UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 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 x No o

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

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

The number of shares of common stock outstanding as of August 7, 2006 was 11,470,459.

CASCADE MICROTECH, INC.
INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (unaudited) – June 30, 2006 and December 31, 2005

	Condensed Consolidated Statements of Operations (unaudited) - Three and Six Months Ended June 30, 2006 and 2005

	Condensed Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 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 4.	Submission of Matters to a Vote of Security Holders

Item 6.	Exhibits

Signatures

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, In thousands)

	June 30,			December 31,
	2006			2005

Assets
Current Assets:
Cash and cash equivalents	$	2,008		$	2,224
Short-term marketable securities	46,644			48,122
Accounts receivable, net of allowances of $84 and $97	17,399			16,182
Inventories, net	12,445			10,889
Prepaid expenses and other	2,047			3,000
Deferred income taxes	1,745			1,699
Total Current Assets	82,288			82,116

Long-term marketable securities	4,972			1,549
Fixed assets, net of accumulated depreciation of $12,749 and $12,093	5,712			4,422
Deferred income taxes	344			336
Other assets, net	1,881			1,697
Total Assets	$	95,197		$	90,120

Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of capital leases	$	4		$	8
Accounts payable	4,860			3,904
Deferred revenue	562			516
Accrued liabilities	4,116			3,087
Total Current Liabilities	9,542			7,515

Deferred revenue	241			255
Other long-term liabilities	802			845
Total Liabilities	10,585			8,615

Shareholders’ Equity:
Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 11,416 and 11,328	114			113
Additional paid-in capital	59,782			58,287
Deferred stock-based compensation	—			(142		)
Accumulated other comprehensive loss - unrealized holding losses on investments	(59		)	(76		)
Retained earnings	24,775			23,323
Total Shareholders’ Equity	84,612			81,505
Total Liabilities and Shareholders’ Equity	$	95,197		$	90,120

See accompanying Notes to Condensed Consolidated Financial Statements.

Cascade Microtech, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, In thousands, except per share amounts)

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2006			2005		2006		2005

Revenue	$	19,598		$	18,311	$	39,297	$	36,972

Cost of sales	10,739			9,651		21,759		19,141
Stock-based compensation	113			10		225		22
Gross profit	8,746			8,650		17,313		17,809

Operating expenses:
Research and development (includes $76, $4, $153 and $8, respectively, of stock-based compensation)	2,150			1,669		4,148		3,312
Selling, general and administrative (includes $258, $11, $522 and $36, respectively, of stock-based compensation)	5,808			5,172		11,817		9,796
	7,958			6,841		15,965		13,108

Income from operations	788			1,809		1,348		4,701

Other income (expense):
Interest income	405			258		767		470
Interest expense	—			—		—		(16		)
Other, net	(10		)	766		47		790
	395			1,024		814		1,244

Income before income taxes	1,183			2,833		2,162		5,945
Provision for income taxes	387			602		710		1,219
Net income	796			2,231		1,452		4,726

Basic net income per share	$	0.07		$	0.20	$	0.13	$	0.43

Diluted net income per share	$	0.07		$	0.19	$	0.12	$	0.40

Shares used in per share calculations:
Basic	11,411			10,916		11,392		10,890
Diluted	11,897			11,728		11,841		11,696

See accompanying Notes to Condensed Consolidated Financial Statements.

Cascade Microtech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In thousands)

	For the Six Months Ended June 30,
	2006			2005

Cash flows from operating activities:
Net income	$	1,452		$	4,726
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization	902			1,003
Stock-based compensation, net	900			66
(Gain) loss on disposal of fixed assets	(6		)	17
Deferred income taxes	(54		)	(322		)
Excess tax benefits related to stock option exercises	(99		)	(243		)
(Increase) decrease in:
Accounts receivable, net	(1,217		)	(876		)
Inventories, net	(1,556		)	(684		)
Prepaid expenses and other	953			(808		)
Increase (decrease) in:
Accounts payable	956			238
Deferred revenue	32			(167		)
Accrued and other long-term liabilities	1,085			231
Net cash provided by operating activities	3,348			3,181

Cash flows from investing activities:
Purchase of marketable securities	(27,349		)	(18,463		)
Proceeds from sale of marketable securities	25,421			14,220
Purchase of fixed assets	(2,014		)	(532		)
Proceeds from disposal of fixed assets	7			—
Investment in patents and other assets	(363		)	(276		)
Net cash used in investing activities	(4,298		)	(5,051		)

Cash flows from financing activities:
Principal payments on capital lease obligations	(4		)	(22		)
Excess tax benefits related to stock option exercises	99			243
Additional offering costs	—			(83		)
Proceeds from issuances of common stock	639			733
Net cash provided by financing activities	734			871

Decrease in cash and cash equivalents	(216		)	(999		)

Cash and cash equivalents:
Beginning of period	2,224			2,033
End of period	$	2,008		$	1,034

Supplemental disclosure of cash flow information:
Cash paid for interest	$	—		$	1
(Cash paid) refunds received for income taxes, net	(1,284		)	1,437

Noncash financing activities:
Reversal of stock-based compensation	$	—		$	15

See accompanying Notes to Condensed Consolidated Financial Statements.

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 periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Inventories

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

Inventories consisted of the following (in thousands):

	June 30,		December 31
	2006		2005
Raw materials	$	4,793	$	4,747
Work-in-process	2,463		1,138
Finished goods	5,189		5,004
	$	12,445	$	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 No. 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 No. 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 Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” was reclassified into additional paid in capital upon the adoption of SFAS No. 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 of the requisite service period. The cumulative effect of the change in accounting principle from APB 25 to SFAS No. 123R was not material.

Prior to January 1, 2006, we accounted for stock options using the intrinsic value method as prescribed by APB 25. 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 June 30,			Six Months Ended June 30,
	2005			2005
Net income, as reported	$	2,231		$	4,726
Add - stock-based compensation included in reported net income, net of tax	20			53
Fair value of stock-based employee compensation, net of tax	(307		)	(676		)
Net income, as adjusted	$	1,944		$	4,103
Basic net income per share:
As reported	$	0.20		$	0.43
As adjusted	$	0.18		$	0.38
Diluted net income per share:
As reported	$	0.19		$	0.40
As adjusted	$	0.17		$	0.35

To determine stock-based compensation included in reported net income, net of tax, we used a tax rate approximating our effective tax rate of 21.3% and 20.5%, respectively, for the three and six-month periods ended June 30, 2005.

Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Weighted average grant-date fair value of share options granted	$	180	$	39	$	803	$	255
Total intrinsic value of share options exercised	67		1,785		340		1,793
Stock-based compensation recognized in results of operations	447		25		900		66
Cash received from options exercised and shares purchased under all share-based arrangements	47		5		639		733
Tax benefit realized related to stock options exercised	31		243		99		243

No stock-based compensation was capitalized as a part of an asset during the three or six-month periods ended June 30, 2006 or 2005.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Cost of sales	$	113	$	10	$	225	$	22
Research and development	76		4		153		8
Selling, general and administrative	258		11		522		36
	$	447	$	25	$	900	$	66

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 June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Stock Option Plan
Risk-free interest rate	5.07	%	3.77	%	4.72% - 5.07	%	3.77% - 4.17	%
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected term	6.5 years		6 years		6.5 years		6 years
Expected volatility	60.7	%	68.9	%	60.7% - 61.4	%	67.4% - 68.9	%

Employee Stock Purchase Plan
Risk-free interest rate	4.73% - 4.79	%	2.85	%	4.73% - 4.79	%	2.85	%
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected term	6 months – 2 years		6 months		6 months – 2 years		6 months
Expected volatility	34.6% to 45.7	%	56.0	%	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 peer group data. 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 table presents the impact of our adoption of SFAS No. 123R on selected line items from the condensed consolidated financial statements for the three and six-month periods ended June 30, 2006 (in thousands, except per share amounts):

	Three Months Ended June 30, 2006				Six Months Ended June 30, 2006
	As reported following SFAS No. 123R		If reported following APB No. 25		As reported following SFAS No. 123R		If reported following APB No. 25
Income before income taxes	$	1,183	$	1,608	$	2,162	$	3,018
Net income	796		1,221		1,452		2,308
Cash flow from operating activities	3		3		3,348		3,348
Cash flow from financing activities	76		76		734		734
Basic earnings per share	0.07		0.11		0.13		0.20
Diluted earnings per share	0.07		0.10		0.12		0.19

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 2.4 million shares of common stock for issuance under the 2000 Plan.

At June 30, 2006, 900,991 shares were available for future grants, and we had 2,663,869 shares of our common stock reserved for future issuance under the Plans. Stock option activity for the six-month period ended June 30, 2006 was as follows:

	Options Outstanding		Weighted Average Exercise Price
Outstanding at December 31, 2005	1,721,438		$	8.37
Granted	95,000		13.43
Exercised	(44,069	)	5.23
Forfeited	(9,491	)	11.84
Outstanding at June 30, 2006	1,762,878		8.70

Certain information regarding options outstanding as of June 30, 2006 was as follows:

	Options Outstanding		Options Exercisable
Number	1,762,878		1,077,811
Weighted average exercise price	$	8.70	$	7.14
Aggregate intrinsic value	$	6.2 million	$	5.1 million
Weighted average remaining contractual term	6.0 years		4.5 years

The aggregate intrinsic value in the table above is based on our closing stock price of $11.46 on June 30, 2006, which would have been received by the optionees had all of the options with exercise prices less than $11.46 been exercised on that date. As of June 30, 2006, total unrecognized stock-based compensation related to outstanding, but unvested options was $4.8 million, which will be recognized over the weighted average remaining vesting period of 1.7 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 six month period ended June 30, 2006, we issued 43,471 shares pursuant to the 2004 ESPP at a weighted average price of $9.39 per share, which represented a weighted average discount of $4.76 per share from the fair market value on the dates of purchase, and 325,265 shares remained available for purchase as of June 30, 2006.

Note 4. Amendment to 2000 Stock Incentive Plan

At our annual meeting of shareholders, which was held on May 19, 2006, our shareholders approved an increase in the number of shares reserved for issuance under the Cascade Microtech, Inc. 2000 Stock Incentive Plan to 2.4 million shares from 1.8 million shares.

Note 5. 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.

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 June 30,		Six Months Ended June 30,
	2006	2005	2006	2005
Shares used to calculate basic earnings per share	11,411	10,916	11,392	10,890
Dilutive effect of outstanding options and ESPP	486	812	449	806
Shares used to calculate diluted earnings per share	11,897	11,728	11,841	11,696

Stock options not considered as they would have been antidilutive	788	270	795	271

Note 6. 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 as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Unrealized holding gains (losses)	$	14	$	28	$	17	$	(30	)

Total unrealized holding losses were $59,000 and $76,000, respectively, at June 30, 2006 and December 31, 2005.

Note 7. 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):

	Six Months Ended June 30,
	2006			2005
Warranty accrual, beginning of period	$	488		$	365
Reductions for warranty charges	(223		)	(272		)
Additions to warranty reserve	313			300
Warranty accrual, end of period	$	578		$	393

Note 8. 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):

	June 30,			December 31,
	2006			2005
Patents	$	4,268		$	3,945
Accumulated amortization	(2,685		)	(2,527		)
	$	1,583		$	1,418

Amortization expense totaled $68,000 and $158,000, respectively, in the three and six-month periods ended June 30, 2006 and $57,000 and $119,000, respectively, in the three and six-month periods ended June 30, 2005.

Note 9. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	June 30,		December 31,
	2006		2005
Accrued compensation and benefits	$	1,966	$	1,775
Accrued warranty	578		488
Other	1,572		824
	$	4,116	$	3,087

Note 10. Significant Customer and Segment Reporting

The segment data below is presented in the same manner that management organizes the segments for assessing certain performance trends. Our Chief Operating Decision Maker monitors the revenue streams of the engineering products division (“EPD”) and the pyramid products division (“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 June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
External revenue from EPD	$	15,967	$	15,980	$	32,257	$	32,713
External revenue from PPD	3,631		2,331		7,040		4,259
	$	19,598	$	18,311	$	39,297	$	36,972

One customer accounted for 12.0% and 10.8%, respectively, of our total revenue in the three and six-month periods ended June 30, 2006. No other customer accounted for 10% or more of our total revenue in the three and six-month periods ended June 30, 2006 or 2005.

Note 11. New Accounting Pronouncements

FASB Interpretation No. 48

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” Interpretation No. 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. Upon adoption, we will adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to our beginning retained earnings balance in the period of adoption and reported as a change in accounting principle. We are currently analyzing the effects of adopting Interpretation No. 48.

Note 12. Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform with the current period presentation.

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.

· 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 and second quarters 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 as a percentage of sales 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. Although these legal expenses were not significant in the second quarter of 2006 due to little activity, these cases are still open 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. As our business has grown, this strategic relationship has become less significant and the impact of any disruption in this relationship is now considered minimal.

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

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

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

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

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

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

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

· 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, Singapore, Taiwan and China. 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 40% and 35% of our total EPD revenue in the first six months of 2006 and 2005, respectively.

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 six months 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.

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 June 30,				For the Six Months Ended June 30,
	2006		2005		2006		2005
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and stock-based compensation	55.4		52.8		55.9		51.8
Gross profit	44.6		47.2		44.1		48.2
Operating expenses:
Research and development	11.0		9.1		10.6		9.0
Selling, general and administrative	29.6		28.2		30.1		26.5
Total operating expenses	40.6		37.4		40.6		35.5
Income from operations	4.0		9.9		3.4		12.7
Other income (expense), net	2.0		5.6		2.1		3.4
Income before income taxes	6.0		15.5		5.5		16.1
Provision for income taxes	2.0		3.3		1.8		3.3
Net income	4.1	%	12.2	%	3.7	%	12.8	%

(1) Percentages may not add due to rounding.

Revenue increased $1.3 million, or 7.0%, to $19.6 million in the three months ended June 30, 2006 compared to $18.3 million in the three months ended June 30, 2005 and increased $2.3 million, or 6.3%, to $39.3 million in the six months ended June 30, 2006 compared to $37.0 million in the six months ended June 30, 2005.

Revenue in the Engineering Products Division was flat at $16.0 million in the three months ended June 30, 2006 and 2005 and decreased $0.4 million, or 1.4%, to $32.3 million in the six months ended June 30, 2006 compared to $32.7 million in the six months ended June 30, 2005.

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

	Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005		Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Percentage increase (decrease) in unit sales	(6.0	)%	(6.1	)%
Percentage increase (decrease) in average order total	9.0	%	1.4	%

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

The increases in average order total were primarily attributable to increases in unit sales of our 300mm systems, which have a higher average sales price than our 200mm systems, which had declining unit sales in both the three and six month periods ended June 30, 2006 compared to the same periods of 2005. The purchase of our higher-end eVue microscopes with many of the 300mm systems also contributed to the increases in average order total. These increases were partially offset by 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.

Revenue in the Pyramid Probe Division increased $1.3 million, or 55.8%, to $3.6 million in the three months ended June 30, 2006 compared to $2.3 million in the three months ended June 30, 2005 and increased $2.7 million, or 65.3%, to $7.0 million in the six months ended June 30, 2006 compared to $4.3 million in the six months ended June 30, 2005. These increases were due to an increase in the number of production probe cards that we sold, partially offset by a shift in mix to lower priced probe cards.

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.

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 $1.0 million, or 11.3%, to $10.7 million in the three months ended June 30, 2006 compared to $9.7 million in the three months ended June 30, 2005 and increased $2.7 million, or 13.7%, to $21.8 million in the six months ended June 30, 2006 compared to $19.1 million in the six months ended June 30, 2005. These increases were primarily due to the following:

	Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005		Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Increased direct costs for higher revenue and changes in geographic and product mix	$	799,000	$	1,924,000
Increased inventory costs related to scrapping, discrepancies, obsolescence, revisions and returns	102,000		272,000
Increased freight expenses due primarily to more overseas inventory purchases and higher fuel costs	98,000		137,000
	$	999,000	$	2,333,000

Gross profit as a percentage of revenue decreased to 44.6% in the three months ended June 30, 2006 compared to 47.2% in the three months ended June 30, 2005 and decreased to 44.1% in the six months ended June 30, 2006 compared to 48.2% in the six months ended June 30, 2005. These decreases in our gross profit were primarily attributable to 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 and $0.2 million, respectively, in the three and six months ended June 30, 2006 compared to the same periods of 2005. These increases resulted in an approximately 0.5 percentage point decrease in gross margin in both the three and six month periods ended June 30, 2006.

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 28.8%, to $2.1 million in the three months ended June 30, 2006 compared to $1.7 million in the three months ended June 30, 2005 and increased $0.8 million, or 25.2%, to $4.1 million in the six months ended June 30, 2006 compared to $3.3 million in the six months ended June 30, 2005.

The increases were primarily due to the following:

	Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005		Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Increase in salaries and benefits primarily due to increases in headcount	$	426,000	$	817,000
Increase in stock-based compensation due to the adoption of SFAS No. 123R in the first quarter of 2006	72,000		145,000
	$	498,000	$	962,000

Selling, General and Administrative

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

SG&A expense increased $0.6 million, or 12.3%, to $5.8 million in the three months ended June 30, 2006 compared to $5.2 million in the three months ended June 30, 2005 and increased $2.0 million, or 20.6%, to $11.8 million in the six months ended June 30, 2006 compared to $9.8 million in the six months ended June 30, 2005. The increases were primarily due to the following:

	Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005			Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Increase in costs related to expansion and setting up direct sales offices in China, Taiwan and Singapore, including costs for labor and recruiting, offset by a decrease in representative commissions in these regions	$	46,000		$	282,000
Increase in stock-based compensation due to the adoption of SFAS No. 123R in the first quarter of 2006	247,000			486,000
Increase in legal costs primarily related to initiating litigation against third parties to protect against the infringement of our patents and corporate projects	136,000			315,000
Increase in IT services, labor and software requirements for the network and expansion	143,000			200,000
Increase in representative commissions in regions other than China, Taiwan and Singapore and other sales expenses, primarily related to increased revenue	173,000			351,000
Increase (decrease) related to year-end audit and Sarbanes-Oxley compliance	(124,000		)	190,000
	$	621,000		$	1,824,000

During 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 as a percentage of sales in the future. These activities increased our operating expenses in the first and second quarters of 2006 and will increase our operating expenses going forward.

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 $405,000 and $767,000, respectively, in the three and six-month periods ended June 30, 2006 compared to $258,000 and $470,000, respectively, in the comparable periods of 2005. The increases were primarily due to higher average cash balances in the first six months of 2006 compared to the first six months of 2005, as well as higher interest rates in the 2006 periods compared to the 2005 periods.

Interest expense of $16,000 in the six-month period ended June 30, 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 (expense), net totaled ($10,000) and $47,000, respectively, in the three and six-month periods ended June 30, 2006 compared to $766,000 and $790,000, respectively, in the comparable periods of 2005. Other income (expense), net was comprised of the following (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Foreign currency remeasurement gain (loss)	$	49		$	(5	)	$	(9	)	$	(9	)
Foreign currency transaction gain	(58		)	81			51			111
Settlement income from a service provider	—			700			—			700
Other	(1		)	(10		)	5			(12		)
	$	(10	)	$	766		$	47		$	790

The settlement income from a service provider was fully recognized in the quarter ended June 30, 2005 and we do not anticipate any additional settlement income in future periods.

Income Taxes

Our provision for income taxes totaled $710,000, or 32.8% of income before income taxes, and $1.2 million, or 20.5% of income before income taxes, in the first six months of 2006 and 2005, respectively. The effective tax rate in the first six months of 2006 does not include any benefit for U.S. research and experimentation tax credits since current legislation related to such credits has expired and has not yet been reinstated. The effective tax rate in the first six months of 2005 included the release of $213,000 of valuation allowance related to the future realization of foreign tax credits.

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 June 30, 2006, we had a net deferred tax asset on our balance sheet totaling $2.1 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 $48.7 million at June 30, 2006, as well as from cash expected to be generated from operations.

Net cash provided by operating activities in the first six months of 2006 was $3.3 million and consisted of net income of $1.5 million, depreciation, amortization and stock-based compensation combined of $1.8 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net was increased $1.2 million to $17.4 million at June 30, 2006 compared to $16.2 million at December 31, 2005, due primarily to the non-linearity of shipments and higher revenue during the second quarter of 2006 compared to the fourth quarter of 2005. Our days sales outstanding was approximately 81 days at June 30, 2006 compared to 83 days at December 31, 2005.

Inventories increased $1.5 million to $12.4 million at June 30, 2006 compared to $10.9 million at December 31, 2005, primarily due to increased work-in-process and finished goods balances required to meet the projected demand for the third quarter of 2006. We believe that our inventory levels at June 30, 2006 are adequate given our revenue projections for the third quarter of 2006.

Prepaid expenses and other current assets decreased $1.0 million to $2.0 million at June 30, 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 $1.0 million to $4.9 million at June 30, 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 $1.0 million to $4.1 million at June 30, 2006 compared to $3.1 million at December 31, 2005, primarily due to a $100,000 increase in accrued wages due to the timing of bi-weekly payroll dates and the number of days required to be accrued, a $655,000 increase in income taxes payable and a $171,000 increase in our sales return reserve.

Net cash used in investing activities of $4.3 million in the first six months of 2006 resulted from $1.9 million used for the net purchase of marketable securities, $2.0 million used for the purchase of fixed assets and $0.4 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 six months 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 six months 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 June 30, 2006, we had $284,000 in lines for letters of credit, of which, $153,000 was in use for certain guarantees. These lines expire March 31, 2007.

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.

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 June 30, 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 4. Submission of Matters to a Vote of Security Holders

The annual meeting of our shareholders was held on May 19, 2006, at which the following actions were taken:

1. The shareholders elected the one nominee for director to the Board of Directors. The one Class II directors elected, along with the voting results, were as follows:

Name		No. of Shares Voting For		No. of Shares Withheld Voting
Keith L. Barnes		10,468,517		47,692

2. The shareholders approved an amendment to the Cascade Microtech, Inc. 2000 Stock Incentive Plan to increase the number of shares reserved for issuance thereunder from 1,800,000 shares to 2,400,000 shares as follows:

No. of Shares Voting For:		No. of Shares Voting Against:		No. of Shares Abstaining:		No. of Broker Non-Votes:
6,863,172		2,388,073		4,556		1,260,408

3. The shareholders approved the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2006 as follows:

No. of Shares Voting For:		No. of Shares Voting Against:		No. of Shares Abstaining:		No. of Broker Non-Votes:
10,470,524		43,475		2,210		—

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. Incorporated by reference to Form 10-Q for the quarterly period ended March 31, 2006 and filed with the Securities and Exchange Commission on May 10, 2006.
10.1	Cascade Microtech, Inc. 2000 Stock Incentive Plan, as amended. Incorporated by reference to Form 8-K as filed with the Securities and Exchange Commission on May 24, 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.

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: August 9, 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)

CASCADE MICROTECH, INC. INDEX TO FORM 10-Q

Item 1A. Risk Factors

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

Item 4. Submission of Matters to a Vote of Security Holders

Item 6. Exhibits

CASCADE MICROTECH, INC.
INDEX TO FORM 10-Q