Cascade Microtech (CSCD) 10-Q 2008 Q1 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 March 31, 2008

OR

¨ 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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    (Do not check if a smaller reporting company)    Smaller reporting company  ¨

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

The number of shares of common stock outstanding as of May 6, 2008 was 13,049,217.

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) - March 31, 2008 and December 31, 2007	2
	Condensed Consolidated Statements of Operations (unaudited) - Three Months Ended March 31, 2008 and 2007	3
	Condensed Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2008 and 2007	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
PART II - OTHER INFORMATION
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 6.	Exhibits	19
Signatures		20

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PART 1- FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)

	March 31, 2008		December 31, 2007
Assets
Current Assets:
Cash and cash equivalents	$	5,359	$	4,900
Short-term marketable securities		27,522		24,521
Accounts receivable, net of allowances of $204 and $203		17,265		18,195
Inventories		18,972		18,608
Prepaid expenses and other		1,533		1,874
Deferred income taxes		2,731		2,729
Total Current Assets		73,382		70,827
Long-term marketable securities		3,717		4,836
Fixed assets, net of accumulated depreciation of $14,150 and $14,280		14,509		14,575
Goodwill		17,310		17,310
Purchased intangible assets, net		14,393		15,042
Other assets, net		2,720		2,691
Total Assets	$	126,031	$	125,281
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of capital leases	$	14	$	13
Accounts payable		4,657		5,158
Deferred revenue		974		1,102
Accrued liabilities		5,316		5,589
Total Current Liabilities		10,961		11,862
Capital leases, net of current portion		55		51
Deferred income taxes		3,037		3,114
Deferred revenue		423		481
Other long-term liabilities		2,253		2,168
Total Liabilities		16,729		17,676
Shareholders’ Equity:
Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 13,040 and 12,878		130		129
Additional paid-in capital		81,185		79,568
Accumulated other comprehensive income - unrealized holding gains on investments		140		45
Retained earnings		27,847		27,863
Total Shareholders’ Equity		109,302		107,605
Total Liabilities and Shareholders’ Equity	$	126,031	$	125,281

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 Quarter Ended March 31,
	2008			2007
Revenue	$	20,759		$	22,471
Cost of sales		10,867			12,087
Stock-based compensation		109			122
Gross profit		9,783			10,262
Operating expenses:
Research and development (includes $116 and $79, respectively, of stock-based compensation)		2,906			2,639
Selling, general and administrative (includes $414 and $361, respectively, of stock-based compensation)		6,879			6,664
Amortization of purchased intangibles		648			106
		10,433			9,409
Income (loss) from operations		(650	)		853
Other income (expense):
Interest income		264			455
Interest expense		(1	)		(1	)
Other, net		439			110
		702			564
Income before income taxes		52			1,417
Provision for income taxes		68			369
Net income (loss)	$	(16	)	$	1,048
Basic net income (loss) per share	$	(0.00	)	$	0.09
Diluted net income (loss) per share	$	(0.00	)	$	0.09
Shares used in per share calculations:
Basic		12,985			11,808
Diluted		12,985			12,207

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 Quarter Ended March 31,
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	(16	)	$	1,048
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Depreciation and amortization		1,489			627
Stock-based compensation, net		639			310
Unrealized loss on foreign currency		9			—
Deferred income taxes		(79	)		(28	)
(Increase) decrease in:
Accounts receivable, net		930			(1,125	)
Inventories, net		(364	)		(412	)
Prepaid expenses and other		341			(57	)
Increase (decrease) in:
Accounts payable		(501	)		(399	)
Deferred revenue		(186	)		(176	)
Accrued and other long-term liabilities		(188	)		813
Net cash provided by operating activities		2,074			601
Cash flows from investing activities:
Purchase of marketable securities		(16,996	)		(8,872	)
Proceeds from sale of marketable securities		15,209			6,730
Purchase of fixed assets		(656	)		(2,175	)
Investment in patents and other assets		(147	)		(178	)
Net cash used in investing activities		(2,590	)		(4,495	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(4	)		—
Excess tax benefits related to stock option exercises		21			252
Proceeds from issuances of common stock, net		958			1,032
Net cash provided by financing activities		975			1,284
Increase (decrease) in cash and cash equivalents		459			(2,610	)
Cash and cash equivalents:
Beginning of period		4,900			5,260
End of period	$	5,359		$	2,650
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1		$	1
Cash paid for income taxes, net		25			353
Supplemental disclosure of non-cash information:
Equipment acquired with capital lease	$	—		$	33

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”). 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. The financial information as of December 31, 2007 is derived from our 2007 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 2007 Annual Report on Form 10-K. The results of operations for the interim period 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):

	March 31, 2008		December 31 2007
Raw materials	$	10,100	$	9,764
Work-in-process		2,547		2,471
Finished goods		6,325		6,373
	$	18,972	$	18,608

Note 3. Net Income (Loss) Per Share

We compute net income (loss) per share in accordance with Statement of Financial Accounting Standards (“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) attributed to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options using the treasury stock method, if dilutive.

The following table reconciles the shares used in calculating basic net income (loss) per share and diluted net income (loss) per share (in thousands):

Three Months Ended March 31,	2008	2007
Shares used to calculate basic net income (loss) per share	12,985	11,808
Dilutive effect of outstanding stock options and restricted stock units	—	399
Shares used to calculate diluted net income (loss) per share	12,985	12,207
Stock options not considered as they would have been antidilutive	1,519	722

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Note 4. Comprehensive Income

Comprehensive income 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 $95,000 and $(3,000) in the first quarter of 2008 and 2007, respectively.

Note 5. 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):

Three Months Ended March 31,	2008			2007
Warranty accrual, beginning of period	$	501		$	536
Reductions for warranty charges		(133	)		(177	)
Additions to warranty reserve		137			89
Warranty accrual, end of period	$	505		$	448

Note 6. Goodwill, Purchased Intangibles and Other Intangible Assets

There was no change in our goodwill balance in the quarters ended March 1, 2008 or 2007. Included in other long-term assets on our balance sheet were internally developed patents as follows: (in thousands):

	March 31, 2008			December 31 2007
Patents	$	5,672		$	5,523
Accumulated amortization		(3,371	)		(3,253	)
	$	2,301		$	2,270

Purchased intangible assets, net included the following:

	March 31, 2008			December 31, 2007
Developed technology	$	8,242		$	8,242
Accumulated amortization		(1,030	)		(773	)
		7,212			7,469
Purchased patents		961			961
Accumulated amortization		(180	)		(150	)
		781			811
Developed software technology		165			165
Accumulated amortization		(83	)		(69	)
		82			96
Customer relationships		6,146			6,146
Accumulated amortization		(994	)		(762	)
		5,152			5,384
Trade names and trademarks		1,136			1,136
Accumulated amortization		(114	)		(85	)
		1,022			1,051
Non-compete agreements		156			156
Accumulated amortization		(78	)		(58	)
		78			98
Customer backlog		342			342
Accumulated amortization		(276	)		(209	)
		66			133
Total purchased intangible assets, net	$	14,393		$	15,042

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Amortization expense of internally developed patents and purchased intangible assets totaled $767,000 and $200,000, respectively, in the first quarter of 2008 and 2007. Of the amortization expense, $118,000 and $94,000, respectively, was for internally developed patents and was included as a component of selling, general and administrative expense.

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 2008	$	538	$	773	$	90	$	41	$	699
2009		542		1,030		120		41		931
2010		461		1,030		120		—		931
2011		394		1,030		120		—		931
2012		289		1,030		120		—		838
Thereafter		77		2,319		211		—		822

	Trade names and trademarks		Non-compete agreements		Customer Backlog
2008	$	85	$	58	$	66
2009		114		20		—
2010		114		—		—
2011		114		—		—
2012		114		—		—
Thereafter		481		—		—

Note 7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31, 2008		December 31, 2007
Accrued compensation and benefits	$	2,584	$	2,372
Income taxes payable		1,536		1,533
Accrued warranty		505		501
Accrued materials returns		222		332
Other		469		851
	$	5,316	$	5,589

Note 8. Segment Reporting

The segment data below is presented in the same manner that management organizes the segments for assessing certain performance trends. Our Chief Operating Decision Maker monitors the revenue streams and the gross profit of the Engineering Products Division (“EPD”) and the Production Products Division (“PPD”). We do not track our assets on a segment level, and, accordingly, that information is not provided. Revenue and gross profit information by segment was as follows (in thousands):

Three Months Ended March 31, 2008	EPD			PPD			Total
Revenue	$	14,469		$	6,290		$	20,759
Gross Profit	$	6,568		$	3,215		$	9,783
Gross Margin		45.4	%		51.1	%		47.1	%
Three Months Ended March 31, 2007
Revenue	$	18,409		$	4,062		$	22,471
Gross Profit	$	8,733		$	1,529		$	10,262
Gross Margin		47.4	%		37.6	%		45.7	%

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

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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.

Note 9. Fair Value Measurements

Effective January 1, 2008, we adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for our financial assets and liabilities. The adoption of this portion of SFAS No. 157 did not have any effect on our financial position or results of operations and we do not expect the adoption of the provisions of SFAS No. 157 related to non-financial assets and liabilities to have an effect on our financial position or results of operations.

Various inputs are used in determining the fair value of our financial assets and liabilities and are summarized into three broad categories:

• Level 1 – quoted prices in active markets for identical securities;

• Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.; and

• Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

Following are the disclosures related to our financial assets pursuant to SFAS No. 157 (in thousands):

	March 31, 2008
	Fair Value		Input Level
Marketable securities	$	31,239	Level 1
Forward sale or purchase contracts for foreign Japanese yen	$	2,216	Level 2

The fair value of our marketable securities is determined based on quoted market prices. The fair value of our forward contracts is based on quoted market prices and is used for the purpose of determining any gain or loss on our foreign currency positions. We do not record the value of the forward contracts on our balance sheet. We record the net unrealized gain or loss as a component of other income (expense), net on a quarterly basis.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We did not elect to measure any items at fair value that are not required to be measured at fair value. Accordingly, the adoption of SFAS No. 159 effective January 1, 2008 did not have any effect on our financial position or results of operations.

Note 10. Accounting Pronouncements Issued Not Yet Adopted

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which requires certain disclosures related to derivative instruments. SFAS No. 161 is effective prospectively for interim periods and fiscal years beginning after November 15, 2008. We do not have any hedging instruments that fall under the guidance of SFAS No. 161 and, accordingly, the adoption of SFAS No. 161 is not expected to have any effect on our financial position or results of operations.

SFAS No. 160

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” SFAS No. 160 establishes accounting and reporting standards for a parent company’s non-controlling, or minority, interests in its subsidiaries. SFAS No. 160 also provides accounting and reporting standards for changes in a parent’s ownership interest of a non-controlling interest

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as well as deconsolidation procedures. SFAS No. 160 aligns the reporting of non-controlling interests in subsidiaries with the requirements in International Accounting Standards 27 and is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. We do not have any non-controlling or minority interests and, accordingly, we do not expect the adoption of this statement to have any effect on our consolidated financial position or results of operations.

SFAS No. 141R

In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations,” which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS No. 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of a business combination. SFAS No. 141R is effective for business combinations that occur after January 1, 2009.

Note 11. Income Taxes

The income tax provision in the first quarter of 2008 included $22,000 related to estimated interest on tax contingencies. The effective tax rate in the first quarter of 2007 included a benefit for research and experimentation tax credits, which expired December 31, 2007.

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 March 31, 2008, we had a net deferred tax liability on our balance sheet totaling $0.3 million, primarily related to deferred tax liabilities recorded in connection with the Gryphics, Inc. acquisition, offset by deferred tax assets for reserves and research tax credits.

We are currently undergoing an IRS audit and, in February 2008, we received notification that the audit will disallow certain research and development credits on our returns. We did not provide any additional tax contingency in the first quarter of 2008 since we believe that we have previously provided a sufficient tax contingency provision for any future potential disallowance. When a formal response is received from the IRS we will determine whether we need to provide any additional tax contingencies. In addition, we may enter into a legal dispute with the IRS over this matter and the costs could be significant.

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 17, 2008. 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.

• 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.

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• Intense competition in the semiconductor wafer probing business 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.

• As a result of our acquisitions, we have intangible assets, including goodwill and other identifiable intangible assets, recorded on our balance sheet. If our operating results do not justify the value of the intangible assets, we may be required to record asset impairment charges in future periods, which would adversely impact our results of operations.

• 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.

• 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 and Minnesota 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.

• 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.

• 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.

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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.

Our products include engineering probe stations, analytical probes, production probe cards, test sockets, application software and services.

Our engineering probe stations, analytical probes and probing accessories are sold through our Engineering Products Division (“EPD”). 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 and test sockets are sold through our Production Products Division (“PPD”). 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. Our test sockets are designed and sold for both production and engineering test applications, typically for high speed digital and radio frequency testing.

We refer to analytical probes, production probe cards and test sockets 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 EPD 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.

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 typically generated from customers outside of North America, primarily in Japan, other Asian countries and, to a lesser extent, Europe.

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 27.7% and 40.4% of our total EPD revenue in the first quarter of 2008 and 2007, respectively. Current market conditions have delayed some customers’ conversion to the higher-end 300mm systems in recent quarters, as there is currently little investment within the industry.

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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 most of Europe, we primarily sell our EPD products through distributors and manufacturers’ representatives and we sell our PPD products directly. We also sell both our EPD and PPD products directly in Germany, Austria, Switzerland, China and Taiwan. 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.

Current Events

In June 2007, we announced our Tesla system for characterization measurements of power semiconductors. The Tesla system is a 200mm platform aimed at the development of semiconductors that can handle higher currents, voltages and power densities. Tesla widens our offerings to include this important segment of semiconductors. We booked and shipped our first Tesla systems in the fourth quarter of 2007 and we continued to see companies adopting this technology in the first quarter of 2008.

In the first quarter of 2008, we shipped our first Elite 300 platform stations to companies in the U.S. and Taiwan. This next-generation engineering prober is a major upgrade of our S300 system, and should support the next five years of semiconductor research and development. We believe the new wafer stage technology in the Elite 300 should enable mechanical accuracy, reliability and maintainability that is superior to anything else available in the market today.

We achieved record revenue from our analytical probes during the first quarter of 2008. We have been focusing on increasing our analytical probe market share and expect continued growth opportunities in Europe, Japan and the U.S. We expect to introduce new analytical probe products in the second quarter of 2008, which we expect will contribute to growing our market share in the second half of 2008.

Increasing chip complexities and parallel test requirements have continued to drive higher probe card complexities and higher probe card average selling prices, which has contributed to higher gross margins for this product category.

We are also focusing on growing our PPD market share by aggressively concentrating on our top 15 customers. We are also adding application and sales resources in Singapore and Taiwan, where we believe there is significant market opportunity. Incremental sales within PPD should improve our gross margins as we currently have unused capacity, therefore we expect to gain efficiencies with increased volume.

The PDC50 parametric probe card, which was introduced in the fourth quarter of 2007, is being evaluated at several integrated device manufacturers and foundries for implementation at advanced process nodes. Successful adoption at these accounts should result in a long-term revenue stream since probe performance is integral to process control and fabs do not typically change probe technology until a new process node is introduced.

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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, bad debts, inventory, 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.

We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission on March 17, 2008.

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 March 31,
	2008		2007
Revenue	100.0	%	100.0	%
Cost of sales, including related stock-based compensation	52.9		54.3
Gross profit	47.1		45.7
Operating expenses:
Research and development	14.0		11.7
Selling, general and administrative	33.1		29.7
Amortization of purchased intangibles	3.1		0.5
Total operating expenses	50.2		41.9
Income (loss) from operations	(3.1	)	3.8
Other income, net	3.4		2.5
Income before income taxes	0.3		6.3
Provision for income taxes	0.3		1.6
Net income	0.1	%	4.7	%

(1) Percentages may not add due to rounding.

The following table summarizes revenue and gross profit for each of our segments (dollars in thousands):

Three Months Ended March 31, 2008	EPD			PPD			Total
Revenue	$	14,469		$	6,290		$	20,759
Gross Profit	$	6,568		$	3,215		$	9,783
Gross Margin		45.4	%		51.1	%		47.1	%
Three Months Ended March 31, 2007
Revenue	$	18,409		$	4,062		$	22,471
Gross Profit	$	8,733		$	1,529		$	10,262
Gross Margin		47.4	%		37.6	%		45.7	%

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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 8 of Notes to Condensed Consolidated Financial Statements above for additional information.

Revenue decreased $1.7 million, or 7.6%, to $20.8 million in the first quarter of 2008 compared to $22.5 million in the first quarter of 2007.

Revenue in EPD decreased $3.9 million, or 21.4%, to $14.5 million in the first quarter of 2008 compared to $18.4 million in the first quarter of 2007.

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

	First quarter of 2008 compared to first quarter of 2007
Percentage decrease in unit sales	28.1	%
Percentage decrease in average sales price	20.9	%
Percentage increase in non-station revenue	25.7	%

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

We realized decreased unit sales in both our 300mm systems and our non-300mm systems in the first quarter of 2008 compared to the first quarter of 2007 due to the global slow-down in semiconductor markets. There is currently very little production expansion within the semiconductor markets. Our EPD revenue in the first quarter of 2008 was primarily related to research and development activities conducted by our customers.

The decrease in average sales price in the first quarter of 2008 compared to the first quarter of 2007 was attributable to fewer high-end 300mm systems sales in relation to total system sales as companies are not currently adding capacity.

The increase in non-station revenue in the first quarter of 2008 compared to the first quarter of 2007 was primarily related to our efforts to grow our analytical probe sales, as well as higher average selling prices for our analytical probes due to the geographical mix of sales and the increased complexity of the probes.

Revenue in PPD increased $2.2 million, or 54.8%, to $6.3 million in the first quarter of 2008 compared to $4.1 million in the first quarter of 2007. This increase was partially due to the addition of Gryphics, Inc. during the second quarter of 2007, which accounted for $0.9 million of the increase. In the first quarter of 2008, we continued to focus on growing our business in market segments and applications other than our core RF business, especially in the parametric test market. Parametric test is the electrical verification of the wafer fabrication process quality and is used by all semiconductor wafer fabs world wide.

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, typically 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 gross 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.

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Cost of sales, including stock-based compensation, decreased $1.2 million, or 10.1%, to $11.0 million in the first quarter of 2008 compared to $12.2 million in the first quarter of 2007 due to the following:

Decreased direct costs, such as raw materials, resulting from changes in revenue and product mix	$	(1,477,000	)
Decrease in indirect manufacturing overhead salaries and related costs due to changes in headcount		(267,000	)
Decrease in salaries and related costs in PPD resulting from changes in headcount and other labor		(99,000	)
Decrease in salaries and related costs in EPD resulting from changes in headcount and other labor related to lower production volumes		(200,000	)
Increased inventory costs related to scrapping, obsolescence, revisions and returns		253,000
Increase in depreciation		213,000
Increase in expense due to reduction in metals reclaim credits		207,000
Increase due to decreased allocation of costs to research and development expense due to decreased research and development fab runs		122,000
Other		48,000
	$	(1,200,000	)

Our gross profit decreased $0.5 million, or 4.7%, to $9.8 million in the first quarter of 2008 compared to $10.3 million in the first quarter of 2007. This decrease in our gross profit was attributable to the decreased sales discussed above, partially offset by an increase in our overall gross margin to 47.1% in the first quarter of 2008 compared to 45.7% in the first quarter of 2007. The increase in gross margin was due to an increase in the gross margins achieved within PPD, as we gained manufacturing efficiencies with increased PPD sales. The decrease within EPD resulted primarily from a shift in product mix to fewer higher-end 300mm systems, which have more accessories, partially being offset by an increase in the mix of non-station analytical probe revenue and an increase in the gross margins achieved on such products.

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 $0.3 million, or 10.1%, to $2.9 million in the first quarter of 2008 compared to $2.6 million in the first quarter of 2007. The increase was primarily due to the following:

Increase related to Gryphics acquisition	$	316,000
Increase related to higher allocations for occupancy expenses		45,000
Increase in recruiting expense related to specialized employee search		38,000
Increase in stock-based compensation due to increased headcount and annual awards		37,000
Decrease related to fewer fab runs		(122,000	)
Decrease related to wages and related expenses due to lower headcount		(55,000	)
Decrease in supplies expense		(45,000	)
Other		53,000
	$	267,000

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, internally developed 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.

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SG&A expenses increased $215,000, or 3.2%, to $6.9 million in the first quarter of 2008 compared to $6.7 million in the first quarter of 2007. The increase was primarily due to the following:

Increase related to our German sales subsidiary	$	382,000
Increase related to Gryphics acquisition		218,000
Increase in accounting expenses		200,000
Increase in recruiting expense related to CEO and other senior management searches		114,000
Increase in stock-based compensation due to increased headcount and annual awards		53,000
Decrease related to lower outside sales representative commissions due to shifting to more in-house sales force		(568,000	)
Decrease due to lower wages and related expenses due to reduced headcount		(260,000	)
Other		76,000
	$	215,000

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, the acquisition of Gryphics, Inc. in the second quarter of 2007 and the acquisition of certain assets of Synatron GmbH in the third quarter of 2007. Net purchased intangibles totaled $14.4 million at March 31, 2008 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 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 $264,000 in the first quarter of 2008 compared to $455,000 in the first quarter of 2007. The decrease was primarily due to lower cash, cash equivalent and marketable securities balances in 2008 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 certain assets of Synatron GmbH in July 2007.

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

	Three Months Ended March 31,
	2008			2007
Remeasurement related foreign currency gains (losses)	$	(184	)	$	15
Gains related to foreign currency hedges		612			92
Other		11			3
	$	439		$	110

Income Taxes

Our provision for income taxes totaled $68,000, or 130.8%, of income before income taxes and $369,000, or 26.0%, of income before income taxes, in the first quarter of 2008 and 2007, respectively. The income tax provision in the first quarter of 2008 included $22,000 related to estimated interest on tax contingencies. The effective tax rate in the first quarter of 2007 included a benefit for research and experimentation tax credits, which expired December 31, 2007.

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 March 31, 2008, we had a net deferred tax liability on our balance sheet totaling $0.3 million, primarily related to deferred tax liabilities recorded in connection with the Gryphics, Inc. acquisition, offset by deferred

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tax assets for reserves and research tax credits.

We are currently undergoing an IRS audit and, in February 2008, we received notification that the audit will disallow certain research and development credits on our returns. We did not provide any additional tax contingency in the first quarter of 2008 since we believe that we have previously provided a sufficient tax contingency provision for any future potential disallowance. When a formal response is received from the IRS we will determine whether we need to provide any additional tax contingencies. In addition, we may enter into a legal dispute with the IRS over this matter and the costs could be significant.

Liquidity and Capital Resources

Net cash provided by operating activities in the first quarter of 2008 was $2.1 million and consisted of our net loss of $16,000 being offset by non-cash depreciation, amortization and stock-based compensation of $2.1 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net decreased $0.9 million to $17.3 million at March 31, 2008 compared to $18.2 million at December 31, 2007, due primarily to lower sales in the first quarter of 2008 than in the fourth quarter of 2007, partially offset by an increase in our days sales outstanding. Our days sales outstanding was approximately 76 days at March 31, 2008 compared to 74 days at December 31, 2007.

Inventories increased $0.4 million to $19.0 million at March 31, 2008 compared to $18.6 million at December 31, 2007, primarily due to the timing of systems orders and shipments. We believe that our inventory levels at March 31, 2008 are adequate given our revenue projections for the second quarter of 2008.

Purchases of fixed assets of $0.6 million in the first quarter of 2008 were primarily for PPD production and service related equipment. We anticipate spending a total of approximately $5.0 to $7.0 million in 2008 for fixed assets, primarily for new processes and product development within PPD.

Proceeds from the issuance of common stock of $1.0 million included proceeds from the exercise of employee stock options and the sale of stock pursuant to our employee stock purchase plan.

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 $36.6 million at March 31, 2008, as well as from cash expected to be generated from operations. We have, from time to time, evaluated, and continue to evaluate, opportunities for acquisition and expansion. Any such transactions, if consummated, may use a portion of our working capital.

Accounting Pronouncements Issued Not Yet Adopted

See Note 10. of Notes to Condensed Consolidated Financial Statements.

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.

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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 2007 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 17, 2008.

Item 4. Controls and Procedures

Changes in Internal Control Over Financial Reporting

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.

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, 2007 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, 2007, which was filed with the Securities and Exchange Commission on March 17, 2008. 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. 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.

As of March 31, 2008, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness and $19.9 million, net of cash acquired, for our acquisitions of eVue product line, Gryphics, Inc. and certain assets of Synatron GmbH.

Item 6. Exhibits

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

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: May 12, 2008	CASCADE MICROTECH, INC.
	(Registrant)
	By:	/s/ GEOFF WILD
		Geoff Wild
		Director, 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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