Cascade Microtech (CSCD) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to               

Commission File No. 000-51072

CASCADE MICROTECH, INC.

(Exact name of registrant as specified in its charter)

Oregon	93-0856709
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2430 N.W. 206th Avenue Beaverton, Oregon	97006
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (503) 601-1000

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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o  Accelerated filer x Non-accelerated filer o

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

The number of shares of common stock outstanding as of November 8, 2007 was 12,841,244.

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) – September 30, 2007 and December 31, 2006
	Condensed Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2007 and 2006
	Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2007 and 2006
	Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II - OTHER INFORMATION
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits
Signatures

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)

	September 30, 2007		December 31, 2006
Assets
Current Assets:
Cash and cash equivalents	$	2,780	$	5,260
Short-term marketable securities	29,428		38,534
Accounts receivable, net of allowances of $193 and $153	18,494		17,642
Inventories, net	17,316		15,094
Prepaid expenses and other	2,514		2,055
Deferred income taxes	2,236		2,042
Total Current Assets	72,768		80,627
Long-term marketable securities	3,598		9,662
Fixed assets, net of accumulated depreciation of $14,122 and $13,385	14,365		6,818
Deferred income taxes	—		682
Goodwill	16,225		1,295
Purchased intangible assets, net	15,690		2,610
Other assets, net	2,504		2,092
Total Assets	$	125,150	$	103,786
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of capital leases	$	6	$	—
Accounts payable	6,647		6,013
Deferred revenue	531		1,184
Accrued liabilities	4,529		5,026
Total Current Liabilities	11,713		12,223
Capital leases, net of current portion	24		—
Deferred income taxes	3,839		—
Deferred revenue	589		199
Other long-term liabilities	1,977		1,171
Total Liabilities	18,142		13,593
Shareholders’ Equity:
Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 12,831 and 11,717	128		117
Additional paid-in capital	78,858		63,144
Accumulated other comprehensive loss - unrealized holding gains (losses) on investments	19		(1		)
Retained earnings	28,003		26,933
Total Shareholders’ Equity	107,008		90,193
Total Liabilities and Shareholders’ Equity	$	125,150	$	103,786

See accompanying Notes to Condensed Consolidated Financial Statements.

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Cascade Microtech, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, In thousands, except per share amounts)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2007			2006		2007			2006
Revenue	$	21,343		$	22,950	$	67,930		$	62,247
Cost of sales	11,355			12,929		36,628			34,688
Stock-based compensation	100			107		349			332
Gross profit	9,888			9,914		30,953			27,227
Operating expenses:
Research and development (includes $86, $77, $254 and $230, respectively, of stock-based compensation)	2,723			2,231		8,482			6,379
Selling, general and administrative (includes $385, $332, $1,154 and $854, respectively, of stock-based compensation)	6,748			6,222		20,851			18,039
Amortization of purchased intangibles	667			—		1,328			—
	10,138			8,453		30,661			24,418
Income (loss) from operations	(250		)	1,461		292			2,809
Other income (expense):
Interest income	330			428		1,151			1,195
Interest expense	—			—		(1		)	—
Other, net	(101		)	272		(56		)	319
	229			700		1,094			1,514
Income (loss) before income taxes	(21		)	2,161		1,386			4,323
Provision for income taxes	195			929		316			1,639
Net income (loss)	$	(216	)	$	1,232	$	1,070		$	2,684
Basic net income (loss) per share	$	(0.02	)	$	0.11	$	0.09		$	0.24
Diluted net income (loss) per share	$	(0.02	)	$	0.10	$	0.08		$	0.23
Shares used in per share calculations:
Basic	12,799			11,475		12,447			11,420
Diluted	12,799			11,930		12,755			11,845

See accompanying Notes to Condensed Consolidated Financial Statements.

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Cascade Microtech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

	For the Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	1,070		$	2,684
Adjustments to reconcile net income to net cash flows provided by operating activities, net of acquisitions:
Depreciation and amortization	3,205			1,404
Stock-based compensation, net	1,757			1,416
Loss (gain) on disposal of fixed assets	104			(6		)
Deferred income taxes	(239		)	(140		)
Excess tax benefits related to stock option exercises	(218		)	(407		)
(Increase) decrease, net of acquisitions, in:
Accounts receivable, net	142			(2,547		)
Inventories, net	(1,607		)	(3,051		)
Prepaid expenses and other	(272		)	1,099
Increase (decrease), net of acquisitions, in:
Accounts payable	238			1,792
Deferred revenue	(263		)	52
Accrued and other long-term liabilities	527			2,456
Net cash provided by operating activities	4,444			4,752
Cash flows from investing activities:
Purchase of marketable securities	(18,536		)	(41,060		)
Proceeds from sale of marketable securities	33,726			38,702
Purchase of fixed assets	(8,568		)	(3,065		)
Proceeds from disposal of fixed assets	4			7
Investment in patents and other assets	(735		)	(634		)
Cash paid for acquisitions, net of cash acquired	(14,821		)	—
Net cash used in investing activities	(8,930		)	(6,050		)
Cash flows from financing activities:
Principal payments on capital lease obligations	(3		)	(7		)
Excess tax benefits related to stock option exercises	218			407
Proceeds from issuances of common stock	1,791			1,480
Net cash provided by financing activities	2,006			1,880
Increase (decrease) in cash and cash equivalents	(2,480		)	582
Cash and cash equivalents:
Beginning of period	5,260			2,224
End of period	$	2,780		$	2,806
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1		$	—
Cash paid for income taxes, net	1,054			80
Supplemental disclosure of non-cash information:
Equipment acquired with capital lease	$	33		$	—
Common stock issued in connection with Gryphics acquisition	11,959			—
Unrealized gain (loss) on investment activities	20			83

See accompanying Notes to Condensed Consolidated Financial Statements.

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CASCADE MICROTECH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The condensed consolidated financial information included herein has been prepared by Cascade Microtech, Inc. without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and requires the use of management estimates. However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. During the first quarter of 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” as described in Note 10 below. The financial information as of December 31, 2006 is derived from our 2006 Annual Report on Form 10-K. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2006 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Inventories

Inventories are stated at the lower of standard cost, which approximates cost computed on a first-in, first-out basis, or market, and include materials, labor and manufacturing overhead. Demonstration goods, which are included as a component of finished goods, represent inventory that is used for customer demonstration purposes. This inventory is typically sold after 12 to 18 months. We analyze the carrying value of our inventory quarterly, considering a combination of factors including, but not limited to, the following: forecasted sales or usage, historical usage rates, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions. We estimate market value based on factors including, but not limited to, replacement cost and estimated resale value.

Inventories consisted of the following (in thousands):

	September 30,		December 31
	2007		2006
Raw materials	$	8,475	$	6,205
Work-in-process	2,737		2,947
Finished goods	6,104		5,942
	$	17,316	$	15,094

Note 3. Earnings Per Share

We compute net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Under the provisions of SFAS No. 128, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share incorporates, to the extent they are dilutive, the incremental shares issuable upon the assumed exercise of stock options and warrants using the treasury stock method.

The following table reconciles the shares used in calculating basic earnings per share to the shares used in calculating diluted earnings per share (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2007	2006	2007	2006
Shares used to calculate basic earnings per share	12,799	11,475	12,447	11,420
Dilutive effect of outstanding stock options	—	455	308	425
Shares used to calculate diluted earnings per share	12,799	11,930	12,755	11,845
Shares issuable pursuant to stock options not considered as they would have been antidilutive	1,526	723	834	812

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Note 4. Acquisitions

Gryphics, Inc.

On April 3, 2007, we acquired Gryphics, Inc., a private company that designs, manufactures and markets a range of high performance socket products used for final production and evaluation testing of packaged semiconductor integrated circuits.  The results of operations from Gryphics, Inc. have been included in our PPD segment from the date of acquisition.

We acquired all of the outstanding capital stock of Gryphics for 842,753 shares of our common stock with a fair market value of approximately $12.0 million, based on the per share closing price of our common stock on the day the stock was transferred, and cash of $13.7 million, subject to a post-closing purchase price adjustment. The number of shares issued was determined based on a contractual formula. Approximately $1.3 million of the $13.7 million is being held in escrow for a one-year period to secure the indemnification obligation of the shareholders of Gryphics. In addition, we incurred $0.3 million of acquisition costs.

The acquisition was accounted for by the purchase method of accounting, in accordance with SFAS No. 141, “Business Combinations.” The fair values of tangible and identifiable intangible assets acquired, including useful lives, were based upon a valuation as estimated by management with the assistance of an independent appraiser. The following summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

				Useful Life
Cash	$	999		—
Accounts receivable	994			—
Inventories	614			—
Prepaid expenses and other	168			—
Property, plant and equipment	598			1 - 7 years
Trade name and trademarks	1,136			10 years
Non-compete agreements	156			2 years
Developed technology	8,242			8 years
Customer relationships	3,681			7 years
Goodwill	14,350			—
	30,938
Accounts payable	(396		)	—
Deferred tax liabilities	(4,566		)	—
	$	25,976

Goodwill of $14.4 million was recorded as a result of consideration paid in excess of the fair value of the net tangible assets and liabilities acquired, which resulted from expected future revenues and the workforce acquired. The goodwill has been assigned to the PPD segment. Within one year from the purchase date, we may update the value allocated to the purchased assets and the resulting goodwill balance as a result of information received regarding the valuation of such assets and liabilities that was not available at the time of purchase. Goodwill will not be amortized, but will be periodically evaluated for potential impairment. None of the goodwill will be deductible for income tax purposes.

Pro forma results of operations, assuming the above acquisition occurred as of January 1, 2006, were as follows (in thousands, except per share amounts):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007		2006
Total revenues	$	21,343		$	25,058	$	69,367	$	68,217
Net income (loss)	(216		)	1,139		672		3,095
Basic earnings (loss) per share	(0.02		)	0.09		0.05		0.25
Diluted earnings (loss)per share	(0.02		)	0.09		0.05		0.24

Pro forma historical results of operations are not necessarily indicative of actual future results of operations.

Synatron GmbH

In July 2007, we terminated our distribution agreement and acquired certain assets and operations from our German distributor, Synatron GmbH, for an amount of $1.8 million in cash plus nominal acquisition costs. An

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additional $0.2 million was placed in escrow and will be paid for the purchase of Synatron in July 2008, subject to meeting certain milestones pursuant to the agreement. The contingent purchase price will be recorded when paid. We have established a new subsidiary, Cascade Microtech, GmbH, which commenced operations as a direct sales and support office in Munich, Germany.

The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated as follows:

			Useful Life
Customer relationship	$	928	5 years
Customer backlog	265		Less than 1 year
Goodwill	574		—
Equipment	15		1 to 5 years
Acquisition costs	19		—
	$	1,801

The fair values of tangible and identifiable intangible assets acquired, including useful lives, were based upon a valuation as estimated by management with the assistance of an independent appraiser. The goodwill of $574,000 was recorded as a result of the consideration paid in excess of the fair value of the net assets acquired, which resulted from expected future revenues. The goodwill has been assigned to the EPD segment. Goodwill will not be amortized, but will be periodically evaluated for potential impairment. The goodwill is expected to be deductible for income tax purposes.

Pro forma results of operations have not been included as the acquisition would not be material to the operating results.

Note 5. Comprehensive Income (Loss)

Comprehensive income (loss) includes unrealized holding gains and losses on our available-for-sale marketable securities, which are included as a separate component of shareholders’ equity until realized. Unrealized holding gains (losses) were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Unrealized holding gains	$	45	$	66	$	20	$	83

Total unrealized holding gains (losses) were $19,000 and $(1,000), respectively, at September 30, 2007 and December 31, 2006.

Note 6. Product Warranty

We estimate a liability for costs to repair or replace products under warranties for a period of approximately twelve months and technical support costs when the related product revenue is recognized. The products are sold without a right of return or price protection rights. The liability for product warranties is calculated as a percentage of sales. The percentage is based on historical actual product repair costs. The liability for product warranties is included in accrued liabilities on our consolidated balance sheet.

Product warranty activity was as follows (in thousands):

	Nine Months Ended September 30,
	2007			2006
Warranty accrual, beginning of period	$	536		$	488
Reductions for warranty charges	(494		)	(348		)
Additions to warranty reserve	434			463
Warranty accrual, end of period	$	476		$	603

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Note 7. Goodwill and Purchased and Other Intangible Assets

The roll-forward of our goodwill was as follows (in thousands):

	Nine Months Ended September 30,
	2007		2006
Balance, beginning of period	$	1,295	$	—
Acquisition of Gryphics, Inc.	14,350		—
Acquisition of Synatron	574		—
Adjustments to goodwill	6		—
Balance, end of period	$	16,225	$	—

Adjustments to goodwill include additional acquisition costs related to our acquisition of eVue in the fourth quarter of 2006.

Included in other long-term assets on our balance sheet were internally developed patents as follows: (in thousands):

	September 30,			December 31,
	2007			2006
Patents	$	5,328		$	4,641
Accumulated amortization	(3,177		)	(2,859		)
	$	2,151		$	1,782

Purchased intangible assets, net included the following:

	September 30,			December 31,
	2007			2006
Developed technology	$	8,242		$	—
Accumulated amortization	(515		)	—
	7,727			—
Purchased patents	961			961
Accumulated amortization	(120		)	(30		)
	841			931
Developed software technology	165			165
Accumulated amortization	(55		)	(14		)
	110			151
Customer relationships	6,146			1,537
Accumulated amortization	(529		)	(61		)
	5,617			1,476
Trade names and trademarks	1,136			—
Accumulated amortization	(57		)	—
	1,079			—
Non-compete agreements	156			—
Accumulated amortization	(39		)	—
	117			—
Customer backlog	342			77
Accumulated amortization	(143		)	(25		)
	199			52
Total purchased intangible assets, net	$	15,690		$	2,610

Amortization expense totaled $1.7 million and $247,000, respectively, in the nine-month periods ended September 30, 2007 and 2006. Of the amortization expense, $318,000 and $247,000, respectively, was included as a component of selling, general and administrative expense for the nine-month periods ended September 30, 2007 and 2006.

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Amortization of the identifiable intangible assets is as follows over the next five years and thereafter (in thousands):

	Internally Developed Patents		Developed Technology		Purchased Patents		Developed Software Technology		Customer Relationships
Remainder of 2007	$	99	$	258	$	30	$	14	$	233
2008	333		1,030		120		55		931
2009	275		1,030		120		41		931
2010	206		1,030		120		—		931
2011	155		1,030		120		—		931
Thereafter	1,083		3,349		331		—		1,660

	Trade names and trademarks		Non-compete agreements		Customer Backlog
Remainder of 2007	$	28	$	20	$	66
2008	114		78		133
2009	114		19		—
2010	114		—		—
2011	114		—		—
Thereafter	595		—		—

Note 8. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	September 30,		December 31,
	2007		2006
Accrued compensation and benefits	$	2,536	$	2,261
Income taxes payable	185		1,072
Accrued warranty	476		536
Sales return reserve	596		473
Other	736		684
	$	4,529	$	5,026

Note 9. Significant Customer and Segment Reporting

The segment data below is presented in the same manner that management organizes the segments for assessing certain performance trends. Beginning in the first quarter of 2007, our Chief Operating Decision Maker began to monitor the revenue streams and the gross profit of the Engineering Products Division (“EPD”) and the Production Products Division (“PPD”), as opposed to revenue information only, which was previously provided.

As such, the following table summarizes revenue and gross profit for each segment. The results of Gryphics, Inc. have been included in PPD from the acquisition date of April 3, 2007. The results of the Synatron GmbH acquisition have been included in EPD from the acquisition date of July 3, 2007. See Note 4 for additional information regarding our acquisitions. Prior period information has been reclassified to match the current period presentation. We do not track our assets on a segment level, and, accordingly, that information is not provided (in thousands):

	EPD			PPD			Total
Three Months Ended September 30, 2007
Revenue	$	15,719		$	5,624		$	21,343
Gross Profit	$	6,890		$	2,998		$	9,888
Gross Margin	43.8		%	53.3		%	46.3		%
Three Months Ended September 30, 2006
Revenue	$	18,116		$	4,834		$	22,950
Gross Profit	$	8,447		$	1,467		$	9,914
Gross Margin	46.6		%	30.3		%	43.2		%

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	EPD			PPD			Total
Nine Months Ended September 30, 2007
Revenue	$	53,187		$	14,743		$	67,930
Gross Profit	$	24,044		$	6,909		$	30,953
Gross Margin	45.2		%	46.9		%	45.6		%
Nine Months Ended September 30, 2006
Revenue	$	50,373		$	11,874		$	62,247
Gross Profit	$	23,127		$	4,100		$	27,227
Gross Margin	45.9		%	34.5		%	43.7		%

The segment data provided is prepared in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” and is not meant to represent stand alone divisional information. In preparing this financial information, certain expenses were allocated between the segments based on management estimates, while others were based on specific factors such as headcount. For example, certain indirect costs related to the manufacture of key components by PPD on behalf of EPD have been fully allocated to PPD. In addition, no adjustments have been made to reflect the sale of these components by PPD to EPD. These factors can have a significant impact on the amount of gross profit for each segment. Assignment of other reasonable cost allocations to each segment could result in materially different segment gross margins.

No customer accounted for 10% or greater of our total revenue in the three-month or nine-month period ended September 30, 2007. One customer accounted for 10% of our total revenue in the nine-month period ended September 30, 2006. No other customer accounted for 10% or more of our total revenue in the three or nine-month periods ended September 30, 2007 or 2006.

Note 10. Adoption of Interpretation No. 48

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” Interpretation No. 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006.

We adopted the provisions of Interpretation No. 48 on January 1, 2007. In accordance with paragraph 19, we elected to treat interest and penalties accrued on unrecognized tax benefits as tax expense within our financial statements. Upon adoption, we analyzed our tax positions to determine if there were any that were “more-likely-than-not” to be sustained as of the adoption date. Based on this analysis, we determined that no adjustment was required upon adoption of Interpretation No. 48.

At the date of adoption, we had unrecognized tax benefits of $0.7 million, of which $0.4 million would have an impact on the effective tax rate, and interest and penalties accrued on unrecognized tax benefits were $49,000.

During the three and nine-month periods ended September 30, 2007, unrecognized tax benefits increased by $0.4 million and $0.5 million, respectively, and totaled $1.2 million as of September 30, 2007. Of the $1.2 million, $0.9 million would have an impact on the effective tax rate. Interest and penalties accrued on the unrecognized tax benefits totaled $0.2 million at September 30, 2007. Although we cannot be certain of the final outcome of any ongoing tax examinations, we believe it is reasonably possible that the total amount of unrecognized benefits will decrease in the range of $0.6 million to $0.8 million within the next 12 months. There were no changes in prior unrecognized tax benefits resulting from settlements with taxing authorities or the lapse of applicable statutes of limitation during the three or nine-month periods ended September 30, 2007.

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The tax years which remain open to examination in our major taxing jurisdictions were as follows:

Jurisdiction	Open Tax Years
U.S.	2004 - 2006
Japan	2000 - 2006
United Kingdom	2004 - 2006

Note 11. New Accounting Pronouncements

EITF 07-3

In June 2007, the Emerging Issues Task Force (“EITF”) issued EITF 07-3, “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” which states that non-refundable advance payments for services that will be consumed or performed in a future period in conducting research and development activities on behalf of the company should be recorded as an asset when the advance payment is made and then recognized as an expense when the research and development activities are performed. EITF 07-3 is applicable prospectively to new contractual arrangement entered into in fiscal years beginning after December 15, 2007. We do not expect the adoption of EITF 07-3 to have a material effect on our financial position or results of operations.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking, including, but not limited to, statements regarding industry prospects; future results of operations or financial position; our expectations and beliefs regarding future revenue growth; the future capabilities and functionality of our products and services, our strategies and intentions regarding acquisitions; the outcome of any litigation to which we are a party; our accounting and tax policies; our future strategies regarding investments, product offerings, research and development, market share, and strategic relationships and collaboration; our dividend policies; and our future capital requirements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, including “intend,” “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate” “predict,” “potential,” “future,” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those expressed or implied in such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2007. These risk factors have not significantly changed since they were filed with our Form 10-K and included the following:

•Our operating results have fluctuated in the past and are likely to fluctuate in the future, which could cause us to miss analyst expectations about these results and cause the trading price of our common stock to decline.

•The cyclicality of the semiconductor industry affects our financial results, and, as a result, we may experience reduced sales or operating losses in a semiconductor industry downturn.

•As is the case with other companies in our industry, many of our customers defer purchasing decisions until late each quarter. As a result, we are significantly dependent upon the sale of our products in the third month of each quarter, and, if we do not generate enough revenue in the third month of each quarter to meet the earnings expectations of analysts or investors, the price of our common stock could decline.

•Because we generally do not have a sufficient backlog of unfilled orders to meet our quarterly revenue targets, revenue in any quarter is substantially dependent upon customer orders received and fulfilled in that quarter.

•We continue to devote significant effort and resources to the growth and development of our Pyramid Probe products, which has had, and could continue to have, an adverse effect on our operating margins.

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•If we do not keep pace with technological developments in the semiconductor industry, especially the trend toward faster, smaller and lower cost chips, our revenue and operating results could suffer as potential customers decide to adopt our competitors’ products.

•Intense competition in the semiconductor wafer probing and test socket businesses may reduce demand for our products and reduce our sales.

•We obtain some of the materials, components and subassemblies used in our products from a single source or a limited group of suppliers. If these suppliers are unable to provide us with these materials, components or subassemblies in adequate quantities and on a timely basis, we may be unable to manufacture our products or meet our customers’ needs.

•We depend upon the sale of our engineering probe stations for a significant portion of our revenue, and a decline in demand for our engineering probe stations would have a more significant impact on our revenue than a downturn in demand for our analytical probes, production probe cards or test sockets.

•We may make future acquisitions, which may be costly, difficult to integrate with our operations, divert management resources and dilute shareholder value.

•We face economic, political and other risks associated with our international sales and operations, which could materially harm our operating results.

•We rely on independent manufacturers’ representatives and distributors for a significant portion of our revenue, and a disruption in our relationship with our manufacturers’ representatives or distributors would have a material adverse effect on our revenue.

•If semiconductor manufacturers do not convert to 300mm wafers, or do not convert at the rate we anticipate, our growth and profitability could be harmed.

•There is no assurance that products recently introduced for micro-fluidics research for the life sciences industry will generate revenues and profits.

•Failure to retain key managerial, technical, and sales and marketing personnel or to attract new key personnel could harm our business.

•Our customers’ evaluation processes can lead to lengthy sales cycles, during which we may incur significant costs that may not result in sales.

•If our products contain defects, our reputation would be damaged, and we could lose customers and revenue and incur warranty expenses.

•If we fail to protect our proprietary technology and rights, competitors may be able to use our technologies, which would weaken our competitive position and could reduce our sales.

•Intellectual property infringement claims by or against us may result in litigation, the cost of which could be substantial and could prevent us from selling our products.

•Our growth could strain our personnel and infrastructure resources, and, if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

•Our success depends on our continued investment in research and development, the level and effectiveness of which could reduce our profitability.

•We manufacture nearly all of our products at our Oregon facilities, and any disruption in the operations of these facilities could harm our business.

•We may fail to comply with environmental regulations, which could result in significant costs and harm our business.

•Product liability claims may be asserted against us, resulting in costly litigation for which we may not have sufficient liability insurance.

•We rely on a small number of customers for a significant portion of our revenue, and the termination of any of these relationships would adversely affect our business.

•Our employment costs in the short-term are, to a large extent, fixed, and therefore, any shortfall in sales would harm our operating results.

•The additional costs that we incur as a result of being a public company will affect our operating results.

•Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability.

•Our officers and directors and their affiliates will control the outcome of matters requiring shareholder approval.

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•The anti-takeover provisions of our charter documents and Oregon law may inhibit a takeover or change in our control that shareholders may consider beneficial.

•If our stock price is volatile, securities class action litigation may be brought against us, which could result in substantial costs.

Overview

We design, develop and manufacture advanced wafer probing and test socket solutions for the electrical measurement of high performance chips. We design, manufacture and assemble our products in Beaverton, Oregon and Plymouth, Minnesota, with global sales, service and support centers in North America, Europe, Japan, Taiwan, China and Singapore. We were incorporated and introduced our first commercial products in 1984.

Our products include engineering probe stations, analytical probes, production probe cards, application software and services. Engineering probe stations address the need for precise and accurate measurement of semiconductor electrical characteristics during chip design or when optimizing the chip fabrication process. Our engineering probe stations are highly configurable and are typically sold with various accessories, including our analytical probes, as well as accessories from third parties. In addition, we design and build custom engineering probe stations to address the specific requirements of our customers. Analytical probes are sold to serve as components of our engineering probe stations, or less often, to serve as components of test equipment manufactured by third parties. Our production probe cards are designed and sold for production test applications, ranging from very low current parametric testing to sophisticated, high speed radio frequency testing. We refer to analytical probes and production probe cards as consumables, as they are routinely replaced during the testing process. We also generate revenue through the sale of service contracts to our customers.

Our engineering probe stations, analytical probes and probing accessories are sold through our Engineering Products Division (“EPD”). Our production probe cards and test sockets are sold through our Production Products Division (“PPD”). To date, we have derived the majority of our revenue from the sale of our engineering probe stations, and we expect to continue to do so for the next few years. Our production products revenue, however, increased as a percentage of total revenues in the first nine months of 2007, due to the acquisition of Gryphics, Inc. in April 2007, compared to the first nine months of 2006.

Our engineering products business and operating results depend in significant part on the level of capital expenditures related to semiconductor research and development, which, in turn, depends upon current and anticipated market demand for chips. Historically, the semiconductor industry has been highly cyclical with recurring periods of over-supply, which has often resulted in a reduction in demand for our products. While our financial results are impacted by cycles within the semiconductor industry, we believe our business cycles are typically less pronounced than those of other semiconductor equipment companies. We believe this is due to our greater reliance on our customers’ research and development capital spending and usage of test consumables rather than on our customers’ spending to increase production capacity. Capital spending aimed at increasing production capacity is one of the first areas in which most semiconductor manufacturers reduce spending in an industry downturn.

While the conversion to 300mm technology continues, high conversion costs combined with continued process developments on 200mm wafers continue to make sales of our sub-300mm probing systems an important component of our revenue stream for the foreseeable future. 300mm technology more than doubles the available area on a wafer, significantly increasing the number of chips per wafer and reducing per unit manufacturing costs. Revenue from our 300mm engineering probe stations, including all probes, accessories and other items sold therewith, represented 43.3% and 37.0% of our total EPD revenue in the first nine months of 2007 and 2006, respectively.

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We sell our solutions to most segments of the semiconductor industry, including manufacturers of communications, wireless, microprocessors and other logic and memory chips. A substantial portion of our revenue is generated from sales of our engineering probe stations and analytical probes to research and development laboratories of semiconductor manufacturers as well as to fabless semiconductor companies and academic institutions. As a result, we sell to a geographically diversified customer base, with more than 50% of our revenue in 2007 and 2006 generated outside of North America, primarily in Japan, other Asian countries and, to a lesser extent, Europe.

We sell our products both directly through our own sales force and indirectly through a combination of manufacturers’ representatives and distributors. In North America and Asia, excluding Japan, Taiwan, Singapore, Malaysia and portions of China, we sell most of our products through manufacturers’ representatives. We sell certain products in these regions directly. In Japan, Taiwan, Singapore, Malaysia and China, we sell through Cascade Microtech Japan, K.K., Cascade Microtech Taiwan, Cascade Microtech Singapore and Cascade Microtech China, our direct sales and service subsidiary and branch offices, respectively. In Europe, we sell primarily through distributors and manufacturers’ representatives, except in the U.K., where we sell through our direct sales subsidiary, Cascade Microtech Europe, Ltd. We also sell certain products directly in Germany, Austria, Switzerland, China and Taiwan. In the rest of the world, we typically sell through manufacturers’ representatives or distributors. Our distributors normally place orders with us once they have received an order from an end-user customer, and therefore, the total amount of inventory held by our distributors at any given date is not material.

Critical Accounting Policies and the Use of Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of condensed consolidated financial statements 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. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, inventory, bad debts, investments, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

With the exception of the adoption of Interpretation No. 48 as described in Note 10 of Notes to Condensed Consolidated Financial Statements, we reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission on March 16, 2007.

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Results of Operations

The following table sets forth our consolidated statement of operations data for the periods indicated as a percentage of revenue.(1)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2007		2006		2007		2006
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and stock-based compensation	53.7		56.8		54.4		56.3
Gross profit	46.3		43.2		45.6		43.7
Operating expenses:
Research and development	12.8		9.7		12.5		10.2
Selling, general and administrative	31.6		27.1		30.7		29.0
Amortization of purchased intangibles	3.1		—		2.0		—
Total operating expenses	47.5		36.8		45.1		39.2
Income (loss) from operations	(1.2	)	6.4		0.4		4.5
Other income, net	1.1		3.1		1.6		2.4
Income (loss) before income taxes	(0.1	)	9.4		2.0		6.9
Provision for (benefit from) income taxes	0.9		4.0		0.5		2.6
Net income (loss)	(1.0	)%	5.4	%	1.6	%	4.3	%

(1)  Percentages may not add due to rounding.

The following table summarizes revenue and gross profit for each of our segments. Prior period information has been reclassified to match the current period presentation (dollars in thousands):

	EPD			PPD			Total
Three Months Ended September 30, 2007
Revenue	$	15,719		$	5,624		$	21,343
Gross Profit	$	6,890		$	2,998		$	9,888
Gross Margin	43.8		%	53.3		%	46.3		%
Three Months Ended September 30, 2006
Revenue	$	18,116		$	4,834		$	22,950
Gross Profit	$	8,447		$	1,467		$	9,914
Gross Margin	46.6		%	30.3		%	43.2		%

	EPD			PPD			Total
Nine Months Ended September 30, 2007
Revenue	$	53,187		$	14,743		$	67,930
Gross Profit	$	24,044		$	6,909		$	30,953
Gross Margin	45.2		%	46.9		%	45.6		%
Nine Months Ended September 30, 2006
Revenue	$	50,373		$	11,874		$	62,247
Gross Profit	$	23,127		$	4,100		$	27,227
Gross Margin	45.9		%	34.5		%	43.7		%

The segment data provided is prepared in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” and is not meant to represent stand alone divisional information. See Note 9 of Notes to Condensed Consolidated Financial Statements above for additional information.

Revenue decreased $1.7 million, or 7.0%, to $21.3 million in the three-month period ended September 30, 2007 compared to $23.0 million in the three-month period ended September 30, 2006 and increased $5.7 million, or 9.1%, to $67.9 million in the nine-month period ended September 30, 2007 compared to $62.2 million in the nine-month period ended September 30, 2006. The decrease in the three-month period ended September 30, 2007 compared to the three-month period ended September 30, 2006 was primarily due to lower EPD revenue as described below.

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EPD revenue decreased $2.4 million, or 13.2%, to $15.7 million in the three-month period ended September 30, 2007 compared to $18.1 million in the three-month period ended September 30, 2006 and increased $2.8 million, or 5.6%, to $53.2 million in the nine-month period ended September 30, 2007 compared to $50.4 million in the nine-month period ended September 30, 2006.

Certain financial information which contributed to the EPD revenue results was as follows:

	Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006		Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Percentage increase (decrease) in unit sales	(13.8	)%	0.8	%
Percentage increase (decrease) in average order total	(7.1	)%	9.6	%

Average order total includes the sales price of all analytical probes, probe cards and other accessories purchased with an engineering probe station.

The decrease in unit sales in the three-month period ended September 30, 2007 compared to the three-month period ended September 30, 2006 was primarily due to some order delays and orders being pushed out into future quarters. We did not experience order cancellations in the third quarter of 2007 or in the first part of the fourth quarter of 2007 through the date of this report.

For the nine-month period ended September 30, 2007 compared to the same period of 2006, increases in unit sales of our 300mm systems were offset by decreases in unit sales of our non-300mm systems. The increase in the 300mm systems was due to increased customer demand. As more customers transition to our 300mm systems, sales of non-300mm systems typically decline as a percentage of total system sales.

The decrease in the average order total in the three-month period ended September 30, 2007 compared to the same period of 2006 was due primarily to product mix changes with a higher percentage of units sold being non-300mm systems.

For the nine-month period ended September 30, 2007 compared to the same period of 2006, increases in average order total were attributable to increased unit sales of our 300mm systems, which have a higher average sales price than our non-300mm systems.

Other EPD revenue was flat in the three-month period ended September 30, 2007 compared to the same period of 2006 and decreased 3.4% in the nine-month period ended September 30, 2007 compared to the same period of 2006. The decrease in the nine-month period ended September 30, 2007 compared to the same period of 2006 was primarily due to lower stand-alone analytical probe revenue.

PPD revenue increased $0.8 million, or 16.3%, to $5.6 million in the three-month period ended September 30, 2007 compared to $4.8 million in the three-month period ended September 30, 2006 and increased $2.8 million, or 24.2%, to $14.7 million in the nine-month period ended September 30, 2007 compared to $11.9 million in the nine-month period ended September 30, 2006. These increases were due to the addition of Gryphics, Inc. revenues during the second quarter of 2007.

During the last several quarters, we have been adding probe card capabilities in the form of headcount and equipment. Although we expect to add additional equipment during the next few quarters, we do not anticipate further headcount additions. We have recently expanded our clean room space and increased our manufacturing capacity. When new equipment installations are complete in 2008, we expect to have manufacturing capacity of approximately $60 million annually, compared to our current capacity of approximately $40 million annually.

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Cost of Sales and Gross Profit

Cost of sales includes purchased materials, fabrication, assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, royalties and provision for inventory valuation reserves.

Fluctuations in gross profit as a percentage of revenue, or gross margin, primarily result from changes in geographic mix, product mix, general pricing dynamics and yields in some of our production lines. Sales in Europe typically have a lower margin than sales in North America and Japan due to our use of third-party distributors in Europe. Within EPD, we typically achieve higher gross margins on the consumables than on the engineering probe stations.

Cost of sales, including stock-based compensation expense, decreased $1.5 million, or 12.1%, to $11.5 million in the three-month period ended September 30, 2007 compared to $13.0 million in the three-month period ended September 30, 2006 and increased $2.0 million, or 5.6%, to $37.0 million in the nine-month period ended September 30, 2007 compared to $35.0 million in the nine-month period ended September 30, 2006.

These increase (decrease) was primarily due to the following:

	Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006			Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Increased (decreased) direct costs, such as raw materials, resulting from changes in revenue and product mix	$	(1,087,400	)	$	1,391,000
Increase in salaries and related costs in EPD labor due to higher production activities and wage increases	92,000			676,600
Increase in supplies due to higher production volumes	54,700			232,700
Decrease in salaries and related costs in PPD resulting from changes in headcount and other labor	(370,500		)	(58,100		)
Decrease due to increased allocation of costs to research and development expense due to increased research and development fab runs	(94,100		)	(647,200		)
Other decreases	(94,700		)	405,000
	$	(1,500,000)		$	2,000,000

Gross profit was flat at $9.9 million in the three-month period ended September 30, 2007 compared to the same period of 2006 as the decrease due to lower sales was offset by an increase in the gross margin percentage. Gross profit increased $3.8 million, or 13.7%, to $31.0 million in the nine-month period ended September 30, 2007 compared to $27.2 million in the same period of 2006. The increase in the nine-month period was primarily attributable to the increased sales discussed above. Our gross margin increased to 46.3% in the three-month period ended September 30, 2007 compared to 43.2% in the same period of 2006 and increased to 45.6% in the nine-month period ended September 30, 2007 compared to 43.7% in the same period of 2006. The gross margin improvements were within PPD and resulted primarily from the inclusion of gross margin from Gryphics, Inc. product sales beginning during the second quarter of 2007, as well as increased fab run allocations to research and development expense. The increase in the number of research and development fab runs resulted in an increase in research and development expenses and a decrease in cost of sales. The decreases in gross margin in EPD in the three and nine-month periods ended September 30, 2007 compared to the same periods of 2006 were primarily due to the mix of product sales and some price discounts.

Research and Development

Research and development costs are expensed as incurred and include compensation and related expenses for personnel, materials, consultants and overhead. From time to time, we enter into arrangements that provide for the reimbursement of research and development expenses. Such reimbursements are netted against gross research and development expenses.

Research and development expenses increased $0.5 million, or 22.1%, to $2.7 million in the three-month

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period ended September 30, 2007 compared to $2.2 million in the three-month period ended September 30, 2006 and increased $2.1 million, or 33.0%, to $8.5 million in the nine-month period ended September 30, 2007 compared to $6.4 million in the nine-month period ended September 30, 2006. The increases were primarily due to the following:

	Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006		Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Increase in salaries and benefits primarily due to increases in headcount	$	317,600	$	885,300
Increase in stock-based compensation due to increased headcount and annual awards	9,000		24,000
Increase related to the increasing number of research and development fab runs	94,100		647,200
Increases in other costs, including supplies	79,300		543,500
	$	500,000	$	2,100,000

Selling, General and Administrative

Selling, general and administrative, or SG&A, expense includes compensation and related expenses for personnel, travel, outside services, manufacturers’ representative commissions, patent and trademark amortization and overhead incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions, as well as costs to operate as a public company.

SG&A expense increased $0.5 million, or 8.4%, to $6.7 million in the three-month period ended September 30, 2007 compared to $6.2 million in the three-month period ended September 30, 2006 and increased $2.9 million, or 15.6%, to $20.9 million in the nine-month period ended September 30, 2007 compared to $18.0 million in the nine-month period ended September 30, 2006. The increases were primarily due to the following:

	Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006			Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Increase (decrease) in costs related to our China and Taiwan sales offices, which opened in the second quarter of 2006	$	(42,600	)	$	504,700
Increase in salaries and related expenses due to increased headcount	261,000			1,228,200
Increase (decrease) in IT services, labor and software due to international expansion demands	(5,100		)	207,600
Increase in accounting fees for public company compliance	120,200			160,700
Increased stock-based compensation due to increased headcount and annual awards	53,000			300,000
Increase related to recruiting costs for Chief Operating Officer and German sales manager	42,600			145,000
Decrease related to decreased legal costs as a result of patent protection law suits filed in the first quarter of 2006 and generally lower activity in the 2007 periods	(163,800		)	(497,600		)
Other	234,700			851,400
	$	500,000		$	2,900,000

Amortization of Purchased Intangibles

Amortization of purchased intangibles includes amortization related to our acquisition of certain assets of the eVue product line in the fourth quarter of 2006, acquisition of Gryphics, Inc. in the second quarter of 2007, and the acquisition of Synatron in the third quarter of 2007. Purchased intangibles totaled $15.7 million at September 30, 2007 and current amortization is approximately $0.6 million per quarter.

Other Income (Expense)

Other income (expense) typically includes interest income, interest expense, gains and losses on sales of investments and transaction and remeasurement related foreign currency gains and losses. Other income (expense) can also include other miscellaneous non-operating gains and losses. Transaction related foreign

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currency gains and losses result from gains and losses recognized on foreign exchange forward contracts and on certain of our accounts receivable that are denominated in Japanese yen.

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $330,000 and $1.2 million, respectively, in the three and nine-month periods ended September 30, 2007 compared to $428,000 and $1.2 million, respectively, in the comparable periods of 2006. The decrease in the three-month period ended September 30, 2007 compared to the same period of 2006 was due to the use of $14.9 million, net of cash acquired, for the purchase of Gryphics, Inc. in April 2007 and the purchase of Synatron GmbH in July 2007 and the use of $8.6 million during the first nine months of 2007 for the purchase of fixed assets, partially offset by $4.4 million of cash generated by operations in the first nine months of 2007. These decreases were partially offset by higher interest rates in the 2007 periods compared to the 2006 periods.

Other income (expense), net was comprised of the following (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
Foreign currency remeasurement gain (loss)	$	(38	)	$	117	$	(50	)	$	108
Foreign currency transaction gain	35			155		103			207
Other	(98		)	—		(109		)	4
	$	(101	)	$	272	$	(56	)	$	319

Income Taxes

Our provision for income taxes totaled $0.3 million, or 22.8%, of income before income taxes, and $1.6 million, or 37.9%, of income before income taxes, in the first nine months of 2007 and 2006, respectively. The effective tax rate in the first nine months of 2007 included a benefit for research and experimentation tax credits, which were reinstated in December 2006. The effective tax rate in the first nine months of 2006 did not include any benefit for research and experimentation tax credits since legislation related to such credits was expired during that period.

Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet realized for tax purposes and from unutilized tax credits and net operating loss carry forwards. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined that it is more likely than not that we will not realize the benefit of our deferred tax assets, we record a valuation allowance against deferred tax assets.

At September 30, 2007, we had a net deferred tax liability on our balance sheet totaling $1.6 million, primarily related to deferred tax liabilities assumed with the Gryphics, Inc. acquisition.

Liquidity and Capital Resources

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash, short-term marketable securities and long-term marketable securities, which totaled $35.8 million at September 30, 2007, as well as from cash expected to be generated from operations. In the first nine months of 2007, we used $14.9 million of cash, net of cash acquired, for acquisitions as discussed in Note 4 of Notes to Consolidated Financial Statements.

Net cash provided by operating activities in the first nine months of 2007 was $4.4 million and consisted of net income of $1.1 million, depreciation, amortization and stock-based compensation of $5.0 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net increased $0.9 million to $18.5 million at September 30, 2007 compared to $17.6 million at December 31, 2006, due primarily to an increase in our days sales outstanding and the assumption of accounts receivable with the acquisition of Gryphics. In addition, a greater percentage of our revenue was in the last month of the third quarter of 2007 as compared to the last month of the fourth quarter

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of 2006. Our days sales outstanding was approximately 79 days at September 30, 2007 compared to 71 days at December 31, 2006.

Inventories increased $2.2 million to $17.3 million at September 30, 2007 compared to $15.1 million at December 31, 2006, primarily due to the timing of systems orders and shipments and the purchase of inventory with the acquisition of Gryphics. We believe that our inventory levels at September 30, 2007 are adequate given our revenue projections for the fourth quarter of 2007.

Deferred income taxes were a net liability of $1.6 million at September 30, 2007 compared to a net asset of $2.7 million at December 31, 2006. The change in deferred income taxes was due primarily to deferred tax liabilities recorded in connection with the Gryphics, Inc. acquisition.

Net cash used in investing activities of $8.9 million in the first nine months of 2007 resulted from $8.6 million used for the purchase of fixed assets and $14.9 million, net of cash acquired, used for the acquisition of Gryphics, Inc. and Synatron GmbH. These uses were offset by a net maturity and sale of marketable securities of $15.2 million. Purchases of fixed assets primarily were for our PPD capacity expansion project. We anticipate spending approximately $2.0 million in the remainder of 2007 for fixed assets, primarily for PPD capacity expansion.

Net cash provided by financing activities of $2.0 million in the first nine months of 2007 resulted primarily from $1.8 million of proceeds from the exercise of employee stock options and the sale of stock pursuant to our employee stock purchase plan and $0.2 million of tax benefits related to stock option exercises.

New Accounting Pronouncements

See Note 11 of Notes to Consolidated Financial Statements for a discussion of new accounting pronouncements.

Seasonality

Typically, our revenue is lower in our fiscal first quarter than in our fiscal fourth quarter preceding it. In addition, as is typical in our industry, we recognize a large percentage of our quarterly revenue in the last month of the quarter.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks or risk management policies since the filing of our 2006 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2007.

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Item 4.    Controls and Procedures

Changes in Internal Control Over Financial Reporting

Other than as described below, there has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We acquired Gryphics, Inc. on April 3, 2007 and Synatron GmbH on July 3, 2007. In connection with these acquisitions, we are reviewing our internal control over financial reporting and implementing new processes and procedures to integrate the activities associated with accounting for Gryphics, Inc and Synatron GmbH.

We have excluded Gryphics, Inc. and Synatron GmbH from our assessment of the effectiveness of our internal control over financial reporting as of September 30, 2007.

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Limitation on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all occurrences of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the control systems will detect all control issues, including instances of fraud, if any.

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PART II – OTHER INFORMATION

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2006 includes a detailed discussion of our risk factors. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K. Accordingly, the information in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission on March 16, 2007. See also Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report under the heading “Forward Looking Statements and Risk Factors.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds

We filed a registration statement on Form S-1, File No. 333-113256 for an initial public offering of common stock, which was declared effective by the Securities and Exchange Commission on December 15, 2004. In that offering, we sold an aggregate of 3.3 million shares of our common stock with net offering proceeds of $41.6 million. As of September 30, 2007, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness and $14.9 million, net of cash acquired, for our acquisitions of Gryphics, Inc. and Synatron GmbH. No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to any affiliates.

Item 6.    Exhibits

The following exhibits are filed herewith or incorporated by reference hereto and this list is intended to constitute the exhibit index:

2.1	Agreement and Plan of Merger by and among Cascade Microtech, Inc., Gryphics Acquisition Corporation and Gryphics, Inc., dated as of April 3, 2007 (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 5, 2007).
10.1	Shareholder Agreement by and among Cascade Microtech, Inc. and each of the shareholders of Gryphics, Inc. dated as of April 3, 2007 (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 5, 2007).
10.2	Executive Compensation Plan for the Six-Month Period Ending December 31, 2007 (incorporated by reference to the Company’s Current Report on Form 8-K filed on August 16, 2007).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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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.

Date: November 9, 2007	CASCADE MICROTECH, INC.
	(Registrant)
	By:	/s/ ERIC W. STRID
	Eric W. Strid
	Chairman of the Board, President
	and Chief Executive Officer
	(Principal Executive Officer)
	By:	/s/ STEVEN SIPOWICZ
	Steven Sipowicz
	Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

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