SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

# FORM 10-Q

(Check One)

# [X]    QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly
period ended March 31, 2004

# [   ] TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition
period from ________________ to ________________

Commission file number
0-16577

# CYBEROPTICS
CORPORATION

(Exact name of
registrant as specified in its charter)

|                                  |                    
|--------------------------------- | -------------------
|Minnesota                         | 41-1472057         
|(State or other jurisdiction      | (IRS Employer      
|of incorporation or organization) | Identification No.)

5900 Golden Hills
Drive, Minneapolis, Minnesota 55416(Address of principal executive offices)

(763) 542-5000(Issuer's
telephone number)

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

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ___ No _X_

Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest practicable
date.

At May 14, 2004,
there were 8,482,869 shares of the registrant's Common Stock, no par value,
issued and outstanding.



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# PART I. FINANCIAL
INFORMATION

| | ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
| | -----------------------------------------

CYBEROPTICS
CORPORATIONCONSOLIDATED BALANCE SHEETS(In thousands)

|                                            | March 31, 2004
(Unaudited) | DEC. 31, 2003
|------------------------------------------- | -------------------------- | -------------
|                                           
|ASSETS                                      |                            |              
|                                           
|Cash and cash equivalents                   |                            |              
|Marketable securities                       |                            |              
|Accounts receivable, net                    |                            |              
|Inventories                                 |                            |              
|Other current assets                        |                            |              
|                                           
|Total current assets                        |                            |              
|                                           
|Marketable securities                       |                            |              
|Equipment and leasehold improvements, net   |                            |              
|Intangible and other assets, net            |                            |              
|Goodwill, net                               |                            |              
|                                           
|Total assets                                |                            |              
|                                           
|                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY        |                            |              
|                                           
|Accounts payable                            |                            |              
|Accrued expenses                            |                            |              
|                                           
|Total current liabilities                   |                            |              
|                                           
|Commitments and contingencies               |                            |              
|Stockholders' equity:                       |                            |              
|Preferred stock, no par value, 5,000 shares |                            |              
|authorized, none outstanding                |                            |              
|Common stock, no par value, 37,500 shares   |                            |              
|authorized, 8,420 and 8,291 shares issued   |                            |              
|and outstanding, respectively               |                            |              
|Retained (deficit) earnings                 |                            |              
|Accumulated other comprehensive loss        |                            |              
|                                           
|Total stockholders' equity                  |                            |              
|                                           
|                                           
|Total liabilities and stockholders' equity  |                            |              
|                                           

# SEE THE
ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



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CYBEROPTICS
CORPORATIONSTATEMENTS OF OPERATIONS(Unaudited)(In thousands, except per share amounts)

|                                              | THREE MONTHS ENDED MARCH 31,
|--------------------------------------------- | ----------------------------
|
|                                             
|Revenues                                      |                             
|Cost of revenues                              |                             
|                                             
|Gross margin                                  |                             
|Research and development expenses             |                             
|Selling, general and administrative expenses  |                             
|Restructuring and severance costs             |                             
|Gain from technology transfer and license     |                             
|Amortization of intangibles                   |                             
|                                             
|Income (loss) from operations                 |                             
|Interest income and other                     |                             
|                                             
|Income (loss) before income taxes             |                             
|Income tax provision                          |                             
|                                             
|Net Income (loss)                             |                             
|                                             
|Net income (loss) per share - Basic           |                             
|Net income (loss) per share - Diluted         |                             
|                                             
|Weighted average shares outstanding - Basic   |                             
|Weighted average shares outstanding - Diluted |                             

# SEE
THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



---

CYBEROPTICS
CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In thousands)

|                                                  | THREE MONTHS ENDED MARCH 31,
|------------------------------------------------- | ----------------------------
|
|                                                 
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                             
|                                                 
|Net income (loss)                                 |                             
|Adjustments to reconcile net income (loss) to     |                             
|net cash provided (used) by operating activities: |                             
|Depreciation and amortization                     |                             
|Gain from technology transfer and license         |                             
|Provision for losses on inventories               |                             
|Provision for doubtful accounts                   |                             
|Changes in operating assets and liabilities:      |                             
|Accounts receivable                               |                             
|Inventories                                       |                             
|Other current assets                              |                             
|Accounts payable                                  |                             
|Income taxes receivable                           |                             
|Accrued expenses                                  |                             
|                                                 
|Net cash provided (used)                          |                             
|by operating activities                           |                             
|                                                 
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                             
|Maturities of marketable securities               |                             
|Purchases of marketable securities                |                             
|Proceeds from technology transfer and license     |                             
|Additions to equipment and leasehold improvements |                             
|Additions to patents                              |                             
|                                                 
|Net cash used in                                  |                             
|investing activities                              |                             
|                                                 
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                             
|Proceeds from exercise of stock options           |                             
|                                                 
|Net cash provided by financing                    |                             
|activities                                        |                             
|                                                 
|Increase (decrease) in cash and cash equivalents  |                             
|Cash and cash equivalents - beginning             |                             
|of period                                         |                             
|                                                 
|Cash and cash equivalents - end of period         |                             
|                                                 

# SEE
THE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.



---

# CYBEROPTICS
CORPORATION

# NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS

1. INTERIM REPORTING:

The interim consolidated financial
statements presented herein as of March 31, 2004, and for the three month periods ended
March 31, 2004 and 2003, are unaudited; however, in our opinion, the interim consolidated
financial statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of financial position, results of
operations and cash flows for the periods presented.

The results of operations for the
three month period ended March 31, 2004, do not necessarily indicate the results to be
expected for the full year. The December 31, 2003, consolidated balance sheet data was
derived from audited consolidated financial statements, but does not include all
disclosures required by generally accepted accounting principles. These unaudited interim
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, 2003.

2. ACCOUNTING FOR STOCK-BASED COMPENSATION:

In December 2002, the Financial
Accounting Standards Board issued SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123. We intend to continue to account for stock-based compensation to our employees
and directors using the intrinsic value method prescribed by APB Opinion No. 25. We have
adopted the disclosure requirements of SFAS No. 148 in these notes to the consolidated
financial statements.

As permitted by SFAS No. 123, Accounting
for Stock Based Compensation, we continue to measure compensation cost for our
stock incentive and option plans using the intrinsic value method of accounting. Had we
used the fair value method of accounting for our stock option and incentive plans and
charged compensation costs against income over the vesting period, net income and net
income per share for the three months ended March 31, 2004 and 2003 would have been
reduced to the following pro forma amounts (In thousands):

|                                      
|--------------------------------------
|
|                                      
|                                      
|Net Income (loss) as reported         
|Add: Stock-based compensation         
|expense included in net income,       
|net of related tax effects            
|                                      
|Deduct: Total stock-based compensation
|expense determined under fair value,  
|net of related tax                    
|                                      
|Net income (loss) - Pro forma         
|                                      
|                                      
|Net income (loss) per share:          
|As reported - Basic                   
|Pro forma - Basic                     
|                                      
|As reported - Diluted                 
|Pro forma - Diluted                   

No tax benefit provision was applied
to the fair value expense calculated under SFAS No. 123 due to establishing valuation
allowances on deferred tax assets during the three month period ended September 30, 2002.
The assumptions used to calculate the fair value of options granted are evaluated and
revised, as necessary, to reflect market conditions and our experience.



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3. CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS):

Inventories consisted of the
following:

|                           | March 31,
2004 | December 31,
2003
|-------------------------- | -------------- | -----------------
|                           |               
|Raw materials              |                |                  
|Work in process            |                |                  
|Finished goods             |                |                  
|                           |               
|Allowance for obsolescence |                |                  
|                           |               
|Total inventories          |                |                  
|                           |               

Intangible and other assets include
the following:

|                         | March 31,
2004 | December 31,
2003
|------------------------ | -------------- | -----------------
|                         |               
|Gross intangibles:       |                |                  
|Developed technology     |                |                  
|Patents and trademarks   |                |                  
|Customer Base            |                |                  
|                         |               
|                         |                |                  
|                         |               
|Accumulated amortization |                |                  
|                         |               
|Total intangibles        |                |                  
|and other assets, net    |                |                  
|                         |               

We provide for the estimated cost of
product warranties at the time revenue is recognized. While we engage in extensive
product quality programs and processes, including actively monitoring and evaluating the
quality of component suppliers, warranty obligations are affected by product failure
rates, material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery costs
differ from our estimates, revisions to the estimated warranty liability would be
required. 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:

|                                  
|----------------------------------
|
|                                  
|Balance at the beginning of period
|Accruals for Warranties           
|Settlements made during the period
|                                  
|Balance at the end of period      
|                                  



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4. GEOGRAPHIC REVENUE INFORMATION:

Export sales for the three months
ended March 31, 2004 and the three months ended March 31, 2003 amounted to 81% and 75% of
revenues, respectively. All or our export sales are negotiated, invoiced and paid in U.S.
dollars. Export sales by geographic area are summarized as follows (In thousands):

|                   | Three Months Ended
March 31,
|------------------ | ----------------------------
|
|                  
|Americas           |                             
|Europe             |                             
|Asia               |                             
|Other              |                             
|                  
|Total export sales |                             
|                  

5. NET INCOME (LOSS) PER SHARE:

Basic net income (loss) per share
has been computed using the weighted average number of shares outstanding during the
period presented. The diluted net income per share includes the effect of common stock
equivalents for each period. The number of shares utilized in the denominator of the
diluted net income per share computation has been increased from the number of shares used
in computing basic net income per share by 371,000 equivalent shares for the three months
ended March 31, 2004. The shares used in the basic and diluted net (loss) per share
computation for the three months ended March 31, 2003 are the same, as additional shares
in the denominator would be anti-dilutive due to our net loss. Weighted average shares
for which the option price exceeds the average market price were 336,000 and 1,572,000
for the three month periods ended March 31, 2004 and 2003, respectively.

6. COMPREHENSIVE INCOME (LOSS):

Statement of Financial Accounting
Standards No. 130 requires that unrealized gains and losses on our available-for-sale
marketable securities and certain foreign currency translation adjustments be included as
a component of other comprehensive income.

During the three month periods ended
March 31, 2004 and 2003, total comprehensive income (loss) amounted to $2,638,000 and
($1,490,000), respectively. Accumulated other comprehensive loss at March 31, 2004 and
December 31, 2003 was ($474,000) and ($426,000), respectively.

6. INCOME TAXES:

In the third quarter of fiscal 2002,
we recorded a full valuation allowance against our deferred tax assets. Our decision to
record this valuation allowance was based on the cumulative losses we had incurred over
the three years prior to that date, the fact that we were continuing to generate
operating losses and that we fully utilized our loss carryback potential in 2002. From
the third quarter of fiscal 2002 to date, we have continued to provide a full valuation
allowance against all future tax benefits produced by our operating results. We assess
the realizability of our deferred tax assets and the need for this valuation allowance
based on Statement of Financial Accounting Standards No. 109. We expect to continue to
provide a full valuation allowance (financial statements will not reflect a tax provision
on U.S. based income or benefit on U.S. based losses) until we can sustain a level of
profitability that demonstrates our ability to utilize these assets. At that time, the
valuation allowance will be reassessed, and could be eliminated, resulting in recognition
of deferred taxes. We will continue to record a tax provision related to foreign
operating results.

During the three month periods ended
March 31, 2004 and 2003, we have continued to provide a full valuation allowance against
future tax provisions and benefits produced by our U.S. based operating results. Tax
expense of $25,000 and $60,000 recorded during the three months ended March 31, 2004 and
2003 relates to income generated by foreign subsidiaries.



---

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

We enter into foreign currency swap
agreements to hedge short term inter-company financing transactions with our subsidiary
in the United Kingdom. These currency swap agreements are structured to mature on the
last day of each quarter and are designated as cash flow hedges. At March 31, 2004,
CyberOptics had one open swap agreement that was purchased on that date. As a result,
there were no material unrealized gains or losses as of March 31, 2004. During the three
months ended March 31, 2004 we recognized a net loss of approximately $159,000 from the
settlement of foreign currency swap agreements which offset the approximately $185,000
translation gain on the underlying inter-company balance.

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.

8. RESTRUCTURING AND SEVERANCE:

In January 2003, we incurred
approximately $170,000 of severance costs and facility costs associated with further
consolidation of our semiconductor product group from Redwood City, California to
Portland, Oregon. Severance costs were associated with a workforce reduction of 5 people.
Substantially all of these costs were paid as of March 31, 2003.

During 2002 and 2003 we implemented
a series of workforce reductions, closed our facilities in California, downsized other
facilities and made other reductions in discretionary spending designed to reduce our
overall fixed cost structure. The following table reports the activity and ending balance
related to accruals established for these restructuring actions (In thousands).

|                                           | Employee
Termination
Benefits | Lease
Commitment
Costs | Other | Total
|------------------------------------------ | ----------------------------- | ---------------------- | ----- | -----
|                                          
|Restructuring liability, December 31, 2002 |                               |                        | $     | 148  
|Initial expense and accrual                |                               |                        |       | 541  
|Cash payments                              |                               |                        |       | (509 
|                                           |                              
|Restructuring liability, December 31, 2003 |                               |                        |       | 180  
|Initial expense and accrual                |                               |                        |       |     
|Cash payments                              |                               |                        |       | (41  
|                                           |                              
|Restructuring liability, March 31, 2004    |                               |                       
|                                           |                               |                        | $     | 139  

We expect cash to be paid for
employee termination costs by September 30, 2004. Cash payments for lease termination
costs are expected to be made through the term of our lease, which expires in May 2006.

9. TECHNOLOGY TRANSFER AND LICENSE AGREEMENT:

In March 2003, we transferred to the
Optical Gaging Products Division of Quality Vision International, Inc. (QVI) the rights
and technology necessary to manufacture our Digital Range Sensors (DRS). In addition, we
granted QVI a non-exclusive license to the intellectual property associated with this
product line and sold a portion of our inventory as part of this transaction. QVI had
been the primary customer for DRS sensors prior to this agreement as part of a separate
1999 agreement. As part of the agreement, QVI paid a one-time technology transfer fee and
a pre-paid non-refundable royalty fee covering a specified number of sensors built by OGP
for a period of five years from the effective date of the contract. As a result of this
transaction, we recorded a $645,000 gain in the three month period ended March 31, 2003.



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10. RECENT ACCOUNTING DEVELOPMENTS:

In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities. This
interpretation addresses the requirements for business enterprises to consolidate related
entities in which they are determined to be the primary beneficiary as a result of their
variable economic interests. The interpretation is intended to provide guidance in
judging multiple economic interests in an entity and in determining the primary
beneficiary. The interpretation outlines disclosure requirements for Variable Interest
Entities in existence prior to January 31, 2003 and outlines consolidation requirements
for Variable Interest Entities created after January 31, 2003. We do not have investments
or relationships with third parties subject to the requirements of this interpretation.



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

CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS:

The following is managements
discussion and analysis of certain significant factors that have affected our results and
financial position during the periods included in the accompanying financial statements
or that could have an impact on future results. This discussion should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003 and
our interim consolidated financial statements and associated notes.

The following Managements
Discussion and Analysis contains forward looking statementswithin the meaning
of federal securities laws which represent our expectations or beliefs relating to future
events, including statements regarding trends in the industries in which we function,
levels of orders, research and development expenses, taxation levels, the sufficiency of
cash to meet operating and capital expenses and the ability to continue to price foreign
transactions in U.S. currency. Our actual results may vary from these expectations
because of a number of factors that affect our business, the most important of which
include the following:

| |  |  | We operate in a very cyclical market  the electronics capital equipment market. We
have been unable to predict with accuracy the timing of periodic downturns in this market.
Further, because we sell to manufacturers (both OEM manufacturers of production equipment
and end-user circuit board assembly companies) in the market and do not have immediate
access to trends in their sales, it has been difficult for us to predict the affect of
these downturns on our sales, which typically lag general market conditions by several
months. These downturns, particularly the severe downturn in electronics production
markets from 2001 through 2003, have severely affected our operations, necessitating a
series of reductions in workforce and expenses, and generating several years of
unprofitable operations. We may be unable to foresee additional changes in these markets
before they affect our operations in the future.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our operations and markets could be negatively affected by world events that effect
economies and commerce in countries, such as China and Japan, in which we do business,
including any additional outbreaks of infectious disease such as SARS.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We have been dependent on two original equipment manufacturer customers for a large
portion of our revenue (41%, 28% and 40% of revenues in 2003, 2002 and 2001,
respectively). Our operations were significantly negatively affected by reduced order
rates from these two customers during the past two years, and have been favorably impacted
by increased order rates in the past three quarters. If these customers are unsuccessful
selling the products into which our sensors are incorporated, design their products to
function without our sensors, purchase sensors from other suppliers, or otherwise
terminate their relationships with us, our results of operations would be significantly
negatively affected.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We generate more than half of our revenue (approximately 81% in the first quarter of 2004
and 79% in fiscal 2003) from export sales. Our export sales are subject to many of the
risks of international operations, including changes in economic and business climate in
foreign countries that affect the business health of our customers, changes in exchange
rates that affect the willingness of customers to purchase our products, different laws
that may affect our ability to protect our intellectual property, and the expense of
long-distance commerce.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our current products, as well as the products we have under development, are designed to
operate with the technology we believe currently exists or may exist for electronic
components and printed circuit boards. The technology for these components changes rapidly
and if we incorrectly anticipate technology developments, or have inadequate resources to
develop our products to deal with changes in technology, our products could become
obsolete.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our electronic assembly sensor products compete with products made by larger machine
vision companies, other optical sensor companies, and by solutions internally developed by
our customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The electronics capital equipment market for surface mount technologies is becoming more
mature, resulting in increased price pressure on suppliers of equipment. Consequently, our
electronic assembly system and sensor products may become subject to increased levels of
price competition and competition from other technologies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We use a different distribution network to sell our end-user systems products, such as the
SE 300, and generate lower margins from these products, than the distribution system and
margins from our electronic assembly sensor products. To the extent our end-user systems
constitute a larger portion of our business, our profitability may be affected.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We compete with large multinational systems companies in sales of end-user systems
products, many of which are able to take advantage of greater financial resources and
larger sales distribution networks.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We compete in large part based on the technology we have developed and our success will
depend in part on how successful we are in protecting that technology and enforcing our
technology rights in the United States and other countries.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We use outside contractors to manufacture the components used in many of our products and
some of the components we order require significant lead times that could affect our
ability to sell our products if not available. In addition, if these components do not
meet stringent quality requirements or become subject to obsolescence, there could be
delays in product availability, and we could be required to make significant investments
in designing replacement components.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We plan to introduce a number of new products during fiscal 2004 and if those
introductions are delayed, our revenue and profitability could be negatively affected. In
particular, we are currently devoting significant resources to complete development and
commence sale of our embedded process verification (EPV) products. These products have yet
to generate substantial commercial sales.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CRITICAL ACCOUNTING POLICIES AND
ESTIMATES:

The preparation of the financial
information contained in this Form 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, for warranty
expense, and for obsolete inventory, the carrying value and any impairment of intangible
assets, and the valuation allowance for deferred tax assets. 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, 2003.



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RESULTS OF OPERATIONS:

General

Consistent with the strength of the
recovery in the global electronics market, all components of our operations performed at
a higher level in the quarter ended March 31, 2004. Sales of electronic assembly sensors
to OEMs of robotic assembly equipment grew significantly, and revenues from shipments of
SMT inspection systems primarily to Asian outsourcing manufacturers exceeded planned
levels. In addition, we experienced sales growth in our semiconductor products,
particularly in the area of reflective wafer mapping sensors. Overall, our revenues
increased 98% in the quarter ended March 31, 2004 compared to the same quarter in 2003,
and our earnings, which benefited from the streamlined cost structure established through
several work reductions and restructuring over the past few years, increased from a net
loss of $1.5 million in the first quarter of 2003 to net income of $2.7 million in 2004.

Revenues

The following table sets forth
revenues by product line for the periods indicated (in Thousands):

|                                  | Three months ended
March 31,
|--------------------------------- | ----------------------------
|
|                                  |                             
|OEM Solutions:                    |                             
|Electronic Assembly Sensors (EAS) |                             
|Products                          |                             
|Semiconductor Products            |                             
|End-User Systems Products         |                             
|                                  |                             
|Total                             |                             

Our revenues from EAS products
increased 186% during the three months ended March 31, 2004 from the three months ended
March 31, 2003 and also reflect a 30% increase from revenue levels during the quarter
ended December 31, 2003. These increased revenues reflect increased order rates from our
two largest EAS customers. During the three months ended March 31, 2004, revenues from
EAS products, primarily LaserAlign sensors, were positively impacted by improved market
conditions in the worldwide market for SMT capital equipment and the introduction of two
new sensors for one of our large OEM customers. These sensors were designed for the
latest generation pick-and -place machine of this customer, which was introduced during
2003. The Companys two largest EAS customers accounted for approximately 50% of
total revenues for the three months ended March 31, 2004, and 33% of revenues for the
comparable period in 2003. We also generated approximately $480,000 of revenue in the
first quarter of 2004 from a last time purchase of Laser Lead Locators, a sensor that we
have ceased manufacturing.

Our revenues from sales of
semiconductor product increased 39% during the three months ended March 31, 2004 from the
three months ended March 31, 2003 and 33% from the quarter ended December 31, 2003. This
increase in revenue during 2004 from 2003 is primarily due to improved market conditions
in the semiconductor capital equipment market, which began in late 2003. This trend is
consistent with the growth in the overall electronics capital equipment market and
resulted in increased sales of our wafer mapping products, which represented
approximately 52% and 26% of semiconductor product sales during the three month period
ended March 31, 2004 and 2003, respectively.

Our revenues from sales of end-user
systems increased 39% during the three months ended March 31, 2004 from the three months
ended March 31, 2003, but decreased 17% from the quarter ended December 31, 2003. These
revenue increases are the result of improved market conditions in the SMT capital
equipment markets and continued success in selling inspection systems to many of the
large manufacturers of circuit boards, particularly in Asia. A large portion of the
worldwide production capacity for printed circuit boards is being added in China, and we
have been successful in selling inspection systems to new and existing customers in that
region. We are planning to open a sales office in China in late 2004 to further pursue
opportunities in that market. Also, during the fourth quarter of 2003 and the first
quarter of 2004, we shipped SE 300systems for a large order that has not been reflected
in revenue due to pending customer acceptance and we also recently received a sizable
order for our KS line of automated optical inspection systems. We expect to recognize
revenue for these systems in the third quarter of 2004.



---

International revenues comprised
approximately 81% and 75% of total revenues during the three month periods ended March
31, 2004 and 2003, respectively. The international markets in Asia, Japan and Europe
account for a significant portion of the capital equipment market for the manufacture of
electronics, the primary market for our EAS sensors and End-User systems product lines.
Revenues generated from products used primarily for SMT electronic assembly production
(revenues from OEM sensors and End-User systems) were approximately 85% and 78% of
revenues for the three month periods ended March 31, 2004 and 2003, respectively.

Gross Margin

Gross margin for the three months
ended March 31, 2004 increased as a percent of revenues to 58% compared to 45% during the
three months ended March 31, 2003. Gross margin is highly dependent on the level of
revenues and resulting production levels over which to spread fixed manufacturing costs
such as facilities and other compensation and non-compensation expenses that do not vary
with activity levels. In addition, with higher production volumes, manufacturing
processes become more efficient and reduce the overall cost of producing products for
sale. Revenue levels were 98% higher in the three month period ended March 31, 2004 than
during the same period in 2003, and consequently, gross margins were favorably impacted.
In addition, increased revenues from EAS sensors and semiconductor products, which carry
higher margins than systems products, and revenues from the last time purchase of a high
margin sensor in the three months ended March 31, 2004 contributed to higher gross
margins. We expect that strong sales of EAS sensors and strong overall revenue will allow
us to maintain margin levels at least through the second quarter of 2004.

Research and Development

Research and development expenses
increased 1% to $1.8 million during the three months ended March 31, 2004 from the three
months ended March 31, 2003. As a percentage of revenue, research and development
expenses decreased to 14% during the three months ended March 31, 2004 from 27% during
the comparable period in 2003. As a percentage of revenue, the level of investment in
research and development expense was maintained at a relatively high level during 2002
and 2003, as we continued to fund new product development on important new products even
as revenues levels declined. The dollar investment in research and development has
remained relatively constant on a quarterly basis during 2003 and the first quarter of
2004, which we expect to continue for 2004. However, we will continue to evaluate new
investment opportunities and could decide to increase research and development investment
levels in order to accelerate completion of current projects and or add new product
development initiatives to those currently planned.

Research and development expenses
during the three months ended March 31, 2004 were primarily focused on initial
development activities for several new sensor products, including the new Embedded
Process Verification sensor family (EPV), continued development of the SE and KS series
inspection systems, next generation LaserAlign products and other new sensors for the SMT
and Semiconductor markets. Customer funded research and development is recognized as a
reduction of research and development expense. During the three months ended March 31,
2004, there was no customer funded research and development recognized as a reduction of
research and development expense compared to $14,000 during the three months ended March
31, 2003.

Selling, General and Administrative
Expenses

Selling, general and administrative
expenses increased 2% to $2.8 million during the three month period ended March 31, 2004
compared to the three months ended March 31, 2003. As a percentage of revenue, selling,
general and administrative expenses decreased to 22% during the three month period ended
March 31, 2004 from 43% in 2003. The increase in selling, general and administrative
expense is primarily the result of additional investments in sales and marketing,
primarily in Asia, and other variable costs associated with supporting a growing revenue
base, offset somewhat by cost reduction measures implemented during the third quarter of
2003.

Restructuring and Severance Costs

During 2001, 2002 and 2003, we have
implemented a series of workforce reductions, closed our facility in California,
downsized other facilities and made other reductions in discretionary spending designed
to reduce our overall fixed cost structure. In January 2003, we incurred approximately
$170,000 of severance costs and facility closure costs associated with further
consolidation of our semiconductor product group from Redwood City, California to
Portland, Oregon. Severance costs were associated with a workforce reduction of 5 people.
Substantially all of these costs were paid as of March 31, 2003.



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Gain from Technology Transfer and
License

In March 2003, we transferred to the
Optical Gaging Products Division of Quality Vision International, Inc. (QVI) the rights
and technology necessary to manufacture our Digital Range Sensors (DRS). In addition, we
granted QVI a non-exclusive license to the intellectual property associated with this
product line and sold a portion of our inventory as part of this transaction. QVI had
been the primary customer for DRS sensors prior to this agreement as part of a separate
1999 agreement. As part of the agreement, QVI paid a one-time technology transfer fee and
a pre-paid non-refundable royalty fee covering a specified number of sensors built by OGP
for a period of five years from the effective date of the contract. As a result of this
transaction, we recorded a $645,000 gain in the three month period ended March 31, 2003.

Amortization of Goodwill and
Intangible Assets

Amortization of acquired intangible
assets was approximately $230,000 during the three month periods ended March 31, 2004
compared to approximately $280,000 during the three month period ended March 31, 2003.
The decrease in amortization during the first three months of 2004 compared to the same
period in 2003 was due to the acceleration of amortization of certain intangible assets
established as the result of the acquisition of HAMA Laboratories, Inc. in 1999. The
accelerated amortization of $632,000 was recorded in the third quarter of 2003.
Amortization is primarily attributable to developed technology, and trademarks resulting
from CyberOptics acquisition of technology and other assets of Kestra Ltd. and HAMA
Laboratories Inc. during the second quarter of 1999 and CyberOpticsacquisition of
Imagenation Corporation during the fourth quarter of 2000. Amortization of these
acquisition related intangible assets and amortization of patent costs is expected to be
approximate $1.1 million in 2004.

Interest and Other

Interest income and other primarily
includes interest earned on investments. Interest income remained relatively constant
during the three month period ended March 31, 2004 compared to the same period in 2003 as
a result of increased investment balances but lower interest rates on invested funds. In
addition, during the three months ended March 31, 2003 we incurred foreign currency
translation charges and certain other expenses which resulted in reduced interest and
other income during this period.

Provision for Income Taxes and
Effective Income Tax Rate

In the third quarter of fiscal 2002,
we recorded a full valuation allowance against our deferred tax assets. Our decision to
record this valuation allowance was based on the cumulative losses we had incurred over
the three years prior to that date, the fact that we were continuing to generate
operating losses and that we fully utilized our loss carryback potential in 2002. From
the third quarter of fiscal 2002 to date, we have continued to provide a full valuation
allowance against all future tax benefits produced by our operating results. We assess
the realizability of our deferred tax assets and the need for this valuation allowance
based on Statement of Financial Accounting Standards No. 109. We expect to continue to
provide a full valuation allowance (financial statements will not reflect a tax provision
on U.S. based income or benefit on U.S. based losses) until we can sustain a level of
profitability that demonstrates our ability to utilize these assets. At that time, the
valuation allowance will be reassessed, and could be eliminated, resulting in recognition
of the value of deferred taxes. We will continue to record a tax provision related to
foreign operating results.

During the three month periods ended
March 31, 2004 and 2003, we have continued to provide a full valuation allowance against
future tax provisions and benefits produced by our U.S. based operating results. Tax
expense of $25,000 and $60,000 recorded during the three months ended March 31, 2004 and
2003 relates to income generated by foreign subsidiaries.

Order Rate and Backlog

Our orders totaled $13.7 million
during the three month period ended March 31, 2004 compared to $6.3 million during the
three month period ended March 31, 2003. Backlog totaled $7.7 million and $2.6 million at
March 31, 2004 and 2003, respectively. The scheduled shipment (or revenue for systems
recognized upon acceptance) of the March 31, 2004 backlog is as follows (in thousands):

|2nd Quarter 2004           |  |  | $ | 4,710 | 
|-------------------------- |  |  | - | ----- | 
|3rd Quarter 2004 and after |  |  |   | 2,960 | 
|                           |  | 
|Total backlog              |  |  | $ | 7,670 | 



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LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents
increased by $1.3 million during the three month period ended March 31, 2004, primarily
because of $1.8 million of cash generated from operating activities and $1.0 million of
cash generated from financing activities, offset by the purchase of $1.4 million of
marketable securities, net of maturities of marketable securities, and the purchase of
$88,000 of capital assets. Our cash and cash equivalents fluctuate in part because of
maturities of marketable securities and investment of cash balances resulting from those
maturities, or from other sources of cash, in additional to marketable securities.
Accordingly, we believe the combined balances of cash and marketable securities provide a
more reliable indication of our available liquidity. Our combined balances of cash and
marketable securities increased $2.7 million to $27.5 million as of March 31, 2004 from
$24.8 million as of December 31, 2003.

We generated $1.8 million of cash
from operations during the three months ended March 31, 2004. Cash generated from
operations primarily included net income of $2.7 million, which included $661,000 of
non-cash expenses for depreciation and amortization, provision for inventory obsolescence
and other non-cash items and increases in accounts payable and accrued expenses of
$644,000. This cash generated more than offset investments in accounts receivable of $1.1
million, inventory of $838,000 and other assets of $266,000. Increased investment in
accounts receivable and inventory is primarily the result of increased revenue levels in
2004. During the three months ended March 31, 2003, we used $442,000 million of cash from
operations, primarily due to a net loss of $1.5 million, which included $938,000 of
non-cash expenses and a $645,000 gain from a technology transfer and license. The first
three months of 2003 also included $747,000 of net cash generated from changes in
operating assets.

We used $1.5 million of cash in
investing activities during the three months ended March 31, 2004 compared to $3.5
million during the same period in 2003. Changes in the level of investment in marketable
securities resulting from the purchases and maturities of those securities used $1.4
million of cash in 2004 and used $4.1 million of cash in 2003. We used approximately
$88,000 and $149,000 of cash for the purchase of fixed assets and the acquisition of
technology and other intangible assets during the three months ended March 31, 2004 and
2003, respectively. In addition, during the three months ended March 31, 2003, we
generated $750,000 of cash from a technology transfer and license agreement.

We generated $1.0 million of cash
from financing activities during the three months ended March 31, 2004 and there was no
financing activity in the three months ended March 31, 2003. Cash generated from
financing activities represents cash from stock option exercises.

We had no material commitments for
capital expenditures as of March 31, 2004. While there were no material commitments, we
routinely evaluate investment opportunities that come to our attention and could make a
significant commitment in the future. Our cash and cash equivalents and investments
totaled $27.5 million at March 31, 2004. With this level of cash and cash equivalents and
investments, and the fact that we are generating net profits and cash during 2004, we
believe that our cash and cash equivalents and investments will be adequate to fund cash
flow needs.

At March 31, 2004, we did not have
any relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance of special purpose entities, which would
have been established for the purpose of establishing off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, we are not exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged in such
relationships.

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, 2003. There were no significant changes to our contractual obligations
during the three months ended March 31, 2004. Purchase commitments for inventory can vary
based on the volume of revenue and resulting inventory requirements.

OTHER FACTORS

Changes in revenues have resulted
primarily from changes in the level of unit shipments and new product introductions. We
believe that inflation has not had any significant effect on operations. Most of our
international export sales are negotiated, invoiced and paid in U.S. dollars.
Accordingly, although currency fluctuations do not significantly affect our revenue and
income per unit, they can influence the price competitiveness of our products and the
willingness of existing and potential customers to purchase units.

As a result of the Kestra Ltd.
acquisition we have a sales and software development office located in the UK. We also
have a sales office in Singapore. We do not believe that currency fluctuations will have
a material impact on our consolidated financial statements.



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# PART II. OTHER
INFORMATION

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 timely alerting them to the material information relating to us (or
          our consolidated subsidiaries) required to be included in the reports we file or
          submit under the Exchange Act.

b.    
          During the quarter ended March 31, 2004, 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.

ITEM 6  EXHIBITS AND REPORTS
ON 8-K

a.    Exhibits

31.1    Certification of Chief
Executive Officer pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the
Sarbanes-Oxley Act of 2002

31.2    Certification of Chief
Financial Officer pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the
Sarbanes-Oxley Act of 2002

32    Certification of Chief Executive
Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

b.    Reports
on Form 8-K

The following reports on Form 8-K were
filed during the quarter ended March 31, 2004.

Form
8-K  CyberOptics Corporation published a press release reporting information
regarding its preliminary sales results, the level of orders and the anticipated level of
restructuring and related charges for the three month period ended December 31, 2003
(1/20/04).

Form
8-K  CyberOptics Corporation published a press release reporting its results of
operations and financial condition for the three and twelve month periods ended December
31, 2003 and 2002 (2/14/04).



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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. IversonKathleen P. Iverson, President and Chief Executive Officer(Principal Executive Officer andDuly Authorized Officer)
| | -----------------------------------------------------------------------------------------------------------------------------------------
|
|
|
| |                                                                                                                                          
| | /s/ Scott G. LarsonScott G. Larson, Chief Financial Officer(Principal Accounting Officer andDuly Authorized Officer)                     

Dated: May 17, 2004