10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                to

Commission File No. 000-51072

CASCADE MICROTECH, INC.

(Exact name of registrant as specified in its charter)

Oregon	93-0856709
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2430 N.W. 206th Avenue Beaverton, Oregon	97006
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code: (503) 601-1000

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

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

Large accelerated filer o Accelerated filer ý Non-accelerated filer o

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

The number of shares of common stock outstanding as of May 8, 2006 was 11,409,572.

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) - March 31, 2006 and December 31, 2005
	Condensed Consolidated Statements of Operations (unaudited) - Three Months Ended March 31, 2006 and 2005
	Condensed Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2006 and 2005
	Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II - OTHER INFORMATION
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits
Signatures

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)

	March 31,			December 31,
	2006			2005
Assets
Current Assets:
Cash and cash equivalents	$	1,896		$	2,224
Short-term marketable securities	51,673			48,122
Accounts receivable, net of allowances of $81 and $97	16,088			16,182
Inventories, net	11,477			10,889
Prepaid expenses and other	2,014			3,000
Deferred income taxes	1,584			1,699
Total Current Assets	84,732			82,116
Long-term marketable securities	1,045			1,549
Fixed assets, net of accumulated depreciation of $12,398 and $12,093	5,240			4,422
Deferred income taxes	342			336
Other assets, net	1,734			1,697
Total Assets	$	93,093		$	90,120
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of capital leases	$	6		$	8
Accounts payable	4,686			3,904
Deferred revenue	515			516
Accrued liabilities	3,478			3,087
Total Current Liabilities	8,685			7,515
Deferred revenue	309			255
Other long-term liabilities	822			845
Total Liabilities	9,816			8,615
Shareholders’ Equity:
Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 11,406 and 11,328	114			113
Additional paid-in capital	59,257			58,287
Deferred stock-based compensation	—			(142		)
Accumulated other comprehensive loss - unrealized holding losses on investments	(73		)	(76		)
Retained earnings	23,979			23,323
Total Shareholders’ Equity	83,277			81,505
Total Liabilities and Shareholders’ Equity	$	93,093		$	90,120

See accompanying Notes to Condensed Consolidated Financial Statements.

2

Cascade Microtech, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, In thousands, except per share amounts)

	For the Quarter Ended March 31,
	2006		2005
Revenue	$	19,699	$	18,661
Cost of sales	11,020		9,490
Stock-based compensation	112		12
Gross profit	8,567		9,159
Operating expenses:
Research and development (includes $77 and $4, respectively, of stock-based compensation)	1,998		1,643
Selling, general and administrative (includes $264 and $25, respectively, of stock-based compensation)	6,009		4,624
	8,007		6,267
Income from operations	560		2,892
Other income (expense):
Interest income	362		212
Interest expense	—		(16		)
Other, net	57		24
	419		220
Income before income taxes	979		3,112
Provision for income taxes	323		617
Net income	$	656	$	2,495
Basic net income per share	$	0.06	$	0.23
Diluted net income per share	$	0.06	$	0.21
Shares used in per share calculations:
Basic	11,373		10,864
Diluted	11,907		11,674

See accompanying Notes to Condensed Consolidated Financial Statements.

3

Cascade Microtech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

	For the Quarter Ended March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	656		$	2,495
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization	433			513
Stock-based compensation, net	453			41
Gain on disposal of fixed assets	(1		)	—
Deferred income taxes	109			(388		)
Excess tax benefits related to stock option exercises	(68		)	—
(Increase) decrease in:
Accounts receivable, net	94			(1,265		)
Inventories, net	(588		)	(648		)
Prepaid expenses and other	986			(426		)
Increase (decrease) in:
Accounts payable	782			319
Deferred revenue	53			24
Accrued and other long-term liabilities	436			1,107
Net cash provided by operating activities	3,345			1,772
Cash flows from investing activities:
Purchase of marketable securities	(10,977		)	(13,158		)
Proceeds from sale of marketable securities	7,933			11,109
Purchase of fixed assets	(1,169		)	(207		)
Proceeds from disposal of fixed assets	2
Investment in patents and other assets	(120		)	(153		)
Net cash used in investing activities	(4,331		)	(2,409		)
Cash flows from financing activities:
Principal payments on capital lease obligations	(2		)	(7		)
Excess tax benefits related to stock option exercises	68			—
Additional offering costs	—			(83		)
Proceeds from issuances of common stock	592			5
Net cash provided by (used in) financing activities	658			(85		)
Decrease in cash and cash equivalents	(328		)	(722		)
Cash and cash equivalents:
Beginning of period	2,224			2,033
End of period	$	1,896		$	1,311
Supplemental disclosure of cash flow information:
Cash paid for interest	$	—		$	1
Cash paid (refunded) for income taxes, net	(1,284		)	38

See accompanying Notes to 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”). 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, 2005 is derived from our 2005 Annual Report on Form 10-K. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2005 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,		December 31
	2006		2005
Raw materials	$	5,169	$	4,747
Work-in-process	1,411		1,138
Finished goods	4,897		5,004
	$	11,477	$	10,889

Note 3. Stock-Based Compensation

Adoption of SFAS No. 123R

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” We elected to use the modified prospective transition method as provided by SFAS 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. Our deferred compensation balance of $142,000 as of December 31, 2005, which was accounted for under APB 25, was reclassified into additional paid in capital upon the adoption of SFAS 123R. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in the net income in the periods after the date of adoption using the Black-Scholes valuation method over the remainder the requisite service period. The cumulative effect of the change in accounting principle from APB 25 to SFAS 123R was not material.

5

Prior to January 1, 2006, we accounted for stock options using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” We provided disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied in measuring compensation expense as follows (in thousands, except per share amounts):

Three Months Ended March 31,	2005
Net income, as reported	$	2,495
Add - stock-based compensation included in reported net income , net of tax	33
Fair value of stock-based employee compensation, net of tax	(368		)
Net income, pro forma	$	2,160
Basic net income per share:
As reported	$	0.23
Pro forma	$	0.20
Diluted net income per share:
As reported	$	0.21
Pro forma	$	0.19

To determine stock-based compensation included in reported net income, net of tax, we used a tax rate approximating our effective tax rate of 19.8% for the first quarter of 2005.

Certain information regarding our stock-based compensation was as follows:

Three Months Ended March 31,	2006		2005
Weighted average grant-date fair value of share options granted	$	623,000	$	215,000
Total intrinsic value of share options exercised	273,000		8,000
Stock-based compensation recognized in results of operations	453,000		41,000
Tax benefit recognized in statement of operations	181,000		16,000
Cash received from options exercised and shares purchased under all share-based arrangements	592,000		5,000
Tax deduction realized related to stock options exercised	68,000		—

No stock-based compensation was capitalized as a part of an asset during the three months ended March 31, 2006.

Our stock-based compensation was included in our statements of operations as follows:

Three Months Ended March 31,	2006		2005
Cost of sales	$	112,000	$	12,000
Research and development	77,000		4,000
Selling, general and administrative	264,000		25,000
	$	453,000	$	41,000

6

To determine the fair value of stock-based awards granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

Three Months Ended March 31,	2006		2005
Stock Incentive Plans
Risk-free interest rate	4.72	%	4.17	%
Expected dividend yield	0.0	%	0.0	%
Expected term (years)	6.5 years		6 years
Expected volatility	61.4	%	67.4	%
Employee Stock Purchase Plan
Risk-free interest rate	4.73% - 4.79	%	2.68	%
Expected dividend yield	0.0	%	0.0	%
Expected term (years)	0.5 to 2.0 years		0.5 years
Expected volatility	34.6% to 45.7	%	56.0	%

The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Our option pricing model utilizes the simplified method accepted under Staff Accounting Bulletin No. 107 to estimate the expected term. The expected volatility for options granted pursuant to our stock incentive plans is calculated based on a weighted average actual volatility of a peer group of companies over the prior 6.5 year period. The expected volatility for our employee stock purchase plan is calculated based on our historical volatility and consideration of a peer group. We have not paid dividends in the past and we do not expect to pay dividends in the future and, therefore, the expected dividend rate is 0%.

We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award, which is the requisite service period, with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.

The following reconciles what certain operating results would have been without the effects of applying SFAS No. 123R in the first quarter of 2006:

	As reported		Pro Forma without effects of applying SFAS No. 123R
Income before income taxes	$	979,000	$	1,410,000
Net income	656,000		1,017,000
Cash flow from operating activities	3,345,000		3,413,000
Cash flow from financing activities	658,000		590,000
Basic earnings per share	0.06		0.09
Diluted earnings per share	0.06		0.09

Stock Incentive Plans

Our stock incentive plans include our 1993 Stock Incentive Plan (the “1993 Plan”) and our 2000 Stock Incentive Plan (the “2000 Plan”) (together, the “Plans”) and provide for the granting to employees of either incentive stock options or nonqualified stock options. Incentive stock options must be granted at an exercise price not less than 100% of the fair market value per share at the grant date. Nonqualified stock options granted or shares sold under the Plans cannot be granted or sold at a price less than 85% of the fair market value per share at the date of grant or sale. The contractual term of options granted under the Plans is 10 years, and the right to exercise options granted generally vests as to 20% at the end of the first year and then as to 1.67% per month thereafter with full vesting occurring on the fifth anniversary. The 1993 Plan expired during 2003 and any remaining unissued options were canceled. The 2000 Plan expires October 15, 2010. In addition, options currently outstanding under the 1993 Plan will not be available for reissuance upon cancellation. We have authorized a total of 1.8 million shares of common stock for issuance under the 2000 Plan.

7

At March 31, 2006, 322,572 shares were available for future grants, and we had 2,073,369 shares of our common stock reserved for future issuance under the Plans. Stock option activity for the three-month period ended March 31, 2006 was as follows:

	Options Outstanding		Weighted Average Exercise Price
Outstanding at December 31, 2005	1,721,438		$	8.37
Granted	70,500		14.04
Exercised	(34,569	)	5.31
Forfeited	(6,572	)	12.54
Outstanding at March 31, 2006	1,750,797		8.64

Certain information regarding options outstanding as of March 31, 2006 was as follows:

	Options Outstanding		Options Exercisable
Number	1,750,797		1,039,655
Weighted average exercise price	$	8.64	$	7.00
Aggregate intrinsic value	$	8,239,000	$	6,445,000
Weighted average remaining contractual term	6.2 years		4.6 years

As of March 31, 2006, unrecognized stock-based compensation related to outstanding, but unvested options was $5.0 million, which will be recognized over the weighted average remaining vesting period of 1.8 years.

Employee Stock Purchase Plan

In February 2004, our board of directors approved the 2004 Employee Share Purchase Plan (the “2004 ESPP”) and the reservation of 400,000 shares of our common stock thereunder. The 2004 ESPP consists of two-year offering periods with four consecutive, overlapping six-month purchase periods commencing on the first trading day on or after February 1 and August 1 each year (the “Enrollment Date”). Based on the effective date of our IPO, the first offering period commenced on February 1, 2005 and ended on July 31, 2005. Any eligible employee may participate in the 2004 ESPP by completing a subscription agreement which allows participants to purchase up to 5,000 shares per six-month purchase period, at a purchase price of 85% of the fair market value of a share of common stock on the Enrollment Date or on the exercise date, whichever is lower. The exercise date is the last trading day of each offering period. If the purchase price is lower on the exercise date than on the Enrollment Date, the two-year offering period will terminate and a new two-year offering period will begin. Participating employees are automatically enrolled in the new offering period. During the first quarter of 2006, we issued 43,471 shares pursuant to the 2004 ESPP at a price of $9.39 per share, which represented a discount of $4.76 per share from the fair market value on the date of purchase, and 325,265 shares remained available for purchase as of March 31, 2006.

Note 4. Earnings Per Share

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

8

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

Three Months Ended March 31,	2006	2005
Shares used to calculate basic earnings per share	11,373	10,864
Dilutive effect of outstanding stock options	534	810
Shares used to calculate diluted earnings per share	11,907	11,674
Stock options not considered as they would have been antidilutive	652	270

Note 5. 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 $3,000 and $(59,000) in the first quarter of 2006 and 2005, respectively, and, as of March 31, 2006, total unrealized holding losses were $73,000.

Note 6. Product Warranty

We estimate a liability for costs to repair or replace products under warranties for a period of approximately six 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,
	2006			2005
Warranty accrual, beginning of period	$	488		$	365
Reductions for warranty charges	(117		)	(166		)
Additions to warranty reserve	111			152
Warranty accrual, end of period	$	482		$	351

Note 7. Other Assets

Included in other long-term assets on our balance sheet are patents. The gross amount of patents and the related accumulated amortization were as follows (in thousands):

	March 31,			December 31,
	2006			2005
Patents	$	4,053		$	3,945
Accumulated amortization	(2,601		)	(2,527		)
	$	1,452		$	1,418

Amortization expense totaled $74,000 and $62,000, respectively, in the quarters ended March 31, 2006 and 2005.

Note 8. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31,		December 31,
	2006		2005
Accrued compensation and benefits	$	2,015	$	1,775
Accrued warranty	482		488
Other	981		824
	$	3,478	$	3,087

9

Note 9. 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 of engineering products (“EPD”) and pyramid products (“PPD”).

The following table summarizes revenue for each of our business segments. We do not track our assets on a segment level, and, accordingly, that information is not provided (in thousands):

Three Months Ended March 31,	2006		2005
External revenue from EPD	$	16,290	$	16,732
External revenue from PPD	3,409		1,929
	$	19,699	$	18,661

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

Forward Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking, including, but not limited to, statements regarding industry prospects; future results of operations or financial position; our expectations and beliefs regarding future revenue growth; the future capabilities and functionality of our products and services, our strategies and intentions regarding acquisitions; the outcome of any litigation to which we are a party; our accounting and tax policies; our future strategies regarding investments, product offerings, research and development, market share, and strategic relationships and collaboration; our dividend policies; and our future capital requirements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, including “intend,” “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate” “predict,” “potential,” “future,” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those expressed or implied in such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2006. 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.

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

10

•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 or production probe cards.

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

•We face economic, political and other risks associated with our international sales and operations, which could materially harm our operating results. During the first quarter of 2006, we began the process of establishing direct sales office in China and Taiwan. This increased our operating expenses in the first quarter of 2006 and will increase our operating expenses going forward. There can be no assurance that the establishment of these offices will result in an increase in sales or a reduction in selling costs in these countries in the future.

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

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

•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. During the first quarter of 2006, we began legal proceedings against two separate parties to protect against the infringement of our patents. These proceedings increased our legal expenses during the first quarter of 2006 and we expect additional legal costs over the next few quarters. Any such litigation, whether or not determined in our favor or settled, might be costly, could harm our reputation and could divert the efforts and attention of management and technical personnel from our normal business operations.

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

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

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

•A disruption in our strategic relationship with Agilent Technologies could have a negative effect on our ability to market our products and could result in a decline in the price of our common stock.

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

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

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

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

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

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•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.

Overview

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

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

Our engineering probe stations, analytical probes, probing accessories and application software are sold through our Engineering Products Division (“EPD”). Our production probe cards are sold through our Pyramid Probe Division (“PPD”). To date, we have derived the majority of our revenue from the sale of our engineering probe stations, and we expect to continue to do so for the next few years. Our production probe card revenue, however, increased as a percentage of total revenues in 2005 and in the first quarter of 2006 and we expect that trend to continue in the remainder of 2006 and beyond.

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

While the conversion to 300mm technology continues, high conversion costs combined with continued process developments on 200mm wafers continue to make sales of our sub-300mm probing systems an important component of our revenue stream for the foreseeable future. 300mm technology more than doubles the available area on a wafer, significantly increasing the number of chips per wafer and reducing per unit manufacturing costs. Revenue from our 300mm engineering probe stations, including all probes, accessories and other items sold therewith, represented 34.4% and 36.8% of our total Engineering Products Division revenue in the first quarter of 2006 and 2005, respectively.

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We sell our solutions to most segments of the semiconductor industry, including manufacturers of communications, wireless, microprocessors and other logic and memory chips. A substantial portion of our revenue is generated from sales of our engineering probe stations and analytical probes to research and development laboratories of semiconductor manufacturers as well as to fabless semiconductor companies and academic institutions. As a result, we sell to a geographically diversified customer base, with more than 50% of our revenue in the first quarter of 2006 and 2005 generated outside of North America, primarily in Japan, other Asian countries and, to a lesser extent, Europe.

Critical Accounting Policies and the Use of Estimates

Management’s discussion and analysis of financial condition and results of operation 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, 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.

Except for the addition of the Stock-Based Compensation information below, we reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission on March 16, 2006.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123R which requires the measurement and recognition of compensation expense for all share based payment awards granted to our employees and directors, including employee stock options, non-vested stock and stock purchases related to our employee stock purchase plan based on the estimated fair value of the award on the grant date.  Upon the adoption of SFAS No. 123R, we maintained our method of valuation for stock option awards using the Black-Scholes valuation model, which has historically been used for the purpose of providing pro-forma financial disclosures in accordance with SFAS No. 123.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

Compensation expense is only recognized on awards that ultimately vest.  Therefore, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures.  Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change.  If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

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Results of Operations

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

	For the Three Months Ended March 31,
IN THOUSANDS (except per share amounts)	2006		2005
Revenue	100.0	%	100.0	%
Cost of sales and stock-based compensation	56.5		50.9
Gross profit	43.5		49.1
Operating expenses:
Research and development	9.8		8.8
Selling, general and administrative	29.2		24.6
Stock-based compensation	1.7		0.2
Total operating expenses	40.6		33.6
Income from operations	2.8		15.5
Other income, net	2.1		1.2
Income before income taxes	5.0		16.7
Provision for income taxes	1.6		3.3
Net income	3.3	%	13.4	%

(1)  Percentages may not add due to rounding.

Revenue increased $1.0 million, or 5.6%, to $19.7 million in the first quarter of 2006 compared to $18.7 million in the first quarter of 2005.

Revenue in the Engineering Products Division decreased $0.4 million, or 2.6%, to $16.3 million in the first quarter of 2006 compared to $16.7 million in the first quarter of 2005. Station average order total in the Engineering Products Division decreased 6.3% in the first quarter of 2006 compared to the first quarter of 2005 and total stations sold decreased 6.2%. Average order total includes the sales price of all analytical probes, probe cards and other accessories purchased with an engineering probe station.

The decrease in average order total was primarily attributable to sales of our new line of lower-priced, entry-level 150mm systems, more low-end options selected on our 300mm systems and more competitive pricing provided on multiple system orders. These factors were partially offset by the purchase of our higher-end eVue microscopes with many of the 300mm systems.

Revenue in the Pyramid Probe Division increased $1.5 million, or 76.7%, to $3.4 million in the first quarter of 2006 compared to $1.9 million in the first quarter of 2005 due to an increase in the number of production probe cards that we sold.

While our Pyramid probes still represent a small portion of our customers’ total probe card purchases, many of our large customers are now ordering our Pyramid probes for numerous, mainstream, high-volume logic test applications, displacing their historical purchases of cantilever and vertical probe cards. We continue to have a significant share of the market in probe cards for wireless devices. We also expect to continue to increase our non-wireless production probe card applications for a variety of wirebonded chip types. We have been adding probe card capabilities in the form of headcount and equipment over the past several quarters. However, the strong demand has caused our lead times to increase. We expect to continue to add headcount and equipment in the coming quarters in order to shorten the lead times.

When fully utilized, the capacity of our probe card microfabrication facility is about $40 million annually with our current product mix. We are currently using less than one third of the facility’s capacity. Our growth rate, therefore, relies on our ability to recruit and train enough top-quality people for product fulfillment and field support.

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Cost of Sales and Gross Profit

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

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

Cost of sales increased $1.5 million, excluding stock-based compensation expense, or 16.1%, to $11.0 million in the first quarter of 2006 compared to $9.5 million in the first quarter of 2005 due to the following:

•an approximately $900,000 increase due to increased direct costs for higher revenue and changes in geographic and product mix;

•an approximately $181,000 increase due to increased inventory costs related to scrapping, obsolescence and returns;

•a $165,000 increase due to increased supplies usage;

•a $62,000 increase in salaries and wages; and

•a $115,000 increase due to less usage of the facilities for research and development fab runs.

Our gross profit decreased $0.6 million, or 6.5%, to $8.6 million in the first quarter of 2006 compared to $9.2 million in the first quarter of 2005. This decrease in our gross profit was attributable to the lower average order total described above as well as the additional costs incurred related to ramping our production run rate and reducing lead times within our PPD Division.  In addition, stock-based compensation increased $0.1 million in the first quarter of 2006 compared to the first quarter of 2005.  As a result, our gross profit as a percentage of revenue decreased to 43.5% in the first quarter of 2006 compared to 49.1% in the first quarter of 2005.

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 $0.4 million, or 21.6%, to $2.0 million in the first quarter of 2006 compared to $1.6 million in the first quarter of 2005. The increase was primarily due to a $96,000 increase in supplies usage, a $254,000 increase in wages and related expenses due to headcount increases and salary adjustments and a $73,000 increase in stock-based compensation due to the adoption of SFAS No. 123R in the first quarter of 2006. Partially offsetting these increases was a $115,000 decrease related to fewer fab runs.

Selling, General and Administrative

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

SG&A expenses increased $1.4 million, or 30.0%, to $6.0 million in the first quarter of 2006 compared to $4.6 million in the first quarter of 2005. The increase was primarily due to the following:

•$105,000 of costs in the first quarter of 2006 related to setting up direct sales offices in China and Taiwan, compared to none in the first quarter of 2005;

•a $239,000 increase in stock-based compensation due to the adoption of SFAS No. 123R in the first quarter of 2006;

•a $180,000 increase in legal costs primarily related to initiating litigation against third parties to protect against the infringement of our patents;

•a $253,000 increase in audit-related costs and Sarbanes-Oxley compliance;

•a $110,000 increase in representative commissions, primarily related to the increase in PPD revenue;

•a $142,000 increase in wages and related costs, which resulted from increases in headcount and salary adjustments;

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•a $99,000 increase in event fees and sales materials; and

•a $98,000 increase in demonstration equipment expenses.

During the first quarter of 2006, we accelerated our timetable for establishing our direct sales offices in China and Taiwan with the belief that there will be opportunity to increase business and lower our selling costs in the future.

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. Remeasurement related foreign currency gains result from the remeasurement of foreign currency denominated accounting records into U.S. dollars.

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $362,000 in the first quarter of 2006 compared to $212,000 in the first quarter of 2005. The increase was primarily due to higher average cash balances in the first quarter of 2006 compared to the first quarter of 2005, as well as higher interest rates in the 2006 period compared to the 2005 period.

Interest expense of $16,000 in the first quarter of 2005 related to interest on our $7.0 million note payable for the portion of the 30-day prepayment notice period that occurred in January 2005.

Other income, net totaled $57,000 in the first quarter of 2006 compared to $24,000 in the first quarter of 2005. Other, net was comprised of the following (in thousands):

	Three Months Ended March 31,
	2006			2005
Foreign currency remeasurement loss	$	(58	)	$	(4	)
Foreign currency transaction gain	109			29
Other	6			(1		)
	$	57		$	24

Income Taxes

Our provision for income taxes totaled $323,000, or 33.0%, of income before income taxes, and $617,000, or 19.8%, of income before income taxes, in the first quarter of 2006 and 2005, respectively. The effective tax rate in the first quarter of 2006 does not include any benefit for research and experimentation tax credits since current legislation related to such credits has expired and has not yet been renewed. The effective tax rate in the first quarter of 2005 includes the release of $175,000 of valuation allowance related to the future realization of foreign tax credits.

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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, 2006, we had a net deferred tax asset on our balance sheet totaling $1.9 million, primarily related to timing differences in the recognition of certain reserves and accruals.

Liquidity and Capital Resources

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 $53.6 million at March 31, 2006, as well as from cash expected to be generated from operations.

Net cash provided by operating activities in the first quarter of 2006 was $3.3 million and consisted of net income of $0.7 million, non-cash expenses of $0.9 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net was relatively flat at $16.1 million at March 31, 2006 compared to $16.2 million at December 31, 2005. Our days sales outstanding was approximately 75 days at March 31, 2006 compared to 83 days at December 31, 2005.

Inventories increased to $11.5 million at March 31, 2006 compared to $10.9 million at December 31, 2005, primarily due to increased raw material balances based on demand for the second quarter of 2006. We believe that our inventory levels at March 31, 2006 are adequate given our revenue projections for the second quarter of 2006.

Prepaid expenses and other current assets decreased to $2.0 million at March 31, 2006 compared to $3.0 million at December 31, 2005 primarily due to a $1.3 million decrease in income taxes receivable as a result of receiving refunds.

Accounts payable increased to $4.7 million at March 31, 2006 compared to $3.9 million at December 31, 2005, primarily due to the increase in inventory discussed above and the timing of payments.

Accrued liabilities increased to $3.5 million at March 31, 2006 compared to $3.1 million at December 31, 2005, primarily due to a $0.2 million increase in accrued wages due to the timing of bi-weekly payroll dates and the number of days required to be accrued, and a $0.1 million increase in income taxes payable.

Net cash used in investing activities of $4.3 million in the first quarter of 2006 resulted from $3.0 million used for the net purchase of marketable securities, $1.2 million used for the purchase of fixed assets and $0.1 million used for investment in patents and other assets. Purchases of fixed assets primarily were for equipment related to our production probe division in the first quarter of 2006. We anticipate spending approximately $7.0 million in all of 2006 for fixed assets.

Net cash provided by financing activities of $0.7 million in the first quarter of 2006 resulted primarily from $0.6 million of proceeds from the exercise of employee stock options and the sale of stock pursuant to our employee stock purchase plan.

At March 31, 2006, we had an unused $150,000 standby letter of credit to be utilized in the event a customer requires certain guarantees. This letter of credit is collateralized by $150,000 of our cash and cash equivalents and expires August 14, 2006.

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Seasonality

Typically, our revenue is lower in our fiscal first quarter than in our fiscal fourth quarter preceding it. However, revenue in the first quarter of 2006 was greater than the revenue in the fourth quarter of 2005 due to delays in closing certain orders in the fourth quarter of 2005. In addition, as is typical in our industry, we recognize a large percentage of our quarterly revenue in the last month of the quarter.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks or risk management policies since the filing of our 2005 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2006.

Item 4. Controls and Procedures

Changes in Internal Controls

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, 2005 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, 2005, which was filed with the Securities and Exchange Commission on March 16, 2006. See also Part I, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report under the heading “Forward Looking Statements and Risk Factors.”

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

Use of Proceeds

We filed a registration statement on Form S-1, File No. 333-113256 for an initial public offering of common stock, which was declared effective by the Securities and Exchange Commission on December 15, 2004. In that offering, we sold an aggregate of 3.3 million shares of our common stock with net offering proceeds of $41.6 million. As of March 31, 2006, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness. No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to any affiliates.

Item 6.    Exhibits

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

3.1	Second Amended and Restated Bylaws of Cascade Microtech, Inc., as amended March 31, 2006.
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 10, 2006	CASCADE MICROTECH, INC.
	(Registrant)
	By:	/s/ ERIC W. STRID
	Eric W. Strid
	Chairman of the Board, President
	and Chief Executive Officer
	(Principal Executive Officer)
	By:	/s/ STEVEN SIPOWICZ
	Steven Sipowicz
	Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

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EX-3.1

EXHIBIT 3.1

SECOND AMENDED AND RESTATED BYLAWS

OF

CASCADE MICROTECH, INC.

Pursuant to the Oregon Business Corporation Act (ORS Chapter 60), Cascade Microtech, Inc. hereby adopts the following Second Amended and Restated Bylaws, which shall supersede the heretofore existing Restated Bylaws and all previous amendments and restatements thereof.

ARTICLE I

OFFICES

1.1Principal Office. The principal office of the Corporation shall be located at 2430 NW 206th Place, Beaverton, Oregon. The Corporation may have such other offices as the Board of Directors may designate or as the business of the Corporation may from time to time require.

1.2Registered Office. The registered office of the Corporation required by the Oregon Business Corporation Act to be maintained in the State of Oregon may be, but need not be, identical with the principal office in the State of Oregon, and the address of the registered office may be changed from time to time by the Board of Directors.

ARTICLE II

SHAREHOLDERS

2.1Annual Meeting. The annual meeting of the shareholders shall be held in the month of April of each year, unless a different date and time are fixed by the Board of Directors and stated in the notice of the meeting, beginning with the year 2005. The failure to hold an annual meeting at the time stated herein shall not affect the validity of any corporate action.

2.2Special Meeting. Special meetings of the shareholders may be called by the President or by the Board of Directors and shall be called by the President (or in the event of absence, incapacity, or refusal of the President, by the Secretary or any other officer) at the request of the holders of not less than one-tenth of all the outstanding shares of the Corporation entitled to vote at the meeting, unless a lower or higher percentage be fixed in the corporation’s Articles of Incorporation. The requesting shareholders shall sign, date, and deliver to the Secretary a written demand describing the purpose or purposes for holding the special meeting.

2.3Place of Meetings. Meetings of the shareholders shall be held at the principal business office of the Corporation or at such other place, within or without the State of Oregon, as may be determined by the Board of Directors.

2.4Participation at Meetings. The shareholders may hold an annual or special meeting by, or permit the conduct of a meeting through, use of any means of communication by which all shareholders participating may simultaneously hear each other. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting.

2.5Notice of Meetings. The corporation shall deliver to shareholders entitled to vote at the meeting written notice of the date, time, place and means of communication of each annual and special shareholders’ meeting not earlier than sixty (60) days nor less than ten (10) days before the meeting date. Notice of a special meeting shall also include a description of the purpose or purposes for which the meeting is called. Notice to a shareholder is effective:

(a)Upon deposit in the United States mail if it is mailed to each shareholder entitled to vote at the meeting at the shareholder’s address shown in the corporation’s current record of shareholders, with postage thereon prepaid; or

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(b)When electronically transmitted to the shareholder in a manner authorized in writing by the shareholder.

2.5Waiver of Notice. A shareholder may at any time waive any notice required by law, the Articles of Incorporation or these Second Restated Bylaws. The waiver must be in writing, be signed by the shareholder entitled to the notice, and be delivered to the Corporation for inclusion in the minutes for filing with the corporate records. A shareholder’s attendance at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. The shareholder’s attendance also waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented.

2.6Record Date

(a) For the purpose of determining shareholders entitled to notice of a shareholders’ meeting, to demand a special meeting, or to vote or to take any other action, the Board of Directors may fix a future date as the record date for any such determination of shareholders, such date in any case to be not more than 70 days before the meeting or action requiring a determination of shareholders. The record date shall be the same for all voting groups.

(b) A determination of shareholders entitled to notice of or to vote at a shareholders’ meeting is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.

(c) If a court orders a meeting adjourned to a date more than 120 days after the date fixed for the original meeting, it may provide that the original record date continue in effect or it may fix a new record date.

2.7Shareholders List for Meeting. After the record date for a shareholders’ meeting is fixed by the Board of Directors, the Secretary of the Corporation shall prepare an alphabetical list of the names of all its shareholders entitled to notice of the shareholders’ meeting. The list must be arranged by voting group and within each voting group by class or series of shares and show the address of and number of shares held by each shareholder. The shareholders’ list must be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the Corporation’s principal office or at a place identified in the meeting notice in the city where the meeting will be held. The Corporation shall make the shareholders’ list available at the meeting, and any shareholder or the shareholder’s agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment. Refusal or failure to prepare or make available the shareholders’ list does not affect the validity of action taken at the meeting.

2.8Quorum; Adjournment. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. A majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action in that matter. A majority of shares represented at the meeting, although less than a quorum, may adjourn the meeting from time to time to a different time and place without further notice to any shareholder of any adjournment. At such adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting originally held. Once a share is represented for any purpose at a meeting, it shall be deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting, unless a new record date is set for the adjourned meeting.

2.9Voting Requirements: Action Without Meeting. Unless otherwise provided in the Articles of Incorporation, each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. If a quorum exists, action on a matter, other than the election of directors, is approved if the votes cast by the shares entitled to vote favoring the action exceed the votes cast opposing the action, unless a greater number of affirmative votes is required by law or the Articles of Incorporation. If a quorum exists, directors are elected by a plurality of the votes cast by the shares entitled to vote unless otherwise provided in the Articles of Incorporation. No cumulative voting for directors shall be permitted unless the Articles of

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Incorporation so provide. Action required or permitted by law to be taken at a shareholders’ meeting may be taken without a meeting if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one or more written consents describing the action taken, signed by all the shareholders entitled to vote on the action and delivered to the Corporation for inclusion in the minutes for filing with the corporate records. Action taken under this section is effective when the last shareholder signs the consent, unless the consent specifies an earlier or later effective date. If the law requires that notice of proposed action be given to nonvoting shareholders and the action is to be taken by unanimous consent of the voting shareholders, the Corporation must give its nonvoting shareholders written notice of the proposed action at least 10 days before the action is taken. The notice must contain or be accompanied by the same material that, under the Oregon Business Corporation Act, would have been required to be sent to nonvoting shareholders in a notice of meeting at which the proposed action would have been submitted to the shareholders for action.

2.10Proxies.

(a) A shareholder may vote shares in person or by proxy. A shareholder may authorize a proxy by any means authorized by law. An authorization of a proxy shall be effective when received by the Secretary or other officer of the Corporation authorized to tabulate votes. An authorization is valid for 11 months unless a longer period is provided in the authorization form. An authorization is revocable by the shareholder unless the authorization form conspicuously states that it is irrevocable and the authorization is coupled with an interest that has not been extinguished.

(b) The death or incapacity of a shareholder authorizing a proxy shall not affect the right of the Corporation to accept the proxy’s authority unless notice of the death or incapacity is received by the Secretary or other officer authorized to tabulate votes before the proxy exercises the proxy’s authority under the authorization.

2.11Corporation’s Acceptance of Votes.

(a)If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the Corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder.

(b)If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of a shareholder, the Corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if:

(i)The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity;

(ii)The name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;

(iii)The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;

(iv)The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory’s authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment; or

(v)Two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners.

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(c)The Corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the Secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory’s authority to sign for the shareholder.

(d)The shares of a corporation are not entitled to vote if they are owned, directly or indirectly, by a second corporation, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation; provided, however, a corporation may vote any shares, including its own shares, held by it in a fiduciary capacity.

(e)The Corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this provision shall not be liable in damages to the shareholder for the consequences of the acceptance or rejection. Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this provision is valid unless a court of competent jurisdiction determines otherwise.

2.12Notice of Business to be Conducted at Meeting. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before an annual meeting by a shareholder.

For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days’ notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made.

A shareholder’s notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business, (c) the class and number of shares of stock of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 2.12.

The Chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2.12 and if the Chairman should so determine, the Chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

ARTICLE III

BOARD OF DIRECTORS

3.1Duties. All corporate powers shall be exercised by or under the authority of the Board of Directors and the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

3.2Number and Qualification. The number of directors of the Corporation shall be not less than three nor more than nine, and within such limits, the exact number shall be fixed and increased or decreased from time to time by resolution of the Board of Directors. If the number of directors is fixed by the Board of Directors at five or less, the directors shall hold office until the next annual meeting of shareholders and until their

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successors have been elected and qualified. If the number of directors is fixed by the Board of Directors at six or more, the directors shall be divided into three classes designated Class I, Class II and Class III, each class to be as nearly equal in number as possible. Each director shall serve for a term ending on the third annual meeting following the annual meeting at which such director was elected; provided, however, that the directors first elected to Class I shall serve for a term ending on the annual meeting of shareholders for fiscal year 2005, the directors first elected to Class II shall serve for a term ending on the annual meeting of shareholders for fiscal year 2006, and the directors first elected to Class III shall serve for a term ending on the annual meeting of shareholders for fiscal year 2007. Notwithstanding the foregoing, each director shall serve until his successor shall have been duly elected and qualified, unless he shall resign, become disqualified, disabled or shall otherwise be removed. At each annual election, directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed. When the number of directors is changed within the limits provided herein, any newly created directorships, or any decrease in directorships, shall be so apportioned among the classes as to make all classes as nearly equal as possible, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent directors. Directors need not be residents of the State of Oregon or shareholders of the Corporation.

3.3Chairman of the Board of Directors. The directors may elect a director to serve as Chairman of the Board of Directors to preside at all meetings of the Board of Directors and to fulfill any other responsibilities delegated by the Board of Directors.

3.4Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this Section 3.4 immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Oregon, for the holding of additional regular meetings without other notice than the resolution.

3.5Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President or any director. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Oregon, as the place for holding any special meeting of the Board of Directors called by them.

3.6Notice. Notice of the date, time, and place of any special meeting of the Board of Directors shall be given at least three days prior to the meeting by any means provided by law. If mailed, notice shall be deemed to be given upon deposit in the United States mail addressed to the director at the director’s business address, with postage thereon prepaid. If by telegram, notice shall be deemed to be given when the telegram is delivered to the telegraph company. Notice by all other means shall be deemed to be given when received by the director or a person at the director’s business or residential address whom the person giving notice reasonably believes will deliver or report the notice to the director within 24 hours. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.

3.7Waiver of Notice. A director may at any time waive any notice required by law, the Articles of Incorporation, or these Second Restated Bylaws. Unless a director attends or participates in a meeting, a waiver must be in writing, must be signed by the director entitled to notice, must specify the meeting for which notice is waived, and must be filed with the minutes or corporate records.

3.8Quorum. A majority of the number of directors fixed by Section 3.2 shall constitute a quorum for the transaction of business at any meeting of the Board of Directors.

3.9Manner of Acting.

(a)The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a different number is provided by law, the Articles of Incorporation, or these Second Restated Bylaws.

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(b)Members of the Board of Directors may hold a board meeting by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at the meeting.

(c)Any action that is required or permitted to be taken by the directors at a meeting may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the directors entitled to vote on the matter. The action shall be effective on the date when the last signature is placed on the consent or at such earlier or later time as is set forth therein. Such consent, which shall have the same effect as a unanimous vote of the directors, shall be filed with the minutes of the Corporation.

3.10Vacancies. Any vacancy, including a vacancy resulting from an increase in the number of directors, occurring on the Board of Directors may be filled by the shareholders, the Board of Directors, or the affirmative vote of a majority of the remaining directors if less than a quorum of the Board of Directors, or by a sole remaining director. If the vacant office is filled by the shareholders and was held by a director elected by a voting group of shareholders, then only the holders of shares of that voting group are entitled to vote to fill the vacancy. Any directorship not so filled by the directors shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose. A director elected to fill a vacancy shall be elected to serve until the next annual meeting of shareholders and until a successor shall be duly elected and qualified. A vacancy that will occur at a specific later date, by reason of a resignation or otherwise, may be filled before the vacancy occurs, and the new director shall take office when the vacancy occurs.

3.11Compensation. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

3.12Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors or a committee of the Board of Directors shall be presumed to have assented to the action taken (a) unless the director’s dissent to the action is entered in the minutes of the meeting, (b) unless a written dissent to the action is filed with the person acting as the secretary of the meeting before the adjournment thereof or forwarded by certified or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting or (c) unless the director objects at the meeting to the holding of the meeting or transacting business at the meeting. The right to dissent shall not apply to a director who voted in favor of the action.

3.13Director Conflict of Interest.

(a)A transaction in which a director of the Corporation has a direct or indirect interest shall be valid notwithstanding the director’s interest in the transaction if the material facts of the transaction and the director’s interest are disclosed or known to the Board of Directors or a committee thereof and it authorizes, approves, or ratifies the transaction by a vote or consent sufficient for the purpose without counting the votes or consents of directors with a direct or indirect interest in the transaction; or the material facts of the transaction and the director’s interest are disclosed or known to shareholders entitled to vote and they, voting as a single group, authorize, approve, or ratify the transaction by a majority vote; or the transaction is fair to the Corporation.

(b)A conflict of interest transaction may be authorized, approved, or ratified if it receives the affirmative vote of a majority of directors on the Board of Directors or a committee thereof who have no direct or indirect interest in the transaction. If a majority of such directors vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking action.

(c)A conflict of interest transaction may be authorized, approved, or ratified by a majority vote of shareholders entitled to vote thereon. Shares owned by or voted under the control of a director or an entity controlled by a director who has a direct or indirect interest in the transaction are entitled to vote with respect to a conflict of interest transaction. A majority of the shares, whether or not present, that are entitled to be counted in a vote on the transaction constitutes a quorum for the purpose of authorizing, approving, or ratifying the transactions.

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(d)A director has an indirect interest in a transaction if (i) another entity in which the director has a material financial interest or in which the director is a general partner is a party to the transaction or (ii) another entity of which the director is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the Board of Directors.

3.14Removal. All or any number of the directors of the Corporation may be removed only for cause and at a meeting of shareholders called expressly for that purpose, by the vote of 75 percent of the votes then entitled to be cast for the election of directors. Cause for removal shall be deemed to exist only if the director whose removal is proposed has engaged in criminal conduct or has engaged in fraudulent or dishonest conduct or gross abuse of authority or discretion with respect to the Corporation. At any meeting of shareholders at which one or more directors are removed, a majority of votes then entitled to be cast for the election of directors may fill any vacancy created by such removal. If any vacancy created by removal of a director is not filled by the shareholders at the meeting at which the removal is effected, such vacancy may be filled by a majority vote of the remaining directors.

3.15Resignation. Any director may resign by delivering written notice to the Board of Directors, its chairperson, or the Corporation. Such resignation shall be effective at the earliest of the following, unless the notice specifies a later effective date, (a) on receipt, (b) five days after its deposit in the United States mails, if mailed postpaid and correctly addressed, or (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by addressee. Once delivered, a notice of resignation is irrevocable unless revocation is permitted by the Board of Directors.

3.16Nominations for Election to Board of Directors. Only persons who are nominated in accordance with the procedures set forth in this Section 3.16 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors may be made at a meeting of shareholders by or at the direction of the Board of Directors or by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3.16.

Such nominations, other than those made by or at the direction of the Board of Directors shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days’ notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made.

Such shareholder’s notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice, (i) the name and address, as they appear on the Corporation’s books, of such shareholder, and (ii) the class and number of shares of stock of the Corporation which are beneficially owned by such shareholder.

At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee.

No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.16. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures

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prescribed by these Second Restated Bylaws, and if the Chairman should so determine, the Chairman shall so declare to the meeting and the defective nomination shall be disregarded.

3.17  Directors Emeritus. The Board of Directors may, from time to time, by majority vote, elect one or more of its former directors to serve as director emeritus for one or more consecutive one-year terms or until earlier resignation or removal by a majority of the Board of Directors. Directors emeritus may be invited to attend meetings of the Board of Directors or any committee of the Board of Directors. Directors emeritus shall not be permitted to vote on matters brought before the Board of Directors or any committee thereof and shall not be counted for the purpose of determining whether a quorum of the Board or a committee is present. Directors emeritus will be entitled to receive fees and reimbursement for expenses of meeting attendance, as approved by the Compensation Committee of the Board of Directors. Directors emeritus may be removed at any time by the Board of Directors. A director emeritus shall not, solely by virtue of that position, be considered an officer, employee or agent of the Company for any purpose, and shall not have any of the responsibilities or liabilities of a director, nor any of a director’s rights, powers or privileges. Reference in these bylaws to “directors” shall not mean or include directors emeritus.

ARTICLE IV

EXECUTIVE COMMITTEE AND OTHER COMMITTEES

4.1Designation of Executive Committee. The Board of Directors may designate two or more directors to constitute an executive committee. The designation of an executive committee, and the delegation of authority to it, shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. No member of the executive committee shall continue to be a member thereof after ceasing to be a director of the Corporation. The Board of Directors shall have the power at any time to increase or decrease the number of members of the executive committee, to fill vacancies thereon, to change any member thereof, and to change the functions or terminate the existence thereof. The creation of the executive committee and the appointment of members to it shall be approved by a majority of the directors in office when the action is taken, unless a greater number is required by the Articles of Incorporation or these Second Restated Bylaws.

4.2Powers of Executive Committee. During the interval between meetings of the Board of Directors, and subject to such limitations as may be imposed by resolution of the Board of Directors, the executive committee may have and may exercise all the authority of the Board of Directors in the management of the Corporation, provided that the committee shall not have the authority of the Board of Directors with respect to the following matters: authorizing distributions; approving or proposing to the shareholders actions that are required to be approved by the shareholders under the Articles of Incorporation or these Second Restated Bylaws or by law; filling vacancies on the Board of Directors or any committee thereof; amending the Articles of Incorporation; adopting, amending, or repealing bylaws; approving a plan of merger not requiring shareholder approval; authorizing or approving a reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; authorizing or approving the issuance or sale or contract for sale of shares or determining the designation and relative rights, preferences, and limitations of a class or series of shares except within limits specifically prescribed by the Board of Director.

4.3Procedures; Meetings; Quorum.

(a) The Board of Directors shall appoint a chairperson from among the members of the executive committee and shall appoint a secretary who may, but need not, be a member of the executive committee. The chairperson shall preside at all meetings of the executive committee and the secretary of the executive committee shall keep a record of its acts and proceedings, which shall be filed with the minutes of the Corporation.

(b) Regular meetings of the executive committee, of which no notice shall be necessary, shall be held on such days and at such places as shall be fixed by resolution adopted by the executive committee. Special meetings of the executive committee shall be called at the request of the President or of any member of the executive committee, and shall be held upon such notice as is required by these Second Restated Bylaws for special meetings of the Board of Directors.

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(c) Attendance of any member of the executive committee at a meeting shall constitute a waiver of notice of the meeting. A majority of the executive committee, from time to time, shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the executive committee. Members of the executive committee may hold a meeting of such committee by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such meeting shall constitute presence in person at the meeting.

(d)Any action that is required or permitted to be taken at a meeting of in the executive committee may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all members of the executive committee entitled to vote on the matter. The action shall be effective on the date when the last signature is placed on the consent or at such earlier or later time as is set forth therein. Such consent, which shall have the same effect as a unanimous vote of the members of the executive committee, shall be filed with the minutes of the Corporation.

(e)The Board of Directors may approve a reasonable fee for the members of the executive committee as compensation for attendance at meetings of the executive committee.

4.4Other Committees. By the approval of a majority of the directors when the action is taken (unless a greater number is required by the Articles of Incorporation), the Board of Directors, by resolution, may create one or more additional committees, appoint directors to serve on them, and define the duties of such committee or committees. Each such committee shall have two or more members, who shall serve at the pleasure of the Board of Directors. Such additional committee or committees, shall not have the powers proscribed in Section 4.2.

ARTICLE V

OFFICERS

5.1Number. The officers of the Corporation shall be a President and a Secretary. Such other officers and assistant officers as are deemed necessary or desirable may be appointed by the Board of Directors and shall have such powers and duties prescribed by the Board of Directors or the officer authorized by the Board of Directors to prescribe the duties of other officers. A duly appointed officer may appoint one or more officers or assistant officers if such appointment is authorized by the Board of Directors. Any two or more offices may be held by the same person.

5.2Appointment and Term of Office. The officers of the Corporation shall be appointed annually by the Board of Directors at the first meeting of the Board of Directors held after the annual meeting of the shareholders. If the officers shall not be appointed at the meeting, a meeting shall be held as soon thereafter as is convenient for such appointment of officers. Each officer shall hold office until a successor shall have been duly appointed and qualified or until the officer’s death, resignation, or removal.

5.3Qualification. An officer need not be a director, shareholder, or a resident of the State of Oregon.

5.4Resignation and Removal. An officer may resign at any time by delivering notice of such resignation to the Corporation. A resignation is effective on receipt unless the notice specifies a later effective date. If the Corporation accepts a specified later effective date, the Board of Directors may fill the pending vacancy before the effective date, but the successor may not take office until the effective date. Once delivered, a notice of resignation is irrevocable unless revocation is permitted by the Board of Directors. Any officer appointed by the Board of Directors may be removed at any time with or without cause. Appointment of an officer shall not of itself create contract rights. Removal or resignation of an officer shall not affect the contract rights, if any, of the Corporation or the officer.

5.5Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the Board of Directors for the unexpired portion of the term.

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5.6Chief Executive Officer. The Chief Executive Officer (“CEO”) shall be principally responsible for developing and reviewing the corporation’s business strategies and communicating information regarding the corporation’s business, strategies and market vision to parties external to the corporation, subject to the control of the Board of Directors. The CEO shall preside at all meetings of shareholders and at all meetings of directors (unless there is a different acting Chairman of the Board presiding at the meeting). The CEO may execute on behalf of the corporation all contracts, agreements, stock certificates, and other instruments. The CEO shall from time to time report to the Board of Directors all matters within the CEO’s knowledge affecting the corporation that should be brought to the attention of the Board of Directors. The CEO shall perform other duties assigned by the Board of Directors.

5.7President. The President shall be principally responsible for the corporation’s day to day business operations and affairs, subject to the control of the Chief Executive Officer and the Board of Directors. The President may execute on behalf of the corporation all contracts, agreements, stock certificates, and other instruments. The President shall from time to time report to the Chief Executive Officer and the Board of Directors all matters within the President’s knowledge affecting the corporation that should be brought to the attention of the Chief Executive Officer and the Board of Directors. The President shall vote all shares of stock in other corporations owned by the corporation and is empowered to execute proxies, waivers of notice, consents, and other instruments in the name of the corporation with respect to such stock. The President shall perform other duties assigned by the Chief Executive officer and the Board of Directors.

5.8Vice Presidents. In the absence of the President or in the event of the President’s death or inability or refusal to act, the Vice President (or, in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their election), if any, shall perform the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President shall perform other duties assigned by the President or by the Board of Directors.

5.9Secretary. The Secretary shall prepare the minutes of all meetings of the directors and shareholders, shall have custody of the minute books and other records pertaining to the corporate business, and shall be responsible for authenticating the records of the Corporation. The Secretary shall countersign all instruments requiring the seal of the Corporation and shall perform other duties assigned by the Board of Directors. In the event no Vice President exists to succeed to the President under the circumstances set forth in Section 5.7 above, the Secretary shall make such succession.

5.10Assistant Secretaries. The Assistant Secretaries, when authorized by the Board of Directors or these Second Restated Bylaws, may sign, with the President or Vice President, certificates for shares of the Corporation the issuance of which shall have been authorized by resolution of the Board of Directors. The Assistant Secretaries shall, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries shall, in general, perform such duties as shall be specifically assigned to them in writing by the President or the Board of Directors.

5.11Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary because the officer is also a director of the Corporation.

ARTICLE VI

ISSUANCE OF SHARES

6.1Certificates for Shares.

(a)Certificates representing shares of the Corporation shall be in a form determined by the Board of Directors. Such certificates shall be signed, either manually or in facsimile, by two officers of the Corporation, at least one of whom shall be the Chief Executive Officer or the President, and may be sealed with the seal of the Corporation or a facsimile thereof. All certificates for shares shall be consecutively numbered or otherwise identified.

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(b)Every certificate for shares of stock that are subject to any restriction on transfer pursuant to the Articles of Incorporation, these Second Restated Bylaws, applicable securities laws, agreements among or between shareholders, or any agreement to which the Corporation is a party shall have conspicuously noted on the face or back of the certificate either (i) the full text of the restriction or (ii) a statement of the existence of such restriction and that the Corporation retains a copy of the restriction. Every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either (i) the full text of the designations, relative rights, preferences, and limitations of the shares of each class and series authorized to be issued and the authority of the Board of Directors to determine variations for future series or (ii) a statement of the existence of such designations, relative rights, preferences, and limitations and a statement that the Corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge.

(c)The name and mailing address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. Each shareholder shall have the duty to notify the Corporation of his or her mailing address. All certificates surrendered to the Corporation for transfer shall be canceled, and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors prescribes.

6.2Transfer of Shares. A transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record thereof or by the holder’s legal representative, who shall furnish proper evidence of authority to transfer, or by the holder’s attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation. The person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes.

6.3Transfer Agent and Registrar. The Board of Directors may from time to time appoint one or more transfer agents and one or more registrars for the shares of the Corporation, with such powers and duties as the Board of Directors determines by resolution. The signatures of officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or by a registrar other than the Corporation itself or an employee of the Corporation.

6.4Officer Ceasing to Act. If the person who signed a share certificate, either manually or in facsimile, no longer holds office when the certificate is issued, the certificate is nevertheless valid.

ARTICLE VII

CONTRACTS, LOANS, CHECKS, AND OTHER INSTRUMENTS

7.1Contracts. The Board of Directors may authorize any officer or officers and agent or agents to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.

7.2Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances.

7.3Checks; Drafts. All checks, drafts, or other orders for the payment of money and notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers and agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.

7.4Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board of Directors may select.

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ARTICLE VIII

MISCELLANEOUS PROVISIONS

8.1Seal. The Board of Directors from time to time may provide for a seal of the Corporation, which shall be circular in form and shall have inscribed thereon the name of the Corporation, the state of incorporation and the words “Corporate Seal.”

8.2Severability. Any determination that any provision of these Second Restated Bylaws is for any reason inapplicable, invalid, illegal, or otherwise ineffective shall not affect or invalidate any other provision of these Second Restated Bylaws.

ARTICLE IX

AMENDMENTS

These Second Restated Bylaws may be altered, amended, or repealed and new bylaws may be adopted by the Board of Directors at any regular or special meeting, subject to repeal or change by action of the shareholders of the Corporation.

	/s/Steven Sipowicz
	Steven Sipowicz, Secretary
Amended: March 31, 2006

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EX-31.1

EXHIBIT 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

I, Eric W. Strid, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cascade Microtech, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2006

/s/ Eric W. Strid

Eric W. Strid

Chairman, Chief Executive Officer and President

Cascade Microtech, Inc.

EX-31.2

EXHIBIT 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

I, Steven Sipowicz, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cascade Microtech, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2006

/s/ Steven Sipowicz

Steven Sipowicz

Chief Financial Officer and Treasurer

Cascade Microtech, Inc.

EX-32.1

EXHIBIT 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

In connection with the Quarterly Report of Cascade Microtech, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric W. Strid, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge,:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Eric W. Strid

Eric W. Strid

Chief Executive Officer

Cascade Microtech, Inc.

May 10, 2006

This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Cascade Microtech, Inc. and will be retained by Cascade Microtech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 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

In connection with the Quarterly Report of Cascade Microtech, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven Sipowicz, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge,:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Steven Sipowicz

Steven Sipowicz

Chief Financial Officer

Cascade Microtech, Inc.

May 10, 2006

This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Cascade Microtech, Inc. and will be retained by Cascade Microtech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.