders equity
     
     $
     59,209
     
     $
     51,137
  SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.    1


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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CYBEROPTICS CORPORATION 
(Unaudited)  Three Months Ended 
June 30,
     
     Six Months Ended 
June 30,(In thousands, except per share amounts)
     
     2010
     
     2009
     
     2010
     
     2009Revenues
     
     $
     16,499
     
     $
     5,179
     
     $
     28,840
     
     $
     9,541Cost of revenues
     
     
     9,843
     
     
     3,581
     
     
     16,928
     
     
     6,565Gross margin
     
     
     6,656
     
     
     1,598
     
     
     11,912
     
     
     2,976Research and development expenses
     
     
     1,707
     
     
     1,730
     
     
     3,484
     
     
     3,807Selling, general and administrative expenses
     
     
     3,714
     
     
     3,702
     
     
     6,891
     
     
     6,634Severance
     
     
     
     
     
     90
     
     
     
     
     
     395Amortization of intangibles
     
     
     46
     
     
     46
     
     
     91
     
     
     91Income (loss) from operations
     
     
     1,189
     
     
     (3,970
     )
     
     1,446
     
     
     (7,951
     )Interest income and other
     
     
     13
     
     
     150
     
     
     90
     
     
     358Income (loss) before income taxes
     
     
     1,202
     
     
     (3,820
     )
     
     1,536
     
     
     (7,593
     )Income tax provision (benefit)
     
     
     233
     
     
     (1,897
     )
     
     320
     
     
     (3,237
     )Net income (loss)
     
     $
     969
     
     $
     (1,923
     )
     $
     1,216
     
     $
     (4,356
     )Net income (loss) per share  Basic
     
     
     $0.14
     
     
     ($0.28
     )
     
     $0.18
     
     
     ($0.64
     )Net income (loss) per share  Diluted
     
     
     $0.14
     
     
     ($0.28
     )
     
     $0.18
     
     
     ($0.64
     )Weighted average shares outstanding  Basic
     
     
     6,847
     
     
     6,781
     
     
     6,843
     
     
     6,776Weighted average shares outstanding  Diluted
     
     
     6,914
     
     
     6,781
     
     
     6,892
     
     
     6,776
  SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.    2


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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
CYBEROPTICS CORPORATION 
(Unaudited)  Six Months Ended June 30,(In thousands)
     
     2010
     
     2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
     
     $
     1,216
     
     $
     (4,356
     )Adjustments to reconcile net income (loss) to net cash used by operating activities:Depreciation and amortization
     
     
     1,036
     
     
     1,161Provision for doubtful accounts
     
     
     14
     
     
     804Deferred taxes
     
     
     99
     
     
     (1,351
     )Foreign currency transaction (gains) losses
     
     
     55
     
     
     (145
     )Stock compensation costs
     
     
     194
     
     
     262Realized gains on available for sale marketable securities
     
     
     
     
     
     (24
     )Changes in operating assets and liabilities:Accounts receivable
     
     
     (6,376
     )
     
     1,354Inventories
     
     
     (4,906
     )
     
     (678
     )Income tax refunds and deposits
     
     
     (195
     )
     
     (1,403
     )Other current assets
     
     
     (274
     )
     
     161Accounts payable
     
     
     5,577
     
     
     (427
     )Advance customer payments
     
     
     218
     
     
     82Accrued expenses
     
     
     874
     
     
     (1,101
     )Net cash used by operating activities
     
     
     (2,468
     )
     
     (5,661
     )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from maturities of available for sale marketable securities
     
     
     10,031
     
     
     5,612Proceeds from sales of available for sale marketable securities
     
     
     2,644
     
     
     2,478Purchases of available for sale marketable securities
     
     
     (7,429
     )
     
     (4,759
     )Additions to equipment and leasehold improvements
     
     
     (692
     )
     
     (296
     )Additions to patents
     
     
     (87
     )
     
     (184
     )Net cash provided by investing activities
     
     
     4,467
     
     
     2,851CASH 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
     
     
     (31
     )
     
     13Net increase (decrease) in cash and cash equivalents
     
     
     1,993
     
     
     (2,797
     )Cash and cash equivalents  beginning of period
     
     
     4,177
     
     
     4,516Cash and cash equivalents  end of period
     
     $
     6,170
     
     $
     1,719
  SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.    3


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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION  1.  INTERIM REPORTING:  The interim condensed consolidated financial statements presented herein as of June 30, 2010, and for the three and six month periods ended June 30, 2010 and 2009, are unaudited, but in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.  The results of operations for the three and six month periods ended June 30, 2010 do not necessarily indicate the results to be expected for the full year. The December 31, 2009 consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2009.  2.  MARKETABLE SECURITIES:  Our investments in marketable securities are classified as available for sale and consist of the following:  June 30, 2010(In thousands)
     
     Cost
     
     Unrealized
Gains
     
     Unrealized
Losses
     
     Fair ValueShort TermU.S. government and agency obligations
     
     $
     6,758
     
     66
     
     
     
     6,824Corporate debt securities and certificates of deposit
     
     
     1,317
     
     7
     
     
     
     1,324Marketable securities  short term
     
     $
     8,075
     
     73
     
     
     
     8,148Long TermU.S. government and agency obligations
     
     $
     3,042
     
     16
     
     
     
     3,058Corporate debt securities and certificates of deposit
     
     
     807
     
     2
     
     
     
     809Asset backed securities
     
     
     200
     
     8
     
     
     
     208Equity securities
     
     
     84
     
     
     
     (26
     )
     58Marketable securities  long term
     
     $
     4,133
     
     26
     
     (26
     )
     4,133
    4


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December 31, 2009(In thousands)
     
     Cost
     
     Unrealized
Gains
     
     Unrealized
Losses
     
     Fair ValueShort TermU.S. government and agency obligations
     
     $
     11,199
     
     158
     
     
     
     11,357Corporate debt securities and certificates of deposit
     
     
     3,180
     
     20
     
     
     
     3,200Marketable securities  short term
     
     $
     14,379
     
     178
     
     
     
     14,557Long TermU.S. government and agency obligations
     
     $
     2,757
     
     47
     
     
     
     2,804Corporate debt securities
     
     
     101
     
     
     
     
     
     101Asset backed securities
     
     
     200
     
     10
     
     
     
     210Equity securities
     
     
     84
     
     
     
     (54
     )
     30Marketable securities  long term
     
     $
     3,142
     
     57
     
     (54
     )
     3,145
  Our investment in equity securities was in a $26,000 unrealized loss position at June 30, 2010 and a $54,000 unrealized loss position at December 31, 2009 due to weak economic and stock market conditions.  We intend to hold this security indefinitely and expect its value to recover given improved economic and market conditions.  Our investments in marketable debt securities all have maturities of less than five years. At June 30, 2010, marketable debt securities valued at $12,223,000 were in an unrealized gain position totaling $99,000.  At December 31, 2009, marketable debt securities valued at $16,463,000 were in an unrealized gain position totaling $235,000 and marketable debt securities valued at $1,209,000 were in an insignificant unrealized loss position totaling several hundred dollars (all had been in an unrealized loss position for less than twelve months).  Net pre-tax unrealized gains for marketable securities of $73,000 at June 30, 2010 and $182,000 at December 31, 2009 were recorded as a component of accumulated other comprehensive income (loss) in stockholders equity.  In the three months ended June 30, 2010 we received proceeds of $1,500,000 from the sale of marketable securities.  In the six months ended June 30, 2010 we received proceeds of $2,644,000 from the sale of marketable securities.  No gain or loss was recognized on any of the sales in 2010.  In the three months ended June 30, 2009 we received proceeds of $660,000 from the sale of marketable securities and recognized a gain of $13,000 from the sales.  In the six months ended June 30, 2009, we received proceeds of $2,478,000 from the sale of marketable securities and recognized a gain of $24,000 from the sales.  3.  FAIR VALUE MEASUREMENTS:  We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1).  The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2).   The lowest priority is given to unobservable inputs (Level 3).    5


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The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of June 30, 2010 and December 31, 2009 according to the three-level fair value hierarchy:  Fair Value Measurements at June 30, 2010 Using(In thousands)
     
     Balance
June 30,
2010
     
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
     Significant Other
Observable
Inputs
(Level 2)
     
     Significant
Unobservable
Inputs
(Level 3)Cash equivalents
     
     $
     3,809
     
     $
     
     
     $
     3,809
     
     $
     U.S. government and agency
obligations
     
     
     9,882
     
     
     
     
     
     9,882
     
     
     Corporate debt securities
     
     
     2,133
     
     
     
     
     
     2,133
     
     
     Asset backed securities
     
     
     208
     
     
     
     
     
     208
     
     
     Equity securities
     
     
     58
     
     
     58
     
     
     
     
     
     Total
     
     $
     16,090
     
     $
     58
     
     $
     16,032
     
     $
     
  Fair Value Measurements at December 31, 2009 Using(In thousands)
     
     Balance
December 31, 
2009
     
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
     Significant Other
Observable
Inputs
(Level 2)
     
     Significant
Unobservable
Inputs
(Level 3)Cash equivalents
     
     $
     2,320
     
     $
     
     
     $
     2,320
     
     $
     U.S. government and agency
obligations
     
     
     14,161
     
     
     
     
     
     14,161
     
     
     Corporate debt securities
     
     
     3,301
     
     
     
     
     
     3,301
     
     
     Asset backed securities
     
     
     210
     
     
     
     
     
     210
     
     
     Equity securities
     
     
     30
     
     
     30
     
     
     
     
     
     Total
     
     $
     20,022
     
     $
     30
     
     $
     19,992
     
     $
     
  During the six months ended June 30, 2010 there were no significant transfers to or from the three level hierarchy.  The carrying amounts of financial instruments such as cash equivalents, accounts receivable, income tax refunds 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.  Our foreign currency swap agreements are structured to mature on the last day of each quarter.  The fair value associated with these agreements is inconsequential and represents a Level 2 measurement.  We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.  At June 30, 2010, cash and cash equivalents consist of funds maintained in demand deposit accounts, money market accounts, corporate debt instruments and U.S. government backed obligations.  Some cash and cash equivalent balances may exceed federally insured limits.  4.  ACCOUNTING FOR STOCK-BASED COMPENSATION:  All equity-based payments to employees, including grants of employee stock options, are recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award.  We utilize the straight-line method of expense recognition over the awards service period for our graded vesting options.  The fair value of stock options granted has been determined using the Black-Scholes model.   The compensation expense recognized for all equity based awards is net of estimated forfeitures, which are based on historical data.  We have classified equity based compensation within our statement of operations in the same manner as our cash based employee compensation costs.    6


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The fair value of the options granted to our employees was estimated on the date of grant using the Black-Scholes model.  Stock options for 47,000 shares of stock and restricted stock units for 350 shares of stock were granted in the six months ended June 30, 2010 to certain key employees.  We issued 4,000 shares of common stock under our stock grant plan for non-employee directors upon their re-election to the board of directors in May 2010.  These stock options, restricted stock units and share grants were valued at their fair market value on the date of grant, with recognition of compensation expense over the corresponding vesting period.  Equity based compensation expense in the three months ended June 30, 2010 totaled $121,000 and includes $46,000 for stock option awards, $18,000 for our employee stock purchase plan, $19,000 for unvested restricted stock units and $38,000 for shares issued to our non-employee directors upon their re-election to our board in May 2010. Equity based compensation expense in the six months ended June 30, 2010 totaled $195,000 and includes $83,000 for stock option awards, $36,000 for our employee stock purchase plan, $38,000 for unvested restricted stock units and $38,000 for shares issued to our non-employee directors upon their re-election to our board in May 2010.  Equity based compensation expense in the three months ended June 30, 2009 totaled $84,000 and includes $49,000 for stock option awards, $11,000 for our employee stock purchase plan, $10,000 for unvested restricted stock units and $14,000 for shares issued to our non-employee directors.  Equity based compensation expense in the six months ended June 30, 2009 totaled $262,000 and includes $141,000 for stock option awards, $27,000 for our employee stock purchase plan, $30,000 for unvested restricted stock units, $14,000 for shares issued to our non-employee directors and $50,000 for shares issued to an officer under an incentive compensation arrangement.  At June 30, 2010, the total unrecognized compensation cost related to non-vested equity based compensation arrangements was $616,000 and the related weighted average period over which it is expected to be recognized is 2.2 years.  The Black Scholes valuation model incorporates ranges of assumptions that are disclosed in the table below. The risk-free interest rate is based on the United States Treasury yield curve at the time of grant with a remaining term equal to the expected life of the awards. We estimated the expected term for our graded vesting options, representing the length of time in years that the options are expected to be outstanding, using the simplified method.  We continued to use the simplified method in 2010 because our historical exercise experience is not expected to be representative of exercise patterns in the future, due to our recent restructuring activities.  Expected volatility was computed based on historical fluctuations in the daily price of our common stock.  For stock options granted during the six months ending June 30, 2010, we utilized the fair value of our common stock on the date of grant and employed the following key assumptions in computing fair value using the Black-Scholes option-pricing model:  Black Scholes Assumptions:
     
     Six Months Ending 
June 30, 2010Risk-free interest rates
     
     
     2.47% - 2.75%Expected life in years
     
     
     4.75Expected volatility
     
     
     50% - 52%Expected dividends
     
     
     NoneWeighted average fair value on grant date
     
     
     $4.80
  Stock Options  We have three stock incentive plans that are administered under the supervision of the Compensation Committee of the Board of Directors.  There are 828,209 shares of common stock reserved in the aggregate for issuance of options and other stock based benefits under these plans, including restricted stock units and share grants to employees, officers, non-employee directors and others.  Reserved shares underlying canceled options are available for future grant under our active plans.  Options are granted at an option price per share equal to or greater than the market value on the date of grant.  Generally, options granted to employees vest over a four-year period and expire five, seven, or ten years after the date of grant.  Stock options for 47,000 shares of stock were granted during the six months ended June 30, 2010.   As of June 30, 2010, there were 336,445 shares of common stock available under these plans for future issuance to employees, officers and others. There are no options available under these plans for future issuance to non-employee directors. In addition, there are 50,000 shares reserved and included in the plan summaries below that are not part of the three stock incentive plans.    7


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The following is a summary of stock option activity during the six months ended June 30, 2010:  Options 
Outstanding
     
     Weighted Average
Exercise Price Per
ShareOutstanding, December 31, 2009
     
     
     549,095
     
     $
     10.04Granted
     
     
     47,000
     
     
     10.70Exercised
     
     
     (64,000
     )
     
     6.02Expired
     
     
     (13,500
     )
     
     24.83Forfeited
     
     
     
     
     
     Outstanding, June 30, 2010
     
     
     518,595
     
     $
     10.21Exercisable, June 30, 2010
     
     
     343,578
     
     $
     11.66
  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 June 30, 2010 was 3.89 years and $705,000.  The weighted average remaining contractual term and aggregate intrinsic value of options that were exercisable at June 30, 2010 was 2.93 years and $187,000.  The aggregate intrinsic value of stock options that were exercised in the six months ended June 30, 2010 was $104,000.  During the six months ended June 30, 2010, we received total proceeds of $25,000 from the exercise of stock options.  The excess tax benefit associated with the exercise of stock options in the three and six months ended June 30, 2010 was inconsequential.  Restricted Stock Units  Our 1998 Stock Incentive Plan also permits our Compensation Committee to grant other stock-based benefits, including restricted stock units.  Restricted stock units are valued at a price equal to the fair market value of our common stock on the date of grant, vest over a four year period and entitle the holders to one share of our common stock for each restricted stock unit.  The aggregate fair value of outstanding restricted stock units as of June 30, 2010 was $224,000.  A summary of activity in non-vested restricted stock units for the six months ended June 30, 2010 is as follows:  Non vested restricted stock units
     
     Shares
     
     Weighted  Average
Grant Date Fair ValueNon vested at December 31, 2009
     
     
     22,819
     
     $
     6.79Granted
     
     
     350
     
     
     7.71Vested
     
     
     
     
     
     Forfeited
     
     
     
     
     
     Non vested at June 30, 2010
     
     
     23,169
     
     $
     6.80
  Employee Stock Purchase Plan  We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may designate from 1% to 10% of their compensation to be withheld through payroll deductions, up to a maximum of $6,500 in each plan year, for the purchase of common stock at 85% of the lower of the market price on the first or last day of the offering period. There were no shares issued under this plan in the six months ended June 30, 2010 or the six months ended June 30, 2009. As of June 30, 2010, 92,002 shares remain available for future issuance under this plan.  Stock Grant Plan for Non-Employee Directors  Our stock grant plan for non-employee directors provides for automatic grants of 1,000 shares of our common stock to each of our non-employee directors upon their re-election to the board of directors.  The plan provides for a total of 30,000 shares of our common stock for issuance to directors and will expire on May 19, 2018.  We issued a total of 4,000 shares of common stock under this plan in connection with our annual meeting in May 2010, resulting in $38,000 of stock compensation expense in the three and six months ended June 30, 2010.There are presently 20,000 shares of common stock reserved in the aggregate for future issuance under this plan.    8


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5.  INVENTORIES AND WARRANTIES:  Inventories consist of the following:  (In thousands)
     
     June 30, 2010
     
     December 31, 2009Raw materials and purchased parts
     
     $
     6,159
     
     $
     3,312Work in process
     
     
     1,305
     
     
     637Finished goods
     
     
     4,907
     
     
     3,796Total inventories
     
     $
     12,371
     
     $
     7,745
  Warranty costs:  We provide for the estimated cost of product warranties at the time revenue is recognized, generally for one year. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.  Our warranty liability is included as a component of accrued expenses.  At the end of each reporting period we revise our estimated warranty liability based on these factors. A reconciliation of the changes in our estimated warranty liability is as follows:  Three Months Ended
June 30,
     
     Six Months Ended
June 30,(In thousands)
     
     2010
     
     2009
     
     2010
     
     2009Balance at beginning of period
     
     $
     552
     
     $
     636
     
     $
     488
     
     $
     823Accrual for warranties
     
     
     324
     
     
     114
     
     
     505
     
     
     198Settlements made during the period
     
     
     (269
     )
     
     (241
     )
     
     (386
     )
     
     (512
     )Balance at end of period
     
     $
     607
     
     $
     509
     
     $
     607
     
     $
     509
  Extended warranty:  Our extended warranty liability is included as a component of advance customer payments.  A reconciliation of the changes in our extended warranty liability is as follows:  Three Months Ended
June 30,
     
     Six Months Ended
June 30,(In thousands)
     
     2010
     
     2009
     
     2010
     
     2009Balance at beginning of period
     
     $
     697
     
     $
     608
     
     $
     636
     
     $
     605Revenue deferrals
     
     
     290
     
     
     125
     
     
     466
     
     
     206Amortization of deferred revenue
     
     
     (112
     )
     
     (94
     )
     
     (227
     )
     
     (172
     )Balance at end of period
     
     $
     875
     
     $
     639
     
     $
     875
     
     $
     639
    9


---



6.  INTANGIBLE ASSETS:  Intangible assets consist of the following:  As of June 30, 2010
     
     As of December 31, 2009(In thousands)
     
     Gross 
Carrying
Amount
     
     Accumulated
Amortization
     
     Net
     
     Gross
Carrying
Amount
     
     Accumulated
Amortization
     
     NetDeveloped technology
     
     $
     7,775
     
     $
     (7,576
     )
     $
     199
     
     $
     7,775
     
     $
     (7,485
     )
     $
     290Patents and trademarks
     
     
     2,768
     
     
     (2,443
     )
     
     325
     
     
     2,681
     
     
     (2,329
     )
     
     352Total
     
     $
     10,543
     
     $
     (10,019
     )
     $
     524
     
     $
     10,456
     
     $
     (9,814
     )
     $
     642
  Amortization expense for the three and six month periods ended June 30, 2010 and 2009 is as follows:  Three Months Ended
June 30,
     
     Six Months Ended
June 30,(In thousands)
     
     2010
     
     2009
     
     2010
     
     2009Developed technology
     
     $
     46
     
     $
     46
     
     $
     91
     
     $
     91Patents and trademarks
     
     
     56
     
     
     80
     
     
     114
     
     
     156Total
     
     $
     102
     
     $
     126
     
     $
     205
     
     $
     247
  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:  $203,000 for the remainder of 2010 and $244,000 in 2011, $66,000 in 2012, and $11,000 in 2013.    10


---



7.  BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS:  Our electronic assembly segment is the design, manufacture and sale of optical process control sensors and inspection systems for the electronic assembly equipment market.  The semiconductor segment is the design, manufacture and sale of optical and other process control sensors and related equipment for the semiconductor capital equipment market.  Information regarding our segments is as follows:  Three Months Ended
June 30,
     
     Six Months Ended
June 30,(In thousands)
     
     2010
     
     2009
     
     2010
     
     2009Revenue:Electronic AssemblyOEM Sensors
     
     $
     6,485
     
     $
     1,204
     
     $
     11,604
     
     $
     2,644SMT Systems
     
     
     8,716
     
     
     3,320
     
     
     14,761
     
     
     5,565Total Electronic Assembly
     
     
     15,201
     
     
     4,524
     
     
     26,365
     
     
     8,209Semiconductor
     
     
     1,298
     
     
     655
     
     
     2,475
     
     
     1,332Total
     
     $
     16,499
     
     $
     5,179
     
     $
     28,840
     
     $
     9,541Income (loss) from operations:Electronic Assembly
     
     $
     887
     
     $
     (3,753
     )
     $
     952
     
     $
     (7,377
     )Semiconductor
     
     
     302
     
     
     (217
     )
     
     494
     
     
     (574
     )Total income (loss) from operations
     
     
     1,189
     
     
     (3,970
     )
     
     1,446
     
     
     (7,951
     )Interest income and other
     
     
     13
     
     
     150
     
     
     90
     
     
     358Income (loss) before taxes
     
     $
     1,202
     
     $
     (3,820
     )
     $
     1,536
     
     $
     (7,593
     )Depreciation and amortization:Electronic Assembly
     
     $
     490
     
     $
     503
     
     $
     920
     
     $
     1,018Semiconductor
     
     
     59
     
     
     71
     
     
     116
     
     
     143Total
     
     $
     549
     
     $
     574
     
     $
     1,036
     
     $
     1,161
  Export sales were 87% of revenue in the three months ended June 30, 2010 and 85% of revenue in the six months ended June 30, 2010.  Export sales were 76% of revenue in the three months ended June 30, 2009 and 74% of revenue in the six months ended June 30, 2009.  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
June 30,
     
     Six Months Ended
June 30,(In thousands)
     
     2010
     
     2009
     
     2010
     
     2009Americas
     
     $
     79
     
     $
     493
     
     $
     282
     
     $
     550Europe
     
     
     3,250
     
     
     1,453
     
     
     6,670
     
     
     3,567Asia
     
     
     10,951
     
     
     909
     
     
     17,451
     
     
     1,846Other
     
     
     56
     
     
     1,099
     
     
     86
     
     
     1,099Total export sales
     
     $
     14,336
     
     $
     3,954
     
     $
     24,489
     
     $
     7,062
  Historically, we have been dependent upon two electronic assembly customers, Assembleon and Juki, for a significant portion of our revenue.  For the six months ended June 30, 2010, sales to Juki accounted for 20% of our total revenue and sales to Assembleon accounted for 11% of our total revenue.    11


---



8.  NET INCOME (LOSS) PER SHARE:  Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Net income (loss) per diluted share is computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, restricted stock units and from participation in our employee stock purchase plan, as calculated using the treasury stock method. All potentially dilutive common equivalent shares are excluded from the calculation of net loss per diluted share due to their anti-dilutive effect. As a result, no common equivalent shares were included in the calculations of net loss per diluted share for the three or six months ended June 30, 2009.  The components of net income (loss) per basic and diluted share are as follows:  (In thousands except per share amounts)
     
     Net income 
(loss)
     
     Weighted Average
Shares Outstanding
     
     Per Share
AmountThree Months Ended June 30, 2010:Basic
     
     $
     969
     
     
     6,847
     
     $
     0.14Dilutive effect of common equivalent shares
     
     
     
     
     
     67
     
     
     Dilutive
     
     $
     969
     
     
     6,914
     
     $
     0.14(In thousands except per share amounts)
     
     Net income 
(loss)
     
     Weighted Average
Shares Outstanding
     
     
     Per Share
AmountThree Months Ended June 30, 2009:Basic
     
     $
     (1,923
     )
     
     6,781
     
     $
     (0.28
     )Dilutive effect of common equivalent shares
     
     
     
     
     
     
     
     
     Dilutive
     
     $
     (1,923
     )
     
     6,781
     
     $
     (0.28
     )(In thousands except per share amounts)
     
     Net income 
(loss)
     
     Weighted Average
Shares Outstanding
     
     
     Per Share
AmountSix Months Ended June 30, 2010:Basic
     
     $
     1,216
     
     
     6,843
     
     $
     0.18Dilutive effect of common equivalent shares
     
     
     
     
     
     49
     
     
     Dilutive
     
     $
     1,216
     
     
     6,892
     
     $
     0.18(In thousands except per share amounts)
     
     Net income 
(loss)
     
     Weighted Average
Shares Outstanding
     
     
     Per Share
AmountSix Months Ended June 30, 2009:Basic
     
     $
     (4,356
     )
     
     6,776
     
     $
     (0.64
     )Dilutive effect of common equivalent shares
     
     
     
     
     
     
     
     
     Dilutive
     
     $
     (4,356
     )
     
     6,776
     
     $
     (0.64
     )
    12


---



The calculation of diluted net income (loss) per common share excludes 241,000 potentially dilutive shares for the three months ended June 30, 2010, 671,000 potentially dilutive shares for the three months ended June 30, 2009, 297,000 potentially dilutive shares for the six months ended June 30, 2010 and 739,000 potentially dilutive shares for the six months ended June 30, 2009, because their effect would be anti-dilutive.  9.  COMPREHENSIVE INCOME (LOSS):  Components of comprehensive income (loss) include net income (loss), foreign-currency translation adjustments, unrealized gains and losses on available-for-sale securities and reclassification adjustments.  Total comprehensive income (loss) amounted to $940,000 for the three months ended June 30, 2010 and $(2,041,000) for the three months ended June 30, 2009.  Total comprehensive income (loss) amounted to $1,185,000 for the six months ended June 30, 2010 and $(4,659,000) for the six months ended June 30, 2009.  At December 31, 2009 and June 30, 2010 components of accumulated other comprehensive loss is as follows:  (In thousands)
     
     
     Foreign 
Currency
Translation
     
     
     Unrealized Gains
(Losses) on 
Securities
     
     
     Accumulated 
Other
Comprehensive
 LossBalance December 31, 2009
     
     $
     (887
     )
     $
     119
     
     $
     (768
     )Unrealized losses on securities, net of tax of $38
     
     
     
     
     
     (71
     )
     
     (71
     )Translation adjustments
     
     
     39
     
     
     
     
     
     39Balance June 30, 2010
     
     $
     (848
     )
     $
     48
     
     $
     (800
     )
  10.  INCOME TAXES:  We recorded a provision for income tax expense in the six months ended June 30, 2010 at an effective tax rate of 20.8%, compared to an income tax benefit in the six months ended June 30, 2009 at an effective tax rate of 42.6%.  Our recorded income tax benefit for the three and six months ended June 30, 2009 includes a $537,000 discrete benefit from reversal of a portion of our reserve for income taxes resulting from settlement of Internal Revenue Service audits of our 2006 and 2007 federal income tax returns. Discrete items impacting the effective tax rate in the six months ended June 30, 2010 were inconsequential. Other items impacting the effective tax rate for 2010, compared to 2009, include the anticipated benefit from  the domestic manufacturers production incentive and additional tax expense in foreign tax jurisdictions with lower tax rates than the U.S federal statutory rate.  The effective tax rate for the six months ended June 30, 2010 was also favorably impacted by recognition of the benefit from the Minnesota state R&D tax credit.  No benefit from this credit was recognized in the first quarter of 2010 because the credit had not yet been signed into law.  We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and foreign net operating loss carry forwards.  A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our financial statements become deductible for income tax purposes, or when net operating loss carry forwards or credits are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.  Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives.    13


---



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 June 30, 2010.  Our results in both 2008 and 2009 were negatively impacted by the recent global economic slowdown, and we incurred a loss in the United States in both 2008 and 2009, where most of our net deferred tax assets are recorded. Therefore, achievement of profitability in the United States will be a significant factor in determining our continuing ability to carry these deferred tax assets without recording a valuation allowance.  If future results from our operations are less than projected, a valuation allowance may be required against virtually all of our deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.  Deferred tax assets at June 30, 2010, include net operating loss carry forwards incurred in the UK by CyberOptics Ltd., which was acquired in 1999. The utilization of these net operating loss carry forwards is dependent on CyberOptics Ltd.s ability to generate sufficient UK taxable income during the carry forward period.  11.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:  We enter into foreign currency swap agreements to hedge short term inter-company financing transactions with our subsidiaries in the United Kingdom and Singapore.  These currency swap agreements are structured to mature near the last day of each quarter, and are designated as cash flow hedges.  At June 30, 2010, we had two open swap agreements for £225,000 British Pounds Sterling and $1,000,000 Singapore dollars that were purchased on June 30, 2010, the fair value of which was inconsequential.  Gains and losses from foreign currency transactions and foreign currency swap agreements are recognized in interest income and other in our statement of operations.  In the three months ended June 30, 2010, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(3,500) in addition to foreign currency transaction gains (losses) on the underlying inter-company balances of $(7,000).  In the six months ended June 30, 2010, we recognized net gains (losses) from settlement of foreign currency swap agreements of $30,500 that offset foreign currency transactions gains (losses) on the underlying inter-company balances of $(55,000).  In the three months ended June 30, 2009, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(192,000) that offset foreign currency transaction gains (losses) on the underlying inter-company balances of $188,000.  In the six months ended June 30, 2009, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(182,000) that offset foreign currency transactions gains (losses) on the underlying inter-company balances of $145,000.  Our foreign currency swap agreements contain credit risk to the extent that our bank counter-parties may be unable to meet the terms of the agreements.  We minimize such risk by limiting our counter-parties to major financial institutions.  We do not expect material losses as a result of defaults by other parties.  12.  CONTINGENCIES:  In the ordinary course of business, we are a defendant in miscellaneous claims and disputes.  While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.  In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including customers, with respect to certain matters.  In these instances, we have agreed to hold the other parties harmless against losses arising out of intellectual property infringement or other types of claims.  These agreements may limit the time within which an indemnification claim can be made, and almost always limit the amount of the claim.  It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.  Historically, payments made, if any, under these agreements have not had a material impact on our operating results, financial position or cash flows.    14


---



13.  SEVERANCE COSTS:  We started to incur severance costs in February 2008 in connection with our decision to move a significant portion of development and manufacturing for our systems products to Singapore.  The transition of systems-related product development was substantially complete by the end of the fourth quarter of 2008, and the transition of systems-related manufacturing was substantially complete by the end of the first quarter of 2009.  Severance costs incurred in connection with the February 2008 decision to move our systems related product development and manufacturing to Singapore totaled $29,000 in the three months ended June 30, 2009 and $80,000 in the six months ended June 30, 2009.  In February 2009, we further reduced our workforce by 24 positions in response to the weakening global economy, our transition to Singapore and our decision to consolidate manufacturing for our semiconductor products in our Minneapolis facility.  Severance costs incurred in connection with the February 2009 workforce reduction totaled $61,000 in the three months ended June 30, 2009 and $315,000 in the six months ended June 30, 2009.  All of the aforementioned severance costs incurred in 2009 were paid prior to December 31, 2009.  No severance costs were incurred in the six months ended June 30, 2010.  All of the severance costs related to the February 2008 transition to Singapore, and the February 2009 workforce reduction have been classified as severance in our statement of operations.  14.  RECENT ACCOUNTING DEVELOPMENTS:  Prior to January 1, 2010, we recognized revenue based on multiple element revenue guidance which required the existence of vendor specific objective evidence of fair value (VSOE) for the undelivered elements in an arrangement in order for us to account for the elements separately.  We utilized the residual method of allocation to account for delivered elements.  In October 2009, the Financial Accounting Standards Board (FASB) amended guidance inFASB Accounting Standards CodificationTM(ASC) 605,Revenue Recognition, 25, Multiple-Element Arrangements, to (1) modify the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and instead requires that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price.  The FASB also issued guidance to amend the scope of ASC 985,Software, 605, Revenue Recognition, to exclude arrangements with tangible products containing both software and non-software components that function together to deliver a products essential functionality.  Under the amended guidance, consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method. Selling price is determined based on a selling price hierarchy, consisting of VSOE, third party evidence or estimated selling price.  Under the amended guidance, we determined an estimated selling price for each of the elements in our multiple elements sales based on the selling price hierarchy and allocated consideration to the deliverables using the relative selling price method.  We have adopted the amended guidance effective January 1, 2010.  The impact of adopting the amended guidance had the effect of increasing our revenue by less than $30,000 in the three months ended June 30, 2010 and by less than $51,000 in the six months ended June 30, 2010. The impact of adopting the amended guidance on our results for 2009 would have been insignificant.  In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)  Improving Disclosures about Fair Value Measurements(ASU No. 2010-06). ASU No. 2010-06 requires new disclosures regarding significant transfers in and out of Levels 1 and 2, as well as information about activity in Level 3 fair value measurements, including presenting information about purchases, sales, issuances and settlements on a gross versus a net basis in the Level 3 activity roll forward. In addition, ASU No. 2010-06 clarifies existing disclosures regarding input and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities. ASU No. 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures pertaining to purchases, sales, issuances and settlements in the roll forward of Level 3 activity; those disclosures are effective for interim and annual periods beginning after December 15, 2010. Our adoption of ASU No. 2010-06 effective January 1, 2010 had no current impact on our consolidated financial position, results of operations or cash flows.    15


---



ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  CRITICAL ACCOUNTING POLICIES AND ESTIMATES:  The preparation of the financial information contained in this 10-Q requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an ongoing basis, including those related to allowances for doubtful accounts and returns, warranty obligations, inventory valuation, the carrying value and any impairment of intangible assets, and income taxes. These critical accounting policies are discussed in more detail in the Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year ended December 31, 2009.  FORWARD LOOKING STATEMENTS:  The following managements discussion and analysis contains a number of estimates and predictions that are forward looking rather than based on historical fact.  Among other matters, we discuss (i) our expectations regarding the transfer of our research and development and manufacturing operations for our systems products to Singapore; (ii) our level of anticipated revenues and net income for the third quarter of 2010; (iii) the potential margin improvements resulting from our next-generation solder paste and automated optical inspection (AOI) systems; (iv) the timing of initial revenue and margin improvements from other new products that we have under development or expect to introduce in 2010; (v) our expectations regarding market acceptance ofWaferSenseÔand our other semiconductor products; (vi) our beliefs regarding trends in the general economy and its impact on markets for our equipment; and (vii) the impact of currency fluctuations on our operations.  Although we have made these statements based on our experience and best estimate of future events, there may be events or factors that we have not anticipated, and the accuracy of our statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2009.  RESULTS OF OPERATIONS:  General  Our products are sold primarily into the electronics assembly, semiconductor DRAM memory, and semiconductor fabrication capital equipment markets, where we sell products both to original equipment manufacturers of production equipment and to end-user customers that produce circuit boards and semiconductor wafers and devices. Historically these markets have been very cyclical, with periods of rapid growth as worldwide capacity is added to support increased consumer demand for electronic products, and new capital equipment is purchased as a result of technology changes in electronics components, such as miniaturization, and changing production requirements. These periods of growth have historically been followed by periods of excess capacity and reduced capital spending.  Our results were favorably impacted in 2006 and 2007 as the worldwide demand for cell phones, smart phones, laptops and other consumer electronics remained strong, driving the need for increased production of printed circuit boards and memory modules, and thereby increasing demand for our electronic assembly and semiconductor products.  After peaking in the third quarter of 2007, our revenue declined sequentially each quarter through the first quarter of 2009, as our results were negatively impacted by reduced levels of capital spending for electronics manufacturing capacity brought about by the deepening weakness in the global economy.  New orders dropped off sharply late in the fourth quarter of 2008 as the global economy fell into a severe recession, and our results for 2009 were adversely affected by the ongoing weakness in the global electronics market.  Even before the recession, we worked to improve the efficiencies of our operations.  In February 2008, we commenced plans to move a significant portion of our systems-related product development and manufacturing to Singapore.  The transition of these functions to Singapore was substantially complete by the end of the first quarter of 2009 and has resulted in lower costs and a more focused R&D effort.  Further, in direct response to the recession, we implemented workforce reductions in November 2008 and February 2009, including consolidation of manufacturing operations for our semiconductor products into our Minneapolis, Minnesota headquarters facility.   Implementation of these cost reduction actions has not impacted any of our strategic growth programs.    16


---



We believe that continued and timely development of new products and enhancements to existing products is essential to growing our position in the market. We commit substantial resources to research and development efforts, which play a critical role in maintaining and advancing our position as a leading provider of optical sensors and systems. During the past several years, research and development efforts have been focused on a number of development activities critical to our future growth and success, including the following:  
     Our stand alone next generation SE500 solder paste inspection system and our new next generation QX500 automated optical inspection (AOI) system.
     A new mid-range SE350 solder paste inspection system based on the 3D inspection technology used in the SE500.  The SE350 is a lower cost system for customers that do not require the full inspection functionality of the SE500.
     Our common hardware platforms and sensor technology utilized in both our new QX500 automated optical inspection (AOI) system and a new embedded inspection solution we have developed for DEK offering 100% 2D solder paste inspection with no cycle time penalty.
     Our Embedded Process Verification (EPV®) technology.
     A new solar wafer alignment camera capable of performing accurate high-speed alignment measurements within the wafer print nest, including traditional wafer edge alignment of both monocrystalline and polycrystalline wafer materials.
  The global electronics market is starting to strengthen.  We are seeing significant demand from manufacturers of SMT assembly equipment who purchase our alignment sensor products, and for our stand alone solder paste inspection and AOI systems, particularly from large original design manufacturers in Asia.  We believe that these improving market conditions, the efficiencies in operations we have implemented, and the new products we have introduced and anticipate introducing in 2010, will lead to improved operating results and a return to profitability for the coming year.  For the quarter ending June 30, 2010, we generated a profit of $0.14 per share on revenue of $16.5 million, a significant improvement when compared to the quarter ending June 30, 2009.  In addition, we are forecasting a profit of $0.14 to $0.19 per share in the third quarter of 2010 on revenue of $15.0-$16.0 million.    17


---



Segment Results  Operating results for our electronic assembly and semiconductor segments for the three and six month periods ended June 30, 2010 and 2009 are as follows:  Three months ended June 30, 2010
     
     Three months ended June 30, 2009(In thousands)
     
     Electronic
Assembly
     
     Semi-
Conductor
     
     Total
     
     Electronic
Assembly
     
     Semi-
Conductor
     
     TotalRevenues
     
     $
     15,201
     
     $
     1,298
     
     $
     16,499
     
     $
     4,524
     
     $
     655
     
     $
     5,179Cost of revenues
     
     
     9,455
     
     
     388
     
     
     9,843
     
     
     3,304
     
     
     277
     
     
     3,581Gross margin
     
     
     5,746
     
     
     910
     
     
     6,656
     
     
     1,220
     
     
     378
     
     
     1,598Research and development expenses
     
     
     1,460
     
     
     247
     
     
     1,707
     
     
     1,484
     
     
     246
     
     
     1,730Selling, general and administrative expenses
     
     
     3,371
     
     
     343
     
     
     3,714
     
     
     3,396
     
     
     306
     
     
     3,702Severance
     
     
     
     
     
     
     
     
     
     
     
     65
     
     
     25
     
     
     90Amortization of intangibles
     
     
     28
     
     
     18
     
     
     46
     
     
     28
     
     
     18
     
     
     46Income (loss) from
operations
     
     $
     887
     
     $
     302
     
     $
     1,189
     
     $
     (3,753
     )
     $
     (217
     )
     $
     (3,970
     )
  Six months ended June 30, 2010
     
     Six months ended June 30, 2009(In thousands)
     
     Electronic
Assembly
     
     Semi-
Conductor
     
     Total
     
     Electronic
Assembly
     
     Semi-
Conductor
     
     TotalRevenue
     
     $
     26,365
     
     $
     2,475
     
     $
     28,840
     
     $
     8,209
     
     $
     1,332
     
     $
     9,541Cost of revenue
     
     
     16,197
     
     
     731
     
     
     16,928
     
     
     5,980
     
     
     585
     
     
     6,565Gross margin
     
     
     10,168
     
     
     1,744
     
     
     11,912
     
     
     2,229
     
     
     747
     
     
     2,976Research and development expenses
     
     
     2,965
     
     
     519
     
     
     3,484
     
     
     3,270
     
     
     537
     
     
     3,807Selling, general and administrative expenses
     
     
     6,196
     
     
     695
     
     
     6,891
     
     
     6,000
     
     
     634
     
     
     6,634Severance
     
     
     
     
     
     
     
     
     
     
     
     281
     
     
     114
     
     
     395Amortization of intangibles
     
     
     55
     
     
     36
     
     
     91
     
     
     55
     
     
     36
     
     
     91Income (loss) from
operations
     
     $
     952
     
     $
     494
     
     $
     1,446
     
     $
     (7,377
     )
     $
     (574
     )
     $
     (7,951
     )
    18


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Revenues  Our revenues increased by 219% to $16.5 million in the three months ended June 30, 2010 from $5.2 million in the three months ended June 30, 2009, and increased by 202% to $28.8 million in the six months ended June 30, 2010 from $9.5 million in the six months ended June 30, 2009. The following table sets forth revenues by product line for the three and six month periods ended June 30, 2010 and 2009:  Three Months Ended
June 30,
     
     Six Months Ended
June 30,(In thousands)
     
     2010
     
     2009
     
     2010
     
     2009Electronic AssemblyOEM Alignment Sensors
     
     $
     6,485
     
     $
     1,204
     
     $
     11,604
     
     $
     2,644SMT Inspection Systems
     
     
     8,716
     
     
     3,320
     
     
     14,761
     
     
     5,565Total Electronic Assembly
     
     
     15,201
     
     
     4,524
     
     
     26,365
     
     
     8,209Semiconductor
     
     
     1,298
     
     
     655
     
     
     2,475
     
     
     1,332Total
     
     $
     16,499
     
     $
     5,179
     
     $
     28,840
     
     $
     9,541
  Electronic Assembly  Revenue from sales of our OEM alignment sensors increased by $5.3 million or 439% in the three months ended June 30, 2010 to $6.5 million, up from $1.2 million in the three months ended June 30, 2009, and increased by 339% to $11.6 million in the six months ended June 30, 2010, up from $2.6 million in the six months ended June 30, 2009.  Revenue from sales of our stand alone SMT inspection systems productsincreased by $5.4 million or 163% to $8.7 million in the three months ended June 30, 2010, up from $3.3 million in the three months ended June 30, 2009 and increased by 165% to $14.8 million in the six months ended June 30, 2010, up from $5.6 million in the six months ended June 30, 2009.  The global recession caused severe weakness and disruption in our electronics markets starting late in 2008 and throughout all of 2009, resulting in very low levels of revenue in 2009 from both our OEM alignment sensors and stand-alone SMT inspection systems products.  The global electronics market is now starting to strengthen.  We are seeing significant demand from manufacturers of SMT assembly equipment who purchase our alignment sensor products, and for our stand alone solder paste inspection and AOI systems, particularly from large original design manufacturers in Asia.  We believe that these improving market conditions, combined with favorable market acceptance of the new products we have recently introduced, resulted in the higher revenue levels in the three and six months ended June 30, 2010 compared to the same periods of 2009.  We believe that increased use of outsourcing for circuit board assembly, production difficulties associated with smaller component sizes, increased production speeds and increased cost pressure on companies manufacturing circuit boards caused increased demand for our inspection equipment prior to the recent global economic recession and will increase demand in the future as the recession eases and our markets strengthen.  However, our electronic assembly revenue has been, and will continue to be impacted by increasing competition and price pressure, particularly for stand-alone SMT inspection systems products sold in Asia.  Export revenue from OEM alignment sensors and SMT inspection systems totaled $13.8 million or 91% of electronic assembly revenue in the three months ended June 30, 2010, compared to $3.8 million or 85% of electronic assembly revenue in the three months ended June 30, 2009.  Export revenue from electronic assembly OEM alignment sensors and SMT inspection systems totaled $23.6 million or 90% of electronic assembly revenue in the six months ended June 30, 2010, compared to $6.7 million or 82% of electronic assembly revenue in the six months ended June 30, 2009.Sales to international customers continue to be significant, as manufacturing of electronic components has migrated offshore, particularly to China and other areas of Asia.  Semiconductor  Revenues from semiconductor products increased by 98% to $1.3 million in the three months ended June 30, 2010 from $655,000 in the three months ended June 30, 2009, and increased by 86% to $2.5 million in the six months ended June 30, 2010 from $1.3 million in the six months ended June 30, 2009.  The increase in revenue was due to improving conditions in the market for semiconductor fabrication equipment, coupled with favorable market acceptance of our new WaferSense products.    19


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Our wafer mapper and frame grabber products are relatively mature. We anticipate that future growth in our semiconductor revenues, exclusive of changes related to capital procurement cycles will come from our new WaferSense products, a family of wireless, wafer like precision measurement tools for in-situ setup, calibration and process optimization in semiconductor processing equipment. We have recently introduced, or will be introducing, several new additions to the WaferSense product line, including additional leveling sensors, along with new gapping, teaching, vibration and particle sensors.  WaferSense revenue increased to $693,000 in the three months ended June 30, 2010 from $305,000 in the three months ended June 30, 2009 and increased by 122% to $1.2 million in the six months ended June 30, 2010 from $535,000 in the six months ended June 30, 2009.  Export revenue from semiconductor products totaled $500,000 or 39% of revenue in the three months ended June 30, 2010, compared to $120,000 or 18% of revenue in the three months ended June 30, 2009.  Export revenue from semiconductor products totaled $865,000 or 35% of revenue in the six months ended June 30, 2010, compared to $328,000 or 25% of revenue in the six months ended June 30, 2009.  The increase in the percentage of sales coming from exports for our semiconductor products reflects proportionately higher WaferSense revenue, as these products tend to have a higher concentration of international sales.  Cost of Revenue and Gross Margin  Electronic Assembly  Cost of revenue for our electronic assembly segment increased by $6.2 million or 186% in the three months ended June 30, 2010 and increased by $10.2 million or 171% in the six months June 30, 2010 when compared to the same periods of 2009, due to the significantly higher sales in 2010.   Gross margin as a percentage of electronic assembly sales was 38% in the three months ended June 30, 2010, compared to 27% in the three months ended June 30, 2009, and was 39% in the six months ended June 30, 2010 compared to 27% in the six months ended June 30, 2009.  The improvement in gross margin percentage was due to significantly increased sales of higher margin OEM alignment sensors, better manufacturing leverage resulting from substantially higher production volumes over which to spread fixed manufacturing overhead costs, and the favorable impact of our new cost reduced SMT inspection system products. Our next generation SE500 and new mid-range SE350 solder paste inspection systems, and our new QX500 automated optical inspection (AOI) system are significantly cost reduced when compared to our earlier generation inspection system products.  We anticipate that gross margins as a percentage of electronic assembly sales in the third quarter of 2010 will be slightly above the level in the three months ended June 30, 2010, reflecting continued benefits from our new cost reduced system platforms, additional sales of our higher margin next generation QX500 automated optical inspection (AOI) system and proportionately higher sales of higher margin OEM alignment sensors.  The electronic assembly market is highly price competitive, resulting in continual pressure on our gross margins. We compensate for pricing pressure by introducing new products with more features and improved performance and through manufacturing cost reduction programs.  For example, we believe our next-generation SE500 and SE350 solder paste inspection systems and QX500 automated optical inspection (AOI) system combines a reduction in cost with enhanced performance.  Other recently introduced products including our solar wafer alignment camera, embedded process verification (EPV) technology and the embedded solder paste inspection solution we developed for DEK, have more favorable margins than our existing products.  Semiconductor  Cost of revenue for our semiconductor segment increased by $110,000 or 40% in the three months ended June 30, 2010 and increased by $146,000 or 25% in the six months ended June 30, 2010 when compared to the same periods of 2009, due to the significantly higher sales in 2010.  Gross margin as a percentage of semiconductor sales was 70% in both the three and six months ended June 30, 2010, compared to 58% in the three months ended June 30, 2009 and 56% in the six months ended June 30, 2009. Gross margin as a percentage of semiconductor sales improved due to the cost benefit from consolidation of manufacturing for our semiconductor products into our Minneapolis, Minnesota headquarters and from improved manufacturing leverage, resulting from higher production volumes over which to spread fixed manufacturing overhead costs.  Operating Expenses  We believe continued investment in research and development of new products, coupled with continued investment in and development of our sales channel is critical to future growth and profitability. We historically have maintained research and development and sales and marketing expenses at relatively high levels, even during periods of recession and downturn in our electronic assembly and semiconductor capital equipment markets, as we continue to fund development of important new products, and continue to invest in our sales channels and develop new sales territories.    20


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In February 2008, we announced plans to move to Singapore a significant portion of our systems-related product development and manufacturing.  The transition of systems-related product development to Singapore was substantially complete by the end of the fourth quarter of 2008 and the transition of manufacturing for our system products was substantially complete by the end of the first quarter of 2009. The realignment of our systems-related product development and manufacturing to Singapore has resulted in lower costs and a more focused development effort.  In response to the significant weakness in our markets and the global economy we reduced our workforce by 50 employees (over 30 in manufacturing, including direct labor, and approximately 20 in development, selling, general and administrative) from the start of the fourth quarter of 2008 through the end of the second quarter of 2009.  Other cost saving measures implemented in 2009 include salary reductions and reduced spending for non-labor costs such as travel, supplies and the like.  These cost saving measures, combined with savings from our transition to Singapore, provided significant annual expense savings.  Implementation of the cost reduction actions discussed above had no impact on any of our strategic growth programs; work on our common hardware platforms for inspection, next generation inspection technologies, or pursuit of new OEM contracts.  Due to the improving economy, we elected to restore salary levels for our employees to pre-reduction levels in 2010.  We have also added some headcount, including temporary labor, since January 1, 2010 and anticipate that there will be other headcount additions, and costs will increase as business activity picks up and revenue returns to pre-recession levels.  However, many of the cost savings measures that were put in place during 2008 and 2009 will continue to provide meaningful savings for the foreseeable future.  Electronic Assembly  Research and development expenses for our electronic assembly segment were $1.5 million in both the three months ended June 30, 2010 and the three months ended June 30, 2009.  Research and development expenses for our electronic assembly segment were $3.0 million in the six months ended June 30, 2010, compared to $3.3 million in the six months ended June 30, 2009. The decrease in research and development expenses in the six months ended June 30, 2010 compared to the same period of 2009 resulted from completion of several R&D projects, including our next generation SE500 solder paste inspection system and improvements in focus and efficiency resulting from transition of systems related research and development to Singapore.  We anticipate that research and development expenses in the third quarter of 2010 will be at or slightly above the second quarter level as we expect to add additional engineering resources to invest in product development initiatives to meet the needs of our growing base of inspection customers.  Selling, general and administrative expenses for our electronic assembly segment were $3.4 million in both the three months ended June 30, 2010 and the three months ended June 30, 2009.  Selling, general and administrative expenses for our electronic assembly segment were $6.2 million in the six months ended June 30, 2010, compared to $6.0 million in the six months ended June 30, 2009.  Higher sales and marketing costs in the three and six months ended June 30, 2010, including commissions for third party sales representatives resulting from higher levels of SMT inspection system sales, were mostly offset by lower expense for doubtful accounts.  Selling, general and administrative expenses for the three and six months ended June 30, 2009 includes an $800,000 provision for doubtful accounts related to a key distributor of our SMT system products.  The distributor remains in business, and is committed to paying us the amount owed.   We presently anticipate that selling, general and administrative expenses in the third quarter of 2010 will be at or slightly below the level recorded in the three months ended June 30, 2010, as the costs associated with the annual retainer we pay to our outside board members is included in second quarter selling, general and administrative expense.  Semiconductor  Research and development expenses for our semiconductor segment were $247,000 in the three months ended June 30, 2010 compared to $246,000 in the three months ended June 30, 2009.  Research and development expenses for our semiconductor segment were $519,000 in the six months ended June 30, 2010 compared to $537,000 in the six months ended June 30, 2009. Research and development expenses reflect ongoing investment in our WaferSense product line.  Selling, general and administrative expenses for our semiconductor segment were $343,000 in the three months ended June 30, 2010 compared to $306,000 in the three months ended June 30, 2009.  Selling, general and administrative expenses for our semiconductor segment were $695,000 in the six months ended June 30, 2010, compared to $634,000 in the six months ended June 30, 2009.   No significant changes are expected in the level of semiconductor operating expenses in the third quarter of 2010.    21


---



Severance Costs  We started to incur severance costs in February 2008 in connection with our decision to move a significant portion of development and manufacturing for our systems products to Singapore.  The transition of systems-related product development was substantially complete by the end of the fourth quarter of 2008, and the transition of systems-related manufacturing was substantially complete by the end of the first quarter of 2009.  Severance costs incurred in connection with the February 2008 decision to move our systems related product development and manufacturing to Singapore totaled $29,000 in the three months ended June 30, 2009 and $80,000 in the six months ended June 30, 2009.  In February 2009, we further reduced our workforce by 24 positions in response to the weakening global economy, our transition to Singapore and our decision to consolidate manufacturing for our semiconductor products in our Minneapolis facility.  Severance costs incurred in connection with the February 2009 workforce reduction totaled $61,000 in the three months ended June 30, 2009 and $315,000 in the six months ended June 30, 2009.  All of the aforementioned severance costs incurred in 2009 were paid prior to December 31, 2009.  No severance costs were incurred in the six months ended June 30, 2010.  All of the severance costs related to the February 2008 transition to Singapore, and the February 2009 workforce reduction have been classified as severance in our statement of operations.  Interest and Other  Interest income and other includes interest earned on investments and gains and losses associated with foreign currency transactions and foreign currency swap agreements.  Interest income and other decreased in the three and six months ended June 30, 2010 compared to the same periods of 2009 due to lower rates of interest earned on invested funds and lower invested balances of cash equivalents and marketable securities.  Provision for Income Taxes and Effective Income Tax Rate  We recorded a provision for income tax expense in the six months ended June 30, 2010 at an effective tax rate of 20.8%, compared to an income tax benefit in the six months ended June 30, 2009 at an effective tax rate of 42.6%.  Our recorded income tax benefit for the three and six months ended June 30, 2009 includes a $537,000 discrete benefit from reversal of a portion of our reserve for income taxes resulting from settlement of Internal Revenue Service audits of our 2006 and 2007 federal income tax returns. Discrete items impacting the effective tax rate in the six months ended June 30, 2010 were inconsequential. Other items impacting the effective tax rate for 2010, compared to 2009, include the anticipated benefit from  the domestic manufacturers production incentive and additional tax expense in foreign tax jurisdictions with lower tax rates than the U.S federal statutory rate.  The effective tax rate for the six months ended June 30, 2010 was also favorably impacted by recognition of the benefit from the Minnesota state R&D tax credit.  No benefit from this credit was recognized in the first quarter of 2010 because the credit had not yet been signed into law.  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 June 30, 2010.    22


---



Our results in both 2008 and 2009 were negatively impacted by the recent global economic slowdown, and we incurred a loss in the United States in both 2008 and 2009, where most of our net deferred tax assets are recorded. Therefore, achievement of profitability in the United States will be a significant factor in determining our continuing ability to carry these deferred tax assets without recording a valuation allowance.  The global electronics market is starting to strengthen.  We are seeing significant demand from manufacturers of SMT assembly equipment who purchase our alignment sensor products, and for our stand alone solder paste inspection and AOI systems, particularly from large original design manufacturers in China.  We believe that these improving market conditions, the efficiencies in operations we have implemented, and the new products we have introduced and anticipate introducing in 2010, will lead to improved operating results and a return to profitability over the coming year.  If future results from our operations are less than projected, a valuation allowance may be required against virtually all of our deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.  Deferred tax assets at June 30, 2010, include net operating loss carry forwards incurred in the UK by CyberOptics Ltd., which was acquired in 1999. The utilization of these net operating loss carry forwards is dependent on CyberOptics Ltd.s ability to generate sufficient UK taxable income during the carry forward period.  Order Rate and Backlog  Our orders totaled $17.7 million in the three months ended June 30, 2010, compared to $17.0 million in the three months ended March 31, 2010 and $7.9 million in the three months ended June 30, 2009.  Backlog totaled $12.9 million at June 30, 2010, $11.7 million at March 31, 2010 and $6.4 million at June 30, 2009. The scheduled shipment (or estimated timing of revenue for systems recognized upon acceptance) for backlog at June 30, 2010 is as follows:  (In thousands)
     
     Backlog3rdQuarter 2010
     
     $
     11,9164thQuarter 2010 and after
     
     
     1,033Total backlog
     
     $
     12,949
  LIQUIDITY AND CAPITAL RESOURCES  Our cash and cash equivalents increased by $2.0 million in the six months ended June 30, 2010 resulting from $5.2 million of proceeds from maturities and sales of marketable securities, net of purchases, offset in part by $2.5 million of cash used by operating activities and purchases of capital assets totaling $779,000.  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 decreased by $3.4 million to $18.5 million as of June 30, 2010 from $21.9 million as of December 31, 2009.  Operating activities used $2.5 million of cash in the six months ended June 30, 2010.  Cash provided by operations included net income of $1.2 million, which included non-cash expenses totaling $1.4 million 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 $6.4 million, inventories of $4.9 million and other assets of $469,000. Changes in operating assets and liabilities providing cash included increases in accounts payable of $5.6 million and increases in accrued expenses and other liabilities of $1.1 million.  The increase in accounts receivable was due to higher sales levels in the second quarter of 2010, compared to the fourth quarter of 2009. Inventories were higher due to increased material purchases to support the higher level of sales expected in the second half of 2010. 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.    23


---



Operations used $5.7 million of cash in the six months ended June 30, 2009. Cash used by operations included a net loss of $4.4 million which included $707,000 of net non-cash expenses for depreciation and amortization, provision for doubtful accounts, deferred taxes, foreign currency transactions, stock compensation costs and realized gains on available for sale securities.  Changes in operating assets and liabilities using cash included increases in inventories of $678,000 and refundable income taxes of $1.4 million and decreases in accounts payable of $427,000 and accrued expenses of $1.1 million. Changes in operating assets and liabilities providing cash included decreases in accounts receivable of $1.4 million and advance customer payments of $82,000.  The increase in inventory was due to lower sales resulting from the sluggish global economy and additional inventory purchases to manufacture the SE500 solder paste inspection system that was introduced in 2009.   Refundable income taxes were higher due to anticipated income tax refunds resulting from our losses in the first six months of 2009. Accounts payable were lower due to the timing of inventory purchases and vendor payments, reflecting our expectation for lower sales levels in 2009.  The decrease in accrued expenses resulted from lower warranty accruals resulting from the lower level of sales and reductions in compensation related accruals due to our 2009 workforce reduction. The decrease in accounts receivable was due to the lower level of sales in the second quarter of 2009 compared to the fourth quarter of 2008 and an $800,000 increase in the provision for doubtful accounts.  Investing activities provided $4.5 million of cash in the six months ended June 30, 2010 compared to providing $2.9 million of cash in the same period last year.  Changes in the level of investment in marketable securities, resulting from the purchases, sales and maturities of those securities generated $5.2 million of cash in the six months ended June 30, 2010, compared to generating $3.3 million of cash in the same period last year.  We used $779,000 of cash in the six months ended June 30, 2010 and $480,000 of cash in the six months ended June 30, 2009 for the purchase of fixed asset and capitalized patent costs.  Financing activities provided $25,000 of cash in the six months ended June 30, 2010 from the exercise of employee stock options.  There were no financing activities in the six months ended June 30, 2009.  At June 30, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of establishing off-balance sheet arrangements or other contractually narrow or limited purposes.  A table of our contractual obligations was provided in Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.  There were no significant changes to our contractual obligations in the six months ended June 30, 2010, other than an $8.4 million increase in our commitment for future inventory purchases, to support our significant increase in recent sales activity.  At the present time, we have no material commitments for capital expenditures.  Purchase commitments for inventory will vary based on the volume of revenue and resulting inventory requirements.  Our cash, cash equivalents and marketable securities totaled $18.5 million at June 30, 2010.  We believe that our available balances of cash, cash equivalents and marketable securities will be adequate to fund our cash flow needs for the foreseeable future.    24


---



Fair Value Measurement  We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1).  The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2).   The lowest priority is given to unobservable inputs (Level 3).  The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of June 30, 2010 and December 31, 2009 according to the three-level fair value hierarchy:  Fair Value Measurements at June 30, 2010 Using(In thousands)
     
     Balance 
June 30, 
2010
     
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
     Significant Other
Observable
Inputs
(Level 2)
     
     Significant
Unobservable
Inputs
(Level 3)Cash equivalents
     
     $
     3,809
     
     $
     
     
     $
     3,809
     
     $
     U.S. government and agency
obligations
     
     
     9,882
     
     
     
     
     
     9,882
     
     
     Corporate debt securities
     
     
     2,133
     
     
     
     
     
     2,133
     
     
     Asset backed securities
     
     
     208
     
     
     
     
     
     208
     
     
     Equity securities
     
     
     58
     
     
     58
     
     
     
     
     
     Total
     
     $
     16,090
     
     $
     58
     
     $
     16,032
     
     $
     
  Fair Value Measurements at December 31, 2009 Using(In thousands)
     
     Balance
December 31, 
2009
     
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
     Significant Other
Observable
Inputs
(Level 2)
     
     Significant
Unobservable
Inputs
(Level 3)Cash equivalents
     
     $
     2,320
     
     $
     
     
     $
     2,320
     
     $
     U.S. government and agency
obligations
     
     
     14,161
     
     
     
     
     
     14,161
     
     
     Corporate debt securities
     
     
     3,301
     
     
     
     
     
     3,301
     
     
     Asset backed securities
     
     
     210
     
     
     
     
     
     210
     
     
     Equity securities
     
     
     30
     
     
     30
     
     
     
     
     
     Total
     
     $
     20,022
     
     $
     30
     
     $
     19,992
     
     $
     
  During the six months ended June 30, 2010 there were no significant transfers to or from the three level hierarchy.  The  carrying amounts of financial instruments such as cash equivalents, accounts receivable, income tax refunds 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.  Our foreign currency swap agreements are structured to mature on the last day of each quarter.  The fair value associated with these agreements is inconsequential and represents a Level 2 measurement.    25


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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.  We enter into foreign currency swap agreements to hedge short term inter-company financing transactions with our subsidiaries in the United Kingdom and Singapore. These currency swap agreements are structured to mature near the last day of each quarter, and are designated as cash flow hedges. At June 30, 2010, we had two open swap agreements that were purchased on that day.  As a result, any unrealized gains or losses as of June 30, 2010 were inconsequential.  In the three months ended June 30, 2010, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(3,500) in addition to foreign currency transaction gains (losses) on the underlying inter-company balances of $(7,000).  In the six months ended June 30, 2010, we recognized net gains (losses) from settlement of foreign currency swap agreements of $30,500 that offset foreign currency transactions gains (losses) on the underlying inter-company balances of $(55,000).  In the three months ended June 30, 2009, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(192,000) that offset foreign currency transaction gains (losses) on the underlying inter-company balances of $188,000.  In the six months ended June 30, 2009, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(182,000) that offset foreign currency transactions gains (losses) on the underlying inter-company balances of $145,000.  Recent Accounting Developments  Prior to January 1, 2010, we recognized revenue based on multiple element revenue guidance which required the existence of vendor specific objective evidence of fair value (VSOE) for the undelivered elements in an arrangement in order for us to account for the elements separately.  We utilized the residual method of allocation to account for delivered elements.  In October 2009, the Financial Accounting Standards Board (FASB) amended guidance inFASB Accounting Standards CodificationTM(ASC) 605,Revenue Recognition, 25, Multiple-Element Arrangements, to (1) modify the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and instead requires that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price.  The FASB also issued guidance to amend the scope of ASC 985,Software, 605, Revenue Recognition, to exclude arrangements with tangible products containing both software and non-software components that function together to deliver a products essential functionality.  Under the amended guidance, consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method. Selling price is determined based on a selling price hierarchy, consisting of VSOE, third party evidence or estimated selling price.  Under the amended guidance, we determined an estimated selling price for each of the elements in our multiple elements sales based on the selling price hierarchy and allocated consideration to the deliverables using the relative selling price method.  We have adopted the amended guidance effective January 1, 2010.  The impact of adopting the amended guidance had the effect of increasing our revenue by less than $30,000 in the three months ended June 30, 2010 and by less than $51,000 in the six months ended June 30, 2010. The impact of adopting the amended guidance on our results for 2009 would have been insignificant.  In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)  Improving Disclosures about Fair Value Measurements(ASU No. 2010-06). ASU No. 2010-06 requires new disclosures regarding significant transfers in and out of Levels 1 and 2, as well as information about activity in Level 3 fair value measurements, including presenting information about purchases, sales, issuances and settlements on a gross versus a net basis in the Level 3 activity roll forward. In addition, ASU No. 2010-06 clarifies existing disclosures regarding input and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities. ASU No. 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures pertaining to purchases, sales, issuances and settlements in the roll forward of Level 3 activity; those disclosures are effective for interim and annual periods beginning after December 15, 2010. Our adoption of ASU No. 2010-06 effective January 1, 2010 had no current impact on our consolidated financial position, results of operations or cash flows.    26


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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Not applicable.  ITEM 4  CONTROLS AND PROCEDURES  a.   Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.  b.   During the quarter ended June 30, 2010, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  PART II. OTHER  INFORMATION  ITEM 1A  RISK FACTORS  In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I  Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results.  ITEM 6  EXHIBITS  31.1:
     Certification of Chief Executive Officer pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes Oxley Act of 200231.2:
     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 200232:
     Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
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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. IversonBy Kathleen P. Iverson, Chief Executive Officer and Chair(Principal Executive Officer and Duly Authorized Officer)/s/ Jeffrey A. BertelsenBy Jeffrey A. Bertelsen, Chief Financial Officer(Principal Accounting Officer and Duly Authorized Officer)Dated:  August 9, 2010
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