10-Q

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, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                  to

Commission File No. 000-51072

CASCADE MICROTECH, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

The number of shares of common stock outstanding as of August 6, 2007 was 12,809,563.

CASCADE MICROTECH, INC.
INDEX TO FORM 10-Q

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

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

	June 30,			December 31,
	2007			2006
Assets
Current Assets:
Cash and cash equivalents	$	3,495		$	5,260
Short-term marketable securities	24,425			38,534
Accounts receivable, net of allowances of $191 and $153	20,336			17,642
Inventories, net	15,679			15,094
Prepaid expenses and other	1,842			2,055
Deferred income taxes	2,059			2,042
Total Current Assets	67,836			80,627
Long-term marketable securities	9,442			9,662
Fixed assets, net of accumulated depreciation of $14,266 and $13,385	12,504			6,818
Deferred income taxes	—			682
Goodwill	15,651			1,295
Purchased intangible assets, net	15,164			2,610
Other assets, net	2,281			2,092
Total Assets	$	122,878		$	103,786
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of capital leases	$	6		$	—
Accounts payable	5,432			6,013
Deferred revenue	808			1,184
Accrued liabilities	4,280			5,026
Total Current Liabilities	10,526			12,223
Capital leases, net of current portion	25			—
Deferred income taxes	3,858			—
Deferred revenue	460			199
Other long-term liabilities	1,922			1,171
Total Liabilities	16,791			13,593
Shareholders’ Equity:
Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 12,760 and 11,717	128			117
Additional paid-in capital	77,766			63,144
Accumulated other comprehensive loss - unrealized holding losses on investments	(26		)	(1		)
Retained earnings	28,219			26,933
Total Shareholders’ Equity	106,087			90,193
Total Liabilities and Shareholders’ Equity	$	122,878		$	103,786

See accompanying Notes to Condensed Consolidated Financial Statements.

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2007			2006			2007			2006
Revenue	$	24,116		$	19,598		$	46,587		$	39,297
Cost of sales	13,186			10,739			25,273			21,759
Stock-based compensation	127			113			249			225
Gross profit	10,803			8,746			21,065			17,313
Operating expenses:
Research and development (includes $89, $76, $168 and $153, respectively, of stock-based compensation)	3,120			2,150			5,759			4,148
Selling, general and administrative (includes $408, $258, $769 and $522, respectively, of stock-based compensation)	7,439			5,808			14,103			11,817
Amortization of purchased intangibles	555			—			661			—
	11,114			7,958			20,523			15,965
Income (loss) from operations	(311		)	788			542			1,348
Other income (expense):
Interest income	366			405			821			767
Interest expense	—			—			(1		)	—
Other, net	(65		)	(10		)	45			47
	301			395			865			814
Income (loss) before income taxes	(10		)	1,183			1,407			2,162
Provision (benefit) for income taxes	(248		)	387			121			710
Net income	$	238		$	796		$	1,286		$	1,452
Basic net income per share	$	0.02		$	0.07		$	0.10		$	0.13
Diluted net income per share	$	0.02		$	0.07		$	0.10		$	0.12
Shares used in per share calculations:
Basic	12,724			11,411			12,269			11,392
Diluted	13,038			11,897			12,625			11,841

See accompanying Notes to Condensed Consolidated Financial Statements.

3

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

	For the Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	1,286		$	1,452
Adjustments to reconcile net income to net cash flows provided by operating activities, net of acquisition:
Depreciation and amortization	1,784			902
Stock-based compensation, net	1,186			900
Gain on disposal of fixed assets	(3		)	(6		)
Deferred income taxes	(43		)	(54		)
Excess tax benefits related to stock option exercises	(237		)	(99		)
(Increase) decrease, net of acquisition, in:
Accounts receivable, net	(1,700		)	(1,217		)
Inventories, net	30			(1,556		)
Prepaid expenses and other	381			953
Increase (decrease), net of acquisition, in:
Accounts payable	(977		)	956
Deferred revenue	(115		)	32
Accrued and other long-term liabilities	242			1,085
Net cash provided by operating activities	1,834			3,348
Cash flows from investing activities:
Purchase of marketable securities	(15,360		)	(27,349		)
Proceeds from sale of marketable securities	29,664			25,421
Purchase of fixed assets	(5,981		)	(2,014		)
Proceeds from disposal of fixed assets	4			7
Investment in patents and other assets	(392		)	(363		)
Cash paid for acquisition, net of cash acquired	(13,020		)	—
Net cash used in investing activities	(5,085		)	(4,298		)
Cash flows from financing activities:
Principal payments on capital lease obligations	(2		)	(4		)
Excess tax benefits related to stock option exercises	237			99
Proceeds from issuances of common stock	1,251			639
Net cash provided by financing activities	1,486			734
Decrease in cash and cash equivalents	(1,765		)	(216		)
Cash and cash equivalents:
Beginning of period	5,260			2,224
End of period	$	3,495		$	2,008
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1		$	—
(Cash paid) refunds received for income taxes, net	729			(1,284		)
Supplemental disclosure of non-cash information:
Equipment acquired with capital lease	$	33		$	—
Common stock issued in connection with Gryphics acquisition	11,959			—

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”) and requires the use of management estimates. However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. During the first quarter of 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” as described in Note 10 below. The financial information as of December 31, 2006 is derived from our 2006 Annual Report on Form 10-K. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2006 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2.  Inventories

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

Inventories consisted of the following (in thousands):

	June 30,		December 31
	2007		2006
Raw materials	$	6,393	$	6,205
Work-in-process	3,477		2,947
Finished goods	5,809		5,942
	$	15,679	$	15,094

Note 3.  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 other common stock equivalents using the treasury stock method.

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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,
	2007	2006	2007	2006
Shares used to calculate basic earnings per share	12,724	11,411	12,269	11,392
Dilutive effect of outstanding options and restricted stock units	314	486	356	449
Shares used to calculate diluted earnings per share	13,038	11,897	12,625	11,841
Stock options not considered as they would have been antidilutive	858	788	854	795

Note 4. Acquisition of Gryphics, Inc.

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

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

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

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

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

6

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Total revenues	$	24,116	$	22,500	$	48,023	$	43,159
Net income	238		1,143		888		1,320
Basic earnings per share	0.02		0.09		0.07		0.11
Diluted earnings per share	0.02		0.09		0.07		0.10

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

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 as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2007			2006		2007			2006
Unrealized holding gains (losses)	$	(22	)	$	14	$	(25	)	$	17

Total unrealized holding losses were $26,000 and $1,000, respectively, at June 30, 2007 and December 31, 2006.

Note 6.  Product Warranty

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

	Six Months Ended June 30,
	2007			2006
Warranty accrual, beginning of period	$	536		$	488
Reductions for warranty charges	(319		)	(223		)
Additions to warranty reserve	232			313
Warranty accrual, end of period	$	449		$	578

Note 7. Goodwill and Purchased and Other Intangible Assets

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

	Six Months Ended June 30,
	2007		2006
Balance, beginning of period	$	1,295	$	—
Acquisition of Gryphics, Inc.	14,350		—
Adjustments to goodwill	6		—
Balance, end of period	$	15,651	$	—

Adjustments to goodwill include additional acquisition costs related to our purchase of certain assets of the eVue product line in the fourth quarter of 2006.

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

	June 30,			December 31,
	2007			2006
Patents	$	5,009		$	4,641
Accumulated amortization	(3, 050		)	(2,859		)
	$	1,959		$	1,782

7

Purchased intangible assets, net included the following:

	June 30,			December 31,
	2007			2006
Developed technology	$	8,242		$	—
Accumulated amortization	(258		)	—
	7,984			—
Purchased patents	961			961
Accumulated amortization	(90		)	(30		)
	871			931
Developed software technology	165			165
Accumulated amortization	(41		)	(14		)
	124			151
Customer relationships	5,218			1,537
Accumulated amortization	(296		)	(61		)
	4,922			1,476
Trade names and trademarks	1,136			—
	(28		)	—
	1,108			—
Non-compete agreements	156			—
	(20		)	—
	136			—
Customer backlog	77			77
Accumulated amortization	(58		)	(25		)
	19			52
Total purchased intangible assets, net	$	15,164		$	2,610

Amortization expense totaled $858,000 and $158,000, respectively, in the six-month periods ended June 30, 2007 and 2006. Of the amortization expense, $197,000 and $158,000, respectively, was included as a component of selling, general and administrative expense for the six-month periods ended June 30, 2007 and 2006.

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

	Internally						Developed
	Developed		Developed		Purchased		Software		Customer
	Patents		Technology		Patents		Technology		Relationships
Remainder of 2007	$	354	$	515	$	60	$	28	$	373
2008	413		1,030		120		55		745
2009	395		1,030		120		41		745
2010	332		1,030		120		—		745
2011	295		1,030		120		—		745
Thereafter	170		3,349		331		—		1,569

	Trade names and trademarks		Non-compete agreements		Customer Backlog
Remainder of 2007	$	57	$	39	$	19
2008	114		78		—
2009	114		19		—
2010	114		—		—
2011	114		—		—
Thereafter	595		—		—

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Note 8. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	June 30,		December 31,
	2007		2006
Accrued compensation and benefits	$	2,519	$	2,261
Income taxes payable	258		1,072
Accrued warranty	449		536
Sales return reserve	444		473
Other	610		684
	$	4,280	$	5,026

Note 9. Significant Customer and Segment Reporting

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

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

	EPD			PPD			Total
Three Months Ended June 30, 2007
Revenue	$	19,059		$	5,057		$	24,116
Gross Profit	$	8,421		$	2,382		$	10,803
Gross Margin	44.2		%	47.1		%	44.8		%
Three Months Ended June 30, 2006
Revenue	$	15,967		$	3,631		$	19,598
Gross Profit	$	7,145		$	1,601		$	8,746
Gross Margin	44.7		%	44.1		%	44.6		%

	EPD			PPD			Total
Six Months Ended June 30, 2007
Revenue	$	37,468		$	9,119		$	46,587
Gross Profit	$	17,154		$	3,911		$	21,065
Gross Margin	45.8		%	42.9		%	45.2		%
Six Months Ended June 30, 2006
Revenue	$	32,257		$	7,040		$	39,297
Gross Profit	$	14,680		$	2,633		$	17,313
Gross Margin	45.5		%	37.4		%	44.1		%

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

One customer accounted for 12.0% of our total revenue in the three-month period ended June 30, 2007. Also, one different 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, 2007 or 2006.

9

Note 10. Adoption of Interpretation No. 48

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

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

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

During the three and six-month periods ended June 30, 2007, unrecognized tax benefits increased by $0.1 million to $0.8 million as of June 30, 2007. Of the $0.8 million, $0.6 million would have an impact on the effective tax rate. Interest and penalties accrued on the unrecognized tax benefits totaled $0.1 million at June 30, 2007. Although we cannot be certain of the final outcome of any ongoing tax examinations, we believe it is reasonably possible that the total amount of unrecognized benefits will decrease in the range of $0.1 million to $0.3 million within the next 12 months. There were no decreases in prior unrecognized tax benefits resulting from settlements with taxing authorities or the lapse of applicable statutes of limitation during the three or six-month periods ended June 30, 2007.

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

Jurisdiction	Open Tax Years
U.S.	2003 - 2006
Japan	2000 - 2006
United Kingdom	2004 - 2006

Note 11. Subsequent Events

In July 2007, we terminated our distribution agreement and acquired certain assets and operations from our German distributor, Synatron Gmbh, for an amount of $2 million in cash. We have established a new subsidiary, Cascade Microtech, Gmbh and commenced operations as a direct sales and support office in Munich, Germany.

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

10

materially from those expressed or implied in such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2007. These risk factors have not significantly changed since they were filed with our Form 10-K and included the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Overview

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

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

Our engineering probe stations, analytical probes and probing accessories are sold through our Engineering Products Division (“EPD”). Our production probe cards and test sockets are sold through our Production Products Division (“PPD”). To date, we have derived the majority of our revenue from the sale of our engineering probe stations, and we expect to continue to do so for the next few years. Our production products revenue, however, increased as a percentage of total revenues in the first six months of 2007, due in part to the acquisition of Gryphics, Inc. in April 2007, compared to the first six months of 2006 and in all of 2006 compared to 2005 and we expect that trend to continue in the remainder of 2007 and beyond.

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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 49.2% and 40.4% of our total EPD revenue in the first six months of 2007 and 2006, 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 2006 and 2005 generated outside of North America, primarily in Japan, other Asian countries and, to a lesser extent, Europe.

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

Critical Accounting Policies and the Use of Estimates

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

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

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Results of Operations

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2007		2006		2007		2006
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and stock-based compensation	55.2		55.4		54.8		55.9
Gross profit	44.8		44.6		45.2		44.1
Operating expenses:
Research and development	12.9		11.0		12.4		10.6
Selling, general and administrative	30.8		29.6		30.3		30.1
Amortization of purchased intangibles	2.3		—		1.4		—
Total operating expenses	46.1		40.6		44.1		40.6
Income (loss) from operations	(1.3	)	4.0		1.2		3.4
Other income, net	1.2		2.0		1.9		2.1
Income before income taxes	—		6.0		3.0		5.5
Provision (benefit) for income taxes	(1.0	)	2.0		0.3		1.8
Net income	1.0	%	4.1	%	2.8	%	3.7	%

(1)  Percentages may not add due to rounding.

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

	EPD			PPD			Total
Three Months Ended June 30, 2007
Revenue	$	19,059		$	5,057		$	24,116
Gross Profit	$	8,421		$	2,382		$	10,803
Gross Margin	44.2		%	47.1		%	44.8		%
Three Months Ended June 30, 2006
Revenue	$	15,967		$	3,631		$	19,598
Gross Profit	$	7,145		$	1,601		$	8,746
Gross Margin	44.7		%	44.1		%	44.6		%

	EPD			PPD			Total
Six Months Ended June 30, 2007
Revenue	$	37,468		$	9,119		$	46,587
Gross Profit	$	17,154		$	3,911		$	21,065
Gross Margin	45.8		%	42.9		%	45.2		%
Six Months Ended June 30, 2006
Revenue	$	32,257		$	7,040		$	39,297
Gross Profit	$	14,680		$	2,633		$	17,313
Gross Margin	45.5		%	37.4		%	44.1		%

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

Revenue increased $4.5 million, or 23.1%, to $24.1 million in the three-month period ended June 30, 2007 compared to $19.6 million in the same period of 2006 and increased $7.3 million, or 18.6%, to $46.6 million in the six-month period ended June 30, 2007 compared to $39.3 million in the same period of 2006.

Revenue in EPD increased $3.1 million, or 19.4%, to $19.1 million in the three-month period ended June 30, 2007 compared to $16.0 million in the same period of 2006 and increased $5.2 million, or 16.2%, to $37.5 million in the six-month period ended June 30, 2007 compared to $32.3 million in the same period of 2006.

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

	Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006		Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Percentage increase in unit sales	2.6	%	9.7	%
Percentage increase in average order total	20.7	%	16.7	%

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 unit sales in both the three and six month periods ended June 30, 2007 compared to the same periods of 2006 were due to increases in unit sales of our 300mm systems being partially offset by decreases in unit sales of our non-300mm systems. The increases in the 300mm systems were due to increased customer demand. As more customers transition to our 300mm systems, sales of non-300mm systems typically decline as a percentage of total system sales.

The increases in average order total in the three and six-month periods ended June 30, 2007 compared to the same periods of 2006 were attributable to increased unit sales of our 300mm systems, which have a higher average sales price than our non-300mm systems, as well as increases in the number of accessories purchased with systems.

Other EPD revenue increased 8.9% in the three-month period ended June 30, 2007 compared to the same period of 2006 and decreased 5.1% in the six-month period ended June 30, 2007 compared to the same period of 2006. Other EPD revenue consists primarily of stand-alone analytical probe revenue, service revenue and distribution revenue.

Revenue in PPD increased $1.5 million, or 39.3%, to $5.1 million in the three-month period ended June 30, 2007 compared to $3.6 million in the same period of 2006 and increased $2.1 million, or 29.5%, to $9.1 million in the six-month period ended June 30, 2007 compared to $7.0 million in the same period of 2006. These increases were due to the addition of Gryphics, Inc. revenues during the second quarter of 2007 and increases in the number of production probe cards that we sold.

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

Cost of Sales and Gross Profit

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

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

Cost of sales, including stock-based compensation expense, increased $2.4 million, or 22.7%, to $13.3 million in the three-month period ended June 30, 2007 compared to $10.9 million in the same period of 2006 and increased $3.5 million, or 16.1%, to $25.5 million in the six-month period ended June 30, 2007 compared to $22.0 million in the same period of 2006.

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These increases were primarily due to the following:

	Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006			Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Increased direct costs, such as raw materials, resulting from higher revenue and changes in product mix	$	2,107,000		$	2,751,000
Increase in salaries and related costs in EPD labor due to higher production activities and wage increases	222,000			386,000
Increase in supplies due to higher production volumes	173,000			279,000
Increase (decrease) in salaries and related costs in PPD resulting from changes in headcount and other labor	(41,000		)	771,000
Decrease due to increased allocation of costs to research and development expense due to increased research and development fab runs	(238,000		)	(553,000		)
Other increases	238,000			(96,000		)
	$	2,461,000		$	3,538,000

Gross profit increased $2.1 million, or 23.5%, to $10.8 million in the three-month period ended June 30, 2007 compared to $8.7 million in the same period of 2006 and increased $3.8 million, or 21.7%, to $21.1 million in the six-month period ended June 30, 2007 compared to $17.3 million in the same period of 2006. These increases were primarily attributable to the increased sales discussed above, as well as increases in our overall gross margin. Our gross margin increased to 44.8% in the three-month period ended June 30, 2007 compared to 44.6% in the same period of 2006 and increased to 45.2% in the six-month period ended June 30, 2007 compared to 44.1% in the same period of 2006. The gross margin improvements were primarily within PPD. The increases within PPD resulted primarily from the inclusion of gross margin from Gryphics, Inc. product sales during the second quarter of 2007, as well as increased fab run allocations to research and development expense. The increase in the number of research and development fab runs resulted in an increase in research and development expenses and a decrease in cost of sales. The decrease in gross margin in EPD in the three-month period ended June 30, 2007 compared to the same period of 2006 was primarily due to the mix of product sales and some price discounts.

Research and Development

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

Research and development expenses increased $1.0 million, or 45.1%, to $3.1 million in the three-month period ended June 30, 2007 compared to $2.1 million in the same period of 2006 and increased $1.7 million, or 38.8%, to $5.8 million in the six-month period ended June 30, 2007 compared to $4.1 million in the same period of 2006. The increases were primarily due to the following:

	Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006		Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Increase in salaries and benefits primarily due to increases in headcount	$	300,000	$	682,000
Increase related to the increasing number of research and development fab runs	238,000		553,000
Increases in other costs, including supplies	432,000		376,000
	$	970,000	$	1,611,000

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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 $1.6 million, or 28.1%, to $7.4 million in the three-month period ended June 30, 2007 compared to $5.8 million in the same period of 2006 and increased $2.3 million, or 19.3%, to $14.1 million in the six-month period ended June 30, 2007 compared to $11.8 million in the same period of 2006.

The increases were primarily due to the following:

	Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006			Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Increase in costs related to our China and Taiwan sales offices, which opened in the second quarter of 2006	$	305,000		$	418,000
Increase in salaries and related expenses due to increased headcount	416,000			924,000
Increase in IT services, labor and software due to international expansion demands	71,000			203,000
Increase in accounting fees for public company compliance	142,000			28,000
Increased stock-based compensation due to increased headcount and annual awards	162,000			261,000
Increase related to recruiting costs for Chief Operating Officer and German sales manager	88,000			88,000
Decrease related to decreased legal costs as a result of patent protection law suits filed in the first quarter of 2006 and generally lower activity in the 2007 periods	(170,000		)	(334,000		)
Other	617,000			698,000
	$	1,631,000		$	2,286,000

Amortization of Purchased Intangibles

Amortization of purchased intangibles includes amortization related to our acquisition of certain assets of the eVue product line in the fourth quarter of 2006 and to our acquisition of Gryphics, Inc. in the second quarter of 2007.  Purchased intangibles totaled $15.2 million at June 30, 2007 and current amortization is approximately $560,000 per quarter.

Other Income (Expense)

Other income (expense) typically includes interest income, interest expense, gains and losses on sales of investments and transaction and remeasurement related foreign currency gains and losses. Other income (expense) can also include other miscellaneous non-operating gains and losses. Transaction related foreign currency gains and losses result from gains and losses recognized on foreign exchange forward contracts and on certain of our accounts receivable that are denominated in Japanese yen.

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $366,000 and $821,000, respectively, in the three and six-month periods ended June 30, 2007 compared to $405,000 and $767,000, respectively, in the same periods of 2006. The decrease in the three-month period ended June 30, 2007 compared to the same period of 2006 was due to the use of $13.0 million, net of cash acquired, for the purchase of Gryphics, Inc. in April 2007. This decrease was offset by higher interest rates in the 2007 periods compared to the 2006 periods.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Foreign currency remeasurement gain (loss)	$	(27	)	$	49		$	(12	)	$	(9	)
Foreign currency transaction gain	(24		)	(58		)	68			51
Other	(14		)	(1		)	(11		)	5
	$	(65	)	$	(10	)	$	45		$	47

Income Taxes

Our provision for income taxes totaled $0.1 million, or 8.6%, of income before income taxes, and $0.7 million, or 32.8%, of income before income taxes, in the first six months of 2007 and 2006, respectively.  The effective tax rate is reflective of the rate we expect to achieve for the full year. The effective tax rate in the first six months of 2007 included a benefit for research and experimentation tax credits, which were reinstated in December 2006. The effective tax rate in the first six months of 2006 did not include any benefit for research and experimentation tax credits since legislation related to such credits was expired during that period.

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

At June 30, 2007, we had a net deferred tax liability on our balance sheet totaling $1.8 million, primarily related to deferred tax liabilities assumed with the Gryphics, Inc. acquisition.

Liquidity and Capital Resources

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash, short-term marketable securities and long-term marketable securities, which totaled $37.4 million at June 30, 2007, as well as from cash expected to be generated from operations. In April 2007, we used $13.0 million of cash, net of cash acquired, for the acquisition of Gryphics, Inc. as discussed in Note 4 of Notes to Condensed Consolidated Financial Statements above.

Net cash provided by operating activities in the first six months of 2007 was $1.8 million and consisted of net income of $1.3 million, depreciation, amortization and stock-based compensation of $3.0 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net increased $2.7 million to $20.3 million at June 30, 2007 compared to $17.6 million at December 31, 2006, due primarily to an increase in our days sales outstanding, an increase in revenue in the second quarter of 2007 compared to the fourth quarter of 2006 and the assumption of accounts receivable with the acquisition of Gryphics, Inc. in April 2007. In addition, a greater percentage of our revenue was in the last month of the second quarter of 2007 as compared to the last month of the fourth quarter of 2006. Our days sales outstanding was approximately 78 days at June 30, 2007 compared to 71 days at December 31, 2006.

Inventories increased $0.6 million to $15.7 million at June 30, 2007 compared to $15.1 million at December 31, 2006, primarily due to the acquisition of inventory with the Gryphics, Inc. acquisition. We believe that our inventory levels at June 30, 2007 are adequate given our revenue projections for the third quarter of 2007.

Deferred income taxes were a net liability of $1.8 million at June 30, 2007 compared to a net asset of $2.7 million at December 31, 2006.  The change in deferred income taxes was due to deferred tax liabilities assumed with the Gryphics, Inc. acquisition.

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Net cash used in investing activities of $5.1 million in the first six months of 2007 resulted from $6.0 million used for the purchase of fixed assets and $13.0 million, net of cash acquired, used for the acquisition of Gryphics, Inc.  These uses were offset by a net maturity and sale of marketable securities of $14.3 million. Purchases of fixed assets primarily were for our PPD capacity expansion project. We anticipate spending approximately $4.0 million in the remainder of 2007 for fixed assets, primarily for PPD capacity expansion.

Net cash provided by financing activities of $1.5 million in the first six months of 2007 resulted primarily from $1.3 million of proceeds from the exercise of employee stock options and the sale of stock pursuant to our employee stock purchase plan and $0.2 million of tax benefits related to stock option exercises.

New Accounting Pronouncements

There were no changes in the first six months of 2007 to the new accounting pronouncements disclosed in our 2006 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2007.

Seasonality

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

Off-Balance Sheet Arrangements

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.  Controls and Procedures

Changes in Internal Control Over Financial Reporting

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

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

We excluded Gryphics, Inc. from our assessment of the effectiveness of our internal control over financial reporting as of June 30, 2007.

Disclosure Controls and Procedures

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

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Limitation on Effectiveness of Controls

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

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Part II - Other Information

Item 1A.  Risk Factors

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

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

Use of Proceeds

We filed a registration statement on Form S-1, File No. 333-113256 for an initial public offering of common stock, which was declared effective by the Securities and Exchange Commission on December 15, 2004.  In that offering, we sold an aggregate of 3.3 million shares of our common stock with net offering proceeds of $41.6 million. As of June 30, 2007, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness and $13.0 million, net of cash acquired, for our acquisition of Gryphics, Inc. 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 18, 2007, at which the following actions were taken:

1.The shareholders elected the two nominees for director to the Board of Directors. The two Class III directors elected, along with the voting results, were as follows:

Name	No. of Shares Voting For	No. of Shares Withheld Voting
George P. O’Leary	9,972,316	245,963
Eric W. Strid	9,975,000	243,279

2.The shareholders approved the appointment of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2007 as follows:

No. of Shares Voting For:	No. of Shares Voting Against:	No. of Shares Abstaining:	No. of Broker Non-Votes:
10,126,603	91,076	600	—

Item 6.    Exhibits

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

2.1	Agreement and Plan of Merger by and among Cascade Microtech, Inc., Gryphics Acquisition Corporation and Gryphics, Inc., dated as of April 3, 2007 (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 5, 2007).
10.1	Shareholder Agreement by and among Cascade Microtech, Inc. and each of the shareholders of Gryphics, Inc. dated as of April 3, 2007 (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 5, 2007).
10.2	Executive Compensation Plan for the Six-Month Period Ending June 30, 2007 (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 5, 2007).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

21

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

22

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: August 9, 2007

/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: August 9, 2007

/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 June 30, 2007 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.

August 9, 2007

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 June 30, 2007 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.

August 9, 2007

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.