UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from              to             

Commission File No. 000-51072

CASCADE MICROTECH, INC.

(Exact name of registrant as specified in its charter)

Oregon	93-0856709
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2430 N.W. 206th Avenue Beaverton, Oregon	97006
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (503) 601-1000

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

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

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

The number of shares of common stock outstanding as of November 10, 2008 was 13,139,702.

CASCADE MICROTECH, INC.

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets (unaudited) - September 30, 2008 and December 31, 2007	2
	Condensed Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2008 and 2007	3
	Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2008 and 2007	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II - OTHER INFORMATION
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	22
Signatures		23

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Cascade Microtech, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)

	September 30, 2008		December 31, 2007
Assets
Current Assets:
Cash and cash equivalents	$	4,422	$	4,900
Short-term marketable securities		25,521		24,521
Accounts receivable, net of allowances of $259 and $203		16,890		18,195
Inventories		19,494		18,608
Prepaid expenses and other		1,141		1,874
Assets held for sale		562		—
Deferred income taxes		3,071		2,729
Total Current Assets		71,101		70,827
Long-term marketable securities		5,039		4,836
Fixed assets, net of accumulated depreciation of $14,767 and $14,280		13,799		14,575
Goodwill		17,406		17,310
Purchased intangible assets, net of accumulated amortization of $3,985 and $2,106		13,163		15,042
Other assets, net of accumulated amortization of $3,606 and $3,253		2,820		2,691
Total Assets	$	123,328	$	125,281
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of capital leases	$	16	$	13
Accounts payable		4,773		5,158
Deferred revenue		905		1,102
Accrued liabilities		3,984		5,589
Total Current Liabilities		9,678		11,862
Capital leases, net of current portion		59		51
Deferred income taxes		3,064		3,114
Deferred revenue		413		481
Other long-term liabilities		2,380		2,168
Total Liabilities		15,594		17,676
Shareholders’ Equity:
Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 13,140 and 12,878		131		129
Additional paid-in capital		82,897		79,568
Accumulated other comprehensive income		8		45
Retained earnings		24,698		27,863
Total Shareholders’ Equity		107,734		107,605
Total Liabilities and Shareholders’ Equity	$	123,328	$	125,281

See accompanying Notes to Condensed Consolidated Financial Statements.

2

Cascade Microtech, Inc.

Condensed Consolidated Statements of Operations

(Unaudited, In thousands, except per share amounts)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2008			2007			2008			2007
Revenue	$	21,128		$	21,343		$	61,174		$	67,930
Cost of sales		12,068			11,455			33,933			36,977
Gross profit		9,060			9,888			27,241			30,953
Operating expenses:
Research and development		2,308			2,723			8,040			8,482
Selling, general and administrative		7,739			6,748			21,953			20,851
Amortization of purchased intangibles		582			667			1,879			1,328
		10,629			10,138			31,872			30,661
Income (loss) from operations		(1,569	)		(250	)		(4,631	)		292
Other income (expense):
Interest income, net		221			330			711			1,150
Other, net		(369	)		(101	)		(113	)		(56	)
		(148	)		229			598			1,094
Income (loss) before income taxes		(1,717	)		(21	)		(4,033	)		1,386
Provision (benefit) for income taxes		(426	)		195			(868	)		316
Net income (loss)	$	(1,291	)	$	(216	)	$	(3,165	)	$	1,070
Basic net income (loss) per share	$	(0.10	)	$	(0.02	)	$	(0.24	)	$	0.09
Diluted net income (loss) per share	$	(0.10	)	$	(0.02	)	$	(0.24	)	$	0.08
Shares used in per share calculations:
Basic		13,108			12,799			13,047			12,447
Diluted		13,108			12,799			13,047			12,755

See accompanying Notes to Condensed Consolidated Financial Statements.

3

Cascade Microtech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

	For the Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	(3,165	)	$	1,070
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities, net of acquisitions:
Depreciation and amortization		4,503			3,205
Stock-based compensation, net		1,925			1,757
Loss on disposal of fixed assets		53			104
Net gain on disposal of assets held for sale		(33	)		—
Deferred income taxes		(392	)		(239	)
(Increase) decrease, net of acquisitions, in:
Accounts receivable, net		1,305			142
Inventories, net		(886	)		(1,607	)
Prepaid expenses and other		730			(272	)
Increase (decrease), net of acquisitions, in:
Accounts payable		(385	)		238
Deferred revenue		(265	)		(263	)
Accrued and other long-term liabilities		(1,393	)		309
Net cash provided by operating activities		1,997			4,444
Cash flows from investing activities:
Purchase of marketable securities		(38,600	)		(18,536	)
Proceeds from sale of marketable securities		37,360			33,726
Purchase of fixed assets		(2,192	)		(8,568	)
Proceeds from disposal of fixed assets and assets held for sale		175			4
Investment in patents and other assets		(517	)		(735	)
Cash paid for acquisitions, net of cash acquired		(96	)		(14,821	)
Net cash used in investing activities		(3,870	)		(8,930	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(11	)		(3	)
Excess tax benefits related to stock option exercises		46			218
Withholding taxes paid on net settlement of vested restricted stock units		(38	)		—
Proceeds from issuances of common stock		1,398			1,791
Net cash provided by financing activities		1,395			2,006
Decrease in cash and cash equivalents		(478	)		(2,480	)
Cash and cash equivalents:
Beginning of period		4,900			5,260
End of period	$	4,422		$	2,780
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1		$	1
Cash paid for income taxes, net		1,169			1,054
Supplemental disclosure of non-cash information:
Equipment acquired with capital lease	$	22		$	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”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2007 is derived from our 2007 Annual Report on Form 10-K. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2007 Annual Report on Form 10-K. The results of operations for the interim period presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Inventories

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

Inventories consisted of the following (in thousands):

	September 30, 2008		December 31 2007
Raw materials	$	9,119	$	9,764
Work-in-process		2,150		2,471
Finished goods		8,225		6,373
	$	19,494	$	18,608

Note 3. Earnings Per Share

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

5

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2008	2007	2008	2007
Shares used to calculate basic earnings per share	13,108	12,799	13,047	12,447
Dilutive effect of outstanding stock options	—	—	—	308
Shares used to calculate diluted earnings per share	13,108	12,799	13,047	12,755
Stock options not considered as they would have been antidilutive	1,560	1,526	1,560	834

Note 4. Comprehensive Income (Loss)

Comprehensive income (loss) 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 September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
Unrealized holding gains (losses)	$	(47	)	$	45	$	(37	)	$	20

Note 5. Product Warranty

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

	Nine Months Ended September 30,
	2008			2007
Warranty accrual, beginning of period	$	501		$	536
Reductions for warranty charges		(547	)		(494	)
Additions to warranty reserve		517			434
Warranty accrual, end of period	$	471		$	476

Note 6. Goodwill and Purchased and Other Intangible Assets

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

	Nine Months Ended September 30,
	2008		2007
Balance, beginning of period	$	17,310	$	1,295
Acquisition of Gryphics, Inc.		—		14,350
Acquisition of Synatron		96		574
Adjustments to goodwill		—		6
Balance, end of period	$	17,406	$	16,225

In the third quarter of 2008, we made our final payment of $96,000 related to the acquisition of Synatron.

Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to test our goodwill for impairment at least annually and more frequently if conditions warrant. We perform our annual test of goodwill impairment in the fourth quarter. During the third quarter of 2008, we performed an interim test of goodwill impairment due to the decline in the market price of our common stock. We did this by applying a fair-value based test using a weighted average of an Income Approach and a Market

6

Approach to calculate the fair value of our reporting units. The Income Approach was based on a discounted cash flow (“DCF”) analysis, which considered our estimates of future revenue, gross margin, expenses, effective tax rate and discount rate. Future cash flows were based on our forecast and business plans for each reporting unit. The Market Approach was based on observable market prices to earnings multiples of relevant, comparable peer companies. Based on this analysis, we determined that the fair value of the reporting units was greater than their carrying value at September 30, 2008, and, as such, no impairment charge was recorded. The effect of changes in our assumptions or actual results that are different from our assumptions, either on an individual basis, or cumulatively, may result in an impairment of goodwill in future periods, which would negatively affect our results of operations. The risk of a goodwill impairment loss increases to the extent that our market capitalization and cash flows decline. In addition, a negative long-term performance outlook could cause the carrying value of our reporting units to exceed their fair value, which would also result in an impairment loss.

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

	September 30, 2008			December 31 2007
Patents	$	6,002		$	5,523
Accumulated amortization		(3,606	)		(3,253	)
	$	2,396		$	2,270

Purchased intangible assets as of September 30, 2008 included developed technology, customer relationships, purchased patents, software technology, trade names, trademarks and non-compete agreements. The balance of purchased intangible assets, net, included the following:

	September 30, 2008			December 31, 2007
Developed technology	$	8,242		$	8,242
Accumulated amortization		(1,545	)		(773	)
		6,697			7,469
Customer relationships		6,146			6,146
Accumulated amortization		(1,460	)		(762	)
		4,686			5,384
Other		2,760			2,760
Accumulated amortization		(980	)		(571	)
		1,780			2,189
Total purchased intangible assets, net	$	13,163		$	15,042

Amortization expense totaled $2.2 million and $1.6 million, respectively, in the nine-month periods ended September 30, 2008 and 2007. Of the amortization expense, $353,000 and $318,000, respectively, was for internally developed patents, and was included as a component of selling, general and administrative expense for the nine-month periods ended September 30, 2008 and 2007.

Assuming that the underlying assets are not impaired in the future, we expect amortization of purchased intangible assets as follows over the next five years and thereafter (in thousands):

	Developed Technology		Customer Relationships		Other
Remainder of 2008	$	258	$	233	$	92
2009		1,030		931		295
2010		1,030		931		234
2011		1,030		931		234
2012		1,030		838		234
Thereafter		2,319		822		691

In addition, we expect amortization of internally developed patents to be approximately $0.5 million per year over the next five years.

7

Note 7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	September 30, 2008		December 31, 2007
Accrued compensation and benefits	$	2,675	$	2,372
Income taxes payable		—		1,533
Accrued warranty		471		501
Accrued materials returns		171		332
Other		667		851
	$	3,984	$	5,589

Note 8. Stock-Based Compensation

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Cost of sales	$	73	$	100	$	287	$	349
Research and development		14		86		225		254
Selling, general and administrative		475		385		1,413		1,154
	$	562	$	571	$	1,925	$	1,757

Note 9. Significant Customer and Segment Reporting

In the third quarter of 2008, we redefined our reporting structure along functional lines to include the Systems segment and the Probes and Sockets segment (see Note 11 for additional information regarding this restructuring). Previously, we classified our products by operating division, either the Engineering Products Division or the Production Products Division. The segment data below is presented in the same manner that management currently organizes the segments for assessing certain performance trends. Our Chief Operating Decision Maker monitors the revenue streams and the gross profit of our Systems sales and our Probes and Sockets sales. Prior period data has been reclassified to conform to the current period presentation. We do not track our operating expenses or assets on a segment level, and, accordingly, that information is not provided. Revenue and gross profit information by segment was as follows (dollars in thousands):

Three Months Ended September 30, 2008	Systems			Probes and Sockets			Total
Revenue	$	11,090		$	10,038		$	21,128
Gross Profit	$	3,730		$	5,330		$	9,060
Gross Margin		33.6	%		53.1	%		42.9	%
Three Months Ended September 30, 2007
Revenue	$	12,628		$	8,715		$	21,343
Gross Profit	$	5,114		$	4,774		$	9,888
Gross Margin		40.5	%		54.8	%		46.3	%
Nine Months Ended September 30, 2008	Systems			Probes and Sockets			Total
Revenue	$	31,474		$	29,700		$	61,174
Gross Profit	$	10,764		$	16,477		$	27,241
Gross Margin		34.2	%		55.5	%		44.5	%
Nine Months Ended September 30, 2007
Revenue	$	44,115		$	23,815		$	67,930
Gross Profit	$	18,750		$	12,203		$	30,953
Gross Margin		42.5	%		51.2	%		45.6	%

8

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. 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.

No customer accounted for 10% or greater of our total revenue in the three or nine-month periods ended September 30, 2008 or 2007.

Note 10. Fair Value Measurements

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

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

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

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

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

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

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

	September 30, 2008
	Fair Value		Input Level
Marketable securities	$	30,560	Level 2
Forward sale or purchase contracts for foreign Japanese yen	$	2,743	Level 2

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

Note 11. Restructuring

In the third quarter of 2008, we closed our machine shop, eliminated the divisional infrastructure, and reorganized across functional lines. Machine shop equipment with a net book value of $704,000 was transferred from fixed assets to assets held for sale. Sales of assets held for sale in September 2008 resulted in a gain of $134,000. The remaining assets held for sale at September 30, 2008 were written down by $105,000 to the lower of their carrying value or estimated fair value less cost to sell of $562,000.

The closure of the machine shop and reorganization along functional lines resulted in a severance charge of $490,000, which was included in selling, general and administrative expense for the three and nine-month periods ended September 30, 2008. Severance costs of $312,000 were paid as of September 30, 2008. At September 30, 2008, we had $178,000 of severance cost accrued on our consolidated balance sheet as other current liabilities. We expect the remaining severance costs related to the third quarter 2008 restructuring to be paid by December 31, 2008.

9

Note 12. Income Taxes

We recorded an income tax benefit of $426,000 for the three months ended September 30, 2008 and $868,000 for the nine months ended September 30, 2008. Generally, the provision for income taxes is the result of the mix of profits (losses) earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates and changes in tax reserves. On a quarterly basis, we evaluate our provision for income tax expense (benefit) based on our projected results of operations for the full year and record an adjustment in the current quarter. For the nine months ended September 30, 2008, our effective tax rate was 21.5% and included discrete expense items totaling $208,000, as discussed below.

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 September 30, 2008, we had a net deferred tax asset on our balance sheet totaling $7,000, primarily related to deferred tax liabilities recorded in connection with the Gryphics, Inc. acquisition, offset by deferred tax assets for reserves and research tax credits.

In August 2008, the IRS accepted our written protest without comment and we settled our IRS audit for 2004 and 2005. The impact to our tax expense was an increase of $22,000, including interest, which was recorded as a discrete item in the third quarter of 2008. In addition, we had a true-up to the federal tax return and recorded additional tax expense of $186,000 related to the 2007 research and development credit that was also recorded as a discrete item in the third quarter of 2008. In conjunction with the settlement of the 2004 and 2005 audits, the IRS notified us that the 2006 tax return would be audited. We believe that our tax contingencies at September 30, 2008 are sufficient for any disallowances related to the 2006 tax return.

In October 2008, the Federal research and development credit for 2008 was reinstated retroactive to January 1, 2008. Any tax benefit related to the reinstatement of this credit will be recognized in the fourth quarter of 2008.

Note 13. Accounting Pronouncements Issued Not Yet Adopted

SFAS No. 162

In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 4311, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We believe that our accounting principles and practices are consistent with the guidance in SFAS No. 162, and, accordingly, we do not expect the adoption of SFAS No. 162 to have a material effect on our financial position or results of operations.

SFAS No. 161

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

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SFAS No. 160

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” SFAS No. 160 establishes accounting and reporting standards for a parent company’s non-controlling, or minority, interests in its subsidiaries. SFAS No. 160 also provides accounting and reporting standards for changes in a parent’s ownership interest of a non-controlling interest as well as deconsolidation procedures. SFAS No. 160 aligns the reporting of non-controlling interests in subsidiaries with the requirements in International Accounting Standards 27 and is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. We do not have any non-controlling or minority interests and, accordingly, we do not expect the adoption of this statement to have any effect on our consolidated financial position or results of operations.

SFAS No. 141R

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

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

Forward Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking, including, but not limited to, statements regarding industry prospects; future results of operations or financial position; our expectations and beliefs regarding future revenue growth; the future capabilities and functionality of our products and services, our strategies and intentions regarding acquisitions; the outcome of any litigation to which we are a party; our accounting and tax policies; our future strategies regarding investments, product offerings, research and development, market share, and strategic relationships and collaboration; our dividend policies; and our future capital requirements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, including “intend,” “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate” “predict,” “potential,” “future,” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those expressed or implied in such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 17, 2008. These risk factors have not significantly changed since they were filed with our Form 10-K and included the following:

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

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

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

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

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• 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 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 rely on suppliers and contract manufacturers for the products we sell. Reliance on suppliers and contract manufacturers raises several risks, including the possibility of defective parts, lack of availability, and the possibility of increases in component costs. Manufacturing efficiencies and our profitability can be adversely affected by each of these risks.

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

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

• As a result of our acquisitions, we have intangible assets, including goodwill and other identifiable intangible assets, recorded on our balance sheet. In view of the current turbulent economic environment and the decline in our stock price, the fair value of one or more of our reporting units may be reduced below its carrying value. If there has been an impairment of intangible assets, we would be required to record non-cash asset impairment charges in future periods, which would adversely impact our results of operations.

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

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

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

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

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

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

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

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

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

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

• In the future, we may make additional changes to our organizational structure to improve operating efficiencies and reduce operating costs. A reorganization requires significant efforts, including the integration of product manufacturing, research and development, sales and marketing efforts and general and administration activities. There can be no assurance that a reorganization would be successful or reduce operating costs. A reorganization could also result

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in significant disruption of our business and our relationships with our employees, suppliers and customers could be adversely affected.

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

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

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

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

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

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

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

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

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.

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.

Our 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. Our test sockets are designed and sold for both production and engineering test applications, typically for high speed digital and radio frequency testing.

We refer to analytical probes, production probe cards and test sockets as consumables, as they are routinely replaced during the testing process. We also generate revenue through the sale of service contracts to our customers.

In the third quarter of 2008, we closed our machine shop, eliminated the divisional infrastructure, and reorganized across functional lines. Accordingly, sales of engineering probe stations are included in the Systems segment, and sales of analytical probes, production probe cards and test sockets are sold through our Probes and Sockets segment. Engineering probe stations and analytical probes had previously been sold through the Engineering Products Division (“EPD”). Production probe cards and test sockets had previously been sold through the Production Products Division (“PPD”).

Sales of our engineering probe stations and our overall 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

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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. Recently, we have been experiencing a reduction in demand for our products as a result of an industry downturn.

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

While the conversion to 300mm technology continues, high conversion costs combined with continued process developments on 200mm wafers continue to make sales of our sub-300mm probing systems an important component of our revenue stream for the foreseeable future. 300mm technology more than doubles the available area on a wafer, significantly increasing the number of chips per wafer and reducing per unit manufacturing costs. Revenue from our 300mm engineering probe stations, including any probes or accessories sold with those stations, represented 33.2% and 52.2% of our total Systems revenue in the first nine months of 2008 and 2007, respectively. Current market conditions have delayed some customers’ conversion to the higher-end 300mm systems in recent quarters, as there is currently little investment within the industry.

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 subsidiaries and branch offices, respectively. In most of Europe, we primarily sell our Systems products through distributors and manufacturers’ representatives and we sell our Probes and Sockets products directly. We also sell all of our products directly in Germany, Austria, Switzerland, China and Taiwan. Our distributors normally place orders with us once they have received an order from an end-user customer, and therefore, the total amount of inventory held by our distributors at any given date is not material.

Current Events

Semiconductor and semiconductor equipment market conditions continued to deteriorate during the third quarter of 2008. In addition, recent turbulence and uncertainty in the world economic environment is impacting demand and the timing of customer spending. There is growing potential for an excess of semi-conductor inventory in certain segments of the market and we are seeing a reduction in demand for our products.

In August 2008, we restructured our business by eliminating the divisional structure and put in place a functional organization, which we believe is more effective at this time. Executives and managers that previously had divisional oversight roles in either the Engineering Products Division (“EPD”) or the Production Products Division (“PPD”) were reassigned functional responsibilities in sales, marketing or operations. The restructuring, which also included the closure of our machine shop and move to outsourced manufacturing of 150mm systems, eliminated redundant divisional positions and lowered our cost structure through headcount reductions. The current market conditions will require further review of our world-wide operations and may require further measures to lower our cost structure.

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.

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generally accepted accounting principles. The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, inventory, investments, recoverability of long-lived assets, fair value of our reporting units, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to test our goodwill for impairment at least annually and more frequently if conditions warrant. We perform our annual test of goodwill impairment in the fourth quarter. During the third quarter of 2008, we performed an interim test of goodwill impairment due to the decline in the market price of our common stock. We did this by applying a fair-value based test using a weighted average of an Income Approach and a Market Approach to calculate the fair value of our reporting units. The Income Approach was based on a discounted cash flow (“DCF”) analysis, which considered our estimates of future revenue, gross margin, expenses, effective tax rate and discount rate. Future cash flows were based on our forecast and business plans for each reporting unit. The Market Approach was based on observable market prices to earnings multiples of relevant, comparable peer companies. Based on this analysis, we determined that the fair value of the reporting units was greater than their carrying value at September 30, 2008, and, as such, no impairment charge was recorded. The effect of changes in our assumptions or actual results that are different from our assumptions, either on an individual basis, or cumulatively, may result in an impairment of goodwill in future periods, which would negatively affect our results of operations. The risk of a goodwill impairment loss increases to the extent that our market capitalization and cash flows decline. In addition, a negative long-term performance outlook could cause the carrying value of our reporting units to exceed their fair value, which would also result in an impairment loss.

Results of Operations

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2008		2007		2008		2007
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	57.1		53.7		55.5		54.4
Gross profit	42.9		46.3		44.5		45.6
Operating expenses:
Research and development	10.9		12.8		13.1		12.5
Selling, general and administrative	36.6		31.6		35.9		30.7
Amortization of purchased intangibles	2.8		3.1		3.1		2.0
Total operating expenses	50.3		47.5		52.1		45.1
Income (loss) from operations	(7.4	)	(1.2	)	(7.6	)	0.4
Other income, net	(0.7	)	1.1		1.0		1.6
Income (loss) before income taxes	(8.1	)	(0.1	)	(6.6	)	2.0
Provision (benefit) for income taxes	(2.0	)	0.9		(1.4	)	0.5
Net income (loss)	(6.1	)%	(1.0	)%	(5.2	)%	1.6	%

(1) Percentages may not add due to rounding.

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In the third quarter of 2008, we redefined our reporting structure along functional lines to include the Systems segment and the Probes and Sockets segment. Previously, we classified our products by operating division, either the Engineering Products Division or the Production Products Division. Prior period data has been reclassified to conform to the current period presentation. Revenue and gross profit information by segment was as follows (dollars in thousands):

Three Months Ended September 30, 2008	Systems			Probes and Sockets			Total
Revenue	$	11,090		$	10,038		$	21,128
Gross Profit	$	3,730		$	5,330		$	9,060
Gross Margin		33.6	%		53.1	%		42.9	%
Three Months Ended September 30, 2007
Revenue	$	12,628		$	8,715		$	21,343
Gross Profit	$	5,114		$	4,774		$	9,888
Gross Margin		40.5	%		54.8	%		46.3	%

Nine Months Ended September 30, 2008	Systems			Probes and Sockets			Total
Revenue	$	31,474		$	29,700		$	61,174
Gross Profit	$	10,764		$	16,477		$	27,241
Gross Margin		34.2	%		55.5	%		44.5	%
Nine Months Ended September 30, 2007
Revenue	$	44,115		$	23,815		$	67,930
Gross Profit	$	18,750		$	12,203		$	30,953
Gross Margin		42.5	%		51.2	%		45.6	%

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 decreased $0.2 million, or 1.0%, to $21.1 million in the three-month period ended September 30, 2008 compared to $21.3 million in the same period of 2007 and decreased $6.7 million, or 9.9%, to $61.2 million in the nine-month period ended September 30, 2008 compared to $67.9 million in the same period of 2007.

Revenue in our Systems segment decreased $1.5 million, or 12.2%, to $11.1 million in the three-month period ended September 30, 2008 compared to $12.6 million in the same period of 2007 and decreased $12.6 million, or 28.7%, to $31.5 million in the nine-month period ended September 30, 2008 compared to $44.1 million in the same period of 2007.

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

	Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007		Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Percentage increase (decrease) in unit sales	(7.4	)%	(18.8	)%
Percentage increase (decrease) in average sales price	3.2	%	(21.3	)%

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

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We realized decreased unit sales in both our 300mm systems and our non-300mm systems in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007 due to the global slow-down in semiconductor markets. In the third quarter of 2008, the decrease in unit sales was partially offset by an increase in the average sales price for our non-300mm units, primarily as a result of product mix and accessories sold with those stations.

Average sales prices in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007 were negatively affected by fewer high-end 300mm systems sales in relation to total system sales as companies are not currently adding capacity. In addition, the average sales price for the 300mm systems declined in both periods as a result of recent market pressure to reduce prices due to aggressive discounting activity by competitors, as well as a decrease in accessories sold with the 300mm systems.

Revenue in our Probes and Sockets segment increased $1.3 million, or 15.2%, to $10.0 million in the three-month period ended September 30, 2008 compared to $8.7 million in the same period of 2007 and increased $5.9 million, or 24.7%, to $29.7 million in the nine-month period ended September 30, 2008 compared to $23.8 million in the same period of 2007. The $1.3 million increase in the three-month period ended September 30, 2008 was primarily related to an increase of $1.0 million in production probes. The $5.9 million increase in the nine-month period ended September 30, 2008 was primarily related to a $4.1 million increase in production probes and a $1.3 million increase in analytical probes. The addition of Gryphics, Inc. during the second quarter of 2007 accounted for $0.5 million of the increase in the nine-month period ended September 30, 2008 compared to the same period of 2007. In the first three quarters of 2008, we continued to focus on growing our business in market segments and applications other than our core RF business, especially in the parametric test market. Parametric test is the electrical verification of the wafer fabrication process quality and is used by all semiconductor wafer fabs world-wide.

Cost of Sales and Gross Profit

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

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

Cost of sales increased $0.6 million, or 5.4%, to $12.1 million in the three-month period ended September 30, 2008 compared to $11.5 million in the same period of 2007 and decreased $3.1 million, or 8.2%, to $33.9 million in the nine-month period ended September 30, 2008 compared to $37.0 million in the same period of 2007. The increase in cost of sales in the three-month period ended September 30, 2008 compared to the same period of 2007 was primarily due to an increase in our inventory reserves. Charges for inventory reserves totaled $0.3 million and $14,000, respectively, in the three-month periods ended September 30, 2008 and 2007. In the nine-month period, the increase in reserves was offset by the decrease in sales.

Gross profit decreased $0.8 million, or 8.4%, to $9.1 million in the three-month period ended September 30, 2008 compared to $9.9 million in the same period of 2007 and decreased $3.8 million, or 12.0%, to $27.2 million in the nine-month period ended September 30, 2008 compared to $31.0 million in the same period of 2007. These decreases were attributable to the decreased sales discussed above, as well as decreases in our overall gross margin to 42.9% and 44.5%, respectively, in the three and nine-month periods ended September 30, 2008 compared to 46.3% and 45.6%, respectively, in the comparable periods of 2007. The 2008 gross margins have been negatively affected by a shift in product mix within our Systems segment to fewer high-end 300mm systems, which typically include more accessories, and decreases in average selling prices of our 300mm systems caused by increased market pressure. These decreases were partially offset by an increase in gross margin from higher sales in the Probes and Sockets segment.

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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 decreased $0.4 million, or 15.2%, to $2.3 million in the three-month period ended September 30, 2008 compared to $2.7 million in the same period of 2007 and decreased $0.5 million, or 5.2%, to $8.0 million in the nine-month period ended September 30, 2008 compared to $8.5 million in the same period of 2007.

The decreases were primarily due to the following:

	Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007			Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Decrease in wages and benefits due to lower headcount	$	(191,000	)	$	(184,000	)
Decrease in production costs allocated to R&D		(148,000	)		(465,000	)
Increase in travel expenses		31,000			98,000
Decrease in stock-based compensation expense		(72,000	)		(29,000	)
Increase in recruiting expenses		29,000			75,000
Other		(64,000	)		63,000
	$	(415,000	)	$	(442,000	)

Selling, General and Administrative

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

SG&A expense increased $1.0 million, or 14.7%, to $7.7 million in the three-month period ended September 30, 2008 compared to $6.7 million in the same period of 2007 and increased $1.1 million, or 5.3%, to $22.0 million in the nine-month period ended September 30, 2008 compared to $20.9 million in the same period of 2007. The increases were primarily due to the following:

	Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007			Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Increase (decrease) in external sales commissions	$	72,000		$	(837,000	)
Increase in accounting fees		13,000			199,000
Increase in stock-based compensation expense		90,000			259,000
Increase in severance related to restructuring		490,000			490,000
Increase in SG&A expense related to Synatron acquisition		199,000			388,000
Increase in sales materials		14,000			145,000
Increase in temporary services and consulting fees		166,000			312,000
Other		(53,000	)		146,000
	$	991,000		$	1,102,000

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Amortization of Purchased Intangibles

Amortization of purchased intangibles includes amortization related to our acquisition of certain assets of the eVue product line in the fourth quarter of 2006, the acquisition of Gryphics, Inc. in the second quarter of 2007 and the acquisition of certain assets of Synatron GmbH in the third quarter of 2007. Net purchased intangibles totaled $13.2 million at September 30, 2008 and current amortization is approximately $0.6 million per quarter.

Other Income (Expense)

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Interest income, net	$	221		$	330		$	711		$	1,150
Losses due to foreign currency remeasurement		(81	)		(38	)		(261	)		(50	)
Gains (losses) related to foreign currency transactions		(361	)		35			26			103
Other		73			(98	)		122			(109	)
	$	(148	)	$	229		$	598		$	1,094

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $221,000 and $711,000, respectively, in the three and nine-month periods ended September 30, 2008 compared to $330,000 and $1.2 million, respectively, in the same periods of 2007. The decreases were primarily due to lower cash, cash equivalent and marketable securities balances in the 2008 periods due to the use of $14.9 million, net of cash acquired, for the purchase of Gryphics, Inc. in April 2007 and the purchase of certain assets of Synatron GmbH in July 2007. In addition, interest rates were lower in the 2008 periods compared to the 2007 periods.

Income Taxes

We recorded an income tax benefit of $426,000 for the three months ended September 30, 2008 and $868,000 for the nine months ended September 30, 2008. Generally, the provision for income taxes is the result of the mix of profits (losses) earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates and changes in tax reserves. On a quarterly basis, we evaluate our provision for income tax expense (benefit) based on our projected results of operations for the full year and record an adjustment in the current quarter. For the nine months ended September 30, 2008, our effective tax rate was 21.5% and included discrete expense items totaling $208,000, as discussed below.

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 September 30, 2008, we had a net deferred tax asset on our balance sheet totaling $7,000, primarily related to deferred tax liabilities recorded in connection with the Gryphics, Inc. acquisition, offset by deferred tax assets for reserves and research tax credits.

In August 2008, the IRS accepted our written protest without comment and we settled our IRS audit for 2004 and 2005. The impact to our tax expense was an increase of $22,000, including interest, which was recorded as a discrete item in the third quarter of 2008. In addition, we had a true-up to the federal tax return and recorded additional tax expense of $186,000 related to the 2007 research and development

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credit that was also recorded as a discrete item in the third quarter of 2008. In conjunction with the settlement of the 2004 and 2005 audits, the IRS notified us that the 2006 tax return would be audited. We believe that our tax contingencies at September 30, 2008 are sufficient for any disallowances related to the 2006 tax return.

In October 2008, the Federal research and development credit for 2008 was reinstated retroactive to January 1, 2008. Any tax benefit related to the reinstatement of this credit will be recognized in the fourth quarter of 2008.

Liquidity and Capital Resources

Net cash provided by operating activities in the first nine months of 2008 was $2.0 million and consisted of our net loss of $3.2 million being offset by net non-cash expenses of $6.1 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net decreased $1.3 million to $16.9 million at September 30, 2008 compared to $18.2 million at December 31, 2007, due primarily to lower sales in the third quarter of 2008 than in the fourth quarter of 2007, as well as a decrease in our days sales outstanding. Our days sales outstanding was approximately 64 days at September 30, 2008 compared to 74 days at December 31, 2007.

Inventories increased $0.9 million to $19.5 million at September 30, 2008 compared to $18.6 million at December 31, 2007, as overall sales in 2008 have been lower than anticipated. We believe that our inventory levels at September 30, 2008 are sufficient given our revenue projections for the fourth quarter of 2008.

Assets held for sale of $0.6 million at September 30, 2008 included certain equipment related to our machine shop, which we closed in the third quarter of 2008.

Accrued liabilities decreased $1.6 million to $4.0 million at September 30, 2008 compared to $5.6 million at December 31, 2007, due primarily to a decrease in income taxes payable of $1.5 million.

Purchases of fixed assets of $2.2 million in the first nine months of 2008 were primarily for production probe production and service related equipment. We anticipate spending an additional $0.5 million to 1.0 million in the fourth quarter of 2008, primarily for socket production related equipment.

Proceeds from the issuance of common stock of $1.4 million included proceeds from the exercise of employee stock options and the sale of stock pursuant to our employee stock purchase plan.

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash, short-term marketable securities and long-term marketable securities, which totaled $35.0 million at September 30, 2008, as well as from cash expected to be generated from operations. We have, from time to time, evaluated, and continue to evaluate, opportunities for acquisition and expansion. Any such transactions, if consummated, may use a portion of our working capital.

There have been no material changes in the disclosure related to our contractual obligations contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

Accounting Pronouncements Issued Not Yet Adopted

See Note 13. of Notes to Condensed Consolidated Financial Statements.

Seasonality

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

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

Item 4. Controls and Procedures

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure Controls and Procedures

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

Limitation on Effectiveness of Controls

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

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Part II - Other Information

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2007 includes a detailed discussion of our risk factors. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K. Accordingly, the information in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission on March 17, 2008. See also Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report under the heading “Forward Looking Statements and Risk Factors.”

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

Use of Proceeds

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

As of September 30, 2008, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness and $20.0 million, net of cash acquired, for our acquisitions of the eVue product line, Gryphics, Inc. and certain assets of Synatron GmbH.

Item 6. Exhibits

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

10.1	Executive Compensation Plan for the Six-Month Period Ending December 31, 2008. Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on August 12, 2008.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 10, 2008	CASCADE MICROTECH, INC.
	(Registrant)
	By:	/s/ GEOFF WILD
		Geoff Wild
		Director, President and Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ STEVEN SIPOWICZ
		Steven Sipowicz
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

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