Cascade Microtech (CSCD) 10-Q 2010 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, 2010

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

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 November 3, 2010 was 14,445,211.

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) - September 30, 2010 and December 31, 2009	2
	Condensed Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2010 and 2009	3
	Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2010 and 2009	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II - OTHER INFORMATION
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	23
Signatures		24

1

PART I - FINANCIAL INFORMATION

Item  1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)

	September 30, 2010			December 31, 2009
Assets
Current Assets:
Cash and cash equivalents	$	11,363		$	19,471
Short-term marketable securities		8,174			13,383
Accounts receivable, net of allowances of $432 and $974		18,315			10,877
Inventories		21,282			16,624
Prepaid expenses and other		1,172			763
Taxes receivable		2,545			2,589
Deferred income taxes		529			13
Assets available for sale		146			—
Total Current Assets		63,526			63,720
Long-term marketable securities		—			750
Fixed assets, net of accumulated depreciation of $20,528 and $17,775		10,565			12,010
Goodwill		1,011			—
Purchased intangible assets, net of accumulated amortization of $2,153 and $1,733		3,346			1,858
Deferred income taxes		—			220
Other assets, net of accumulated amortization of $3,140 and $3,094		2,885			2,386
Total Assets	$	81,333		$	80,944
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of capital leases	$	13		$	11
Accounts payable		5,341			3,765
Deferred revenue		2,491			1,071
Accrued liabilities		5,119			2,087
Total Current Liabilities		12,964			6,934
Capital leases, net of current portion		21			29
Deferred revenue		13			56
Deferred income taxes		708			—
Other long-term liabilities		2,775			2,540
Total Liabilities		16,481			9,559
Shareholders’ Equity:
Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 14,380 and 13,459		144			135
Additional paid-in capital		90,265			85,584
Accumulated other comprehensive income (loss)		(588	)		29
Accumulated deficit		(24,969	)		(14,363	)
Total Shareholders’ Equity		64,852			71,385
Total Liabilities and Shareholders’ Equity	$	81,333		$	80,944

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2

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,
	2010			2009			2010			2009
Revenue	$	25,273		$	13,971		$	68,671		$	38,056
Cost of sales		14,850			8,478			44,543			23,927
Gross profit		10,423			5,493			24,128			14,129
Operating expenses:
Research and development		3,038			2,095			9,545			5,906
Selling, general and administrative		7,075			4,971			25,004			15,552
Amortization of purchased intangibles		200			144			580			435
		10,313			7,210			35,129			21,893
Income (loss) from operations		110			(1,717	)		(11,001	)		(7,764	)
Other income (expense):
Interest income, net		9			68			54			269
Other, net		(431	)		226			23			111
		(422	)		294			77			380
Loss before income taxes		(312	)		(1,423	)		(10,924	)		(7,384	)
Income tax expense (benefit)		41			(4	)		(318	)		(224	)
Net loss	$	(353	)	$	(1,419	)	$	(10,606	)	$	(7,160	)
Basic and diluted net loss per share	$	(0.02	)	$	(0.11	)	$	(0.75	)	$	(0.54	)
Shares used in basic and diluted per share calculations		14,361			13,325			14,232			13,291

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

Cascade Microtech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

	For the Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(10,606	)	$	(7,160	)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:
Depreciation and amortization		3,712			3,306
Stock-based compensation, net		1,321			1,409
Loss on disposal of long-lived assets		42			7
Loss on write-down and disposal of assets held for sale		118			40
Loss on write-down of contingent consideration held in escrow		31			—
Deferred income taxes		(537	)		(40	)
(Increase) decrease, net of the effect of acquisition, in:
Accounts receivable, net		(5,253	)		2,831
Inventories, net		3,472			1,491
Income taxes receivable		578			—
Prepaid expenses and other		(566	)		1,486
Increase (decrease), net of effect of acquisition, in:
Accounts payable		592			(413	)
Deferred revenue		221			(433	)
Accrued and other long-term liabilities		957			(1,111	)
Net cash provided by (used in) operating activities		(5,918	)		1,413
Cash flows from investing activities:
Purchase of marketable securities		(1,797	)		(12,648	)
Proceeds from sale of marketable securities		7,733			29,794
Purchase of fixed assets		(1,176	)		(1,765	)
Investment in other long-lived assets		—			(255	)
Cash paid for acquisition, net of cash acquired		(7,052	)		—
Proceeds from disposal of fixed assets		—			16
Proceeds from sale of assets held for sale		—			360
Net cash provided by (used in) investing activities		(2,292	)		15,502
Cash flows from financing activities:
Principal payments on capital lease obligations		(6	)		(17	)
Excess tax benefits related to stock option exercises		—			111
Withholding taxes paid on net settlement of vested restricted stock units		(119	)		(50	)
Proceeds from issuances of common stock		311			321
Net cash provided by financing activities		186			365
Effect of exchange rate changes on cash		(84	)		—
Increase (decrease) in cash and cash equivalents		(8,108	)		17,280
Cash and cash equivalents:
Beginning of period		19,471			3,750
End of period	$	11,363		$	21,030
Supplemental disclosure of cash flow information:
Cash paid (refunds received) for income taxes, net	$	73		$	(1,613	)
Supplemental disclosure of non-cash information:
Common stock issued in connection with acquisition	$	3,177		$	—
Fair value of assets acquired from acquisition		21,029			—
Liabilities assumed from acquisition		5,406			—
Increase in asset retirement obligation		—			25

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

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”). 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 presented. The financial information as of December 31, 2009 is derived from our 2009 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 2009 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. Based on these analyses, we recorded inventory charges of $0.1 million and $1.7 million, respectively, in the three and nine-month periods ended September 30, 2010 and $0.1 million and $0.5 million, respectively, in the comparable periods of 2009. As described in Note 12, inventory charges for the nine-month period ended September 30, 2010 included restructuring costs of $1.1 million for discontinued products.

Inventories consisted of the following (in thousands):

	September 30, 2010		December 31, 2009
Raw materials	$	12,579	$	9,780
Work-in-process		3,140		1,179
Finished goods		5,563		5,665
	$	21,282	$	16,624

Note 3. Net Loss Per Share

Since we were in a loss position for the three and nine-month periods ended September 30, 2010 and 2009, there was no difference between the number of shares used to calculate basic and diluted net loss per share for those periods. Potentially dilutive securities (in thousands) that are not included in the diluted per share calculations because they would be anti-dilutive totaled 1,615 for the three and nine-month periods ended September 30, 2010, and 1,530 for the three and nine-month periods ended September 30, 2009.

5

Note 4. Comprehensive Income (Loss)

Comprehensive income (loss) was as follows (in thousands):

	Three Months  Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net loss	$	(353	)	$	(1,419	)	$	(10,606	)	$	(7,160	)
Unrealized holding losses		(7	)		(15	)		(23	)		(34	)
Change in cumulative translation adjustment		1,411			—			(594	)		—
Comprehensive income (loss)	$	1,051		$	(1,434	)	$	(11,223	)	$	(7,194	)

Note 5. Product Warranty

We estimate a liability for costs to repair or replace products under warranty for a period of approximately twelve to 24 months when the related product revenue is recognized. The liability for product warranties is calculated as a percentage of revenue. The percentage is based on historical actual product repair costs. The liability for product warranties is included in accrued liabilities in the accompanying condensed consolidated balance sheet. Product warranty activity was as follows (in thousands):

	Nine Months  Ended September 30,
	2010			2009
Warranty accrual, beginning of period	$	277		$	313
Reductions for warranty charges		(594	)		(332	)
Additions to warranty reserve		1,069			307
Warranty accrual, end of period	$	752		$	288

Additions to the warranty reserve for the first nine months of 2010 included accrued warranty costs of $0.5 million assumed with the acquisition of SUSS MicroTec Test Systems GmbH as discussed below.

Note 6. SUSS MicroTec Test Systems GmbH Acquisition

On January 27, 2010, we entered into a Sale and Purchase Agreement (the “Agreement”) with SUSS MicroTec AG (the “Seller”). Pursuant to the terms of the Agreement, we acquired all of the outstanding capital stock of SUSS MicroTec Test Systems GmbH (“SUSS Test”), a wholly-owned subsidiary of Seller, along with certain related assets for a purchase price $15.6 million, including cash in the amount of $12.6 million, 747,530 shares of our common stock valued at $3.2 million and a long-term liability of $0.2 million less an amount receivable of $0.4 million related to contingent consideration held in escrow (the “Acquisition”). The Acquisition of SUSS Test, a long-time competitor in the market for engineering probe stations, provides us with an expanded portfolio of products, as well as the engineering and technical resources to help address complex emerging technologies. A portion of the purchase price, totaling 2.5 million euro (approximately $3.5 million), will be held in escrow for up to 24 months and is subject to claims against the Seller under circumstances specified in the Agreement.

6

The allocation of the purchase price was as follows (dollars in thousands):

			Useful Life
Cash and cash equivalents	$	5,572		—
Accounts receivable		2,286		—
Inventories		8,469		—
Prepaid expenses and other		999		—
Fixed assets		475		1-5 years
Goodwill		1,058		Indefinite
Purchased intangible assets:
Developed technology		1,370		6 years
Customer relationships		800		11 years
		21,029
Accounts payable		953		—
Accrued commissions		815		—
Customer deposits		1,177		—
Warranty		487		—
Deferred tax liabilities		1,021		—
Other liabilities		953		—
		5,406
	$	15,623

In performing our purchase price allocation, we considered, among other factors, the historical financial performance and estimates of future performance of SUSS Test. To determine the value of the technology and other identifiable intangible assets acquired, we projected such items as revenues, gross margins, operating expenses, future research and development costs, income taxes and returns on requisite assets. The resulting operating income projections were discounted to a net present value utilizing a discount rate of 19%.

Amortization expense for the purchased intangible assets is approximately $0.3 million per year over the next five years. The overall weighted average amortization period for the above assets as of the date of acquisition was 7.8 years. Goodwill from the Acquisition is attributable to our Systems segment and represents the value of assembled workforce and other intangible assets that do not qualify for separate recognition. Goodwill will not be amortized, but will be periodically evaluated for potential impairment. None of the goodwill will be deductible for income tax purposes.

Acquisition costs incurred of $0.8 million were primarily incurred in the first quarter of 2010 and are included in our condensed consolidated statement of operations as a component of selling, general and administrative expenses for the nine months ended September 30, 2010. The fair value of the amount receivable from the payment in escrow was approximately $0.1 million as of September 30, 2010, and was included in other assets, net on our balance sheet. Due to restructuring and continued integration of the combined businesses and product lines since the date of acquisition, it is impractical to determine the revenue and earnings contributed by SUSS Test. Pro forma results of operations are not required as the Acquisition was not significant.

Note 7. Goodwill and Purchased Intangibles Assets

Goodwill

The change in goodwill was as follows (in thousands):

Nine Months Ended September 30,	2010			2009
Balance, beginning of period	$	—		$	—
Acquisition of SUSS Test		1,058			—
Effect of exchange rate changes		(47	)		—
Balance, end of period	$	1,011		$	—

7

Purchased Intangible Assets

Purchased intangible assets, net included the following (in thousands):

	September 30, 2010			December 31, 2009
Customer relationships	$	3,229		$	2,465
Other		2,270			1,126
		5,499			3,591
Accumulated amortization		(2,153	)		(1,733	)
Total purchased intangible assets, net	$	3,346		$	1,858

Note 8. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	September 30, 2010		December 31, 2009
Accrued compensation and benefits	$	1,552	$	978
Accrued warranty		752		277
Accrued commissions		678		233
Accrued restructuring costs		581		—
Other		1,556		599
	$	5,119	$	2,087

Note 9. Stock-Based Compensation and Stock-Based Plans

Stock-based compensation was included in our statement of operations as follows (in thousands):

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2010		2009		2010		2009
Cost of sales	$	52	$	75	$	162	$	234
Research and development		94		76		205		207
Selling, general and administrative		295		326		954		968
	$	441	$	477	$	1,321	$	1,409

Stock Incentive Plans

Stock option activity for the first nine months of 2010 was as follows:

	Options Outstanding			Weighted Average Exercise Price
Outstanding at December 31, 2009		897,189		$	7.10
Granted		276,490			4.17
Exercised		(31,962	)		3.11
Forfeited		(345,339	)		5.71
Outstanding at September 30, 2010		796,378			6.85

Restricted stock unit (“RSU”) activity for the first nine months of 2010 was as follows:

	Restricted Stock Units			Weighted Average Grant Date Per Share Fair Value
Outstanding at December 31, 2009		478,441		$	7.32
Granted		484,571			4.36
Vested		(122,460	)		4.28
Forfeited		(75,841	)		6.60
Outstanding at September 30, 2010		764,711			6.00

8

As of September 30, 2010, total unrecognized stock-based compensation related to outstanding, but unvested options and RSUs was $3.6 million, which will be recognized over the weighted average remaining vesting period of 2.8 years.

Included in the above tables were the following grants made in July 2010 in connection with the commencement of employment of our new President and Chief Executive Officer, Mr. Michael D. Burger:

• 70,000 RSUs with a fair value of $283,500. 50,000 of those RSUs vest annually at 25% over four years. The remaining 20,000 RSUs vest at 50% after the first 2 years and 25% per year thereafter; and

• an option to purchase 200,000 shares of our common stock at an exercise price equal to the fair market value of the common stock on the date of grant, which was $4.05. The options vest over 5 years with 20% vesting after the first year and monthly vesting thereafter.

If Mr. Burger’s employment is terminated without “cause” or if Mr. Burger terminates his employment for “good reason,” the RSUs, stock options and any other equity awards held by Mr. Burger that would have vested if Mr. Burger had remained an employee after the termination date for an additional period equal to his length of employment, but not less than 12 months, up to a maximum of 18 months, will accelerate and become immediately exercisable. In addition, if, during the one-year period after a “change in control,” Mr. Burger terminates his employment for “good reason” or if his employment is terminated for any reason other than death, disability or cause, then all RSUs, stock options and other equity awards held by Mr. Burger that would have vested had Mr. Burger remained employed after the termination date for an additional period equal to 24 months will accelerate and become immediately exercisable.

Also included in the above tables are 60,000 RSUs with a fair value of $297,000 granted in May 2010 in connection with the hiring of our Chief Financial Officer, Mr. Jeff Killian. These RSUs vest annually at 25% per year over four years.

In addition, a total of 109,077 RSUs, which vest over two years, were awarded to our executive officers in the first and third quarters of 2010 pursuant to our Executive Compensation Plan.

2010 Stock Incentive Plan

In May 2010 our shareholders approved the 2010 Stock Incentive Plan (the “2010 Plan). The 2010 Plan makes approximately 1.3 million shares of authorized but unissued common stock available for grants of incentive stock options, nonqualified stock options and restricted stock units.

Employee Stock Purchase Plan

In January 2010, pursuant to the terms of our 2004 Employee Stock Purchase Plan (“ESPP”), and upon approval by our Board of Directors, the number of shares of our common stock available for purchase under the 2004 ESPP was increased from 600,000 to 700,000. Employees purchased 50,859 shares in the first nine months of 2010 for $0.2 million under the ESPP.

9

Note 10. Segment Reporting

The segment data below is presented in the same manner that management currently organizes the segments for assessing certain performance trends. Our Chief Operating Decision Maker monitors the revenue streams and the operating income of our Systems revenue and our Probes and Sockets revenue. We do not track our assets on a segment level, and, accordingly, that information is not provided. Certain information by segment was as follows (dollars in thousands):

Three Months Ended September 30, 2010	Systems			Probes and Sockets			Corporate Unallocated			Total
Revenue	$	18,025		$	7,248		$	—		$	25,273
Gross profit	$	7,273		$	3,150		$	—		$	10,423
Gross margin		40.4	%		43.5	%		—			41.2	%
Income (loss) from operations	$	3,163		$	(359	)	$	(2,694	)	$	110
Three Months Ended September 30, 2009
Revenue	$	7,221		$	6,750		$	—		$	13,971
Gross profit	$	2,109		$	3,384		$	—		$	5,493
Gross margin		29.2	%		50.1	%		—			39.3	%
Income (loss) from operations	$	(464	)	$	816		$	(2,069	)	$	(1,717	)

Nine Months Ended September 30, 2010	Systems			Probes and Sockets			Corporate Unallocated			Total
Revenue	$	46,835		$	21,836		$	—		$	68,671
Gross profit	$	15,622		$	8,506		$	—		$	24,128
Gross margin		33.4	%		39.0	%		—			35.1	%
Income (loss) from operations	$	2,417		$	(2,806	)	$	(10,612	)	$	(11,001	)
Nine Months Ended September 30, 2009
Revenue	$	19,538		$	18,518		$	—		$	38,056
Gross profit	$	6,275		$	7,854		$	—		$	14,129
Gross margin		32.1	%		42.4	%		—			37.1	%
Income (loss) from operations	$	(1,029	)	$	433		$	(7,168	)	$	(7,764	)

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. These factors can have a significant impact on the amount of income (loss) from operations for each segment. While we believe we have applied a reasonable methodology, assignment of other reasonable cost allocations to each segment could result in materially different segment income (loss) from operations.

We had one customer that represented approximately 11% of our total revenue in the three-month period ended September 30, 2010. No customer accounted for 10% or greater of our total revenue in the nine-month period ended September 30, 2010, or the three or nine-month periods ended September 30, 2009.

Note 11. Fair Value Measurements

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, 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.

10

Following are the disclosures related to our financial assets (in thousands):

	September 30, 2010				December 31, 2009
	Fair Value		Input Level		Fair Value		Input Level
Marketable securities – municipal obligations	$	3,108		Level 2	$	7,610		Level 2
Marketable securities – corporate obligations	$	1,253		Level 2	$	4,465		Level 2
Marketable securities – U.S. agencies	$	3,813		Level 2	$	2,058		Level 2
Forward sale contracts for Japanese yen	$	239		Level 2	$	1,625		Level 2
Forward purchase contract for euro	$	—		Level 2	$	5,762		Level 2

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

Equipment classified as held for sale at September 30, 2010 of $146,000 is measured at fair value on a non-recurring basis using the estimated selling prices of similar equipment, net of estimated costs to sell. See also Note 12.

Note 12. Restructuring

Subsequent to the acquisition of SUSS Test in January 2010, we began to restructure and integrate the combined businesses, which resulted in severance charges and inventory write-offs. In the second quarter of 2010, we restructured our sockets business in Minnesota, which resulted in severance charges, inventory write-offs and shorter useful lives of certain equipment.

Restructuring costs were as follows (in thousands):

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2010		2009		2010		2009
Termination and severance related	$	—	$	—	$	1,185	$	—
Inventory charges on discontinued products		—		—		1,076		—
Equipment write-downs		—		—		224		—
	$	—	$	—	$	2,485	$	—

Restructuring costs were included in our condensed consolidated statement of operations as follows (in thousands):

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2010		2009		2010		2009
Cost of sales	$	—	$	—	$	1,297	$	—
Research and development		—		—		127		—
Selling, general and administrative		—		—		1,061		—
	$	—	$	—	$	2,485	$	—

The following table summarizes the charges, expenditures and write-offs and adjustments related to our restructuring accruals (in thousands):

Nine Months Ended September 30, 2010	Beginning Accrued Liability		Charged  to Expense, Net		Expend- itures			Write-Offs and Adjust- ments			Ending Accrued Liability
Termination and severance related	$	—	$	1,185	$	(805	)	$	201		$	581
Inventory related to discontinued products		—		1,076		—			(1,076	)		—
Equipment write-downs		—		224		—			(224	)		—
	$	—	$	2,485	$	(805	)	$	(1,099	)	$	581

We expect accrued termination and severance related costs to be paid by the end of 2010.

11

Note 13. Recent Accounting Guidance

Accounting Guidance Recently Adopted

ASU 2010-06

Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements,” requires new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into or out of Level 1 and Level 2 fair-value classifications. It also requires information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair-value assets and liabilities. These disclosures are required for fiscal years beginning on or after December 15, 2009 and are included in Note 11 above to the extent applicable. The ASU also clarifies existing fair-value measurement disclosure guidance about the level of disaggregation, inputs and valuation techniques, which are required to be implemented in fiscal years beginning on or after December 15, 2010. Since the requirements of this ASU only relate to disclosure, the adoption of this guidance did not have an effect on our financial position, results of operations or cash flows.

ASU 2009-14

ASU 2009-14, “Certain Revenue Arrangements that Include Software Elements,” amends ASC Subtopic 985-605, “Software-Revenue Recognition,” to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. The ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. In the first quarter of 2010, we early adopted the guidance in ASU 2009-14, which did not have an effect on our financial position, results of operations or cash flows.

ASU 2009-13

ASU 2009-13, “Multiple-Delivered Revenue Arrangements,” amends ASC Subtopic 650-25, “Revenue Recognition - Multiple Element Arrangements,” to eliminate the requirement that all undelivered elements have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE of fair value for one or more delivered or undelivered elements in a multiple element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relevant selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Upon adoption, application of the “residual method” will no longer be permitted and entities will be required to disclose more information about their multiple-element revenue arrangements. The ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. In the first quarter of 2010, we early adopted the guidance in ASU 2009-13, which did not have an effect on our financial position, results of operations or cash flows.

Accounting Guidance Not Yet Adopted

ASU 2010-17

ASU 2010-17, “Revenue Recognition – Milestone Method,” provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a drug study or achieving a specific result from the research or development efforts. An entity often recognizes these milestone payments as revenue in their entirety upon achieving the related milestone, commonly referred to as the milestone method. The amendments in ASU 2010-17 are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. We do not expect the adoption of the guidance in ASU 2010-17 to have any effect on our financial position, results of operations or cash flows.

12

Note 14. Subsequent Event

On October 22, 2010, in connection with our ongoing integration of the operations of SUSS Test, we announced plans to restructure and consolidate our sales organization and manufacturing operations. Manufacturing operations for our Systems business will be consolidated at our Dresden, Germany facility over the next 12 months, and manufacturing operations for our Probes business will be consolidated at our manufacturing facility in Beaverton, Oregon over the next 6 months. Our sales offices in Vermont and Arizona will be closed in the fourth quarter of 2010. These plans will result in the termination of approximately 21 employees and severance charges of approximately $0.6 million to $0.8 million to be paid over the next 12 months. Severance charges of approximately $0.4 million will be recorded as a component of cost of sales or selling, general and administrative expense in the fourth quarter of 2010. These plans could also result in charges related to lease abandonment, write-offs of inventory, and decreased useful lives of fixed assets. The amounts of any such charges, however, are not currently estimable.

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, including the section captioned “Outlook” below, 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 2, 2010. 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.

• Some of our customers may experience sudden and unexpected changes in their financial condition, resulting in decreased revenue and bad debts.

• Consolidation of our customer base could adversely affect our revenues and results of operations.

• 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.

• 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.

13

• We continue to devote significant effort and resources to the growth and development of our production probe cards and test sockets 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.

• We acquired SUSS MicroTec Test Systems GmbH (“SUSS Test”), a wholly owned subsidiary of SUSS MicroTec AG, based near Dresden, Germany in January 2010 and may make future acquisitions. The SUSS Test acquisition, and any other acquisitions, may be costly, difficult to integrate with our operations, divert management resources and dilute shareholder value.

• 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 declare bankruptcy or 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 have long-lived assets, including fixed assets and intangible assets, recorded on our balance sheet. In the future, the fair value of certain long-lived assets may be reduced below their carrying value. If there has been an impairment of long-lived assets, we would be required to record non-cash asset impairment charges in future periods, which would adversely impact our results from 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 revenues.

• 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 revenues.

• 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.

• Any disruption in the operations of our manufacturing facilities, or in the facilities of our contract manufacturers, could harm our business.

• We rely on suppliers and contract manufacturers for the products we sell.

• A reorganization could also result in significant disruption of our business and our relationships with our employees, suppliers and customers could be adversely affected.

• 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 revenue would harm our operating results.

14

• 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.

General

We design, develop, manufacture and market advanced wafer probing and test socket solutions for the electrical measurement and testing of high performance chips. We design, manufacture and assemble our products in Oregon, Minnesota and Dresden, Germany (after our recent acquisition), with global sales, service and support centers in North America, Germany, Japan, Taiwan, China and Singapore. We also utilize contract manufacturers located in Singapore, Thailand and Ohio.

Engineering probe stations provide precise and accurate measurement of semiconductor electrical characteristics during chip design or when optimizing the chip fabrication process. Every new leading- edge semiconductor process is modeled or characterized using our probe stations. Our engineering probe stations are highly configurable and are typically sold with various accessories, including our engineering 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 and generate revenue through the sales of service contracts.

Our engineering 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. Cell phones often contain devices that are tested using our production probes. Our test sockets are designed and sold for both production and engineering test applications, typically for high speed digital and radio frequency testing.

The acquisition of SUSS Test, a long-time competitor in the market for engineering probe stations, provides us with an expanded portfolio of products as well as the engineering and technical resources to help to address complex emerging technologies.

Overview

Revenue in the third quarter of 2010 increased $11.3 million, or 80.9%, to $25.3 million compared to the third quarter of 2009 and increased $1.8 million, or 7.8%, compared to the second quarter of 2010 as the global economic environment, and the semiconductor and semiconductor equipment markets in particular, continued to show improvement.

Our revenues and market share in the Systems business have benefited from the acquisition of SUSS Test in January 2010. However, acquisition and restructuring-related charges in the first and second quarters of 2010 negatively affected our financial results in 2010 compared to 2009. Since the SUSS Test acquisition, we have been working to restructure and integrate the combined businesses and product lines. These restructuring and integration activities are ongoing and are expected to continue. We believe the best people, resources, products and features to meet the needs of our customers have been retained. As a result of our increase in revenue and decreases in acquisition, restructuring and other costs, net losses in the third quarter of 2010 decreased $1.0 million, or 75.1%, to $0.4 million compared to the third quarter of 2009 and decreased $2.5 million, or 87.6%, compared to the second quarter of 2010.

On July 6, 2010, Michael Burger began as our new President and Chief Executive Officer.

15

Outlook

Based on our current backlog and projected bookings, we anticipate revenues will be in the range of $24 million to $27 million for the fourth quarter of 2010. We believe that the acquisition of SUSS Test combined with an ongoing recovery in the market for semiconductors and semiconductor equipment will result in increased revenue for 2010 compared to 2009.

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, lives and recoverability of equipment and other long-lived assets, warranty obligations, deferred income tax assets, unrecognized income tax benefits, 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, 2009, which was filed with the Securities and Exchange Commission on March 2, 2010.

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,
	2010			2009			2010			2009
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		58.8			60.7			64.9			62.9
Gross profit		41.2			39.3			35.1			37.1
Operating expenses:
Research and development		12.0			15.0			13.9			15.5
Selling, general and administrative		28.0			35.6			36.4			40.9
Amortization of purchased intangibles		0.8			1.0			0.8			1.1
Total operating expenses		40.8			51.6			51.2			57.5
Income (loss) from operations		0.4			(12.3	)		(16.0	)		(20.4	)
Other income (expense), net		(1.7	)		2.1			0.1			1.0
Loss before income taxes		(1.2	)		(10.2	)		(15.9	)		(19.4	)
Income tax expense (benefit)		0.2			(0.0	)		(0.5	)		(0.6	)
Net loss		(1.4	)%		(10.2	)%		(15.4	)%		(18.8	)%

(1) Percentages may not add due to rounding.

16

Certain financial information by segment was as follows (dollars in thousands):

Three Months Ended September 30, 2010	Systems			Probes and Sockets			Corporate Unallocated			Total
Revenue	$	18,025		$	7,248		$	—		$	25,273
Gross profit	$	7,273		$	3,150		$	—		$	10,423
Gross margin		40.4	%		43.5	%		—			41.2	%
Income (loss) from operations	$	3,163		$	(359	)	$	(2,694	)	$	110
Three Months Ended September 30, 2009
Revenue	$	7,221		$	6,750		$	—		$	13,971
Gross profit	$	2,109		$	3,384		$	—		$	5,493
Gross margin		29.2	%		50.1	%		—			39.3	%
Income (loss) from operations	$	(464	)	$	816		$	(2,069	)	$	(1,717	)
Nine Months Ended September 30, 2010	Systems			Probes and Sockets			Corporate Unallocated			Total
Revenue	$	46,835		$	21,836		$	—		$	68,671
Gross profit	$	15,622		$	8,506		$	—		$	24,128
Gross margin		33.4	%		39.0	%		—			35.1	%
Income (loss) from operations	$	2,417		$	(2,806	)	$	(10,612	)	$	(11,001	)
Nine Months Ended September 30, 2009
Revenue	$	19,538		$	18,518		$	—		$	38,056
Gross profit	$	6,275		$	7,854		$	—		$	14,129
Gross margin		32.1	%		42.4	%		—			37.1	%
Income (loss) from operations	$	(1,029	)	$	433		$	(7,168	)	$	(7,764	)

Revenue

Revenue increased $11.3 million, or 80.9%, to $25.3 million in the three-month period ended September 30, 2010 compared to $14.0 million in the same period of 2009 and increased $30.6 million, or 80.4%, to $68.7 million in the nine-month period ended September 30, 2010 compared to $38.1 million in the same period of 2009.

Systems

Systems revenue increased $10.8 million, or 149.6%, to $18.0 million in the three-month period ended September 30, 2010 compared to $7.2 million in the same period of 2009 and increased $27.3 million, or 139.7%, to $46.8 million in the nine-month period ended September 30, 2010 compared to $19.5 million in the same period of 2009.

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

	Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009			Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Percentage increase in unit sales		131.4	%		117.6	%
Percentage increase in average sales price		11.8	%		23.1	%

We realized increased unit sales in the first three quarters of 2010 compared to the first three quarters of 2009 due to the acquisition of SUSS Test in January 2010 and overall improvement in semiconductor and semiconductor equipment markets.

Average sales prices in the first three quarters of 2010 compared to the first three quarters of 2009 were positively affected by sales mix, as a larger number of high-end systems were sold. Average sales price includes the sales price of any engineering probes, probe cards and accessories purchased with an engineering probe station.

17

Probes and Sockets

Probes and Sockets revenue increased $0.5 million, or 7.4%, to $7.2 million in the three-month period ended September 30, 2010 compared to $6.7 million in the same period of 2009 and increased $3.3 million, or 17.9%, to $21.8 million in the nine-month period ended September 30, 2010 compared to $18.5 million in the same period of 2009. These increases were primarily the result of increased unit sales driven by the overall improvement in semiconductor design and production markets.

Cost of Sales and Gross Margin

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.

Cost of sales increased $6.4 million, or 75.2%, to $14.9 million in the three-month period ended September 30, 2010 compared to $8.5 million in the same period of 2009 and increased $20.6 million, or 86.2%, to $44.5 million in the nine-month period ended September 30, 2010 compared to $23.9 million in the same period of 2009. These increases were the result of increased sales as discussed above and changes in gross margin as discussed below.

Systems

Systems gross margins were 40.4% and 33.4%, respectively, in the three and nine-month periods ended September 30, 2010 compared to 29.2% and 32.1%, respectively, in the same periods of 2009. Systems gross margins were positively affected in the 2010 periods by changes in sales mix and an increase in average selling prices as described above, as a larger number of high-end systems were sold. Gross margins in the nine-month period ended September 30, 2010 periods were negatively affected by inventory valuation charges of $1.1 million compared to $0.3 million in the same period of 2009. Inventory charges for the nine-month period ended September 30, 2010 included restructuring charges of $1.0 million in the first quarter of 2010 for discontinued products following the acquisition of SUSS Test. In addition, the Systems gross margin in the 2010 periods was negatively affected by purchase price allocation adjustments to value finished goods and work-in-process inventory acquired with the SUSS Test acquisition at their estimated selling price less cost to sell. Accordingly, when such inventory was sold, it resulted in near zero gross margins. During the three and nine-month periods ended September 30, 2010, $0.1 million and $0.9 million, respectively, of such inventory was sold, with a remaining balance of $0.3 million as of September 30, 2010.

Probes and Sockets

The Probes and Sockets gross margin decreased to 43.5% and 39.0%, respectively, in the three and nine-month periods ended September 30, 2010 from 50.1% and 42.4%, respectively, in the same periods of 2009. Gross margins in three-month period ended September 30, 2010 were negatively affected by sales mix as a fewer number of production related probes were sold. Gross margins in nine-month period ended September 30, 2010 were negatively affected by inventory valuation charges of $0.6 million, compared to $0.2 million in the same period of 2009, and restructuring charges of $0.2 million in the second quarter of 2010 related to our sockets business in Minnesota. The increases in sales positively affected gross margins during the 2010 periods as unallocated fixed overhead costs recorded as period expenses in cost of sales decreased as compared to the 2009 periods.

Research and Development

Research and development costs are expensed as incurred and include compensation and related expenses for personnel, materials, consultants and overhead.

Research and development expenses increased $0.9 million, or 45.0%, to $3.0 million in the three-month period ended September 30, 2010 compared to $2.1 million in the same period of 2009 and increased $3.6 million, or 61.6%, to $9.5 million in the nine-month period ended September 30, 2010 compared to $5.9 million in the same period of 2009.

18

The overall increases in expense for both the three and nine-month periods were primarily the result of the SUSS Test acquisition in January 2010. These increases consisted of the following:

	Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009		Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Increase in wages and benefits due to headcount	$	537,000	$	1,751,000
Increase in professional fees		131,000		571,000
Increase in project expenses		129,000		493,000
Increase in travel, meals and entertainment		37,000		182,000
Increase in training and seminars		9,000		94,000
Increase in restructuring cost from terminations and severance		—		99,000
Increase in depreciation expense		29,000		99,000
Other, net		28,000		311,000
	$	900,000	$	3,600,000

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.

SG&A expense increased $2.1 million, or 42.3%, to $7.1 million in the three-month period ended September 30, 2010 compared to $5.0 million in the same period of 2009 and increased $9.4 million, or 60.8%, to $25.0 million in the nine-month period ended September 30, 2010 compared to $15.6 million in the same period of 2009.

The overall increases in expense for both the three and nine-month periods were primarily the result of the SUSS Test acquisition in January 2010 and the increases in sales. These increases consisted of the following:

	Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008		Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Increase in wages and benefits due to headcount	$	1,238,000	$	3,712,000
Increase in internal and external sales commissions		190,000		1,529,000
Increase in travel, meals and entertainment		219,000		808,000
Increase in restructuring costs from terminations and severance		—		1,105,000
Increase in professional fees		66,000		1,026,000
Increase in event fees		32,000		117,000
Increase in occupancy expenses		79,000		206,000
Increase in departmental supplies		44,000		160,000
Increase in equipment repairs and maintenance		38,000		117,000
Other, net		194,000		620,000
	$	2,100,000	$	9,400,000

Amortization of Purchased Intangibles

Amortization of purchased intangibles includes amortization related to our prior acquisitions and our January 2010 acquisition of SUSS Test. Amortization expense increased to $0.2 million and $0.6 million, respectively, in the three and nine-month periods ended September 30, 2010 compared to $0.1 million and $0.4 million, respectively, in the comparable periods of 2009. Net purchased intangibles totaled $3.3 million at September 30, 2010.

19

Other Income (Expense)

Other income (expense) typically includes interest income, interest expense, gains and losses on foreign currency forward contracts and foreign currency gains and losses. Other income (expense) can also include other miscellaneous non-operating gains and losses.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Interest income, net	$	9		$	68		$	54		$	269
Foreign currency gains (losses)		(400	)		270			41			253
Losses on foreign currency forward contracts		(24	)		(53	)		(63	)		(167	)
Other		(7	)		9			45			25
	$	(422	)	$	294		$	77		$	380

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities. The decreases in the 2010 periods compared to the 2009 periods were due to a combination of a decrease in the yields on investments and decreased cash and investment balances resulting from our purchase of SUSS Test in January 2010.

Foreign currency gains and losses primarily result from a combination of changes in foreign currency exchange rates and the net value of monetary assets and liabilities denominated in yen, euro and other foreign currencies.

Income Taxes

Our benefit from income taxes totaled $0.3 million, or 2.9% of loss before income taxes, in the first nine months of 2010 and represented a benefit for the release of valuation allowance on deferred tax assets in Germany due to the acquisition of SUSS Test in the first quarter of 2010, offset by tax expense due to expected taxable income in foreign tax jurisdictions for 2010.

Our benefit from income taxes totaled $0.2 million, or 3.0%, of loss before income taxes, in the first nine months of 2009 and represented the release of tax contingencies as a result of the Internal Revenue Service (“IRS”) completing its audit of our 2006 and 2007 federal tax returns in April 2009. We continued to record a valuation allowance against certain deferred tax assets generated from our net loss in the first nine months of 2009. The income tax benefit in the first nine months of 2009 differs from the statutory rate due to losses not benefited in certain tax jurisdictions.

Liquidity and Capital Resources

Net cash used in operating activities in the first nine months of 2010 was $5.9 million and consisted of our net loss of $10.6 million, offset by net non-cash expenses of $4.7 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net increased by $7.4 million to $18.3 million at September 30, 2010, compared to $10.9 million at December 31, 2009. The increase in accounts receivable was primarily due to our increased sales in the third quarter of 2010 compared to the fourth quarter of 2009.

Inventories increased by $4.7 million to $21.3 million at September 30, 2010, compared to $16.6 million at December 31, 2009. The increase in inventory was primarily due to increased purchases to support our increased sales, partially offset by $1.7 million of inventory valuation charges as discussed above, and $0.9 million in inventory scrap charges. If our actual results are significantly different than our current expectations for the remainder of 2010, we may incur additional inventory charges in future periods.

20

Accounts payable increased by $1.5 million to $5.3 million at September 30, 2010, compared to $3.8 million at December 31, 2009 primarily due to increased inventory purchases to support our increased sales.

Accrued liabilities increased by $3.0 million to $5.1 million at September 30, 2010, compared to $2.1 million at December 31, 2009 primarily due to accrued restructuring costs of $0.6 million, a $0.5 million increase in each of accrued commissions and warranties due to increased sales, a $0.4 million increase in accrued compensation and benefits due to headcount and the timing of payroll, and a $0.4 million increase in accrued property and income taxes due to the timing of payments.

Fixed asset purchases of $1.2 million in the first nine months of 2010 were primarily for information technology, production equipment and office related equipment. We anticipate fixed asset additions for 2010 to be approximately $1.7 million, primarily for production related equipment, research and development tools and information technology.

In January 2010, we utilized $7.1 million of cash and cash equivalents, net of cash acquired, for the purchase of SUSS Test. See Note 6 of Notes to Condensed Consolidated Financial Statements for additional information.

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash and short-term marketable securities, which totaled $19.5 million at September 30, 2010.

We continue to evaluate opportunities for acquisition and expansion and any such transactions, if consummated, may use a portion of our cash and marketable securities.

Recent Accounting Guidance

See Note 13 of Notes to Condensed Consolidated Financial Statements.

Contractual Commitments

The following is a summary of our contractual commitments and obligations as of September 30, 2010 (in thousands):

	Payments Due By Period
Contractual Obligation	Total		Remainder  of 2010		2011 and 2012		2013 and 2014		2015 and beyond
Operating Leases	$	14,402	$	924	$	6,854	$	4,984	$	1,640
Capital Leases		34		4		28		2		—
Purchase Order Commitments		6,774		2,742		4,032		—		—
Forward contracts		239		239		—		—		—
	$	21,449	$	3,909	$	10,914	$	4,986	$	1,640

Purchase order commitments primarily represent open orders for inventory.

Seasonality

Typically, our first quarter revenues are lower than our revenues from the preceding fourth quarter. In addition, as is typical in our industry, we recognize a large percentage of our quarterly revenue in the last month of the quarter. However, our seasonality can be affected by general economic trends and it should not be expected that historical revenue patterns will continue.

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.

21

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 2009 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 2, 2010.

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 had, or is likely to have, a materially affect on our internal control over financial reporting.

We acquired SUSS Test in January 2010 and have been working through the integration of the business and review of controls over financial transactions. We have excluded controls at SUSS Test from our assessment of the effectiveness of our internal control over financial reporting as of September 30, 2010.

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.

22

PART II – OTHER INFORMATION

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2009 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, 2009, which was filed with the Securities and Exchange Commission on March 2, 2010. 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 September 30, 2010, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness and $27.1 million, net of cash acquired, for our acquisitions of the eVue product line, Gryphics, Inc., certain assets of Synatron GmbH and SUSS Test.

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.

23

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 3, 2010	CASCADE MICROTECH, INC.
	(Registrant)
	By:	/s/ MICHAEL D. BURGER
	Michael D. Burger
	Director, President
	and Chief Executive Officer
	(Principal Executive Officer)
	By:	/s/JEFF KILLIAN
	Jeff Killian
	Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

24