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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549





FORM 10-K







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

For the Fiscal Year Ended: December 31, 2008

OR



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

Commission File Number: 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





Securities Registered pursuant to Section 12(b) of the Act:



|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of each class           |  | Name of each exchange on which registered
|Common Stock, $0.01 par value |  | NASDAQ Global Market                     

Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the
Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.   ̈

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
Act).    Yes   ̈    No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $61,762,209, computed by reference to the last sales price ($6.58) as reported by the Nasdaq National
Market System, as of the last business day of the Registrants most recently completed second fiscal quarter (June 30, 2008).

The
number of shares outstanding of the registrants common stock as of March 10, 2009 was 13,270,910 shares.

Documents
Incorporated by Reference

Portions of the registrants definitive Proxy Statement for the 2009 Annual Shareholders Meeting
are incorporated by reference into Part III.









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CASCADE MICROTECH, INC.

2008 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|           |  | PART I                                                                                                       |  |     
|           |  |                                                                                                             
|Item 1.    |  | Business                                                                                                     |  | 2   
|           |  |                                                                                                             
|Item 1A.   |  | Risk Factors                                                                                                 |  | 12  
|           |  |                                                                                                             
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 24  
|           |  |                                                                                                             
|Item 2.    |  | Properties                                                                                                   |  | 24  
|           |  |                                                                                                             
|Item 3.    |  | Legal Proceedings                                                                                            |  | 25  
|           |  |                                                                                                             
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 25  
|           |  |                                                                                                             
|           |  | PART II                                                                                                      |  |     
|           |  |                                                                                                             
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 25  
|           |  |                                                                                                             
|Item 6.    |  | Selected Financial Data                                                                                      |  | 27  
|           |  |                                                                                                             
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 28  
|           |  |                                                                                                             
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 38  
|           |  |                                                                                                             
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 39  
|           |  |                                                                                                             
|Item 9.    |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 39  
|           |  |                                                                                                             
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 39  
|           |  |                                                                                                             
|Item 9B.   |  | Other Information                                                                                            |  | 42  
|           |  |                                                                                                             
|           |  | PART III                                                                                                     |  |     
|           |  |                                                                                                             
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 42  
|           |  |                                                                                                             
|Item 11.   |  | Executive Compensation                                                                                       |  | 42  
|           |  |                                                                                                             
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 42  
|           |  |                                                                                                             
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 43  
|           |  |                                                                                                             
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |  | 43  
|           |  |                                                                                                             
|           |  | PART IV                                                                                                      |  |     
|           |  |                                                                                                             
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 43  
|           | 
|Signatures |  | 45                                                                                                          



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PART I



|ITEM 1. | BUSINESS
|------- | --------

Company Profile

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 also generate revenue through the sales of service contracts to our customers.

Industry
Background

During the last decade, growth in the computer, telecommunications, consumer and industrial electronics markets has
increased demand for chips. However, global sales of semiconductors were severely impacted by the world-wide economic turmoil in 2008 resulting in the first year-on-year drop in sales since 2001, as reported by the Semiconductor Industry Association
(SIA). According to the SIA, total semiconductor sales for 2008 were $248.6 billion compared to $255.6 billion in 2007, a decrease of 2.7%, with most of the decrease seen in the last quarter of 2008 as consumer spending declined.

To reduce the cost and increase the performance of electronic products, chips have become smaller and faster and incorporate greater
levels of functionality at a lower price. Advancements in manufacturing technologies, such as smaller chip elements, new materials and larger wafer sizes have permitted manufacturers to meet these requirements. However, these advancements in chip
manufacturing technologies have led to increasing challenges in the design, manufacturing and testing of chips.

Chips are measured and
tested multiple times throughout the design and manufacturing process to ensure the integrity of the chip design and the quality of the manufacturing process. Our products test chips during design, where precision and accuracy are required, and
during production, where rapid testing at high volumes requires reliability and repeatability. Our strong presence in engineering test segments gives us high visibility of new chip processes and applications, thus aiding our planning and development
of production tools.

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 60% typically generated from customers outside of North America, primarily in Japan, Taiwan,
and other Asian countries and, to a lesser extent, Europe.

Sales of our engineering probe stations and our overall operating results
depend, in significant part,



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on the level of capital expenditures related to semiconductor research and development, which in turn depends upon current and anticipated market demand for
chips. 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 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 purely to increase production capacity.

Products

We design, manufacture and sell multiple product lines, including engineering probe
stations, analytical probes, production probe cards, test sockets and various services. An engineering probe station is used in conjunction with our analytical probes to test chips in wafer form, together forming an engineering probing system.
Analytical probes, production probe cards and test sockets electrically connect test equipment to the chips under test and are sold as consumable test tooling, which are mounted into production or engineering probe stations.

Engineering probing systems are required in the development of new generations of chip processes and designs, and we expect that the demand for
engineering probing systems will continue to grow approximately at the rate of worldwide semiconductor revenues over the long term. The process development complexities and costs have continually increased as each generation of semiconductor process
has required the integration of more layers of smaller chip elements incorporating a longer list of new materials. Engineering probing systems are a basic tool for characterizing and verifying the electrical performance, reliability and
repeatability of the new chip elements.

We believe that we have significant market share by revenue in engineering probing tools
worldwide. We typically offer the widest product options and the highest electrical measurement performance for most engineering test requirements.

Engineering Probe Stations. We offer engineering probe stations for 300mm, 200mm and 150mm or smaller wafer sizes. Engineering probe stations are highly configurable depending upon the size and type of
wafer, the particular characteristics of the chip that the customer is testing, the required measurements, the temperatures at which the chip is tested and the test equipment that the customer is using. Our engineering probe stations are available
in either manual or semiautomatic versions. We also offer many probe station accessories, including thermal control systems, microscopes, lasers, cameras, special cables and connectors and other items.

In January 2008, we announced our next-generation 300mm prober, the Elite 300 platform, which set a new standard for extremely accurate and reliable
300mm wafer probing for devices with process nodes at 45nm and below.

We also introduced the award-winning EDGE Flicker Noise Measurement
System in May of 2008, the only flicker noise measurement system certified to provide accurate measurements from 1Hz to 30 MHz. Integration of the wafer probe station, instruments and accessories is serviced and supported by site surveys, pre- and
post-measurement optimization.

We also offer our eVue microscope for our 300mm and 200mm probe station families, which is a
high-performance digital microscope with advanced and unique navigation and probing-specific features. eVue enables us to address and differentiate our offerings in new application segments within engineering wafer probing.

Analytical Probes. We offer over 50 different analytical probe models for engineering and production testing. The newer
Infinity series probes are designed with unique probe tips derived from our proprietary lithographic manufacturing technology, enabling superior electrical contacts on aluminum and copper pads. While our analytical probes are used primarily for
engineering test, several of our analytical probes are also used in production testing of some high-frequency devices. We continue to add new models of analytical probes that address higher frequency and higher



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complexity measurements. For example, in 2008, we launched our Unity I Series of analytical probes for on-wafer circuit measurement during design debug and
verification.

Production Probe Cards.A production probe card temporarily connects one or more chips on a wafer
under test to a production tester. Probe cards are customized for each new chip type and physically wear out during usage in production testing. Depending upon the test environment, production probe cards may last for several hundred thousand to
roughly 1 to 2 million contact cycles. Production card sales are driven by production unit volumes and the various stages of the ICs being tested.

Our Pyramid Probe Card product line offers high electrical speed performance and is commonly used in wireless chip applications.

We introduced two new Pyramid parametric probe cards in January 2008 that allow single-pass
high-performance DC and RF measurements and reduce the cost of parametric production test for semiconductors with advanced processes nodes at 65nm, 45nm and beyond. The exclusive Pyramid PlusTMmembrane manufacturing process enables multiple specification improvements such as leakage performance to 1 femto-ampere (fA) with a 5 second settling time, improved parametric performance and reliable
contact on smaller test pads. Our membrane technology is unique in its ability to integrate 20 GHz transmission lines and guarded traces to the probe tip, respectively reducing crosstalk and improving settling time.

In April 2008, we introduced the P30 Pyramid Probe production probe card for high-volume wafer testing of RF switches and filters. The new 20 GHz P30
Pyramid Probe card lowers semiconductor manufacturers cost of high-volume wafer testing of RF filters and switches by offering strong probe performance and longer life at a lower cost. Using our unique membrane probe technology, Pyramid Probe
cards can provide semiconductor manufacturers with higher yields, lower maintenance and minimal down time, resulting in a lower overall cost of ownership.

Also during 2008, we introduced Pyramid Accel for rapid production test program development to address the increasingly complex automatic test equipment programming challenges brought on by todays
System-on-Chip (SoC) and RF devices. Paired with the Pyramid Probe card, the Pyramid Accel enables test engineers to develop and debug test programs, accelerating production test program development to reduce time to market.

Factors driving wireless and RF chip probing include the growth of wireless system applications, the trend to more thoroughly test these chips more
thoroughly at the wafer level before assembling them into more expensive modules, and the trend to test more chips in parallel with one probe card, thus more efficiently employing the tester and autoprober equipment around the probe card.

Test Sockets. A test socket connects a packaged chip to a tester much like a probe card connects one or more chips
on a wafer to a tester. Like probe cards, test sockets are production test consumables and have a finite lifetime. Test sockets are usually customized for each chip type tested. Our test socket product line also excels at high-speed chip
applications.

Services. In addition to routine installation services at the time of sale, we offer services to
enable our customers to maintain and more effectively utilize our equipment and to enhance our customer relationships.

Customers and Geographic Revenue

Our products are used by semiconductor manufacturers, test subcontractors, research organizations and designers. Fabless semiconductor
suppliers do not manufacture their own semiconductors but they purchase our analytical probes and engineering probe stations for research and development and purchase, or direct their foundries to purchase, our Pyramid Probe cards to test chips
manufactured for them. We have built strong relationships with our customers through frequent interactions over the past 25 years. To foster stronger customer relationships, we conduct analyses



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for the needs of our customers new labs or products, host seminars on topics such as measurement techniques and make proactive service calls. This
close interaction has helped us build a consistently loyal customer base. More than 800 customers purchased our products in 2008. Our top 20 end-user customers during 2008 were (in alphabetical order): Broadcom Corporation, Chartered Semiconductor,
Epcos AG, Fujitsu, Hitachi, Hynix Semiconductor, IBM, Inari Technology, Infineon, NEC, NXP Semiconductors, Peregrine Semiconductor, Qualcomm, RF Micro Devices, Samsung, Sony, Spansion, Taiwan Semiconductor Manufacturing Company, Texas Instruments
and the Tokyo Institute of Technology.

We believe our customers consider timely customer service and support to be an important aspect of
our relationship. Our engineering probe stations are installed at customer sites either by us, our manufacturers representatives or our distributors, depending on the complexity of the installation and the customers geographic location.
We assist our customers in the selection, integration and use of our products through engineering support. We also provide worldwide on-site training, seminars and telephone support. Our manufacturers representatives and distributors provide
additional service and support.

In 2008, 2007 and 2006, no single customer accounted for 10% or more of our total revenues. Our top 10
customers accounted for approximately 27%, 31% and 35% of our total revenue in each of 2008, 2007 and 2006, respectively.

International
sales accounted for more than 60% of our total revenue in each of 2008, 2007 and 2006. The following table indicates which regions had revenues that totaled 10% or more of our total revenues in 2008, 2007 and 2006 (in thousands):



|                        |  |      |   |  |      |   |  |      |  
|----------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Year Ended December 31, |  | 2008 |   |  | 2007 |   |  | 2006 |  
|United States           |  | 34.1 | % |  | 36.7 | % |  | 38.0 | %
|Asia Pacific            |  | 47.6 | % |  | 42.5 | % |  | 44.6 | %
|Europe                  |  | 15.9 | % |  | 18.6 | % |  | 14.6 | %

Segments

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. 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.



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Revenue and gross profit information by segment was as follows (dollars in thousands):



|                             |  |         |        |   |                  |   |        |       |  |   |        |  
|---------------------------- |  | ------- | ------ | - | ---------------- | - | ------ | ----- |  | - | ------ | -
|Year Ended December 31, 2008 |  | Systems |        |   | ProbesandSockets |   |        | Total | 
|Revenue                      |  | $       | 40,870 |   |                  | $ | 35,691 |       |  | $ | 76,561 |  
|Gross Profit                 |  | $       | 13,697 |   |                  | $ | 18,387 |       |  | $ | 32,084 |  
|Gross Margin                 |  |         | 33.5   | % |                  |   | 51.5   | %     |  |   | 41.9   | %
|                             |  |         |       
|Year Ended December 31, 2007 |  |         |        |   |                  |   |        |       | 
|Revenue                      |  | $       | 56,349 |   |                  | $ | 33,573 |       |  | $ | 89,922 |  
|Gross Profit                 |  | $       | 23,382 |   |                  | $ | 17,739 |       |  | $ | 41,121 |  
|Gross Margin                 |  |         | 41.5   | % |                  |   | 52.8   | %     |  |   | 45.7   | %
|                             |  |         |       
|Year Ended December 31, 2006 |  |         |        |   |                  |   |        |       | 
|Revenue                      |  | $       | 54,448 |   |                  | $ | 30,404 |       |  | $ | 84,852 |  
|Gross Profit                 |  | $       | 22,283 |   |                  | $ | 14,759 |       |  | $ | 37,042 |  
|Gross Margin                 |  |         | 40.9   | % |                  |   | 48.5   | %     |  |   | 43.7   | %

Technology

We are a leading innovator in developing electrical measurement, or metrology, and production test tools. One of our stated growth strategies is to continue to develop next-generation technologies. We have focused our
research and development efforts on enabling our customers to take more precise electrical measurements in less time, on smaller and more dense devices, and with more robustness. Our core technologies include:



| |  |  | Broadband/High-Frequency/High Speed Interconnects and Probing. In 1983, our founders created the first microwave analytical probes that enabled the
first on-wafer 18 GHz measurements and accelerated the commercialization of gallium arsenide chips. We use and maintain a wide variety of design, verification, fabrication and calibration technologies for high-frequency probes and interconnections.
For example, we have developed a complete library of high-frequency circuit elements for our Pyramid Probe layouts, similar to passive element libraries for chip foundries. We believe that these technologies provide a competitive advantage by
allowing us more effectively to design and commercialize production probe cards, test sockets and analytical probes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Precise Low-Level Measurements. In 1993, we were first to commercialize a shielded probe station utilizing our patented MicroChamber technology that
increased thermal measurement productivity by 10 times and current measurement resolutions by 1,000 times. Many of our engineering probe stations feature MicroChambers, which ensure a dark, electrically noise-free measurement environment to enable
low-current measurements over a wide thermal range. Our engineering probe stations also incorporate our proprietary low-noise thermal chuck technologies that increase measurement integrity and reduce the time required to take precise measurements.
These features, in turn, increase the number of chips that can be tested or measured in a given amount of time. In early 2008, we introduced our Elite 300 probe station, which implements our latest probe station technologies for improved low-current
and low-voltage measurements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Microfabrication. Since 1990, we have shipped products that utilize our proprietary lithographic manufacturing processes for depositing, lithographic
patterning, etching and plating probe structures on flexible substrates that are similar to the processes used in making chips. Our proprietary Pyramid technology has been under development since 1992 and continues to evolve and improve. In early
2008, we introduced two parametric probe cards that we build on our new Pyramid Plus manufacturing process. At the center of a Pyramid Probe card, tester connections converge on the chips under test through our unique, lithographically defined
microscopic probe tips and electrical interconnection wiring. Our processing continues to mature and evolve, enabling faster delivery times, larger probe areas, smaller tip dimensions and interconnects, and wider test temperature ranges. As chip
elements continue to shrink, we expect to be able to scale and evolve our lithographic
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | processes to continue to meet our customers requirements. Our socket products utilize unique stamping, laminating, drilling and robotic assembly
processes to achieve high electrical performance and low costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sales, Marketing and Service

We sell our engineering probe stations, analytical probes, production probe cards and test sockets through a combination of manufacturers
representatives, distributors and direct sales people. Manufacturers representatives are independent third parties that agree to sell our products at our prices and on terms set by us, in return for a commission based on sales. We typically
use manufacturers representatives in areas that we believe require greater levels of customer support than we can deliver from our own sales offices. Distributors purchase our products and resell them at prices and upon terms set by the
particular distributor. We typically use distributors where local regulations or business customs require local stocking of service parts, more immediate service support or other local services. Finally, our direct sales force is made up of our
salaried and commissioned employees.

In North America and Asia, excluding Japan, Singapore, China and Taiwan, we sell our products through
manufacturers representatives and distributors. In Japan, we sell through Cascade Microtech Japan, K.K., our direct sales and service subsidiary. In Singapore, we sell through our branch office, Cascade Microtech Singapore. During 2006, we
established direct sales offices in China and Taiwan. In most of Europe, we primarily sell our Systems products through distributors and manufacturers representatives and sell our Probes and Sockets products directly. We also sell our products
directly in Germany, Austria and Switzerland through our German subsidiary, Cascade Microtech GmbH. In other countries, we typically sell through manufacturers representatives or distributors. Our sales managers oversee and manage these
worldwide sales activities.

We work closely with our customers to select the most appropriate product or to configure a custom solution
which best fits their applications. Sales of our engineering test solutions require significant interaction with our customers engineering labs and knowledge of their product development schedules and systems, as well as on-site demonstration
capability. We also may assist our customers in the design requirements for their products to enhance testability. Sales of our production test solutions require significant interaction with customer production test managers, knowledge of their
specific product details and hands-on support, particularly for new customers. Our production customers generally undertake an extensive evaluation of new probe technology before adoption. Our sales managers are experienced sales professionals with
in-depth technical training, customer knowledge and industry expertise. The technical sophistication of our products requires substantial training for our manufacturers representatives, distributors and sales staff. We devote considerable
effort and resources to developing a highly trained sales force that is responsive to our customers changing needs.

We focus our
marketing efforts on building awareness of our products among designers and manufacturers of complex semiconductors and understanding their current and future needs. We market our products and capabilities by participating in trade shows, providing
product and technical information in print and on our website, hosting technical and product seminars, advertising in trade publications and using direct mailings. In addition, our marketing staff performs market research and product planning. We
also participate in joint sales and marketing activities with complementary equipment and software vendors to offer our customers complete test solutions. These relationships benefit us because they can lead to broader awareness and increased sales
of our products.

Our products are sold generally with a 12-month warranty. Customers may purchase an extended warranty of 1-5 years at the
time a probe station is purchased. The extended warranty starts when the 12-month warranty ends. We also offer service contracts for our products of one year or more in duration which can be purchased at any time after expiration of any warranty. We
employ service engineers in each of the four regions (Americas, PacRim, Japan, Europe) in which we have sales and service divisions. We also contract with independent service representatives for product service in some foreign countries.



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Research and Development

Our industry is subject to rapid technological change and new product introductions and improvements. Our continued investment in research and development and timely introduction of new products and services is
critical to maintaining and improving our competitive position. Our growth depends upon our ability to rapidly develop new products that enable customers to improve their electrical, optical and mechanical measurements and increase their
productivity. As a result, we expect to continue to devote substantial resources to research and development. Our research and development expense was $10.5 million in 2008, $11.2 million in 2007 and $8.9 million in 2006. We did not expend material
amounts on customer-sponsored research and development in 2008, 2007 or 2006. In addition, we do not currently have any agreements with third parties for joint research and development projects. We are currently devoting substantial resources to
projects such as releasing new probe and test socket products, developing new probe and test socket manufacturing processes, developing faster, higher-accuracy analytical probes and enhancing the functionality of our engineering probe stations. At
December 31, 2008, we employed 46 research and development engineers. We conduct research and development for all of our product lines at our Beaverton, Oregon and Plymouth, Minnesota facilities.

Manufacturing and Assembly

Our manufacturing and
assembly operations consist of the production of highly complex and sophisticated components and assemblies, some of which are customized to meet customers needs and specifications. We perform nearly all of our manufacturing and assembly in
Beaverton, Oregon at our manufacturing facility within our headquarters building and at our Pyramid Probe microfabrication and assembly facility. We also have a manufacturing facility in Plymouth, Minnesota, where we make our test sockets. We
outsource the manufacturing and assembly of some products and components to the extent they can be purchased at a cost that is lower than the cost to produce internally, and still meet the expectations and requirements of our customers. We depend on
limited source suppliers for some materials, components and subassemblies used in our products.

Our product design and manufacturing
process activities emphasize accurate electrical measurements, precise and reliable mechanical components and assemblies and compliance with industry and governmental safety requirements. We prototype and test our new standard product designs and
components to ensure high electrical signal integrity, mechanical accuracy and safety. In our manufacturing operations, we perform electrical, mechanical and chemical tests and use statistical process control methods, internally developed
manufacturing information systems and inspections of purchased components and products to monitor our product quality throughout the various stages of our manufacturing process.

Competition

The markets for engineering probe stations, analytical probes and production probe cards
are highly competitive. We anticipate that the markets for our products will continually evolve and be subject to rapid technological change.

Engineering Probe Stations. Our primary competitor in the engineering probe station market is Suss MicroTec AG (Karl Suss), but we also compete with Vector Semiconductor Co. Ltd., Lucas/Signatone
Corporation, The Micromanipulator Company Inc. and Wentworth Laboratories Inc., among others. We believe that the primary competitive factors in the engineering probe station market are measurement accuracy and versatility, measurement speed,
automation features, completeness of the measurement solutions, delivery time and price. We generally compete favorably with respect to these factors.

Analytical Probes. Our primary competitor in the analytical probe market is GGB Industries Inc., but we also compete with Suss MicroTech AG (Karl Suss). We believe that the primary competitive factors in
this market are breadth of probe types, probe frequency and electrical signal integrity, contact integrity and the related cleaning required, calibration support, delivery time and price. We generally compete favorably with respect to these factors.



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Production Probe Cards. Competition in the non-memory production probe card
market is fragmented and characterized by many suppliers offering products based on differing technologies. Our Pyramid Probe cards compete with product offerings of other probe card vendors including Feinmetall GmbH, FormFactor Inc., GGB Industries
Inc., Japan Electronic Materials Corporation, Micronics Japan Company, Ltd., MicroProbe Inc., Micro Square Technology Inc., PHICOM Corporation, SV Probe Inc., Technoprobe S.r.l., Tokyo Cathode Laboratory Company Ltd., Wentworth Laboratories
Inc. and others. At least four probe card vendors, FormFactor Inc., Japan Electronic Materials Corporation, Micronics Japan Company, Ltd. and PHICOM Corporation, are also offering probe cards built using types of lithographic patterning. The high
capital investment and other costs associated with the development of lithographically defined probe cards and the time and high cost of customer evaluation, represent a significant barrier to entry for this type of technology. We believe that the
primary competitive factors in the production probe market depend upon the type of chip being tested, but include customer service, delivery time, price, probe card lifetime, chip damage, probe tip touch-down accuracy, speed and frequency of the
probe card, number of chips contacted in parallel, number of probe tips and their layout, signal integrity, and frequency and effectiveness of cleaning required. We believe that we compete favorably in probe cards for high frequencies and high-speed
signals, and in probe cards for parallel testing of chips with densely-packed bond pads. We generally do not compete in applications that require very large probe areas, such as memory test.

Test Sockets.Our competition in test sockets is fragmented among several companies. Depending upon the application, we compete
with Antares Advanced Test Technologies, Everett Charles Technologies, Ironwood Electronics, Johnstech International, Loranger International Corporation, Micronics Japan Company, Ltd., Plastronics and Synergetix. We believe that the primary
competitive factors include customer service, delivery time, price, socket lifetime, contact resistance stability, speed and frequency range of the socket, number and density of socket contacts, signal integrity and frequency and effectiveness of
cleaning required. We believe that we compete favorably in test sockets for high frequencies and high-speed signals, and in test sockets for certain engineering applications. We generally do not compete in applications that require very low costs
such as memory burn-in sockets.

Intellectual Property

Our success in large part depends on our proprietary technology. We do not depend on any one individual patent, instead relying on intellectual property, including patents and trade secrets, covering electrical
measurement reliability and integrity, electrical shielding and the Pyramid Probe contact structure and production process. As of December 31, 2008, we had 144 issued patents and 70 pending patent applications in the U.S. and 79 issued foreign
patents and 73 pending foreign patent applications. In addition, we regard certain of our processes, information and know-how that we have developed and used to design and manufacture our products as proprietary trade secrets.

One important group of our patents claims technology relating to electrical shielding and other inventions required to measure extremely small signals on
wafers. Most of these U.S. patents will expire between 2012 and 2015. Another important group of our patents claims designs and construction methods for probe tips on Pyramid Probes. These patents will expire beginning in 2016.

Our policy is to seek patents where appropriate on inventions involving new products and improvements to existing products as part of our ongoing
engineering and research and development activities. We cannot assure you that any of our pending patent applications will be approved, that we will develop additional proprietary technology that is patentable, that any patents owned by or issued to
us will provide us with competitive advantages or that these patents will not be challenged by third parties. Furthermore, there can be no assurance that third parties will not design around our patents.

We also use certain patented technology of third parties in the manufacture of our products pursuant to license agreements. Pursuant to an agreement with
Micronics Japan Company Ltd. and Hewlett-Packard Japan Ltd. (now Agilent Technologies), our subsidiary, Cascade Microtech Japan, Inc. and



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its affiliates, have been granted a non-exclusive worldwide license to make, have made, use, lease, sell or otherwise transfer certain products that make use
of patented technology relating to electric circuit measurement equipment. In exchange for the rights granted under the license, we pay royalties to Micronics Japan Company Ltd. and Agilent Technologies based on the number of products sold or
leased. These royalties were insignificant in 2008. Our license will expire upon the expiration of the patent covering the licensed technology, which will occur in June 2013.

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. However, our seasonality can be affected by general economic trends and it should not be
expected that historical revenue patterns will continue.

Employees

As of December 31, 2008, we had a total of 292 employees: 46 in engineering and research and development; 148 in manufacturing; and 98 in selling, general and administrative functions. Of these employees, 237
were located in the U.S., 13 were in Singapore, 13 were in Japan, 10 were in Taiwan, 9 were in Germany and 10 were in other countries. Many of our employees are highly skilled and our future performance depends largely on our ability to continue to
attract, train and retain qualified technical, sales, service, marketing and managerial personnel. None of our employees is subject to a collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our
employees to be good.

Environmental Matters

As part of our manufacturing operations, we have handled and continue to handle materials that are considered hazardous or toxic under federal, state and local laws and regulations, and we are subject to environmental laws and regulations
related to the use, storage, discharge, disposal and human exposure to such materials. We believe we are in material compliance with the environmental laws and regulations applicable to the conduct of our business and operations. However, there can
be no assurance that violations of environmental laws or regulations will not occur in the future as a result of human error, equipment failure or other causes. The risk of a release of hazardous or toxic materials cannot be completely eliminated,
and if such a release occurs, we could be held financially responsible for the cleanup or other consequences of the release. We are not aware of any releases at any of our facilities that could reasonably be expected to result in any material
liabilities to us.

In addition, the European Parliament has finalized the Restriction on Use of Hazardous Substances Directive, or RoHS
Directive, which restricts the sale of new electrical and electronic equipment containing certain hazardous substances, including lead. Although we believe a majority of our products, if not all, are exempt from this directive, where possible we
have modified our manufacturing processes, eliminating lead from products we put on the market as required by the RoHS Directive.

In
addition, China has implemented a RoHS Directive that became effective in 2007. This Directive is similar to the European RoHS Directive, except that the China Directive does not include exemptions. Based on current information available, we believe
we comply with the China RoHS Directive. However, if it is determined that we do not comply with this Directive, we may suffer a loss of revenue, be unable to sell in certain markets or countries and suffer competitive disadvantage.

The European Parliament has also recently finalized the Waste Electrical and Electronic Equipment Directive, or WEEE Directive, which makes producers of
electrical and electronic equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. As a producer of industrial electronic equipment, we may incur financial responsibility for
the collection, recycling, treatment or disposal of products covered under the WEEE Directive. Our products have been labeled in accordance with the WEEE Directive since before August 13, 2005, the WEEE implementation date. We determined the
products we presently produce are exempt because they either meet the definition of Large Scale Industrial Equipment, or are



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passive or non-electrical accessories that do not function on their own. We have not incurred any costs or fees or penalties associated with non-compliance.
Furthermore, none of our products have been delayed at a customs point-of-entry into an EU country or China in respect of these RoHS or WEEE Directives. Therefore, we have some confidence that we are interpreting the rules correctly. However,
because the EU member states have not fully implemented the WEEE Directive, the nature and extent of the costs to comply and fees or penalties associated with non-compliance are still unknown at this time. Costs to comply with the WEEE Directive and
similar future legislation, if applicable, may also include legal and regulatory costs and insurance costs. We may also be required to take reserves for costs associated with compliance with these regulations.

We are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups and governmental priorities
concerning environmental laws and regulations. We may be required to incur substantial costs to comply with current or future environmental laws or regulations, and our operations, business or financial condition could be adversely affected by such
requirements.

Backlog

Our backlog
consists of purchase orders we have received for products and services with scheduled delivery dates that we expect to ship and deliver or perform in the future. At December 31, 2008, our backlog was $11.9 million compared with
$17.4 million at December 31, 2007. We generally ship our products within two months of receipt of a customers purchase order. Accordingly, we expect to deliver nearly all of our December 31, 2008 backlog in 2009. Customers may
cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of
products could have a significant impact on our backlog at any date. In addition, a significant portion of our revenue is generated from orders received and products shipped within a quarter. For this and other reasons, the amount of backlog at any
date is not necessarily indicative of revenue in future periods.

Forward-Looking Statements

This Annual Report on Form 10-K and the documents incorporated herein by reference contain 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 Annual Report on Form 10-K 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 identified in Item 1A below and from time to time in our other filings with the Securities and Exchange Commission. We do not intend to update any of the forward-looking statements after the date of this
document to conform them to actual results or to changes in our expectations.

Where You Can Find More Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under
the Securities Exchange Act of 1934 as amended (the Exchange Act). You can inspect and copy our reports, proxy statements, and other information filed with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference



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Room. The SEC maintains an Internet Web site at http://www.sec.gov where you can obtain some of our SEC filings. In addition, you can inspect our reports,
proxy materials and other information at the offices of the Nasdaq Stock Market at 1735 K Street NW, Washington D.C. 20006. We also make available free of charge on our website at www.cascademicrotech.com our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with
the SEC. You can also obtain copies of these reports by contacting Investor Relations at 503-601-1000.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

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.

Our operating results have fluctuated in the past and are likely to continue to fluctuate. As a result, we believe that you should not rely on
period-to-period comparisons of our financial results as an indication of our future performance. Factors that are likely to cause our revenue and operating results to fluctuate include:



| |  |  | customer demand, which is influenced, in part, by conditions in the electronics and semiconductor industry, demand for products that use semiconductors and
market acceptance of our products and those of our customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our geographic sales mix, product sales mix and average selling prices;
| | - |  | -----------------------------------------------------------------------



| |  |  | timing, cancellation or delay of customer orders;
| | - |  | -------------------------------------------------



| |  |  | seasonality, which has caused our first quarter revenue typically to decline compared to our fourth quarter revenue of the previous year;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in foreign currency exchange rates;
| | - |  | ------------------------------------------------



| |  |  | competition, such as competitive pressures on the price, performance and reliability of our products, the introduction or announcement of new products by us or
our competitors and our competitors intellectual property rights, which could prevent us from introducing products that compete effectively with their products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our production capacity and availability and cost of materials, components and subassemblies;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | our ability to deliver reliable products in a timely manner, including as a result of fluctuations in yield on some of our product lines;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our customers decisions regarding the level and timing of research and development spending;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | our product development costs, including research and development and sales and marketing expenses associated with new products or product enhancements and the
costs of transitioning to new or enhanced products; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | economic conditions in the U.S. and the worldwide markets we serve.
| | - |  | -------------------------------------------------------------------

For example, a majority of our revenue in the last five years was derived from the research and development equipment spending of companies in the semiconductor industry or, to a much lesser
extent, various research organizations, including universities, that conduct research that benefits the semiconductor industry. Our customers spending on research and development has been roughly proportional to the customers overall
revenues. Historically, semiconductor industry revenues have been highly cyclical. According to industry data, the semiconductor industry has experienced four significant cyclical downturns since 1983. For example, our revenue increased
approximately 37% from 1999 to 2000. In contrast our revenue decreased approximately 29% from 2001 to 2002 and 15% from 2007 to 2008 and increased approximately 27%, 14%, 15% and 6% from 2003 to 2004, 2004 to 2005, 2005 to 2006 and 2006 to 2007,
respectively. Given this history, there is no reason to expect that our customers business and, therefore, their demand for our products, will be less cyclical in the future.



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If our revenue or operating results fall below the expectations of analysts or investors, the market
price of our common stock could decline substantially.

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.

The semiconductor industry
is highly cyclical with recurring periods of wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, periods of oversupply, maturing
product and technology cycles, excess inventories and declines in general economic conditions. Our customers purchasing behavior in response to these cycles has been generally unpredictable. In the past, our operating results have been
adversely affected by the cyclical downturns in the semiconductor industry.

Our business is heavily dependent on the level of research and
development spending of our customers, the volume of semiconductor production by semiconductor manufacturers, the volume of production, particularly by wireless chip manufacturers, the development of new semiconductors and semiconductor designs and
the overall financial strength of our customers, which, in turn, depend upon the current and anticipated market demand for semiconductors and the products incorporating them. Semiconductor manufacturers in particular are known to sharply curtail
their capital expenditures when confronted with an industry downturn. Since we sell our engineering systems to virtually all chip segments, our revenue may be affected by any significant segment weakness. We may not achieve or maintain our current
or prior levels of revenue growth. Any factor adversely affecting the semiconductor industry in general, or the particular segments, regions or major customers of the industry that our products target, will adversely affect our ability to generate
revenue and could cause us to experience operating losses.

As a result of rapid macroeconomic deterioration, some of our customers may
experience sudden and unexpected changes in their financial condition, resulting in bad debts.

The global economy is undergoing a
period of slowdown and the future economic climate may continue to be less favorable than that of recent years. This slowdown has, and could further lead to, sudden and unexpected negative changes in the financial condition of our customers,
including insolvency and bankruptcy. This condition could make it more difficult to collect on receivables and result in bad debts.

Consolidation of our customer base due to the poor economic environment could adversely affect our revenues and results of operations.

Customers who have a weak market position could be purchased by other companies or simply dissolve. This may mean that an inordinate amount of leverage could be obtained by fewer customers to obtain price concessions
thereby impacting margins negatively.

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.

Our
revenue is difficult to forecast because we generally do not have a sufficient backlog of unfilled orders for our engineering probe stations, analytical probes and production probe cards to meet our quarterly revenue targets at the beginning of a
quarter. Historically, a significant portion of our revenue in any quarter depends upon customer orders that we receive and fulfill in that quarter. Furthermore, because our expense levels are based in part on our expectations as to future revenue
and, to a large extent, are fixed in the short term, we might be unable to adjust spending in time to compensate for any unexpected shortfall in revenue. Accordingly, any significant shortfall in revenue in relation to our expectations and the
expectations of analysts or investors could hurt our operating results and result in a decline in the price of our common stock.



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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.

As is the case with other companies in our industry, we have
historically recognized a substantial portion of our revenue in the last month of each quarter because many of our customers defer purchasing decisions until late each quarter. Historically, we have often recognized more than 50% of our quarterly
revenue in the third month of the quarter. We expect this trend to continue for the foreseeable future. As a result, our ability to meet the earnings expectations of analysts depends on our ability to not only generate customer orders in the third
month of each quarter but also satisfy each of the various accounting requirements for recognizing the revenue generated by such sales prior to the end of the quarter. Moreover, our engineering probe stations typically range in price from $30,000 to
$350,000 for a single unit, so a delay in the shipment of even one engineering probe station and the corresponding delay in recognition of revenue for the sale of probe stations, can have a very large impact on our quarterly results. If we are
unable to generate a sufficient amount of sales during the last month of the quarter or if we are unable to recognize the revenue generated by sales made during this period, we could miss the earnings expectations of analysts or investors, which
could cause the price of our common stock to decline.

We continue to devote significant effort and resources to the growth and
development of our production probe cards and test sockets products, which has had, and could continue to have, an adverse effect on our operating margins.

Our future growth depends, in part, on continued market adoption of, and growing demand for, our production probe cards and test sockets. Large-scale market adoption of these products will depend on our ability to
demonstrate the superior reliability and cost effectiveness of these products to potential customers and on the continued growth of the market for high-speed or complex chips. Production customers are generally very risk-averse when adopting new
technologies that could affect their production output, especially in the case of a sole source supplier. We have devoted significant resources to these products in the past few years. If our production probe cards and test sockets are not adopted
in the market at a rate that is sufficient to offset the costs and resources that we devote to the development and promotion of these products, the future growth of our overall business and our operating margins would be adversely affected.

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

We must continue to invest in research and development and certain manufacturing capabilities to improve our competitive position and to meet the testing needs of our customers. Our future growth depends, in significant part, on our ability
to work effectively with and anticipate the testing needs of our customers and on our ability to develop and support new products and product enhancements to meet these needs on a timely and cost-effective basis. Our customers testing needs
are becoming more challenging as the semiconductor industry continues to experience rapid technological change driven by the demand for complex chips that have smaller element sizes and at the same time are increasing in speed and functionality and
becoming less expensive to produce. Our customers expect that they will be able to integrate our wafer probing products into their design and production processes as soon as they are deployed. Therefore, to meet these expectations and remain
competitive, we must continually design, develop and introduce on a timely basis new products and product enhancements with improved features. Successful product development and introduction on a timely basis require that we:



| |  |  | design innovative and performance-enhancing features that differentiate our products from those of our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------



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| |  |  | identify emerging technological trends in our target markets, including new engineering and production test strategies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | respond effectively to technological changes or product announcements by others; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | adjust to changing market conditions quickly and cost-effectively.
| | - |  | ------------------------------------------------------------------

If we are unable to timely predict industry changes, or if we are unable to modify our products on a timely basis, we might lose customers or market share, and our operating results could suffer.
We cannot assure you that we will successfully develop and bring new products to market in a timely and cost-effective manner, that any product enhancement or new product developed by us will gain market acceptance or that products or technologies
developed by others will not render our products or technologies obsolete or uncompetitive.

For example, the 2001 to 2003 downturn in the
semiconductor industry caused various chip manufacturers to readdress their respective strategies for converting existing 200mm wafer fabrication facilities to 300mm wafer fabrication or for building new 300mm wafer fabrication facilities. Some
manufacturers, including some of our customers such as Texas Instruments, Motorola and ST Microelectronics, delayed, cancelled or postponed previously announced plans to convert to 300mm wafer fabrication. At the time, those delays impacted demand
for our 300mm probe stations. Similarly, some large semiconductor suppliers may, in the future, shift to 450mm wafers. Past wafer-size transitions have been very costly, increasing the risk of delays. The timing of tool development by equipment
suppliers has been very costly if it is too early or too late. If we fail to invest in new tool developments at the right time and including the right functionality or performance, our revenue and margins may be adversely affected.

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

As part of our business strategy, we may make acquisitions of, or investments in, companies, products or technologies that
complement our current product offerings, enhance our technical capabilities, expand our operations into new markets or offer other growth opportunities. During 2007, we acquired the operations of Gryphics, Inc. and certain assets of our German
distributor, Synatron. If we fail to successfully integrate any acquired businesses, products or technologies, we would not achieve anticipated revenue and cost benefits. We may acquire companies, products or technologies in the future, which could
pose risks to our operating results including:



| |  |  | difficulties assimilating the acquired operations, personnel, technologies or products into our company;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention from our existing business;
| | - |  | ---------------------------------------------------------------



| |  |  | adverse effects on relationships with our existing suppliers, customers or partners; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the impairment of intangible assets needed at the time of acquisition.
| | - |  | ----------------------------------------------------------------------

Intense competition in the semiconductor wafer probing business may reduce demand for our products and reduce our sales.

The markets for our products are highly competitive, and we expect competition to continue in the future. We believe that our principal competitors are the major providers of probe stations,
production probe cards and analytical probes. Our primary competitor in the probe station market is Suss MicroTec AG (Karl Suss), but we also compete with Vector Semiconductor Co. Ltd., Lucas/Signatone Corporation, The Micromanipulator Company Inc.,
and Wentworth Laboratories Inc., among others. Our Pyramid Probe cards compete with product offerings of other probe card vendors including Feinmetall GmbH, FormFactor Inc., GGB Industries Inc., Japan Electronic Materials Corporation,
Mesatronics S.A., Micronics Japan Company, Ltd., MicroProbe, Inc., Micro Square Technology Inc., MJC Probe Inc., PHICOM Corporation, SV Probe, Technoprobe S.r.l., Tokyo Cathode Laboratory Company, Ltd., Wentworth Laboratories Inc. and others.
At least five probe card vendors, FormFactor Inc., Japan Electronic Materials Corporation, Mesatronics S.A., Micronics Japan Company, Ltd., and PHICOM Corporation, are also offering probe cards built using types of lithographic patterning. Our
primary competitor in the analytical probe market is GGB Industries. Our primary competitors in the



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test socket market are Antares Advanced Test Technologies, Everett Charles Technologies, Ironwood Electronics, Johnstech International, Loranger
International Corporation, Micronics Japan Company, Ltd., Plastronics and Synergetix,. These competitors or other potential competitors may have developed or may be developing technology of which we are unaware that may render our products
uncompetitive. Some of our competitors have significantly greater financial, technical and marketing resources than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer
requirements, to devote greater resources to the development, promotion and sale of their products or to deliver competitive products at lower prices. We cannot assure you that we will maintain our current competitive position or that our production
probe cards will achieve widespread acceptance in the market. Finally, increased competition could result in pricing pressures, reduced sales, reduced margins or failure to achieve or maintain widespread market acceptance for our products, any of
which could prevent us from growing our business. During 2009, some of these competitors may use a strategy of intense discounting to help maintain, or even increase, their revenue and customer base.

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

We obtain some of the materials, components and subassemblies used in our products from a single source or a limited group of suppliers. Certain of
our product purchases for 2008 were from sole source suppliers. Although we were not forced to delay shipment of any product due to delays in 2008 related to such suppliers, from time to time, we may experience difficulties in obtaining these
materials, components and subassemblies from some suppliers. During 2009, one or more of our suppliers may declare bankruptcy or go out of business due to unusually weak business conditions, which could force us to source our products from different
suppliers. The manufacture of some of the materials, components and subassemblies that we use in our products, such as thermal chucks and microscopes, is a complex process, and in the event that we cannot obtain an adequate supply of these
components, it would be difficult and time-consuming to identify and qualify new suppliers. If some of the materials used in our lithographic probe manufacturing process become unavailable, it would be costly and time consuming to identify and
qualify new suppliers. Moreover, many of these suppliers are small companies that may be more susceptible to downturns in general economic conditions and the rapid unplanned deterioration of sales, thereby increasing the risks of product and
shipment delays, increased costs or loss of suppliers. Finally, we do not have written agreements with any of these suppliers to guarantee the supply of these products.

The delay in shipments from, or complete loss of, any one of these suppliers could prevent us from producing and shipping our products, resulting in delayed or lost orders for our products and damage to our customer
relationships, which would harm our results of operations. Furthermore, a significant increase in the price of one or more of these materials, components or subassemblies could materially adversely affect our results of operations.

The deteriorating macroeconomic environment may cause some of our suppliers to discontinue the products we purchase, or suppliers may declare bankruptcy.
If such suppliers are our single source, then we may need to delay our product shipments. If such suppliers were part of a limited group of suppliers, then we may experience price increases from the remaining suppliers.



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We have long-lived assets, including fixed assets and intangible assets, recorded on our balance
sheet. In view of the current turbulent economic environment and the decline in our revenues, the fair value of certain long-lived assets may be reduced below their carrying value. If there has been an impairment of long-lived assets, we would be
required to record non-cash asset impairment charges in future periods, which would adversely impact our results of operations.

In the
fourth quarter of 2008, we recorded impairment charges of $27.7 million related to goodwill and certain intangible assets as the fair value of these assets was reduced below their carrying value. As of December 31, 2008, we had fixed assets,
purchased intangible assets and patents of $18.0 million recorded on our balance sheets. We test our long-lived assets when an event occurs indicating the potential for impairment. If we record an impairment charge as a result of this analysis, it
could have a material adverse impact on 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.

Since 2005 we have derived more than 60% of our
annual revenue from sales outside the United States, primarily in Japan, other Asian countries and Europe. Geographic revenue for those regions that represented 10% or more of total sales in a given year was as follows (in thousands):



|                        |  |      |        |      |   |        |  |   |       
|----------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|Year Ended December 31, |  | 2008 |        | 2007 |   | 2006  
|United States           |  | $    | 26,079 |      | $ | 32,965 |  | $ | 32,221
|Asia Pacific            |  |      | 36,462 |      |   | 38,229 |  |   | 37,829
|Europe                  |  |      | 12,146 |      |   | 16,746 |  |   | 12,400
|Other                   |  |      | 1,874  |      |   | 1,982  |  |   | 2,402 
|                        |  |      |        |      |   |        |  |   |       
|                        |  | $    | 76,561 |      | $ | 89,922 |  | $ | 84,852
|                        |  |      |        |      |   |        |  |   |       

We expect international sales to continue to represent a substantial portion of our revenue for
the foreseeable future. In the past, the economic climate in some foreign markets, particularly in Asia, has quickly and dramatically changed, resulting in a negative effect on our operating results. For example, during the Asian economic crisis
that began in 1998, we saw a 34% decline in revenue in 1998 compared to 1997 from Asia not including Japan. We saw a 41% decrease in revenue from the same region in 2003 compared to 2001.

Currently, we maintain 5 international offices in Europe and Asia, and we may establish new international offices in the future. If our gross margin from international operations does not exceed
the expense of establishing and maintaining our international operations, our operating margins would be adversely affected. Additional risks we face in conducting business internationally include:



| |  |  | difficulties and costs of staffing and managing international operations across different geographic areas;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | the possible lack of financial and political stability in foreign countries, preventing overseas sales growth;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | changes in domestic or foreign law or policy resulting in the need to comply with potentially burdensome government controls, regulations, tariffs, embargoes or
export license requirements;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | longer payment cycles;
| | - |  | ----------------------



| |  |  | differing and more burdensome labor regulations and practices in Europe;
| | - |  | ------------------------------------------------------------------------



| |  |  | the aftermath of the war in Iraq or other armed conflicts in the Middle East;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the effects of sudden outbreaks of epidemics in Asia and other parts of the world; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the effects of terrorist attacks in the U.S. and any related conflicts or similar events worldwide.
| | - |  | ---------------------------------------------------------------------------------------------------

The different cultures in countries where we do business often challenge us to meet or manage local expectations about how employees are hired, managed,
compensated, or terminated. For example,



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most employees in Japan expect an organization wherein a managers direct reports are younger than the manager. In Europe, governments force the
severance costs of a reduction in force action to be generally much higher than in the U.S.

Finally, there have been significant
fluctuations in the exchange rates between the dollar and the currencies of countries in which we do business. While most of our international sales have been denominated in U.S. dollars, our international operating expenses have been denominated in
foreign currencies. As a result, a decrease in the value of the U.S. dollar relative to the foreign currencies could increase the relative costs of our overseas operations, which could reduce our operating margins. Significant unfavorable
fluctuations in the exchange rates between the U.S. dollar and foreign currencies could cause us to lower our prices and thus reduce our profitability. In addition, fluctuations in exchange rates could cause customers to delay or cancel orders
because of the increased cost of our products relative to those of our competitors who manufacture in other countries. Other income (expense), net in 2008, 2007 and 2006 included the following currency related gains and losses (in thousands):



|                                                      |  |                         |      |   |      |   |      |      |  |   |    
|----------------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---
|                                                      |  | Year Ended December 31,
|                                                      |  | 2008                    |      |   | 2007 |   |      | 2006
|Remeasurement related foreign currency gains (losses) |  | $                       | 458  |   |      | $ | (254 | )    |  | $ | 97 
|Gains (losses) related to foreign currency hedges     |  |                         | (409 | ) |      |   | 238  |      |  |   | 253

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.

More than 70% of our revenue for 2008 was generated through independent manufacturers representatives and distributors, whose activities are not within our direct control. In addition, in
some locations, our manufacturers representatives and distributors provide field service to our customers. A reduction in the sales efforts or financial viability of these manufacturers representatives or distributors, or a termination
of our relationship with these representatives or distributors, would have a material adverse effect on our sales, financial results and ability to support our customers. Our manufacturers representatives and distributors are not obligated to
continue selling our products, and they may terminate their arrangements with us at any time with limited or no prior notice. If we make the business decision to terminate or modify our relationships with one or more of our independent
manufacturers representatives, or if a manufacturers representative decides to disengage from us, and we do not effectively and efficiently manage such a change, we could lose sales to existing customers and fail to obtain new customers.
Establishing alternative sales channels would consume substantial time and resources, decrease our revenue and increase our expenses.

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

Our success depends on the continued services of our executive officers and other key management, technical, and sales and marketing personnel and on our ability to continue to attract, retain and motivate qualified
personnel. Our executive officers and other key employees are able to exercise stock options and sell the underlying stock, which may reduce their incentive to continue their employment with us. The loss of key personnel could limit our ability to
develop new products and adapt existing products to our customers evolving requirements and may result in lost sales and a diversion of management resources. Furthermore, much of our competitive advantage and intellectual property is based on
the expertise, experience and know-how of our key personnel. We do not have employment agreements or non-competition agreements with any of our employees except for employment agreements with our President and Chief Executive Officer and our Chief
Financial Officer. To support our future growth, we will need to attract and retain additional qualified management, technical and sales and marketing employees. Competition for such personnel in our industry can be intense, and we cannot assure you
that we will be successful in attracting and retaining such personnel.



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

Our customers typically expend significant efforts in evaluating and qualifying our
products prior to placing an order, particularly for orders of engineering probe stations and production probe cards. This evaluation and qualification process frequently results in a lengthy sales cycle, typically ranging from three to
12 months and sometimes longer. During the period in which our customers are evaluating our products, we incur substantial sales, marketing, research and development expenses and expend significant management efforts. After completing this
evaluation process, a potential customer may elect not to purchase our products. In addition, product purchases are frequently subject to unplanned processing and other delays, particularly with respect to larger customers for which our products
represent a very small percentage of their overall purchase activity.

Additional factors, some of which are partially or completely
outside our control, that affect the length of time it takes us to complete a sale, include:



| |  |  | the efforts of our sales force;
| | - |  | -------------------------------



| |  |  | the history of previous sales to the customer;
| | - |  | ----------------------------------------------



| |  |  | the complexity of the customers engineering or production processes;
| | - |  | ---------------------------------------------------------------------



| |  |  | the internal technical capabilities and sophistication of the customer; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | the capital expenditure budgets of the customer.
| | - |  | ------------------------------------------------

The lengthy and unpredictable nature of our sales cycle could result in fluctuations in our operating results, which could fall below the expectations of analysts and investors for any particular period of time, and
result in a decline in the price of our common stock.

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

The complexity and ongoing development of our products, as well as the
inclusion in our products of components purchased from third parties, could lead to design, manufacturing or performance problems. Our products may contain defects which could cause our sales to decline, our reputation to be significantly damaged
and our customers to be reluctant to buy our products, any or all of which could result in a decline in revenue, an increase in product returns, higher field service costs, the loss of existing customers or the failure to attract new customers. Our
warranty expense totaled $540,000, $637,000 and $573,000, for 2008, 2007 and 2006, respectively. Although we are not currently seeking reimbursement from any vendors related to our warranty expense, we have in the past, and may again in the future,
seek reimbursement from certain vendors. To the extent that we experience additional failures of purchased components that increase our warranty expenses that are not reimbursed by the vendor, our results of operations will be adversely affected.

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.

Our success and competitive position depend in significant part on the technically
innovative features of our products, and, if we fail to protect our proprietary rights, our competitors might gain access to our technology. Although we rely in part on patent, trade secret and trademark laws to protect the proprietary technology
used in our products, our patents may be challenged by third parties and held invalid, and any of our pending patent applications may not be approved. Additionally, we may not be able to develop additional proprietary technology that is patentable.
Policing unauthorized use of our products is difficult, and we may not be able to prevent the misappropriation and unauthorized use of our technologies. Furthermore, our existing and future patents may not be sufficiently broad to protect our
proprietary technologies, may not provide us with competitive advantages and may be circumvented by the designs of third parties.



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Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Others may independently develop or otherwise acquire similar or competing technologies or methods or design around our patents. Additionally, some of our proprietary technology cannot be effectively protected by patents. In
these cases, we rely on trade secret laws and confidentiality agreements to protect our confidential and proprietary information, processes and technology. However, our confidential and proprietary information, processes and technology could be
independently developed by, or otherwise become known to, third parties, which would weaken our competitive position and might reduce our sales.

Since 1997, we have derived more than 50% of our annual revenue from products sold to customers outside of North America. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S.,
and many companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries. The manner in which we protect our proprietary rights may not be adequate in some foreign countries. Our failure
to adequately protect our intellectual property in foreign countries would make it easier for competitors to copy or circumvent our product designs and sell competing products in those countries, which could adversely affect our revenue and cause us
to lose customers.

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.

The semiconductor industry is characterized by uncertain and conflicting
intellectual property claims, frequent litigation regarding patent and other intellectual property rights and vigorous protection and pursuit of these rights. Questions of infringement in the semiconductor industry involve highly technical and
subjective analyses. Litigation may be necessary to determine the validity and scope of our proprietary rights or to defend against claims of infringement or invalidity by third parties, and we may not prevail in any litigation. Any such litigation,
whether or not determined in our favor or settled, might be costly, could harm our reputation, could cause product shipment delays and could divert the efforts and attention of our management and technical personnel from our normal business
operations.

An adverse outcome in any intellectual property litigation might result in the loss of our proprietary rights, subject us to
significant liabilities, require us to spend significant resources to develop non-infringing technology, require us to seek licenses from third parties, prevent us from manufacturing and selling our products or require us to discontinue the use of
certain technology in our products, any of which could have an adverse effect on our business, financial condition and results of operations. License agreements, if required, might not be available on terms acceptable to us or at all.

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 growth has placed, and will continue to place,
significant demands on our management, operational, financial and technical resources and on our internal control, management information and reporting systems. Our success will depend, in part, upon the ability of our senior management to manage
this growth effectively. To manage the expected growth of our operations and personnel, we will need to:



| |  |  | continue to improve our operational, financial and management controls and our reporting systems and procedures;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | manage the growth of different product lines with different cost structures; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | recruit, train, manage and motivate our employees to support our expanded operations.
| | - |  | -------------------------------------------------------------------------------------



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

We will continue to make investments in research and development to sustain and
improve our competitive position and meet our customers needs. These investments currently include refining Pyramid Probe fabrication processes, developing higher performance Pyramid Probe cards, test sockets and analytical probes and
enhancing engineering probe stations for both 300mm and sub-300mm wafers. To maintain our competitive position, we may need to increase our research and development investment, which could reduce our profitability. In addition, we cannot assure you
that we will achieve a return on these investments, nor can we assure you that these investments will improve our competitive position and meet our customers needs.

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

We manufacture most of our products in our facilities located in Beaverton, Oregon and Plymouth, Minnesota. Our manufacturing processes are complex and
require sophisticated and costly equipment and specially designed facilities. As a result, any prolonged disruption in the operations of our facilities, whether due to technical or labor difficulties, relocation or destruction of or damage to the
facilities as a result of an earthquake, fire or any other reason, could materially and adversely affect our business, financial condition and results of operations.

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.

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

During 2008, we restructured our business by
eliminating the divisional structure and put in place a functional organization. Executives and managers that previously had divisional oversight roles were reassigned functional responsibilities in sales, marketing or operations. The restructuring,
which also included the closure of our machine shop, closure of our sales and service office in England and move to outsourced manufacturing of 150mm systems, eliminated redundant divisional positions and lowered our cost structure through headcount
reductions.

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.

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

We are subject to a variety of federal, state and local laws, rules and regulations
relating to the storage, use, discharge, disposal and human exposure to hazardous and toxic materials used in our thin-film fabrication facility and other manufacturing operations. The risk of a release of hazardous or toxic materials cannot be
completely eliminated, and if such a release occurs, we could be held financially responsible for the cleanup or other consequences of the release. We are not aware of any releases at any of our facilities that could reasonably be expected to result
in any material liabilities to us. Our past, present or future failure to comply with environmental laws and regulations could result in enforcement actions, substantial liabilities and suspension of production or cessation of operations in extreme
situations. Compliance with current or future environmental laws and regulations could



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restrict our ability to expand our facilities or build new facilities or require us to acquire additional expensive equipment, modify our manufacturing
processes, or incur other substantial expenses which could harm our business, financial condition and results of operation.

For example,
the European Parliament has finalized the RoHS Directive which restricts the sale of new electrical and electronic equipment containing certain hazardous substances, including lead. Although we believe a majority of our products, if not all, are
exempt from this directive, where possible we have modified our manufacturing processes, eliminating lead from products we put on the market as required by the RoHS Directive.

In addition, China has implemented a RoHS Directive that became effective in 2007. This Directive is similar to the European RoHS Directive, except for the fact that the China Directive does not
include exemptions. Based on current information available, we believe we will be able to comply with the China RoHS Directive. However, if it is determined that we do not comply with this Directive, we may suffer a loss of revenue, be unable to
sell in certain markets or countries and suffer competitive disadvantage.

The European Parliament has also finalized the WEEE Directive,
which makes producers of electrical and electronic equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. As a producer of industrial electronic equipment, we may incur
financial responsibility for the collection, recycling, treatment or disposal of products covered under the WEEE Directive. Our products have been labeled in accordance with the WEEE Directive since before August 13, 2005, the WEEE
implementation date. We determined the products we presently produce are exempt because they either meet the definition of Large Scale Industrial Equipment, or are passive or non-electrical accessories that do not function on their own.
We have not incurred any costs or fees or penalties associated with non-compliance. Furthermore, none of our products have been delayed at a customs point-of-entry into an EU country or China in respect of the RoHS or WEEE Directives. Therefore, we
have some confidence that we are interpreting the rules correctly. However, because the EU member states have not fully implemented the WEEE Directive, the nature and extent of the costs to comply and fees or penalties associated with non-compliance
are still unknown at this time. Costs to comply with the WEEE Directive and similar future legislation, if applicable, may also include legal and regulatory costs and insurance costs. We may also be required to take reserves for costs associated
with compliance with these regulations.

These environmental laws and regulations could become more stringent over time, imposing even
greater compliance costs and increasing risks and penalties associated with violations, which could seriously harm our business, financial condition and results of operation. There can be no assurance that violations of environmental laws or
regulations will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes.

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

Our customers may use our products in the testing of high reliability semiconductors for critical applications such as telecommunications infrastructure, military, medical and aerospace equipment. Defects or other
problems with the performance of our products could result in financial or other damages to our customers. In addition, some of our engineering probe stations that use high powered lasers or operate at high voltage or extreme temperatures may cause
death or injury to persons utilizing such equipment due to undetected design or manufacturing defects or due to improper use or maintenance by our customers. Although our product invoices and sales contracts generally contain provisions designed to
limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these provisions. Product liability litigation against us, even if it were unsuccessful, could be time consuming and costly to
defend. Additionally, although we carry product liability insurance, in some circumstances it may not cover certain claims or be adequate to cover all claims.



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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 top four customers accounted for a total of 13% and 17% of our
revenue in 2008 and 2007, respectively. Our customer base is less diversified in Probes and Sockets than in Stations. Our customers are not obligated by long-term contracts to purchase our products and may discontinue purchasing our products at any
time. The semiconductor industry is highly concentrated and a small number of semiconductor manufacturers generally account for a substantial portion of the purchases of semiconductor test equipment, including our products. Consequently, our
business and operating results would be materially, adversely affected by the loss of any of our significant customers.

In addition, our
ability to increase our revenue will depend in part upon our ability to obtain orders from new customers, particularly customers of our production probe cards. Obtaining orders from new customers is difficult because semiconductor manufacturers
typically select one vendors products for testing a particular new generation of chips. Once a manufacturer has selected a vendor, that manufacturer is more likely to continue to purchase products from that vendor for that generation of chips,
as well as subsequent generations of chips. We therefore place great emphasis on relationships with our current customers because these customers are difficult to replace. In addition, we focus on leveraging our relationships with current customers
to sell into additional engineering labs and production lines in the same company and similar groups in other companies. If we are unable to maintain our relationships with our existing significant customers or to obtain new customers that adopt and
implement our products and technology, we will not be able to meet our revenue and growth targets, which could result in a decline in the price of our common stock.

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

Our operating expense levels are based, in significant part, on our headcount. For a variety of reasons, particularly the high cost and disruption of layoffs, the costs of recruiting and training
new personnel and product delivery and service commitments to our customers, our headcount in the short-term is, to a large extent, fixed. Accordingly, we may be unable to reduce employment costs in a timely manner to compensate for any shortfall in
our sales or gross margins, which could materially harm our operating results.

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

We are subject to income taxes in both the U.S. and various foreign
jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in different jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings in countries with different
statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, including pending tax law changes, such as the benefit from export sales and the research and development credit by material audit
assessments. In particular, the carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S. In addition, the amount of income taxes we pay could be subject to
ongoing audits in various jurisdictions and a material assessment by a governing tax authority could affect our profitability.

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

As of March 10,
2009, our executive officers and directors and their affiliates beneficially owned approximately 28% of our outstanding shares of common stock. Consequently, these shareholders have substantial influence over the election of our directors and the
outcome of corporate actions requiring shareholder approval, such as a merger or a sale of our company or a sale of all or substantially all of our assets. This concentration of voting power and control could have a significant



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effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other shareholders and be disadvantageous to our shareholders
with interests different from those of our officers, directors and affiliates. These shareholders will also have significant control over our business, policies and affairs. Additionally, this significant concentration of share ownership may
adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling shareholders.

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.

Provisions of our articles of incorporation and bylaws and provisions of Oregon law may have the effect of delaying or preventing a merger or acquisition
of us, making a merger or acquisition of us less desirable to a potential acquirer or preventing a change in our management, even if the shareholders consider the merger or acquisition favorable or if doing so would benefit our shareholders. In
addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. The following are examples of such provisions in our articles of incorporation or bylaws:



| |  |  | We have a staggered board of directors, which will make it more difficult for a group of shareholders to quickly change the composition of our board.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our board of directors is authorized, without prior shareholder approval, to create and issue preferred stock with voting or other rights or preferences that
could impede the success of any attempt to acquire us or change our control, commonly referred to as blank check preferred stock.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Members of our board of directors can only be removed for cause.
| | - |  | ----------------------------------------------------------------



| |  |  | The board of directors may alter our bylaws without obtaining shareholder approval.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Shareholders are required to provide advance notice for nominations for election to the board of directors or for proposing matters to be acted upon at a
shareholder meeting.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any action that is taken by written consent of shareholders must be unanimous.
| | - |  | ------------------------------------------------------------------------------

We are also subject to the provisions of the Oregon Control Share Act and the Oregon Business Combination Act, each of which may have certain anti-takeover effects.

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

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its
securities, and newly public companies tend to experience more volatility in their stock price. We may be the target of such litigation in the future. Securities litigation may result in substantial costs and divert managements attention and
resources, which may seriously harm our business.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None



|ITEM 2. | PROPERTIES
|------- | ----------

We maintain our corporate headquarters
in Beaverton, Oregon. Our primary site contains corporate administration, sales and marketing, design, test, light manufacturing and assembly and various support functions in leased space totaling approximately 137,000 square feet in three adjacent
buildings. This lease expires December 31, 2015. Our Pyramid Probe manufacturing is conducted in a 10,000 square foot clean room within a 58,817 square foot facility that we lease at a separate site in Beaverton, Oregon. Our lease of this
facility expires December 31, 2014. Our test socket manufacturing is conducted in a 8,600 square foot facility that we lease in Plymouth, Minnesota. We lease small sales and service offices in Japan, Germany, China, Taiwan and Singapore.



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|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

As of the date of filing this
Form 10-K, we are not a party to any material legal proceedings. However, the semiconductor test industry is characterized by vigorous protection and pursuit of intellectual property rights and positions. To protect our intellectual property from
infringement, we have, from time to time, initiated litigation against third parties and may be required to do so in the future. We cannot assure you that we shall be successful in future intellectual property litigation and this litigation often is
protracted and expensive.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

No matters were submitted to a vote of security holders during the fourth quarter of 2008.

PART II



|ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ----------------------------------------------------------------------------------------------------------------

Stock Prices and Dividends

Our common stock
began trading on the Nasdaq National Market System under the symbol CSCD on December 15, 2004. The high and low closing sale price of our common stock by quarter for each of the eight quarters in the two-year period ended
December 31, 2008 was as follows:



|          |  |      |       |     |   |      
|--------- |  | ---- | ----- | --- | - | -----
|2008      |  | High |       | Low
|Quarter 1 |  | $    | 9.87  |     | $ | 7.36 
|Quarter 2 |  |      | 8.25  |     |   | 6.58 
|Quarter 3 |  |      | 6.52  |     |   | 3.90 
|Quarter 4 |  |      | 4.15  |     |   | 1.90 
|          |  |     
|2007      |  | High |       | Low
|Quarter 1 |  | $    | 14.54 |     | $ | 13.10
|Quarter 2 |  |      | 14.40 |     |   | 11.92
|Quarter 3 |  |      | 11.90 |     |   | 9.85 
|Quarter 4 |  |      | 10.19 |     |   | 8.40 

As of March 10, 2009, there were 63 shareholders of record and approximately 700 beneficial
shareholders.

We have not declared or paid any cash dividends on our common stock in the past two years. We currently expect to retain any
future earnings to fund the operation and expansion of our business, and therefore, we do not currently expect to pay cash dividends in the foreseeable future.

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 December 31, 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.

Equity Compensation Plan Information

See Item 12. for Equity Compensation Plan Information.



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##### Table of Contents

Stock Performance Graph

The SEC requires that registrants include in this report a line-graph presentation comparing cumulative five-year shareholder returns on an indexed basis, assuming a $100 initial investment and reinvestment of
dividends. Our graph consists of (a) Cascade Microtech, Inc.; (b) the Nasdaq Composite Index and (c) a peer group index composed of Teradyne, Inc., FormFactor, Inc., Kulicke & Soffa Industries, Inc., LTX-Credence Corporation,
Electro Scientific Industries, Inc. and Keithley Instruments, Inc. The peer group index utilizes the same methods of presentation and assumptions for the total return calculation as does Cascade Microtech, Inc. and the Nasdaq Composite Index. All
companies in the peer group index are weighted in accordance with their market capitalizations. Our initial public offering was December 14, 2004 and, accordingly, our graph only includes the time period of December 14, 2004 to
December 31, 2008.

LOGO



|                         |  |                    |        |                             |   |          |  |          |        |          |   |        |  |   |        |  |   |      
|------------------------ |  | ------------------ | ------ | --------------------------- | - | -------- |  | -------- | ------ | -------- | - | ------ |  | - | ------ |  | - | -----
|Company/Index            |  | BasePeriod12/14/04 |        | Indexed ReturnsPeriod Ended
|                         |  | 12/31/04           |        | 12/31/05                    |   | 12/31/06 |  | 12/31/07 |        | 12/31/08
|Cascade Microtech, Inc.  |  | $                  | 100.00 |                             | $ | 95.93    |  | $        | 90.21  |          | $ | 93.57  |  | $ | 72.79  |  | $ | 13.93
|Semiconductor Peer Group |  |                    | 100.00 |                             |   | 101.36   |  |          | 89.37  |          |   | 93.25  |  |   | 71.74  |  |   | 26.38
|Nasdaq Composite Index   |  |                    | 100.00 |                             |   | 100.72   |  |          | 101.87 |          |   | 113.02 |  |   | 122.56 |  |   | 73.02



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The consolidated statement
of operations and balance sheet data set forth below have been derived from our consolidated financial statements. The selected consolidated financial data set forth below should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.



|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|--------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- |  | ---- | ------- | ---- | - | ------ |  | - | ------ | -
|                                                                      |  | For the Year Ended December 31, |        
|IN THOUSANDS (except per share amounts)                               |  | 2008                            |         |   | 2007 |   | 2006    |  | 2005 |         | 2004 |  
|Statement of Operations Data                                          |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|                                                                      |  |                                 |         |   |     
|Revenue                                                               |  | $                               | 76,561  |   |      | $ | 89,922  |  | $    | 84,852  |      | $ | 73,637 |  | $ | 64,415 |  
|Cost of sales                                                         |  |                                 | 44,477  |   |      |   | 48,801  |  |      | 47,810  |      |   | 39,390 |  |   | 35,692 |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Gross profit                                                          |  |                                 | 32,084  |   |      |   | 41,121  |  |      | 37,042  |      |   | 34,247 |  |   | 28,723 |  
|Operating expenses:                                                   |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Research and development                                              |  |                                 | 10,473  |   |      |   | 11,241  |  |      | 8,949   |      |   | 6,968  |  |   | 5,681  |  
|Selling, general and administrative                                   |  |                                 | 29,311  |   |      |   | 27,723  |  |      | 24,819  |      |   | 19,778 |  |   | 16,831 |  
|Amortization of purchased intangibles                                 |  |                                 | 2,461   |   |      |   | 1,977   |  |      | 130     |      |   |       |  |   |       |  
|Asset impairment charges                                              |  |                                 | 27,701  |   |      |   |        |  |      |        |      |   |       |  |   |       |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Total operating expenses                                              |  |                                 | 69,946  |   |      |   | 40,941  |  |      | 33,898  |      |   | 26,746 |  |   | 22,512 |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Income (loss) from operations                                         |  |                                 | (37,862 | ) |      |   | 180     |  |      | 3,144   |      |   | 7,501  |  |   | 6,211  |  
|Other income (expense), net                                           |  |                                 | 1,038   |   |      |   | 1,336   |  |      | 1,961   |      |   | 1,991  |  |   | (117   | )
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Income (loss) before income taxes                                     |  |                                 | (36,824 | ) |      |   | 1,516   |  |      | 5,105   |      |   | 9,492  |  |   | 6,094  |  
|Provision (benefit) for income taxes                                  |  |                                 | (2,247  | ) |      |   | 586     |  |      | 1,495   |      |   | 1,173  |  |   | 1,387  |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Net income (loss)                                                     |  |                                 | (34,577 | ) |      |   | 930     |  |      | 3,610   |      |   | 8,319  |  |   | 4,707  |  
|Accretion of redeemable stock and loss on redemption                  |  |                                 |        |   |      |   |        |  |      |        |      |   |       |  |   | 113    |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Net income (loss) attributed to common shareholders                   |  | $                               | (34,577 | ) |      | $ | 930     |  | $    | 3,610   |      | $ | 8,319  |  | $ | 4,594  |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Basic net income (loss) per share attributed to common shareholders   |  | $                               | (2.65   | ) |      | $ | 0.07    |  | $    | 0.31    |      | $ | 0.75   |  | $ | 0.84   |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Diluted net income (loss) per share attributed to common shareholders |  | $                               | (2.65   | ) |      | $ | 0.07    |  | $    | 0.30    |      | $ | 0.70   |  | $ | 0.56   |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Shares used in basic per share calculations                           |  |                                 | 13,071  |   |      |   | 12,550  |  |      | 11,482  |      |   | 11,055 |  |   | 5,439  |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|Shares used in diluted per share calculations                         |  |                                 | 13,071  |   |      |   | 12,840  |  |      | 11,959  |      |   | 11,816 |  |   | 8,452  |  
|                                                                      |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|                                                                      | 
|                                                                      |  | December 31,                    |        
|                                                                      |  | 2008                            |         |   | 2007 |   | 2006    |  | 2005 |         | 2004 |  
|Balance Sheet Data                                                    |  |                                 |         |   |      |   |         |  |      |         |      |   |        |  |   |        |  
|                                                                      |  |                                 |         |   |     
|Cash, cash equivalents and short-term marketable securities           |  | $                               | 32,545  |   |      | $ | 29,421  |  | $    | 43,794  |      | $ | 50,346 |  | $ | 43,747 |  
|Working capital                                                       |  |                                 | 58,269  |   |      |   | 58,965  |  |      | 68,642  |      |   | 74,601 |  |   | 63,333 |  
|Total assets                                                          |  |                                 | 88,456  |   |      |   | 125,281 |  |      | 103,786 |      |   | 90,120 |  |   | 79,016 |  
|Current portion of capital lease obligations                          |  |                                 | 19      |   |      |   | 13      |  |      |        |      |   | 8      |  |   | 21     |  
|Long-term capital lease obligations, less current portion             |  |                                 | 62      |   |      |   | 51      |  |      |        |      |   |       |  |   | 14     |  
|Other long-term liabilities                                           |  |                                 | 2,669   |   |      |   | 5,763   |  |      | 1,370   |      |   | 1,100  |  |   | 1,449  |  
|Shareholders equity                                                  |  |                                 | 76,700  |   |      |   | 107,605 |  |      | 90,193  |      |   | 81,505 |  |   | 70,188 |  



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##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

You should read the following discussion in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. In addition to historical
consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these
forward-looking statements as a result of many factors, including those discussed under Item 1A, Part I, Risk Factors, and elsewhere in this Form 10-K. We do not guarantee future results, levels of activity, performance or
achievements. We do not intend to update any of the forward-looking statements after the date of this document to conform them to actual results or to changes in our expectations.

Overview

Semiconductor and semiconductor equipment market conditions continued to deteriorate during
the second half of 2008. Our revenues decreased to $76.6 million in 2008 compared to $89.9 million in 2007. Uncertainty in the world economic environment is impacting demand and the timing of customer spending. In the fourth quarter of 2008,
revenues decreased to $15.4 million, or 27%, from $21.1 in the third quarter of 2008. In addition, we recorded an impairment charge of $27.7 million related to goodwill and intangible assets in the fourth quarter of 2008.

During 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 were reassigned functional responsibilities in sales, marketing or operations. The restructuring, which also included the closure of our machine shop,
closure of our sales and service office in England and move to outsourced manufacturing of 150mm systems, eliminated redundant divisional positions and lowered our cost structure through headcount reductions. Current uncertainty in market conditions
requires ongoing review of our operations and may require further restructuring or other measures to lower our cost structure.

It is
unclear when the semiconductor and semiconductor equipment market conditions will improve. However, we believe that our competitive position, products, technology and balance sheet remain strong, and that we are well positioned to manage through the
economic downturn.

Outlook for 2009

The current uncertainty in global economic conditions makes it particularly difficult to predict product demand and other related matters, and makes it more likely that our actual results could differ materially from our expectations. We
believe the market for semiconductors and semiconductor equipment will continue to be uncertain through at least the first six months of 2009, and, accordingly, we expect an overall decline in revenue for the first six months of 2009 compared to the
first six months of 2008.



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##### Table of Contents

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 Year Ended December 31, |   
|                                      |  | 2008                            |    |  | 2007  |   |  | 2006  |  
|Statement of Operations Data          |  |                                 |    |  |       |   |  |       |  
|Revenue                               |  | 100.0                           | %  |  | 100.0 | % |  | 100.0 | %
|Cost of sales                         |  | 58.1                            |    |  | 54.3  |   |  | 56.3  |  
|                                      |  |                                 |    |  |       |   |  |       |  
|Gross profit                          |  | 41.9                            |    |  | 45.7  |   |  | 43.7  |  
|Operating expenses:                   |  |                                 |    |  |       |   |  |       |  
|Research and development              |  | 13.7                            |    |  | 12.5  |   |  | 10.5  |  
|Selling, general and administrative   |  | 38.3                            |    |  | 30.8  |   |  | 29.2  |  
|Amortization of purchased intangibles |  | 3.2                             |    |  | 2.2   |   |  | 0.2   |  
|Asset impairments                     |  | 36.2                            |    |  |      |   |  |      |  
|                                      |  |                                 |    |  |       |   |  |       |  
|Total operating expenses              |  | 91.4                            |    |  | 45.5  |   |  | 39.9  |  
|                                      |  |                                 |    |  |       |   |  |       |  
|Income (loss) from operations         |  | (49.5                           | )  |  | 0.2   |   |  | 3.7   |  
|Other income, net                     |  | 1.4                             |    |  | 1.5   |   |  | 2.3   |  
|                                      |  |                                 |    |  |       |   |  |       |  
|Income (loss) before income taxes     |  | (48.1                           | )  |  | 1.7   |   |  | 6.0   |  
|Provision (benefit) for income taxes  |  | (2.9                            | )  |  | 0.7   |   |  | 1.8   |  
|                                      |  |                                 |    |  |       |   |  |       |  
|Net income (loss)                     |  | (45.2                           | )% |  | 1.0   | % |  | 4.3   | %
|                                      |  |                                 |    |  |       |   |  |       |  



|(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):



|                             |  |         |        |   |                  |   |        |       |  |   |        |  
|---------------------------- |  | ------- | ------ | - | ---------------- | - | ------ | ----- |  | - | ------ | -
|Year Ended December 31, 2008 |  | Systems |        |   | ProbesandSockets |   |        | Total | 
|Revenue                      |  | $       | 40,870 |   |                  | $ | 35,691 |       |  | $ | 76,561 |  
|Gross Profit                 |  | $       | 13,697 |   |                  | $ | 18,387 |       |  | $ | 32,084 |  
|Gross Margin                 |  |         | 33.5   | % |                  |   | 51.5   | %     |  |   | 41.9   | %
|                             |  |         |       
|Year Ended December 31, 2007 |  |         |        |   |                  |   |        |       | 
|Revenue                      |  | $       | 56,349 |   |                  | $ | 33,573 |       |  | $ | 89,922 |  
|Gross Profit                 |  | $       | 23,382 |   |                  | $ | 17,739 |       |  | $ | 41,121 |  
|Gross Margin                 |  |         | 41.5   | % |                  |   | 52.8   | %     |  |   | 45.7   | %
|                             |  |         |       
|Year Ended December 31, 2006 |  |         |        |   |                  |   |        |       | 
|Revenue                      |  | $       | 54,448 |   |                  | $ | 30,404 |       |  | $ | 84,852 |  
|Gross Profit                 |  | $       | 22,283 |   |                  | $ | 14,759 |       |  | $ | 37,042 |  
|Gross Margin                 |  |         | 40.9   | % |                  |   | 48.5   | %     |  |   | 43.7   | %

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 16 of Notes to Consolidated Financial Statements included in Item 8 of this Report on Form 10-K for
additional information.

Revenue

Revenue decreased $13.3 million, or 14.9%, to $76.6 million in 2008 compared to $89.9 million in 2007 and increased $5.0 million, or 6.0%, in 2007 compared to $84.9 million in 2006.



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Systems

Revenue in Systems decreased $15.5 million, or 27.5%, to $40.9 million in 2008 compared to $56.4 million in 2007 and increased $2.0 million, or 3.5%, in 2007 compared to $54.4 million in 2006.

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



|                                                      |  |                     |    |  |                     |   
|----------------------------------------------------- |  | ------------------- | -- |  | ------------------- | --
|                                                      |  | 2008comparedto 2007 |    |  | 2007comparedto 2006 |   
|Percentage decrease in unit sales                     |  | (17.1               | )% |  | (5.8                | )%
|Percentage increase (decrease) in average sales price |  | (18.3               | )% |  | 9.8                 | % 

We realized decreased unit sales in both our 300mm systems and our non-300mm systems in 2008
compared to 2007 due to the global slow-down in semiconductor markets.

Average sales prices in 2008 compared to 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 2008 compared to 2007 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. Average sales price includes the sales price of any analytical probes, probe cards and
accessories purchased with an engineering probe station.

The decrease in unit sales in 2007 compared to 2006 was due to an increase in
sales of our 300mm systems being offset by a decrease in unit sales of our non-300mm systems. The increase in the 300mm systems was due to increased customer demand. As more customers transitioned to our 300mm systems during 2007, sales of non-300mm
systems declined as a percentage of total system sales.

The increases in average sales price in 2007 compared to 2006 was primarily
attributable to increased unit sales of our 300mm systems, which have a higher average sales price than our non-300mm systems, and declining unit sales of our non-300mm systems. In addition, in 2007 compared to 2006, the average sales price for our
non-300mm systems increased, contributing to the overall increase.

Probes and Sockets

Revenue in Probes and Sockets increased $2.1 million, or 6.3%, to $35.7 million in 2008 compared to $33.6 million in 2007 and increased $3.2 million, or 10.4%, in 2007 compared to
$30.4 million in 2006.

The increase in 2008 compared to 2007 was primarily due to new product introductions, new design wins in the
RF and wireless market, and continued focus on growth 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.

Although Probes and Sockets revenue increased from 2007 to 2008, revenue
in the fourth quarter of 2008 decreased $4.0 million, or 40.3%, to $6.0 million compared to $10.0 million the third quarter of 2008. The revenue decrease in the fourth quarter of 2008 was driven by recent economic turmoil and the overall
decrease in worldwide semiconductor production.

The increase in Probes and Sockets revenue in 2007 compared to 2006 was primarily due to
the addition of Gryphics, Inc. during the second quarter of 2007, which accounted for $3.8 million of the increase.



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##### Table of Contents

Cost of Sales and Gross Margin

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.

Cost of sales decreased $4.3 million, or 8.9%, to $44.5 million in 2008 compared to $48.8 million in 2007
and increased $1.0 million, or 2.1%, in 2007 compared to $47.8 million in 2006. Gross margin (gross profit as a percentage of net sales) was 41.9%, 45.7% and 43.7% in 2008, 2007 and 2006, respectively. The decrease in cost of sales in 2008
compared to 2007 was primarily due to the decrease in sales, partially offset by lower gross margins. The increase in cost of sales in 2007 compared to 2006 was primarily due to the increase in sales, partially offset by higher gross margins.

Systems

The gross margin in Systems
decreased to 33.5% in 2008 from 41.5% in 2007, primarily due to the overall decrease in unit sales as unallocated fixed overhead costs and inventory reserve charges were recorded as a period expense in cost of sales. In addition, there was a shift
in sales product mix to fewer 300mm systems, which typically yield higher gross margins and include more accessories.

The gross margin in
Systems increased slightly to 41.5% in 2007 from 40.9% in 2006 due to a decrease in distribution costs that was offset by higher overhead costs.

Probes
and Sockets

The gross margin in Probes and Sockets decreased to 51.5% in 2008 from 52.8% in 2007, primarily due to lower than expected
sales and production volume in the fourth quarter of 2008, as unallocated fixed overhead costs were recorded as a period expense in cost of sales. The decrease in fourth quarter production volume was partially offset by a gross margin in Probes and
Sockets of 55.5% through the first three quarters of 2008 as efficiencies were achieved with the higher production volumes in those quarters.

Gross margin in Probes and Sockets increased to 52.8% in 2007 from 48.5% in 2006, primarily due to improved production yields, lower warranty costs and increased use of the production facility for research and development.

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 $0.7
million, or 6.8%, to $10.5 million in 2008 compared to $11.2 million in 2007 and increased $2.3 million, or 25.6%, in 2007 compared to $8.9 million in 2006.



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##### Table of Contents

The increase (decrease) was primarily due to the following:



|                                                          |  |                     |           |  
|--------------------------------------------------------- |  | ------------------- | --------- | -
|                                                          |  | 2008Comparedto 2007 |          
|Decrease in wages and benefits due to lower headcount     |  | $                   | (494,000  | )
|Decrease in production costs allocated to R&D             |  |                     | (487,000  | )
|Increase in travel expenses                               |  |                     | 130,000   |  
|Increase in recruiting expenses                           |  |                     | 132,000   |  
|Other, net                                                |  |                     | 19,000    |  
|                                                          |  |                     |           |  
|                                                          |  | $                   | (700,000  | )
|                                                          |  |                     |           |  
|                                                          | 
|                                                          |  | 2007Comparedto 2006 |          
|Increase in wages and benefits due to increased headcount |  | $                   | 1,191,000 |  
|Increase in stock-based compensation                      |  |                     | 56,000    |  
|Increase in production costs allocated to R&D             |  |                     | 542,000   |  
|Increase in severance                                     |  |                     | 42,000    |  
|Increase in prototype parts and design changes            |  |                     | 259,000   |  
|Other, net                                                |  |                     | 210,000   |  
|                                                          |  |                     |           |  
|                                                          |  | $                   | 2,300,000 |  
|                                                          |  |                     |           |  

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 $1.6 million, or 5.7%, to $29.3 million in 2008 compared to $27.7 million in 2007 and increased $2.9
million, or 11.7%, in 2007 compared to $24.8 million in 2006. The increases were primarily due to the following:



|                                                                                                     |  |                     |           |  
|---------------------------------------------------------------------------------------------------- |  | ------------------- | --------- | -
|                                                                                                     |  | 2008Comparedto 2007 |          
|Decrease in external sales commissions                                                               |  | $                   | (995,000  | )
|Increase in accounting fees                                                                          |  |                     | 375,000   |  
|Increase in stock-based compensation expense                                                         |  |                     | 285,000   |  
|Increase in bad debt expense                                                                         |  |                     | 774,000   |  
|Increase in severance costs                                                                          |  |                     | 346,000   |  
|Increase in loss on disposals of long-lived assets                                                   |  |                     | 440,000   |  
|Increase in travel expenses                                                                          |  |                     | 177,000   |  
|Increase in temporary services and consulting fees                                                   |  |                     | 186,000   |  
|Other, net                                                                                           |  |                     | 12,000    |  
|                                                                                                     |  |                     |           |  
|                                                                                                     |  | $                   | 1,600,000 |  
|                                                                                                     |  |                     |           |  
|                                                                                                     | 
|                                                                                                     |  | 2007Comparedto 2006 |          
|Increase in costs related to our China and Taiwan sales offices opened in the second quarter of 2006 |  | $                   | 382,000   |  
|Increase in wages and benefits due to increased headcount                                            |  |                     | 1,091,000 |  
|Increase in IT services, labor and other services due to international expansion                     |  |                     | 149,000   |  
|Increase in accounting fees                                                                          |  |                     | 88,000    |  
|Increased stock-based compensation expense                                                           |  |                     | 419,000   |  
|Increase in recruiting costs                                                                         |  |                     | 114,000   |  
|Increase in severance due to reductions in workforce                                                 |  |                     | 245,000   |  
|Decrease in legal costs                                                                              |  |                     | (368,000  | )
|Increase in costs related our German subsidiary opened in the third quarter of 2007                  |  |                     | 546,000   |  
|Other, net                                                                                           |  |                     | 234,000   |  
|                                                                                                     |  |                     |           |  
|                                                                                                     |  | $                   | 2,900,000 |  
|                                                                                                     |  |                     |           |  



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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 $2.4 million at December 31, 2008.

Asset Impairment

Asset impairment charges
included the following (in thousands):



|                            |  |      |       
|--------------------------- |  | ---- | ------
|Year Ended December 31,     |  | 2008
|Goodwill                    |  | $    | 17,406
|Purchased intangible assets |  |      | 10,157
|Patents                     |  |      | 138   
|                            |  |      |       
|                            |  | $    | 27,701
|                            |  |      |       

During the fourth quarter of 2008, the semiconductor and semiconductor equipment markets continued
to deteriorate and the trading price of our common stock declined significantly. Based on these factors, our annual impairment test of goodwill indicated that the implied fair value of our identified reporting units was less than the carrying value
of goodwill at December 31, 2008. We also tested long-lived assets for impairment, which indicated that the fair value of certain long-lived assets were less than carrying value as of December 31, 2008. Accordingly, we recorded impairment
charges of $27.7 million in the fourth quarter of 2008. See Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

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):



|                                                      |  |                         |       |   |      |   |       |      |  |   |       |  
|----------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                      |  | Year Ended December 31, |      
|                                                      |  | 2008                    |       |   | 2007 |   |       | 2006 | 
|Interest income, net                                  |  | $                       | 862   |   |      | $ | 1,455 |      |  | $ | 1,614 |  
|Remeasurement related foreign currency gains (losses) |  |                         | 458   |   |      |   | (254  | )    |  |   | 97    |  
|Gains (losses) related to foreign currency hedges     |  |                         | (409  | ) |      |   | 238   |      |  |   | 253   |  
|Other                                                 |  |                         | 127   |   |      |   | (103  | )    |  |   | (3    | )
|                                                      |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                      |  | $                       | 1,038 |   |      | $ | 1,336 |      |  | $ | 1,961 |  
|                                                      |  |                         |       |   |      |   |       |      |  |   |       |  

Interest income represents interest earned on cash and cash equivalents and investments in
marketable securities. The decrease in 2008 compared to 2007 was primarily due to lower cash, cash equivalent and marketable securities balances in 2008 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 2008 compared to 2007. The decrease in 2007 compared to 2006 was due to the use of cash for acquisitions as mentioned above and
the use of $9.4 million during 2007 for the purchase of fixed assets, partially offset by $4.0 million of cash generated by operations, net proceeds from the sale of marketable securities of $18.9 million and $2.0 million of cash from the sale of
stock pursuant to our stock plans. These decreases were partially offset by higher interest rates in 2007 compared to 2006.



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##### Table of Contents

Income Taxes

Our provision (benefit) for income taxes totaled $(2.2) million, or 6.1% of income before income taxes, in 2008, $0.6 million, or 38.7% of income before income taxes, in 2007 and $1.5 million, or 29.3%, of income
before income taxes, in 2006. 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. The 2008 effective tax rate differed from the federal
statutory rate due primarily to the full reserve we recorded against our domestic deferred tax assets and the goodwill write-off, which was not deductable for tax purposes.

The 2007 effective tax rate differed from federal statutory rates primarily due to benefits from research and experimental tax credits, non-deductible SFAS No. 123R stock-based compensation
and the non-taxable income for federal tax purposes offset by increases to tax expense related to additions to tax contingencies recorded during the year and an out-of-period tax adjustment related to inter-company sales and unrealized foreign
currency gains and losses.

The 2006 effective tax rate differed from federal statutory rates primarily due to the benefit of non-taxable
interest income for federal tax purposes and the reinstatement of the research and development tax credit, offset by the non-deductible SFAS No. 123R stock-based compensation expense.

Liquidity and Capital Resources

Net cash provided by
operating activities in 2008 was $2.9 million and consisted of our net loss of $34.6 million being offset by net non-cash expenses of $35.9 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net decreased $5.4 million to $12.8 million at December 31, 2008 compared to $18.2 million at December 31, 2007, due
primarily to lower sales in the fourth quarter of 2008 than in the fourth quarter of 2007.

Inventories increased $0.5 million to
$19.1 million at December 31, 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 reserves of $2.8 million are adequate at
December 31, 2008. However, if our actual results are significantly different than our current projections for 2009, we may be required to increase reserves for inventory in future periods.

Net deferred tax assets increased to an asset of $0.3 million at December 31, 2008 from a liability of $0.4 million at December 31, 2007. The
change in deferred taxes was primarily a result of a $10.2 million impairment charge in 2008 related to purchased intangible assets, which decreased deferred tax liabilities by $4.1 million, offset by a $5.5 million increase in the valuation
allowance against deferred tax assets.

Assets held for sale of $0.4 million at December 31, 2008 included certain equipment related
to our machine shop, which we closed in the third quarter of 2008.

Accrued liabilities decreased $1.8 million to $3.8 million at
December 31, 2008 compared to $5.6 million at December 31, 2007, due primarily to a decrease in income taxes payable of $1.5 million and decrease in accrued vacation of $0.3 million.

Purchases of fixed assets of $2.7 million in 2008 were primarily for production probe production and service related equipment. We anticipate spending
approximately $3 million in 2009, primarily for socket production related equipment.



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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 December 31, 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.

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. However, our seasonality can be affected by
general economic trends and it should not be expected that historical revenue patterns will continue.

Contractual Commitments

The following is a summary of our contractual commitments and obligations as of December 31, 2008 (in thousands):



|                           |  |                        |        |      |   |             |  |             |       |               |   |       |  |   |      
|-------------------------- |  | ---------------------- | ------ | ---- | - | ----------- |  | ----------- | ----- | ------------- | - | ----- |  | - | -----
|                           |  | Payments Due By Period
|Contractual Obligation     |  | Total                  |        | 2009 |   | 2010and2011 |  | 2012and2013 |       | 2014andbeyond
|Operating Leases           |  | $                      | 16,047 |      | $ | 2,636       |  | $           | 5,170 |               | $ | 4,498 |  | $ | 3,743
|Capital Leases             |  |                        | 86     |      |   | 23          |  |             | 46    |               |   | 17    |  |   |     
|Purchase Order Commitments |  |                        | 3,394  |      |   | 3,327       |  |             | 67    |               |   |      |  |   |     
|                           |  |                        |        |      |   |             |  |             |       |               |   |       |  |   |      
|                           |  | $                      | 19,527 |      | $ | 5,986       |  | $           | 5,283 |               | $ | 4,515 |  | $ | 3,743
|                           |  |                        |        |      |   |             |  |             |       |               |   |       |  |   |      

Purchase order commitments primarily represent open orders for inventory.

Critical Accounting Policies and the Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that have become increasingly difficult to make in the current economic
environment. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the
reporting period. It is possible that the estimates we make may change in the future.

Revenue Recognition

Revenue from product sales to customers that do not have acceptance criteria, including product sales to distributors, is recognized when a written
purchase order has been obtained, the product is shipped, title has transferred, no obligations remain and collectibility is reasonably assured. Generally, we ship our products with ex works terms. For any shipments with destination terms, we defer
revenue until delivery to the customer. Revenue from customers who have acceptance criteria beyond our standard terms and conditions is deferred until all acceptance criteria are satisfied. Revenue for installation services, consisting of assembly
and testing, and for systems shipped to integrators is also deferred. Deferred revenue related to service contracts is recognized over the life of the contract, typically one to two years. Deferred revenue for systems shipped to integrators is
recognized upon shipment to the final customer.

Our transactions may involve the sale of systems and services under multiple element
arrangements. Revenue under multiple element arrangements is allocated based on the fair value of each element. A typical multiple element arrangement may include some or all of the following components: products, accessories, installation services
and extended warranty contracts. The total sales price is allocated based on the relative fair value of each component when sold separately.



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Allowance for Doubtful Accounts

The allowance for doubtful accounts is estimated based on past collection history and known trends with current customers. Our estimates for allowance for doubtful accounts are reviewed and
updated on a quarterly basis. Changes to the reserve occur based upon changes in revenue levels, associated balances in accounts receivable and estimated changes in collectability. The current economic environment has increased both the risk of bad
debt and the difficulty in estimating the allowance for doubtful accounts. In the fourth quarter of 2008, we increased the allowance for doubtful accounts by $0.8 million, primarily for the specific reserve of receivables from one customer.

Valuation of Excess and Obsolete Inventory

We regularly analyze the value of our inventory based on 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. 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. Inventory is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of quantities on hand, which is determined based on past usage, planned
changes to products and known trends in markets and technology. Because of the long-lived nature of many of our products, we maintain a supply of parts for use in future repairs and customer field service. As these service parts become older, we
apply a higher write-down against the recorded balance, recognizing that the older the part, the less likely it will be used. If circumstances related to our inventories change, our estimates of the value of inventory could materially change.
Inventory write-downs are recorded quarterly as a component of cost of sales.

Lives and Recoverability of Equipment and Other
Long-Lived Assets

We evaluate the remaining lives and recoverability of equipment and other assets, including our intangible
assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. If there is an indication of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying value of the
asset, we adjust the carrying amount of the asset to its estimated fair value. During 2008, based on the results of our testing, we recorded impairment charges of $10.2 million against purchased intangible assets and $0.1 million against patents.
See Note 1 of Notes to Consolidated Financial Statements for additional information. We did not record any impairment charges for long-lived assets during 2007 or 2006.

Goodwill Impairment Testing

Goodwill represents the excess of the aggregate purchase price
over the fair value of the net assets acquired in a purchase business combination. Goodwill is not amortized but rather is reviewed for impairment at least annually, or more frequently if a triggering event occurs, in accordance with the provisions
of SFAS No. 142, Goodwill and Other Intangible Assets. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value, and if an indication of goodwill
impairment exists for the reporting unit, the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting units goodwill as
determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied
fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow (DCF) analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be
performed.

In the fourth quarter of 2008, we performed our annual impairment test of goodwill, which indicated that the implied fair value
of our identified reporting units was less than the carrying value of goodwill at December 31, 2008. Accordingly, we recorded an impairment charge of $17.4 million in the fourth



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quarter of 2008. As of December 31, 2008, we had no goodwill recorded on our balance sheet. There were no impairment charges in 2007 or 2006.

Warranty Liabilities

Warranty
costs include labor to repair the system and replacement parts for defective items, as well as other costs incidental to warranty repairs. We estimate a liability for costs to repair or replace products under warranties ranging from 90 days to
one-year 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. Our estimated warranty costs are reviewed and updated on a quarterly basis. Changes to the reserve occur as volume, product mix and actual warranty costs fluctuate.

Deferred Tax Asset Valuation Allowance

We
record deferred tax assets for the estimated future benefit of research and development tax credits, foreign tax credits, net operating loss carryforwards and other temporary differences to the extent management believes these assets will be
realized. A valuation allowance is recorded when management can not reach the conclusion that it is more likely than not that the deferred tax assets will be realized. Based on this evaluation, in 2008, we recorded a $5.0 million charge to
establish a full valuation allowance against our domestic deferred tax assets, and increased the valuation allowance against foreign deferred tax assets by $500,000. Following this increase, the valuation allowance against deferred tax assets
totaled $7.6 million at December 31, 2008. At December 31, 2008, we had net deferred tax assets on our balance sheet totaling $0.3 million, primarily related to foreign jurisdictions. We may record additional valuation allowances in the
future.

Uncertainty in Income Taxes

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, 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 and applies to all tax positions accounted for under SFAS No. 109, Accounting for Income Taxes. Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense within our
financial statements. At December 31, 2008, we had unrecognized tax benefits of $0.7 million, of which $0.6 million would have an impact on the effective tax rate, and interest and penalties accrued on unrecognized tax benefits were $63,000.

Stock-Based Compensation

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

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

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



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Accounting Pronouncements Issued Not Yet Adopted

See Note 2 of Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for a discussion of accounting pronouncements issued not yet adopted.

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 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Foreign Currency Exchange Risk

We sometimes attempt to mitigate our currency exposures for recorded transactions by
using forward exchange contracts. The purpose of these activities is to reduce the risk that future cash flows of the underlying assets and liabilities will be adversely affected by changes in exchange rates. In some cases, we enter into forward
sale or purchase contracts for foreign currencies, primarily the Japanese yen, to hedge specific receivables and bookings positions. As of December 31, 2008, we had contracts outstanding for the purchase of Japanese yen totaling approximately
$1.2 million, which mature through March 2009.

Historically, we have not attempted to mitigate the impact of foreign currency
fluctuations on the remeasurement of our subsidiaries net assets and results of operations, nor do we enter into derivative financial instruments for speculative purposes.

Our forward exchange contracts do not qualify for hedge accounting treatment in accordance with SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities  an amendment of SFAS No. 133, and, accordingly, gains and losses on our forward exchange contracts are recognized currently as a component of other income (expense).

Interest Rate Risk

Our exposure to market
risk from changes in interest rates relates primarily to our investments. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in
diversified investments, consisting only of investment grade securities.

As of December 31, 2008, we held cash, cash equivalents and
short-term marketable securities of $32.5 million. Declines of interest rates over time would reduce our interest income from our highly liquid short-term investments. A decrease in interest rates of one percent would cause a corresponding decrease
in our annual interest income related to our cash, cash equivalents and marketable securities of approximately $0.3 million, assuming our December 31, 2008 balances remained constant. Due to the nature of our highly liquid cash equivalents, a
change in interest rates would not materially affect the fair market value of our cash and cash equivalents.

As of December 31, 2008,
we held long-term fixed rate investments of $2.5 million that consisted primarily of municipal obligations. An increase or decrease in interest rates would not have a material impact on our results of operations, financial position or cash flows, as
we have classified our securities as available-for-sale and, therefore, may choose to sell or hold them as changes in the market occur. Declines in interest rates over time would reduce our interest income from our long-term investments, as funds
are re-invested at current market interest rates.



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

The
financial statements and notes thereto required by this item begin on page F-1 of this document, as listed in Item 15 of Part IV. Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31,
2008 was as follows:



|                                       |  |            |        |   |            |   |        |            |  |   |            |   |  |   |         |  
|-------------------------------------- |  | ---------- | ------ | - | ---------- | - | ------ | ---------- |  | - | ---------- | - |  | - | ------- | -
|In thousands, except per share data    |  | 1stQuarter |        |   | 2ndQuarter |   |        | 3rdQuarter |  |   | 4thQuarter |  
|2008                                   |  |            |        |   |            |   |        |            |  |   |            |   |  |   |         |  
|Revenue                                |  | $          | 20,759 |   |            | $ | 19,287 |            |  | $ | 21,128     |   |  | $ | 15,387  |  
|Gross profit                           |  |            | 9,783  |   |            |   | 8,398  |            |  |   | 9,060      |   |  |   | 4,843   |  
|Net loss                               |  |            | (16    | ) |            |   | (1,858 | )          |  |   | (1,291     | ) |  |   | (31,412 | )
|Basic net loss per share(1)            |  |            | (0.00  | ) |            |   | (0.14  | )          |  |   | (0.10      | ) |  |   | (2.39   | )
|Diluted net loss per share(1)          |  |            | (0.00  | ) |            |   | (0.14  | )          |  |   | (0.10      | ) |  |   | (2.39   | )
|                                       |  |            |        |  
|2007                                   |  |            |        |   |            |   |        |            |  |   |            |   |  |   |         |  
|Revenue                                |  | $          | 22,471 |   |            | $ | 24,116 |            |  | $ | 21,343     |   |  | $ | 21,992  |  
|Gross profit                           |  |            | 10,262 |   |            |   | 10,803 |            |  |   | 9,888      |   |  |   | 10,168  |  
|Net income (loss)                      |  |            | 1,048  |   |            |   | 238    |            |  |   | (216       | ) |  |   | (140    | )
|Basic net income (loss) per share(1)   |  |            | 0.09   |   |            |   | 0.02   |            |  |   | (0.02      | ) |  |   | (0.01   | )
|Diluted net income (loss) per share(1) |  |            | 0.09   |   |            |   | 0.02   |            |  |   | (0.02      | ) |  |   | (0.01   | )



|(1) | Quarterly per share amounts may not add to yearly totals due to rounding.
|--- | -------------------------------------------------------------------------



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Managements Report on Internal
Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a 15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

Our independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2008. Their report appears below.

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.



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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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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Cascade Microtech, Inc.:

We have audited Cascade Microtech, Inc.s (the Company) internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed 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. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cascade Microtech, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated March 10, 2009
expressed an unqualified opinion on those consolidated financial statements.



|                
|----------------
|/s/ KPMG LLP    
|Portland, Oregon
|March 10, 2009  



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|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.

PART III

We
have incorporated by reference into Part III the information that will appear in our definitive proxy statement for our 2009 Annual Meeting of Shareholders (the Proxy Statement), which will be filed within 120 days after the end of our
year ended December 31, 2008 pursuant to Regulation 14A.



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

Information with respect to directors and executive officers is included under Election of Directors, Meetings and Committees of the Board of Directors, Executive Officers, Section 16(a) Beneficial
Ownership Reporting Compliance, Audit Committee Financial Expert and Code of Ethics in our definitive proxy statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

Information with respect to
executive compensation is included under Director Compensation, Executive Compensation, Compensation Committee Report, Compensation Discussion and Analysis, Potential Payments Upon Termination or
Change-in-Control and Compensation Committee Interlocks and Insider Participation in our definitive proxy statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

Equity Compensation Plan Information

The following table summarizes equity securities authorized for
issuance pursuant to compensation plans as of December 31, 2008.



|                                                          |  |                                                                                        |     |  |                                                                      |       |                                                                                                                              |         |    
|--------------------------------------------------------- |  | -------------------------------------------------------------------------------------- | --- |  | -------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------------------------- | ------- | ---
|                                                          |  | A                                                                                      |     |  | B                                                                    |       | C                                                                                                                            |        
|Plan Category                                             |  | Number ofsecuritiesto be issueduponexercise ofoutstandingoptions,warrantsand
rights(1) |     |  | Weightedaverageexerciseprice ofoutstandingoptions,warrantsand rights |       | Number ofsecuritiesremainingavailable forfutureissuanceunder
equitycompensationplans(excludingsecuritiesreflected incolumn A |        
|Equity compensation plans approved by shareholders(3)     |  | 1,013,220                                                                              | (1) |  | $                                                                    | 10.22 |                                                                                                                              | 731,402 | (2)
|Equity compensation plans not approved by shareholders(4) |  |                                                                                       |     |  |                                                                      |      |                                                                                                                              |        |    
|                                                          |  |                                                                                        |     |  |                                                                      |       |                                                                                                                              |         |    
|Total                                                     |  | 1,013,220                                                                              |     |  | $                                                                    | 10.22 |                                                                                                                              | 731,402 |    
|                                                          |  |                                                                                        |     |  |                                                                      |       |                                                                                                                              |         |    



|(1) | Excludes purchase rights accruing under our 2004 Employee Stock Purchase Plan (the Purchase Plan) which has a shareholder approved reserve of 400,000
shares. Under the Purchase Plan, each eligible employee may purchase shares of our common stock at semi-annual intervals at a purchase price per share equal to 85% of the lower of (i) the fair market value of the common stock on the enrollment
date for the offering period in which that semi-annual purchase date occurs or (ii) the fair market value on the semi-annual purchase date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents 569,583 shares of common stock available for issuance under our 1993 Stock Incentive Plan and our 2000 Stock Incentive Plan combined and 161,819
shares of common stock available for purchase under our 2004 Employee Stock Purchase Plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Consists of our 1993 Stock Incentive Plan, 2000 Stock Incentive Plan and 2004 Employee Stock Purchase Plan.
|--- | -----------------------------------------------------------------------------------------------------------

|(4) | We do not have any equity compensation plans or arrangements that have not been approved by shareholders.
|--- | ---------------------------------------------------------------------------------------------------------



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Additional information required by this item is included under Security Ownership of Certain
Beneficial Owners and Management in our definitive proxy statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

The information required by this item is included under Certain Relationships and Related Transactions and Director Independence and Lead Independent Director in our definitive proxy statement
for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The
information required by this item is included in our Proxy Statement for our 2009 Annual Meeting of Shareholders and is incorporated herein by reference.

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

Financial Statements
and Schedules

The Consolidated Financial Statements, together with the report thereon of KPMG LLP, are included on the pages indicated
below:



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Registered Public Accounting Firm                                              |  | F-1 
|                                                                                                     | 
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                         |  | F-2 
|                                                                                                     | 
|Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006           |  | F-3 
|                                                                                                     | 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2008, 2007 and
2006 |  | F-4 
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006           |  | F-5 
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | F-6 
|                                                                                                     | 
|Schedule II  Valuation and Qualifying Accounts                                                      |  | F-26

Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index. Exhibit numbers marked with an asterisk (*) represent management or compensatory arrangements.



|            |  |                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                          
|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 our Current Report on Form 8-K filed on April 5, 2007.               
|            | 
|3.1         |  | Third Amended and Restated Articles of Incorporation of Cascade Microtech, Inc. Incorporated by reference to Exhibit 3.1 to our Form 8-K filed December 23,
2004.                                                                                    
|            | 
|3.2         |  | Second Amended and Restated Bylaws of Cascade Microtech, Inc., as amended March 31, 2006. Incorporated by reference to Form 10-Q for the quarterly period ended March 31,
2006 and filed with the Securities and Exchange Commission on May 10, 2006.
|            | 
|3.3         |  | First Amendment to Second Amended and Restated Bylaws of Cascade Microtech, Inc. dated November 16, 2007. Incorporated by reference to our Current Report on Form 8-K
filed on November 21, 2007.                                                    
|            | 
|4.1         |  | Reference is made to Exhibit 3.1                                                                                                                                                                                                                     
|            | 
|10.1*       |  | Form of Indemnity Agreement between Cascade Microtech, Inc. and each of its Officers and Directors. Incorporated by reference to Exhibit 10.1 to our Registration Statement on
Form S-1, File No. 333-47100.                                         



43



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                
|10.2*       |  | Cascade Microtech, Inc. 1993 Stock Incentive Plan, as amended. Incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-1, File
No. 333-47100.                                                                                                                                                                    
|            | 
|10.3*       |  | Cascade Microtech, Inc. 2000 Stock Incentive Plan, as amended. Incorporated by reference to Form 8-K as filed with the Securities and Exchange Commission on May 24, 2006.                                                                                                                                                                 
|            | 
|10.4*       |  | Cascade Microtech, Inc. 2004 Employee Stock Purchase Plan, as amended.                                                                                                                                                                                                                                                                     
|            | 
|10.5*       |  | Employment Agreement of Steven Sipowicz. Incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-1, File
No. 333-113256.                                                                                                                                                                                        
|            | 
|10.6*       |  | First Amendment to Executive Employment Agreement of Steven Sipowicz dated October 27, 2005. Incorporated by reference to Exhibit 10.2 to our Form 10-Q for the quarterly
period ended September 30, 2005 and filed November 14, 2005.                                                                                                     
|            | 
|10.7        |  | Lease Agreements I and II between Amberjack, Ltd. And Cascade Microtech, Inc. dated August 20, 1997, and Amendment No. 2 to Lease Agreement I dated
July 23, 1998, and Amendment No. 2 to Lease Agreement II dated April 12, 1999. Incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-1, File No. 333-47100.
|            | 
|10.8        |  | Third Amendment dated August 11, 2006 to Lease Agreement I dated August 20, 1997 between Amberjack, LTD. And Cascade Microtech, Inc. Incorporated by reference to Exhibit 10.2
to our Form 10-Q for the quarterly period ended September 30, 2006 and filed November 9, 2006.                                                              
|            | 
|10.9        |  | Third Amendment dated August 11, 2006 to Lease Agreement II dated August 20, 1997 between Amberjack, LTD. And Cascade Microtech, Inc. Incorporated by reference to Exhibit
10.3 to our Form 10-Q for the quarterly period ended September 30, 2006 and filed November 9, 2006.                                                             
|            | 
|10.10       |  | Lease Agreement between Bermuda Trust (Singapore) Limited and Cascade Microtech, Inc. commencing December 12, 2003. Incorporated by reference to Exhibit 10.6
to our Registration Statement on Form S-1, File No. 333-113256.                                                                                                              
|            | 
|10.11       |  | Patent License Agreement between Micronics Japan Co., Ltd, Hewlett Packard Japan, Ltd., and Cascade Microtech Japan, Inc. dated July 28, 1997. Incorporated by reference to
Exhibit 10.14 to our Registration Statement on Form S-1, File No. 333-47100.                                                                                   
|            | 
|10.12       |  | Purchase Agreement between Intel Corporation and Cascade Microtech, Inc., dated April 12, 2003. Incorporated by reference to Exhibit 10.11 to our Registration
Statement on Form S-1, File No. 333-113256.                                                                                                                                 
|            | 
|10.13*      |  | Executive Compensation Plan for the Six-Month Period Ending June 30, 2009. Incorporated by reference to our Current Report on Form 8-K filed on February 10,
2009.                                                                                                                                                                         
|            | 
|10.14       |  | Summary of Non-Employee Director Compensation. Incorporated by reference to Exhibit 10.1 to Form 8-K filed December 13, 2005.                                                                                                                                                                                                              
|            | 
|10.15       |  | 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 our Current
Report on Form 8-K filed on April 5, 2007.                                                                                                                   
|            | 
|10.16*      |  | Executive Employment Agreement between Cascade Microtech, Inc. and Geoff Wild. Incorporated by reference to our Current Report on Form 8-K filed on December 6,
2007.                                                                                                                                                                      
|            | 
|14          |  | Code of Ethics. Incorporated by reference to Exhibit 14 to our Form 10-K for the year ended December 31, 2004 and filed March 29, 2005.                                                                                                                                                                                                    
|            | 
|21          |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                      
|            | 
|23          |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                        
|            | 
|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 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.                                                                                                                                                                                   



44



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cascade Microtech, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on March 10, 2009:



CASCADE MICROTECH, INC.(Registrant)By:

/s/ GEOFF WILDGeoff WildDirector, President and Chief Executive Officer(Principal Executive Officer)


Pursuant to the request of the Securities Exchange Act of 1934, this report has been signed
below on behalf of the Registrant and in the capacities indicated on March 10, 2009.



|                      |  |  |  |                                                  
|--------------------- |  |  |  | -------------------------------------------------
|SIGNATURE             |  |  |  | TITLE                                            
|                      |  | 
|/s/ GEOFF WILD        |  |  |  | Director, President and Chief Executive Officer  
|Geoff Wild            |  |  |  | (Principal Executive Officer)                    
|                      |  | 
|/s/ STEVEN SIPOWICZ   |  |  |  | Chief Financial Officer and Treasurer            
|Steven Sipowicz       |  |  |  | (Principal Financial and Accounting Officer)     
|                      |  | 
|/s/ ERIC W. STRID     |  |  |  | Chairman of the Board and Chief Technical Officer
|Eric W. Strid         |  |  |  |                                                  
|                      |  | 
|/s/ KEITH BARNES      |  |  |  | Director                                         
|Keith Barnes          |  |  |  |                                                  
|                      |  | 
|/s/ F. PAUL CARLSON   |  |  |  | Director                                         
|F. Paul Carlson       |  |  |  |                                                  
|                      |  | 
|/s/ GEORGE P. OLEARY |  |  |  | Director                                         
|George P. OLeary     |  |  |  |                                                  
|                      |  | 
|/s/ WILLIAM R. SPIVEY |  |  |  | Director                                         
|William R. Spivey     |  |  |  |                                                  
|                      |  | 
|/s/ RAYMOND A. LINK   |  |  |  | Director                                         
|Raymond A. Link       |  |  |  |                                                  



45



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Cascade Microtech, Inc.:

We have audited the accompanying consolidated balance sheets of Cascade Microtech, Inc and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the years in the three-year period ended December 31, 2008. In connection with our audits of the
consolidated financial statements, we have also audited the accompanying consolidated financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cascade Microtech, Inc. and subsidiaries as of December 31, 2008 and
2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2009 expressed an
unqualified opinion on the effectiveness of the Companys internal control over financial reporting.

/s/ KPMG LLP

Portland, Oregon

March 10, 2009



F-1



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##### Table of Contents

Cascade Microtech, Inc.

Consolidated Balance Sheets

(In
thousands, except share par value)



|                                                                                                    |  |              |        |   |      |   |        
|--------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | -------
|                                                                                                    |  | December 31,
|                                                                                                    |  | 2008         |        |   | 2007
|Assets                                                                                              |  |              |        |   |      |   |        
|Current Assets:                                                                                     |  |              |        |   |      |   |        
|Cash and cash equivalents                                                                           |  | $            | 3,750  |   |      | $ | 4,900  
|Short-term marketable securities                                                                    |  |              | 28,795 |   |      |   | 24,521 
|Accounts receivable, net of allowances of $1,029 and $203                                           |  |              | 12,801 |   |      |   | 18,195 
|Inventories                                                                                         |  |              | 19,079 |   |      |   | 18,608 
|Prepaid expenses and other                                                                          |  |              | 1,367  |   |      |   | 1,874  
|Taxes receivable                                                                                    |  |              | 1,003  |   |      |   |       
|Deferred income taxes                                                                               |  |              | 99     |   |      |   | 2,729  
|Assets held for sale                                                                                |  |              | 400    |   |      |   |       
|                                                                                                    |  |              |        |   |      |   |        
|Total Current Assets                                                                                |  |              | 67,294 |   |      |   | 70,827 
|                                                                                                    |  |             
|Long-term marketable securities                                                                     |  |              | 2,465  |   |      |   | 4,836  
|Fixed assets, net of accumulated depreciation of $14,769 and $14,280                                |  |              | 13,580 |   |      |   | 14,575 
|Goodwill                                                                                            |  |              |       |   |      |   | 17,310 
|Purchased intangible assets, net of accumulated amortization of $1,166 and $2,106                   |  |              | 2,425  |   |      |   | 15,042 
|Deferred income taxes                                                                               |  |              | 237    |   |      |   |       
|Other assets, net of accumulated amortization of $3,397 and $3,253                                  |  |              | 2,455  |   |      |   | 2,691  
|                                                                                                    |  |              |        |   |      |   |        
|Total Assets                                                                                        |  | $            | 88,456 |   |      | $ | 125,281
|                                                                                                    |  |              |        |   |      |   |        
|                                                                                                    |  |             
|Liabilities and Shareholders' Equity                                                                |  |              |        |   |      |   |        
|Current Liabilities:                                                                                |  |              |        |   |      |   |        
|Current portion of capital leases                                                                   |  | $            | 19     |   |      | $ | 13     
|Accounts payable                                                                                    |  |              | 4,110  |   |      |   | 5,158  
|Deferred revenue                                                                                    |  |              | 1,120  |   |      |   | 1,102  
|Accrued liabilities                                                                                 |  |              | 3,776  |   |      |   | 5,589  
|                                                                                                    |  |              |        |   |      |   |        
|Total Current Liabilities                                                                           |  |              | 9,025  |   |      |   | 11,862 
|                                                                                                    |  |             
|Capital leases, net of current portion                                                              |  |              | 62     |   |      |   | 51     
|Deferred income taxes                                                                               |  |              |       |   |      |   | 3,114  
|Deferred revenue                                                                                    |  |              | 313    |   |      |   | 481    
|Other long-term liabilities                                                                         |  |              | 2,356  |   |      |   | 2,168  
|                                                                                                    |  |              |        |   |      |   |        
|Total Liabilities                                                                                   |  |              | 11,756 |   |      |   | 17,676 
|                                                                                                    |  |             
|Shareholders Equity:                                                                               |  |              |        |   |      |   |        
|Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 13,164 and 12,878 |  |              | 132    |   |      |   | 129    
|Additional paid-in capital                                                                          |  |              | 83,213 |   |      |   | 79,568 
|Accumulated other comprehensive income                                                              |  |              | 69     |   |      |   | 45     
|Retained earnings (deficit)                                                                         |  |              | (6,714 | ) |      |   | 27,863 
|                                                                                                    |  |              |        |   |      |   |        
|Total Shareholders' Equity                                                                          |  |              | 76,700 |   |      |   | 107,605
|                                                                                                    |  |              |        |   |      |   |        
|Total Liabilities and Shareholders' Equity                                                          |  | $            | 88,456 |   |      | $ | 125,281
|                                                                                                    |  |              |        |   |      |   |        

See accompanying Notes to Consolidated Financial Statements.



F-2



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##### Table of Contents

Cascade Microtech, Inc.

Consolidated Statements of Operations

(In thousands, except share par value)



|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|-------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------
|                                       |  | For the Year Ended December 31,
|                                       |  | 2008                            |         |   | 2007 |   |        | 2006
|Revenue                                |  | $                               | 76,561  |   |      | $ | 89,922 |      |  | $ | 84,852
|Cost of sales                          |  |                                 | 44,477  |   |      |   | 48,801 |      |  |   | 47,810
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|Gross profit                           |  |                                 | 32,084  |   |      |   | 41,121 |      |  |   | 37,042
|                                       |  |                                 |        
|Operating expenses:                    |  |                                 |         |   |      |   |        |      |  |   |       
|                                       |  |                                 |        
|Research and development               |  |                                 | 10,473  |   |      |   | 11,241 |      |  |   | 8,949 
|Selling, general and administrative    |  |                                 | 29,311  |   |      |   | 27,723 |      |  |   | 24,819
|Amortization of purchased intangibles  |  |                                 | 2,461   |   |      |   | 1,977  |      |  |   | 130   
|Asset impairment charges               |  |                                 | 27,701  |   |      |   |       |      |  |   |      
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|                                       |  |                                 | 69,946  |   |      |   | 40,941 |      |  |   | 33,898
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|                                       |  |                                 |        
|Income (loss) from operations          |  |                                 | (37,862 | ) |      |   | 180    |      |  |   | 3,144 
|                                       |  |                                 |        
|Other income (expense):                |  |                                 |         |   |      |   |        |      |  |   |       
|Interest income, net                   |  |                                 | 862     |   |      |   | 1,455  |      |  |   | 1,614 
|Other, net                             |  |                                 | 176     |   |      |   | (119   | )    |  |   | 347   
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|                                       |  |                                 | 1,038   |   |      |   | 1,336  |      |  |   | 1,961 
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|                                       |  |                                 |        
|Income (loss) before income taxes      |  |                                 | (36,824 | ) |      |   | 1,516  |      |  |   | 5,105 
|Provision (benefit) for income taxes   |  |                                 | (2,247  | ) |      |   | 586    |      |  |   | 1,495 
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|Net income (loss)                      |  | $                               | (34,577 | ) |      | $ | 930    |      |  | $ | 3,610 
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|                                       |  |                                 |        
|Basic net income (loss) per share      |  | $                               | (2.65   | ) |      | $ | 0.07   |      |  | $ | 0.31  
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|                                       |  |                                 |        
|Diluted net income (loss) per          |  | $                               | (2.65   | ) |      | $ | 0.07   |      |  | $ | 0.30  
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|                                       |  |                                 |        
|Shares used in per share calculations: |  |                                 |         |   |      |   |        |      |  |   |       
|Basic                                  |  |                                 | 13,071  |   |      |   | 12,550 |      |  |   | 11,482
|                                       |  |                                 |         |   |      |   |        |      |  |   |       
|Diluted                                |  |                                 | 13,071  |   |      |   | 12,840 |      |  |   | 11,959
|                                       |  |                                 |         |   |      |   |        |      |  |   |       

See accompanying Notes to Consolidated Financial Statements.



F-3



---

##### Table of Contents

Cascade Microtech, Inc.

Consolidated Statements of Shareholders Equity for The Years Ended December 31, 2008, 2007, 2006

(In thousands)



|                                                                             |  |              |  |                          |     |  |                          |        |   |                                            |   |      |                  |  |   |                          |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | --- |  | ------------------------ | ------ | - | ------------------------------------------ | - | ---- | ---------------- |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                             |  | Common Stock |  | AdditionalPaid-InCapital |     |  | DeferredStock-BasedComp. |        |   | AccumulatedOtherComprehensiveIncome (Loss) |   |      | RetainedEarnings |  |   | TotalShareholdersEquity |  
|                                                                             |  | Shares       |  | Amount                   |     |  |                          |        |  
|Balance at December 31, 2005                                                 |  | 11,328       |  | $                        | 113 |  | $                        | 58,287 |   |                                            | $ | (142 | )                |  | $ | (76                      | ) |  | $ | 23,323  |   |  | $ | 81,505  |  
|                                                                             |  |              |  |                          |     |  |                         
|Common stock issued pursuant to stock plans                                  |  | 389          |  |                          | 4   |  |                          | 2,172  |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 2,176   |  
|Reversal of deferred stock-based compensation upon adoption of SFAS No. 123R |  |             |  |                          |    |  |                          | (142   | ) |                                            |   | 142  |                  |  |   |                         |   |  |   |        |   |  |   |        |  
|Stock-based compensation                                                     |  |             |  |                          |    |  |                          | 1,882  |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 1,882   |  
|Tax benefit of stock option exercises                                        |  |             |  |                          |    |  |                          | 945    |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 945     |  
|Unrealized holding gain on investments, net of tax                           |  |             |  |                          |    |  |                          |       |   |                                            |   |     |                  |  |   | 75                       |   |  |   |        |   |  |   | 75      |  
|Net income                                                                   |  |             |  |                          |    |  |                          |       |   |                                            |   |     |                  |  |   |                         |   |  |   | 3,610   |   |  |   | 3,610   |  
|                                                                             |  |              |  |                          |     |  |                          |        |   |                                            |   |      |                  |  |   |                          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2006                                                 |  | 11,717       |  |                          | 117 |  |                          | 63,144 |   |                                            |   |     |                  |  |   | (1                       | ) |  |   | 26,933  |   |  |   | 90,193  |  
|                                                                             |  |              |  |                          |     |  |                         
|Common stock issued pursuant to stock plans                                  |  | 318          |  |                          | 3   |  |                          | 1,986  |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 1,989   |  
|Common stock issued for acquisition                                          |  | 843          |  |                          | 9   |  |                          | 11,950 |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 11,959  |  
|Stock-based compensation                                                     |  |             |  |                          |    |  |                          | 2,346  |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 2,346   |  
|Tax benefit of stock option exercises                                        |  |             |  |                          |    |  |                          | 142    |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 142     |  
|Unrealized holding gain on investments, net of tax                           |  |             |  |                          |    |  |                          |       |   |                                            |   |     |                  |  |   | 46                       |   |  |   |        |   |  |   | 46      |  
|Net income                                                                   |  |             |  |                          |    |  |                          |       |   |                                            |   |     |                  |  |   |                         |   |  |   | 930     |   |  |   | 930     |  
|                                                                             |  |              |  |                          |     |  |                          |        |   |                                            |   |      |                  |  |   |                          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2007                                                 |  | 12,878       |  |                          | 129 |  |                          | 79,568 |   |                                            |   |     |                  |  |   | 45                       |   |  |   | 27,863  |   |  |   | 107,605 |  
|                                                                             |  |              |  |                          |     |  |                         
|Common stock issued pursuant to stock plans                                  |  | 286          |  |                          | 3   |  |                          | 1,395  |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 1,398   |  
|Value of vested restricted stock withheld for tax liability                  |  |             |  |                          |    |  |                          | (59    | ) |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | (59     | )
|Stock-based compensation                                                     |  |             |  |                          |    |  |                          | 2,531  |   |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | 2,531   |  
|Reversal of tax benefit related to stock option exercises                    |  |             |  |                          |    |  |                          | (222   | ) |                                            |   |     |                  |  |   |                         |   |  |   |        |   |  |   | (222    | )
|Unrealized holding gain on investments, net of tax                           |  |             |  |                          |    |  |                          |       |   |                                            |   |     |                  |  |   | 24                       |   |  |   |        |   |  |   | 24      |  
|Net loss                                                                     |  |             |  |                          |    |  |                          |       |   |                                            |   |     |                  |  |   |                         |   |  |   | (34,577 | ) |  |   | (34,577 | )
|                                                                             |  |              |  |                          |     |  |                          |        |   |                                            |   |      |                  |  |   |                          |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2008                                                 |  | 13,164       |  | $                        | 132 |  | $                        | 83,213 |   |                                            | $ |     |                  |  | $ | 69                       |   |  | $ | (6,714  | ) |  | $ | 76,700  |  
|                                                                             |  |              |  |                          |     |  |                          |        |   |                                            |   |      |                  |  |   |                          |   |  |   |         |   |  |   |         |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

Cascade Microtech, Inc.

Consolidated Statements of Cash Flows

(In thousands)



|                                                                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                    |  | For the Year Ended December 31, |        
|                                                                                                                    |  | 2008                            |         |   | 2007 |   |         | 2006 | 
|Cash flows from operating activities:                                                                               |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                                   |  | $                               | (34,577 | ) |      | $ | 930     |      |  | $ | 3,610   |  
|Adjustments to reconcile net income (loss) to net cash flows provided by operating activities, net of acquisitions: |  |                                 |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                                                       |  |                                 | 5,867   |   |      |   | 4,688   |      |  |   | 2,065   |  
|Stock-based compensation, net                                                                                       |  |                                 | 2,531   |   |      |   | 2,346   |      |  |   | 1,882   |  
|Impairment charges                                                                                                  |  |                                 | 27,701  |   |      |   |        |      |  |   |        |  
|Loss on disposal of long-lived assets                                                                               |  |                                 | 523     |   |      |   | 100     |      |  |   | 3       |  
|Loss on disposal of assets held for sale                                                                            |  |                                 | 15      |   |      |   |        |      |  |   |        |  
|Deferred income taxes                                                                                               |  |                                 | (721    | ) |      |   | (1,457  | )    |  |   | (451    | )
|(Increase) decrease, net of acquisitions, in:                                                                       |  |                                 |         |   |      |   |         |      |  |   |         |  
|Accounts receivable, net                                                                                            |  |                                 | 5,394   |   |      |   | 441     |      |  |   | (1,460  | )
|Inventories, net                                                                                                    |  |                                 | (471    | ) |      |   | (2,899  | )    |  |   | (4,086  | )
|Prepaid expenses and other                                                                                          |  |                                 | (532    | ) |      |   | 349     |      |  |   | 707     |  
|Increase (decrease), net of acquisitions, in:                                                                       |  |                                 |         |   |      |   |         |      |  |   |         |  
|Accounts payable                                                                                                    |  |                                 | (48     | ) |      |   | (2,251  | )    |  |   | 1,990   |  
|Deferred revenue                                                                                                    |  |                                 | (150    | ) |      |   | 200     |      |  |   | 612     |  
|Accrued and other long-term liabilities                                                                             |  |                                 | (1,625  | ) |      |   | 1,560   |      |  |   | 2,265   |  
|                                                                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                                           |  |                                 | 3,907   |   |      |   | 4,007   |      |  |   | 7,137   |  
|                                                                                                                    |  |                                 |        
|Cash flows from investing activities:                                                                               |  |                                 |         |   |      |   |         |      |  |   |         |  
|Purchase of marketable securities                                                                                   |  |                                 | (47,483 | ) |      |   | (23,726 | )    |  |   | (52,152 | )
|Proceeds from sale of marketable securities                                                                         |  |                                 | 45,604  |   |      |   | 42,611  |      |  |   | 53,702  |  
|Purchase of fixed assets                                                                                            |  |                                 | (2,708  | ) |      |   | (9,440  | )    |  |   | (3,970  | )
|Proceeds from sale of fixed assets and assets held for sale                                                         |  |                                 | 296     |   |      |   | 7       |      |  |   | 9       |  
|Investment in patents and other assets                                                                              |  |                                 | (772    | ) |      |   | (1,042  | )    |  |   | (768    | )
|Cash paid for acquisitions, net of cash acquired                                                                    |  |                                 | (1,096  | ) |      |   | (14,905 | )    |  |   | (4,035  | )
|                                                                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                                               |  |                                 | (6,159  | ) |      |   | (6,495  | )    |  |   | (7,214  | )
|                                                                                                                    |  |                                 |        
|Cash flows from financing activities:                                                                               |  |                                 |         |   |      |   |         |      |  |   |         |  
|Principal payments on capital lease obligations                                                                     |  |                                 | (15     | ) |      |   | (3      | )    |  |   | (8      | )
|Excess (reversal of) tax benefits related to stock options exercises                                                |  |                                 | (222    | ) |      |   | 142     |      |  |   | 945     |  
|Withholding taxes paid on net settlement of vested restricted stock units                                           |  |                                 | (59     | ) |      |   |        |      |  |   |        |  
|Proceeds from issuances of common stock                                                                             |  |                                 | 1,398   |   |      |   | 1,989   |      |  |   | 2,176   |  
|                                                                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                                           |  |                                 | 1,102   |   |      |   | 2,128   |      |  |   | 3,113   |  
|                                                                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|                                                                                                                    |  |                                 |        
|Increase (decrease) in cash and cash equivalents                                                                    |  |                                 | (1,150  | ) |      |   | (360    | )    |  |   | 3,036   |  
|                                                                                                                    |  |                                 |        
|Cash and cash equivalents:                                                                                          |  |                                 |         |   |      |   |         |      |  |   |         |  
|Beginning of year                                                                                                   |  |                                 | 4,900   |   |      |   | 5,260   |      |  |   | 2,224   |  
|                                                                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|End of year                                                                                                         |  | $                               | 3,750   |   |      | $ | 4,900   |      |  | $ | 5,260   |  
|                                                                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|                                                                                                                    |  |                                 |        
|Supplemental disclosure of cash flow information:                                                                   |  |                                 |         |   |      |   |         |      |  |   |         |  
|Cash paid for interest                                                                                              |  | $                               | 2       |   |      | $ | 2       |      |  | $ | 1       |  
|Cash paid (refunds received) for income taxes, net                                                                  |  |                                 | 1,176   |   |      |   | 1,425   |      |  |   | (1,193  | )
|                                                                                                                    |  |                                 |        
|Supplemental disclosure of non-cash information                                                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Reversal of deferred stock-based compensation                                                                       |  | $                               |        |   |      | $ |        |      |  | $ | 142     |  
|Common stock issued in connection with Gryphics acquisition                                                         |  |                                 |        |   |      |   | 11,959  |      |  |   |        |  
|Assets acquired with acquisitions                                                                                   |  |                                 |        |   |      |   | 16,921  |      |  |   |        |  
|Liabilities acquired with acquisitions                                                                              |  |                                 |        |   |      |   | 4,962   |      |  |   | 119     |  
|Accrual of additional acquisition payment                                                                           |  |                                 |        |   |      |   | 1,000   |      |  |   |        |  
|Equipment acquired with capital lease                                                                               |  |                                 | 32      |   |      |   | 67      |      |  |   |        |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

Cascade Microtech, Inc.

Notes to Consolidated Financial Statements

NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

We design, develop, manufacture and sell 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.

Principles of Consolidation

The consolidated financial statements include the accounts of Cascade
Microtech, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

The functional
currency of our foreign subsidiaries is the U.S. dollar. Nonmonetary balance sheet items are remeasured at historical rates and monetary balance sheet items are remeasured at current rates. Exchange gains and losses from remeasurement of monetary
assets and liabilities are recognized currently in our consolidated statements of operations.

Use of Estimates in Financial Reporting

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that have become increasingly difficult to make in the current economic environment. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as revenues and expenses reported for the periods presented. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful
accounts, valuation of excess and obsolete inventory, lives and recoverability of equipment and other long-lived assets, warranty liabilities, deferred tax asset valuation allowance, unrecognized tax benefits, stock-based compensation, 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.

Cash and Cash Equivalents

Included in cash and cash equivalents were cash equivalents of $76,000 and $65,000 at
December 31, 2008 and 2007, respectively, which consisted of money market funds, and are stated at cost, which approximates market value. We consider all highly liquid investments with an original maturity of three months or less to be cash
equivalents. Our cash balances with financial institutions may exceed the deposit insurance limits.

Marketable Securities

We account for our marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. We classify our marketable securities as available-for-sale and, accordingly, record them at current market value. Unrealized holding gains and losses are excluded from earnings and are
reported as a separate component of shareholders equity until realized. Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for
determining the cost of securities sold.

We periodically evaluate whether declines in fair values of our investments below their cost are
other-than-temporary. This evaluation consists of qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as our ability and intent to hold the investment until a forecasted recovery
occurs.



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Trade Accounts Receivable

Trade accounts receivable are recorded at their invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts
receivable. We determine our allowance for doubtful accounts utilizing historical collection percentages considering the aging of the accounts and known trends with current customers, including recent significant changes in their financial position.

The provision for doubtful accounts totaled $829,000, $67,000 and $114,000, respectively, in 2008, 2007 and 2006. The allowance for
doubtful accounts totaled $1.0 million and $203,000, respectively, at December 31, 2008 and 2007. Historically, write-offs have been insignificant. The allowance for doubtful accounts at December 31, 2008 includes a specific reserve of
$766,000 for one customer that was recorded in the fourth quarter of 2008.

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. Inventory reserve charges totaled $827,000,
$519,000 and $285,000, respectively, in 2008, 2007 and 2006.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short
maturities.

Fixed Assets

Equipment and leasehold improvements are stated at cost. Equipment under capital lease is recorded at the net present value of the future minimum lease payments at the inception of the lease. Maintenance and repairs are expensed as
incurred. We do not accrue for the future cost of periodic major overhauls and planned maintenance of plant and equipment in annual or interim periods. Depreciation of owned equipment is provided using the straight-line method over the estimated
useful lives of the assets, ranging from two to seven years. Amortization of equipment under capital leases and leasehold improvements is provided using the straight-line method over the life of the lease or the useful life of the asset, whichever
is shorter. Fixed assets are reviewed for impairment as discussed below under Accounting for the Impairment of Long-Lived Assets. We did not capitalize any interest during 2008, 2007 or 2006.

Goodwill

Goodwill represents the excess of
the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is not amortized but rather is reviewed for impairment at least annually, or more frequently if a triggering event occurs, in
accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value,
and if an indication of goodwill impairment exists for the reporting unit, the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the
reporting units goodwill as determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in accordance with SFAS No. 141, Business Combinations. The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow (DCF) analysis. If the fair value of the reporting unit exceeds its carrying value,
step two does not need to be performed.



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In the fourth quarter of 2008, we performed our annual impairment test of goodwill, which indicated that
the implied fair value of our identified reporting units was less than the carrying value of goodwill at December 31, 2008. Accordingly, we recorded an impairment charge of $17.4 million in the fourth quarter of 2008 and, as of
December 31, 2008, we had no goodwill recorded on our balance sheet. There were no impairment charges in 2007 or 2006.

Purchased Intangible
Assets

Purchased intangible assets at December 31, 2008 and 2007 totaled $2.4 million and $15.0 million, respectively, and
include various intangible assets acquired through business acquisitions. These assets are amortized using the straight-line method over their estimated useful lives of one to ten years. Purchased intangible assets are reviewed for impairment as
discussed below under Accounting for the Impairment of Long-Lived Assets. Based on our review of impairment in the fourth quarter of 2008, we recorded an impairment charge of $10.2 million, primarily against the purchased intangible
assets of Gryphics, Inc. Our testing indicated that the purchased intangible assets related to our acquisitions of Synatron GmbH and eVue were not impaired as of December 31, 2008.

Other Assets

Other long-term assets at December 31, 2008 and 2007 included $2.0 million
and $2.3 million, respectively, of internally developed patents. These assets are amortized using the straight-line method over estimated useful lives of one to eight years and have no significant residual value. Patents are reviewed for impairment
as discussed below under Accounting for the Impairment of Long-Lived Assets. In the fourth quarter of 2008, we recorded an impairment charge of $138,000 related to these patents.

Accounting for the Impairment of Long-Lived Assets

Long-lived assets held and used by us, including fixed assets, patents and intangible assets with determinable lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be
recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net
undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Such
reviews assess the fair value of the assets based upon estimates of discounted future cash flows that the assets are expected to generate. Due to the decrease in our revenues in the fourth quarter of 2008, we tested our long-lived assets for
impairment. As a result of our fourth quarter testing, we recorded a $10.2 million impairment charge against purchased intangible assets and a $0.1 million impairment charge against our patents. We did not record any impairment charges against
long-lived assets during 2007 or 2006.

Revenue Recognition

We sell our products to the end-user through distributors, manufacturers representatives and integrators:



| |  |  | distributors purchase our products directly from us and pay us directly according to our standard terms and conditions. They then resell the products to end
users at prices and terms set by them;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | manufacturers representatives are independent companies that agree to sell our products at our prices and on our terms and they are paid a commission based
on a percentage of their sales of our products; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | integrators design and assemble application specific measurement solutions consisting of products from two or more companies. They typically do not purchase our
products directly from us. The end user is billed directly and is liable to us for the purchase of the products. The integrator is paid a fee by the end user.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Revenue from product sales to customers and distributors that do not have special acceptance criteria is
recognized when a written purchase order has been obtained, the price is fixed and determinable, the product is shipped, title has transferred and collectibility is reasonably assured. Generally, we ship our products with ex works terms. For any
shipments with destination terms, we defer revenue until delivery to the customer. Revenue from customers who have special acceptance criteria is not recognized until all acceptance criteria are satisfied. Revenue for installation services,
consisting of assembly and testing, is recognized when the services are performed.

Our transactions may involve the sale of systems and
services under multiple element arrangements. A typical multiple element arrangement may include some or all of the following: products, accessories, installation services or extended warranty contracts. For any arrangements with multiple elements,
we recognize revenue only after we have determined that elements with stand alone value have been delivered to customers and any undelivered elements have objective and reliable evidence of fair value.

We record deferred revenue for service contracts and for custom engineering probe stations and other systems requiring special acceptance criteria from
the customer. Deferred revenue related to service contracts is recognized over the life of the contract, typically one to two years. For systems shipped to integrators, no revenue is recognized until shipment to the end user. Deferred revenue
related to shipped systems requiring acceptance by the customer is recognized upon receipt of such acceptance.

Sales Returns

Customers may return standard products for any reason within 30 days after delivery, provided that the return is received in its original condition,
including all packing materials, for a refund, less a stocking charge. Custom products are non-refundable unless agreed to in writing by us. For certain products, we also provide for a credit against the purchase of future products. We recognize
revenue for products with a right of return in accordance with the revenue recognition policies discussed above. Historically, sales returns have not been significant.

Shipping and Handling Costs

Shipping and handling costs are included as a component of cost
of sales.

Significant Customers

No customer in 2008, 2007 or 2006 accounted for 10% or more of our total revenues and, except for the balance of one customer that we have fully reserved at December 31, 2008, no customers accounted for 5% or more of our gross accounts
receivable balance at December 31, 2008 or 2007.

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):



|                                    |  |   |      |  
|----------------------------------- |  | - | ---- | -
|Warranty accrual, December 31, 2005 |  | $ | 488  |  
|Reductions for warranty charges     |  |   | (525 | )
|Additions to warranty reserve       |  |   | 573  |  
|                                    |  |   |      |  
|Warranty accrual, December 31, 2006 |  |   | 536  |  
|Reductions for warranty charges     |  |   | (672 | )
|Additions to warranty reserve       |  |   | 637  |  
|                                    |  |   |      |  
|Warranty accrual, December 31, 2007 |  |   | 501  |  
|Reductions for warranty charges     |  |   | (728 | )
|Additions to warranty reserve       |  |   | 540  |  
|                                    |  |   |      |  
|Warranty accrual, December 31, 2008 |  | $ | 313  |  
|                                    |  |   |      |  



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##### Table of Contents

Advertising

Advertising costs are expensed as incurred and totaled $ 172,000, $251,000 and $393,000 in 2008, 2007 and 2006, respectively.

Research and Development

Research and development costs are expensed as incurred.

Forward Exchange Contracts

At times, we enter
into forward foreign currency exchange contracts, which typically expire within six months, to manage our exposure against foreign currency fluctuations on sales denominated in Japanese yen. These foreign exchange contracts are not considered hedges
under SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan amendment of FASB Statement No. 133, and, as such, are recorded at fair value on the balance sheet with any changes in
fair value included as other income (expense), net on our statements of operations. At December 31, 2008 and 2007, we had $1.2 million and $2.5 million, respectively, of forward exchange contracts outstanding. The unrealized loss on contracts
outstanding at December 31, 2008 and 2007 was $118,000 and $2,000, respectively.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Accordingly, deferred income taxes are
established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

During the fourth quarter of 2008, based on current and expected future financial performance, we determined that our deferred tax assets were not more likely than not to be
recognized in future periods and we recorded a $5.5 million charge to increase the valuation allowance to $7.6 million. Following the increase to the valuation allowance, we have net deferred tax assets of $336,000 on our balance sheet at
December 31, 2008.

We also follow the provisions of Financial Accounting Standards Board (FASB) 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. We elected to treat interest and penalties accrued on unrecognized tax benefits as tax expense within our financial statements. Upon adoption
in January 2007, 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 December 31, 2008, we had unrecognized tax benefits of $665,000, of which $550,000 would have an impact on the effective tax rate, and interest and penalties accrued on unrecognized tax benefits were $63,000.

Taxes Collected from Customers and Remitted to Governmental Authorities

We account for tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a net (excluded from revenue) basis.



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##### Table of Contents

Net Income (Loss) Per Share

We compute net income (loss) per share in accordance with 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 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 and warrants using the treasury stock method, if dilutive.

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



|                                                                  |  |        |  |        |  |       
|----------------------------------------------------------------- |  | ------ |  | ------ |  | ------
|Year Ended December 31,                                           |  | 2008   |  | 2007   |  | 2006  
|Shares used to calculate basic net income (loss) per share        |  | 13,071 |  | 12,550 |  | 11,482
|                                                                  |  |        | 
|Dilutive effect of outstanding stock options                      |  |       |  | 290    |  | 477   
|                                                                  |  |        |  |        |  |       
|Shares used to calculate diluted net income (loss) per share      |  | 13,071 |  | 12,840 |  | 11,959
|                                                                  |  |        |  |        |  |       
|                                                                  |  |        | 
|Stock options not considered as they would have been antidilutive |  | 1,545  |  | 871    |  | 727   
|                                                                  |  |        |  |        |  |       

Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment. Our deferred compensation balance of $142,000 as of December 31, 2005, which
was accounted for under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, was reclassified into additional paid in capital upon the adoption of SFAS No. 123R effective
January 1, 2006. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in the net income in the periods after the date of adoption using the Black-Scholes valuation method over the remainder of the
requisite service period. The cumulative effect of the change in accounting principle from APB 25 to SFAS No. 123R was not material.

Comprehensive Income (Loss)

Pursuant to SFAS No. 130, Reporting Comprehensive Income, comprehensive
income (loss) is defined as changes in shareholders equity exclusive of transactions with owners, such as capital contributions and dividends. Unrealized holding gains and losses on our available-for-sale marketable securities are included as
a separate component of shareholders equity until realized. The differences between net income (loss) and comprehensive income (loss) for the periods presented are not material.

Reclassifications

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

Certain Risks and Uncertainties

Our future operating results and financial condition are subject to influences driven by rapid technological changes, a highly competitive industry, a
lengthy sales cycle, and the cyclical nature of general economic conditions. Future operating results will depend on many factors, including demand for our products, the introduction and industry acceptance of new products and the level and timing
of available shippable orders and backlog.

In addition, we rely on several suppliers to provide certain key components used in our
products. Some of these items are available from only one supplier or a limited group of suppliers. Any disruption in the availability and delivery of these items could adversely affect our revenues.



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Segment Reporting

Based upon the requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, we have determined that we operate in two business segments: Systems and Probes and
Sockets. 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. Sales of our engineering probe stations are included in the Systems segment and sales of our engineering probes, production probe cards and test sockets are included in the Probes
and Sockets segment.

NOTE 2. ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED

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.

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 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.

NOTE 3. ACQUISITIONS

eVue

During the fourth quarter of 2006 we
acquired certain assets and liabilities related to the eVue product line for $4.0 million in cash plus acquisition costs of $35,000. Of the $4.0 million purchase price, $1.3 million was allocated to goodwill and $2.7 million was allocated to other
intangible assets. At December 31, 2007 we accrued for an additional payment of $1.0 million to the seller upon reaching certain milestones pursuant to the agreement. The additional payment was allocated to goodwill and paid in the first
quarter of 2008. The results of this acquisition have been included in the consolidated financial statements since the date of acquisition as part of our Systems segment. As described in Note 1, we tested our goodwill and long-lived assets for
impairment in the fourth quarter of 2008. As a result of our tests, all goodwill related to the eVue acquisition was written-off at December 31, 2008. None of this goodwill was deductible for income tax purposes.



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Gryphics, Inc.

In the second quarter of 2007, we acquired the outstanding capital stock of Gryphics, Inc. (Gryphics) for 842,753 shares of our common stock, with a fair market value of approximately $12.0 million, and
cash of $13.7 million. In addition, we incurred approximately $0.3 million of acquisition costs. Gryphics specialized in the design, manufacture and marketing of high-performance socket products used for final production and evaluation
testing of packaged semiconductor integrated circuits. Of the $26.0 million purchase price, $14.4 million was allocated to goodwill, $13.2 million was allocated to other intangible assets, $3.4 million was allocated to tangible assets, and $5.0
million was allocated to deferred taxes and other liabilities. The results of operations from Gryphics have been included in our Probes and Sockets segment from the date of acquisition. As described in Note 1, we tested our goodwill and long-lived
assets for impairment in the fourth quarter of 2008. As a result of our tests, all goodwill and intangible assets related to the Gryphics acquisition were written-off at December 31, 2008. None of the goodwill is deductible for income tax
purposes.

Synatron GmbH

In the
third quarter of 2007, we terminated our distribution agreement and acquired certain assets and operations from our German distributor, Synatron GmbH (Synatron), for $1.8 million in cash plus nominal acquisition costs. In connection with
the acquisition, we established a new subsidiary, Cascade Microtech, GmbH, which commenced operations as a direct sales and support office in Munich, Germany. Of the $1.8 million purchase price, $0.6 million was allocated to goodwill and $1.2
million was allocated to other intangible assets. An additional $0.1 million was paid to the seller in July 2008 upon meeting certain milestones pursuant to the agreement. The additional payment was recorded as goodwill in the third quarter of 2008.
As described in Note 1, we tested our goodwill and long-lived assets for impairment in the fourth quarter of 2008. As a result of our tests, all goodwill related to the Synatron acquisition was written-off at December 31, 2008. The goodwill is
deductible for tax purposes.

Pro forma results of operations are not included for any of the above acquisitions as they are not materially
different from actual results of operations.

NOTE 4. MARKETABLE SECURITIES

Certain information regarding our marketable securities was as follows (in thousands):



|                                 |  |      |        |      |   |       
|-------------------------------- |  | ---- | ------ | ---- | - | ------
|December 31,                     |  | 2008 |        | 2007
|Fair market value:               |  |      |        |      |   |       
|Municipal obligations            |  | $    | 31,260 |      | $ | 29,357
|                                 |  |      |        |      |   |       
|Cost:                            |  |      |        |      |   |       
|Municipal obligations            |  | $    | 31,153 |      | $ | 29,312
|                                 |  |      |        |      |   |       
|Fair market value by maturity:   |  |      |        |      |   |       
|Within one year                  |  | $    | 28,795 |      | $ | 24,521
|One to two years                 |  |      | 2,465  |      |   | 4,836 
|                                 |  |      |        |      |   |       
|                                 |  | $    | 31,260 |      | $ | 29,357
|                                 |  |      |        |      |   |       
|Gross unrealized holding gains:  |  |      |        |      |   |       
|Municipal obligations            |  | $    | 108    |      | $ | 70    
|                                 |  |      |        |      |   |       
|Gross unrealized holding losses: |  |      |        |      |   |       
|Municipal obligations            |  | $    | 1      |      | $ |      
|                                 |  |      |        |      |   |       

Proceeds from the sale of available for sale marketable securities were $45.6 million and $42.6
million in 2008 and 2007, respectively.

At December 31, 2008 and 2007, we determined that unrealized losses on our marketable
securities were temporary based on the duration of the unrealized losses and on our ability to hold the marketable securities until maturity. No investments were in an unrealized loss position for more than one year. Realized gains and losses on
marketable securities were immaterial during 2008, 2007 and 2006.



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NOTE 5. 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):



|                                                            |  |                   |        |             |        
|----------------------------------------------------------- |  | ----------------- | ------ | ----------- | -------
|                                                            |  | December 31, 2008
|                                                            |  | Fair Value        |        | Input Level
|Marketable securities                                       |  | $                 | 31,260 |             | Level 2
|Forward sale or purchase contracts for foreign Japanese yen |  | $                 | 1,321  |             | 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 6. INVENTORIES

Inventories consisted of the following (in thousands):



|                |  |      |        |      |   |       
|--------------- |  | ---- | ------ | ---- | - | ------
|December 31,    |  | 2008 |        | 2007
|Raw materials   |  | $    | 10,819 |      | $ | 9,764 
|Work-in-process |  |      | 1,466  |      |   | 2,471 
|Finished goods  |  |      | 6,794  |      |   | 6,373 
|                |  |      |        |      |   |       
|                |  | $    | 19,079 |      | $ | 18,608
|                |  |      |        |      |   |       



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NOTE 7. FIXED ASSETS

Fixed assets consisted of the following (in thousands):



|                              |  |      |         |   |      |   |         |  
|----------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|December 31,                  |  | 2008 |         |   | 2007 |  
|Equipment                     |  | $    | 20,404  |   |      | $ | 19,102  |  
|Leasehold improvements        |  |      | 6,636   |   |      |   | 6,154   |  
|Construction in progress      |  |      | 1,309   |   |      |   | 3,599   |  
|                              |  |      |         |   |      |   |         |  
|                              |  |      | 28,349  |   |      |   | 28,855  |  
|Less accumulated depreciation |  |      | (14,769 | ) |      |   | (14,280 | )
|                              |  |      |         |   |      |   |         |  
|                              |  | $    | 13,580  |   |      | $ | 14,575  |  
|                              |  |      |         |   |      |   |         |  

Depreciation expense was $2.9 million, $2.3 million and $1.6 million, respectively, in 2008, 2007 and 2006.

NOTE 8. GOODWILL, PURCHASED INTANGIBLES AND OTHER INTANGIBLE ASSETS

In the fourth quarter of 2008, we performed our annual impairment test of goodwill, which indicated that the implied fair value of our identified reporting units was less than the carrying value of goodwill at
December 31, 2008. Accordingly, we recorded an impairment charge of $17.4 million in the fourth quarter of 2008 and, as of December 31, 2008, we had no goodwill recorded on our balance sheet. We also reviewed our long-lived assets for
impairment in the fourth quarter of 2008 and recorded an impairment charge of $10.3 million related to purchased intangible assets and patents. Total asset impairment charges were $27.7 million in 2008 as follows (in thousands):



|                            |  |      |       
|--------------------------- |  | ---- | ------
|Year Ended December 31,     |  | 2008
|Goodwill                    |  | $    | 17,406
|Purchased intangible assets |  |      | 10,157
|Patents                     |  |      | 138   
|                            |  |      |       
|                            |  | $    | 27,701
|                            |  |      |       

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



|                                                                      |  |      |         |   |      |   |       
|--------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------
|Year Ended December 31,                                               |  | 2008 |         |   | 2007
|Balance, beginning of year                                            |  | $    | 17,310  |   |      | $ | 1,295 
|Additional purchase price for certain assets of the eVue product line |  |      |        |   |      |   | 1,000 
|Acquisition of Gryphics, Inc.                                         |  |      |        |   |      |   | 14,404
|Acquisition of certain assets of Synatron GmbH                        |  |      | 96      |   |      |   | 605   
|Impairment of goodwill                                                |  |      | (17,406 | ) |      |   |      
|Other adjustments to goodwill                                         |  |      |        |   |      |   | 6     
|                                                                      |  |      |         |   |      |   |       
|Balance, end of year                                                  |  | $    |        |   |      | $ | 17,310
|                                                                      |  |      |         |   |      |   |       

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



|                         |  |      |        |   |      |   |        |  
|------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|December 31,             |  | 2008 |        |   | 2007 |  
|Patents                  |  | $    | 5,395  |   |      | $ | 5,523  |  
|Accumulated amortization |  |      | (3,397 | ) |      |   | (3,253 | )
|                         |  |      |        |   |      |   |        |  
|                         |  | $    | 1,998  |   |      | $ | 2,270  |  
|                         |  |      |        |   |      |   |        |  



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The balance of purchased intangible assets, net, included the following (in thousands):



|                                       |  |      |       |   |      |   |        |  
|-------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|December 31,                           |  | 2008 |       |   | 2007 |  
|Developed technology                   |  | $    |      |   |      | $ | 8,242  |  
|Accumulated amortization               |  |      |      |   |      |   | (773   | )
|                                       |  |      |       |   |      |   |        |  
|                                       |  |      |      |   |      |   | 7,469  |  
|                                       |  |     
|Customer relationships                 |  |      | 2,465 |   |      |   | 6,146  |  
|Accumulated amortization               |  |      | (772  | ) |      |   | (762   | )
|                                       |  |      |       |   |      |   |        |  
|                                       |  |      | 1,693 |   |      |   | 5,384  |  
|                                       |  |     
|Other                                  |  |      | 1,126 |   |      |   | 2,760  |  
|Accumulated amortization               |  |      | (394  | ) |      |   | (571   | )
|                                       |  |      |       |   |      |   |        |  
|                                       |  |      | 732   |   |      |   | 2,189  |  
|                                       |  |      |       |   |      |   |        |  
|Total purchased intangible assets, net |  | $    | 2,425 |   |      | $ | 15,042 |  
|                                       |  |      |       |   |      |   |        |  

Other purchased intangible assets as of December 31, 2008 and 2007 included purchased
patents, software technology, trade names, trademarks and non-compete agreements.

Amortization expense of internally developed patents and
purchased intangible assets totaled $3.0 million, $2.4 million and $0.5 million, respectively, in 2008, 2007 and 2006. Of the amortization expense, $494,000, $394,000 and $372,000, respectively, was for internally developed patents and was included
as a component of selling, general and administrative expense.

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



|           |  |   |    
|---------- |  | - | ---
|2009       |  | $ | 567
|2010       |  |   | 525
|2011       |  |   | 525
|2012       |  |   | 433
|2013       |  |   | 285
|Thereafter |  |   | 90 

In addition, we expect amortization of internally developed patents to be approximately $0.4
million per year over the next five years.

NOTE 9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):



|                                  |  |      |       |      |   |      
|--------------------------------- |  | ---- | ----- | ---- | - | -----
|December 31,                      |  | 2008 |       | 2007
|Accrued compensation and benefits |  | $    | 2,037 |      | $ | 2,372
|Income taxes payable              |  |      |      |      |   | 1,533
|Accrued warranty                  |  |      | 313   |      |   | 501  
|Accrued materials returns         |  |      | 210   |      |   | 332  
|Other                             |  |      | 1,216 |      |   | 851  
|                                  |  |      |       |      |   |      
|                                  |  | $    | 3,776 |      | $ | 5,589
|                                  |  |      |       |      |   |      



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NOTE 10. INCOME TAXES

Domestic and foreign pre-tax income (loss) was as follows (in thousands):



|                        |  |      |         |   |      |   |       |  |   |      
|----------------------- |  | ---- | ------- | - | ---- | - | ----- |  | - | -----
|Year Ended December 31, |  | 2008 |         |   | 2007 |   | 2006 
|Domestic                |  | $    | (35,546 | ) |      | $ | 1,033 |  | $ | 3,915
|Foreign                 |  |      | (1,278  | ) |      |   | 483   |  |   | 1,190
|                        |  |      |         |   |      |   |       |  |   |      
|                        |  | $    | (36,824 | ) |      | $ | 1,516 |  | $ | 5,105
|                        |  |      |         |   |      |   |       |  |   |      

The provision (benefit) for income taxes consisted of the following (in thousands):



|                                     |  |      |        |   |      |   |        |      |  |   |       |  
|------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|Year Ended December 31,              |  | 2008 |        |   | 2007 |   |        | 2006 | 
|Current:                             |  |      |        |   |      |   |        |      |  |   |       |  
|Federal                              |  | $    | (763   | ) |      | $ | 1,786  |      |  | $ | 1,222 |  
|State                                |  |      | 34     |   |      |   | 86     |      |  |   | 68    |  
|Foreign                              |  |      | 51     |   |      |   | 307    |      |  |   | 407   |  
|                                     |  |      |        |   |      |   |        |      |  |   |       |  
|Total current                        |  |      | (678   | ) |      |   | 2,179  |      |  |   | 1,697 |  
|                                     |  |      |       
|Deferred:                            |  |      |        |   |      |   |        |      |  |   |       |  
|Federal                              |  |      | (1,749 | ) |      |   | (1,365 | )    |  |   | (292  | )
|State                                |  |      | 51     |   |      |   | (208   | )    |  |   | 48    |  
|Foreign                              |  |      | 129    |   |      |   | (20    | )    |  |   | 42    |  
|                                     |  |      |        |   |      |   |        |      |  |   |       |  
|Total deferred                       |  |      | (1,569 | ) |      |   | (1,593 | )    |  |   | (202  | )
|                                     |  |      |        |   |      |   |        |      |  |   |       |  
|Provision (benefit) for income taxes |  | $    | (2,247 | ) |      | $ | 586    |      |  | $ | 1,495 |  
|                                     |  |      |        |   |      |   |        |      |  |   |       |  

The provision (benefit) for income taxes varies from the amounts computed by applying the Federal
statutory rate of 34% to income before income taxes as follows (in thousands):



|                                                         |  |      |         |   |      |   |      |      |  |   |       |  
|-------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ---- | ---- |  | - | ----- | -
|Year Ended December 31,                                  |  | 2008 |         |   | 2007 |   |      | 2006 | 
|Federal income tax (benefit) computed at statutory rates |  | $    | (12,520 | ) |      | $ | 516  |      |  | $ | 1,736 |  
|Extraterritorial income exclusion tax benefit            |  |      |        |   |      |   |     |      |  |   | (139  | )
|Difference in foreign tax rate                           |  |      | (87     | ) |      |   | (26  | )    |  |   | 59    |  
|State income taxes, net of federal benefit               |  |      | 12      |   |      |   | 42   |      |  |   | 64    |  
|Stock-based compensation                                 |  |      | 457     |   |      |   | 429  |      |  |   | 508   |  
|Tax credits (R&D and foreign tax credit)                 |  |      | (151    | ) |      |   | (938 | )    |  |   | (638  | )
|Expiration of tax credits                                |  |      | 259     |   |      |   | 259  |      |  |   | 130   |  
|Change in valuation allowance                            |  |      | 5,475   |   |      |   | 160  |      |  |   | 191   |  
|Tax exempt interest income                               |  |      | (259    | ) |      |   | (443 | )    |  |   | (538  | )
|Unrecognized tax benefits                                |  |      | (355    | ) |      |   | 534  |      |  |   | 243   |  
|AMT credit                                               |  |      | (477    | ) |      |   |     |      |  |   |      |  
|Goodwill impairment                                      |  |      | 4,898   |   |      |   |     |      |  |   |      |  
|Other                                                    |  |      | 501     |   |      |   | 53   |      |  |   | (121  | )
|                                                         |  |      |         |   |      |   |      |      |  |   |       |  
|Provision (benefit) for income taxes                     |  | $    | (2,247  | ) |      | $ | 586  |      |  | $ | 1,495 |  
|                                                         |  |      |         |   |      |   |      |      |  |   |       |  

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 conjunction with the settlement of the 2004 and 2005 audits, the IRS notified us
that the 2006 tax returns would be audited. We were subsequently notified that the 2007 tax return would also be audited. We believe that our tax contingencies at December 31, 2008 are sufficient for any disallowances related to the 2006 and
2007 tax returns.



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Significant components of deferred income tax assets and liabilities were as follows (in thousands):



|                                                   |  |      |        |   |      |   |        |  
|-------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|December 31,                                       |  | 2008 |        |   | 2007 |  
|Current deferred tax assets:                       |  |      |        |   |      |   |        |  
|Reserves and allowances                            |  | $    | 634    |   |      | $ | 428    |  
|Inventory reserves                                 |  |      | 1,032  |   |      |   | 784    |  
|Accrued vacation                                   |  |      | 191    |   |      |   | 305    |  
|Deferred intercompany profit                       |  |      | 788    |   |      |   | 813    |  
|Customer deposits                                  |  |      | 352    |   |      |   | 423    |  
|Other current deferred tax assets                  |  |      | 178    |   |      |   | 78     |  
|                                                   |  |      |        |   |      |   |        |  
|Gross current deferred tax assets                  |  |      | 3,175  |   |      |   | 2,831  |  
|Valuation allowance                                |  |      | (2,904 | ) |      |   | (87    | )
|                                                   |  |      |        |   |      |   |        |  
|Net current deferred tax assets                    |  |      | 271    |   |      |   | 2,744  |  
|                                                   |  |      |        |   |      |   |        |  
|                                                   |  |     
|Current deferred tax liabilities:                  |  |      |        |   |      |   |        |  
|Loss on hedging activities                         |  |      | (172   | ) |      |   | (15    | )
|                                                   |  |      |        |   |      |   |        |  
|Current deferred tax assets, net                   |  |      | 99     |   |      |   | 2,729  |  
|                                                   |  |     
|Non-current deferred tax assets:                   |  |      |        |   |      |   |        |  
|Reserves and allowances                            |  |      | 183    |   |      |   | 194    |  
|Federal and state net operating loss carryforwards |  |      | 671    |   |      |   | 150    |  
|Federal and state tax credits                      |  |      | 2,767  |   |      |   | 2,583  |  
|Stock-based compensation                           |  |      | 605    |   |      |   | 281    |  
|Other non-current deferred tax assets              |  |      | 1,466  |   |      |   | 706    |  
|                                                   |  |      |        |   |      |   |        |  
|Gross non-current deferred tax assets              |  |      | 5,692  |   |      |   | 3,914  |  
|Valuation allowance                                |  |      | (4,720 | ) |      |   | (2,060 | )
|                                                   |  |      |        |   |      |   |        |  
|Net non-current deferred tax assets                |  |      | 972    |   |      |   | 1,854  |  
|                                                   |  |     
|Non-current deferred tax liabilities:              |  |      |        |   |      |   |        |  
|Purchased intangibles                              |  |      |       |   |      |   | (4,073 | )
|Patents                                            |  |      | (735   | ) |      |   | (873   | )
|Other non-current deferred tax liabilities         |  |      |       |   |      |   | (22    | )
|                                                   |  |      |        |   |      |   |        |  
|Total non-current deferred tax liabilities         |  |      | (735   | ) |      |   | (4,968 | )
|                                                   |  |      |        |   |      |   |        |  
|Non-current tax assets (liabilities), net          |  |      | 237    |   |      |   | (3,114 | )
|                                                   |  |      |        |   |      |   |        |  
|Net total deferred tax assets (liabilities)        |  | $    | 336    |   |      | $ | (385   | )
|                                                   |  |      |        |   |      |   |        |  

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. Based on this evaluation, in 2008, we recorded a $5.0 million charge to
establish a full valuation allowance against our domestic deferred tax assets, and increased the valuation allowance against foreign deferred tax assets by $500,000. In 2007, we increased the valuation allowance against State of Oregon research
credits by $25,000 and established a valuation allowance against a foreign net operating loss carryforward of $150,000. In 2006, we increased the valuation allowance against State of Oregon research credits by $206,000 as we believed that this
portion of the tax credits were more likely than not to not be utilized in the future.



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The net increase in the total valuation allowance was $5.5 million, $175,000 and $206,000, respectively,
in 2008, 2007 and 2006. The valuation allowance as of December 31, 2008 and 2007 was $7.6 million and $2.1 million, respectively. As of December 31, 2008, the portion of valuation allowance for deferred tax assets for which subsequently
recognized tax benefits will be applied directly to equity is approximately $110,000.

In 2008, income tax benefits of $222,000
attributable to employee stock option transactions, which were previously allocated to shareholders equity, were reversed. In 2007 and 2006, income tax benefits attributable to employee stock option transactions of $142,000 and $945,000,
respectively, were allocated to shareholders equity.

We had federal and state research and experimentation credit carryforwards of
approximately $2.7 million at December 31, 2008 to offset against future taxable income. These carryforwards expire beginning 2008 through 2027.

A reconciliation of unrecognized tax benefits for 2008 and 2007 was as follows (in thousands):



|                                                         |  |   |        |  
|-------------------------------------------------------- |  | - | ------ | -
|Balance, January 1, 2007                                 |  | $ | 645    |  
|Increases due to tax positions taken during a prior year |  |   | 614    |  
|Decreases due to tax positions taken during a prior year |  |   | (134   | )
|                                                         |  |   |        |  
|Balance, December 31, 2007                               |  |   | 1,125  |  
|Increases due to tax positions taken during a prior year |  |   | 618    |  
|Decreases due to tax positions taken during a prior year |  |   | (1,078 | )
|                                                         |  |   |        |  
|Balance, December 31, 2008                               |  | $ | 665    |  
|                                                         |  |   |        |  

In 2008 and 2007, unrecognized tax benefits included $110,000 and $54,000, respectively, that
related to stock-based compensation and, accordingly, will be recorded directly to additional paid-in capital when recognized. Interest and penalties (refunded) recognized during 2008 and 2007 totaled $(135,000) and $162,000, respectively.

Of the total unrecognized tax benefits at December 31, 2008, $550,000 would have an impact on the effective tax rate if recognized.
Interest and penalties accrued on the unrecognized tax benefits totaled $63,000 at December 31, 2008. 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 related primarily to research and experimentation credits could decrease in the range of $300,000 to $500,000 within the next 12 months.

The tax years which remained open to examination in our major taxing jurisdictions as of December 31, 2008 were as follows:



|               |  |               
|-------------- |  | --------------
|Jurisdiction   |  | Open Tax Years
|U.S.           |  | 2004-2008     
|Japan          |  | 2002-2008     
|United Kingdom |  | 2006-2008     
|Taiwan         |  | 2006-2008     
|China          |  | 2006-2008     
|Germany        |  | 2007-2008     

We did not provide for U.S. income taxes on the remaining undistributed earnings of foreign
subsidiaries because they were considered permanently invested outside of the U.S. Upon repatriation, some of these earnings would generate foreign tax credits, which may reduce the U.S. tax liability associated with any future foreign dividend. At
December 31, 2008, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $3.1 million.



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A provision of the Internal Revenue Code requires the utilization of net operating losses and research
and experimentation credits be limited when a change in ownership of more than 50% occurs. We believe that such a change occurred with the issuance of common stock in our initial public offering (IPO) in December 2004. Accordingly, the
utilization of the net operating loss and credit carryforwards generated from periods prior to December 2004 may be limited in the timing of their utilization.

NOTE 11. OTHER, NET

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



|                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|Year ended December 31,                               |  | 2008 |       |   | 2007 |   |       | 2006 | 
|Interest income, net                                  |  | $    | 862   |   |      | $ | 1,455 |      |  | $ | 1,614 |  
|Remeasurement related foreign currency gains (losses) |  |      | 458   |   |      |   | (254  | )    |  |   | 97    |  
|Gains (losses) related to foreign currency hedges     |  |      | (409  | ) |      |   | 238   |      |  |   | 253   |  
|Other                                                 |  |      | 127   |   |      |   | (103  | )    |  |   | (3    | )
|                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|                                                      |  | $    | 1,038 |   |      | $ | 1,336 |      |  | $ | 1,961 |  
|                                                      |  |      |       |   |      |   |       |      |  |   |       |  

NOTE 12. STOCK-BASED COMPENSATION AND STOCK-BASED PLANS

Certain information regarding our stock-based compensation was as follows (in thousands):



|                                                                                             |  |      |       |   |      |   |       |  |   |      
|-------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | -----
|Year Ended December 31,                                                                      |  | 2008 |       |   | 2007 |   | 2006 
|Weighted average grant-date fair value of share options granted                              |  | $    | 446   |   |      | $ | 1,924 |  | $ | 3,026
|Total intrinsic value of share options exercised                                             |  |      | 301   |   |      |   | 1,575 |  |   | 2,397
|Fair value of restricted shares vested                                                       |  |      | 214   |   |      |   | 59    |  |   |     
|Stock-based compensation recognized in results of operations                                 |  |      | 2,531 |   |      |   | 2,346 |  |   | 1,882
|Cash received from options exercised and shares purchased under all share-based arrangements |  |      | 1,398 |   |      |   | 1,989 |  |   | 2,176
|Tax benefit (reversal of benefit) related to stock options exercised                         |  |      | (222  | ) |      |   | 142   |  |   | 945  

No stock-based compensation was capitalized as a part of an asset during the years ended
December 31, 2008, 2007 or 2006.

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



|                                    |  |      |       |      |   |       |  |   |      
|----------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|Year Ended December 31,             |  | 2008 |       | 2007 |   | 2006 
|Cost of sales                       |  | $    | 369   |      | $ | 432   |  | $ | 443  
|Research and development            |  |      | 324   |      |   | 361   |  |   | 305  
|Selling, general and administrative |  |      | 1,838 |      |   | 1,553 |  |   | 1,134
|                                    |  |      |       |      |   |       |  |   |      
|                                    |  | $    | 2,531 |      | $ | 2,346 |  | $ | 1,882
|                                    |  |      |       |      |   |       |  |   |      

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



|                             |  |                    |   |  |                    |   |  |                     |  
|---------------------------- |  | ------------------ | - |  | ------------------ | - |  | ------------------- | -
|Year Ended December 31,      |  | 2008               |   |  | 2007               |   |  | 2006                |  
|Stock Option Plan            |  |                    |   |  |                    |   |  |                     |  
|Risk-free interest rate      |  | 2.7                | % |  | 4.5                | % |  | 4.5% - 5.1          | %
|Expected dividend yield      |  | 0.0                | % |  | 0.0                | % |  | 0.0                 | %
|Expected term                |  | 6.5 years          |   |  | 6.5 years          |   |  | 4 years  6.5 years |  
|Expected volatility          |  | 54.2               | % |  | 48.3               | % |  | 56.2% - 61.4        | %
|Employee Stock Purchase Plan |  |                    |   |  |                    |   |  |                     |  
|Risk-free interest rate      |  | 1.9% - 2.5         | % |  | 4.3% - 5.1         | % |  | 4.7% - 5.1          | %
|Expected dividend yield      |  | 0.0                | % |  | 0.0                | % |  | 0.0                 | %
|Expected term                |  | 6 months  2 years |   |  | 6 months  2 years |   |  | 6 months  2 years  |  
|Expected volatility          |  | 29.2% - 43.7       | % |  | 19.2% - 35.8       | % |  | 24.8% - 45.7        | %



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

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

Stock Incentive Plans

Our stock incentive plans include our 1993 Stock Incentive Plan (the 1993 Plan) and our 2000 Stock Incentive Plan (the 2000 Plan)
(together, the Plans) and provide for the granting of incentive stock options, nonqualified stock options and restricted stock units. Incentive stock options must be granted at an exercise price not less than 100% of the fair market
value per share at the grant date. Nonqualified stock options granted or shares sold under the Plans cannot be granted or sold at a price less than 85% of the fair market value per share at the date of grant or sale. The contractual term of options
granted under the Plans is 10 years, and the right to exercise options granted generally vests as to 20% at the end of the first year and then as to 1.67% per month thereafter with full vesting occurring on the fifth anniversary. Grants of
restricted stock units generally vest 25% each year over four years. The 1993 Plan expired during 2003 and any remaining unissued options were canceled. Options currently outstanding under the 1993 Plan will not be available for reissuance upon
cancellation. We have authorized a total of 2.4 million shares of common stock for issuance under the 2000 Plan.

At December 31,
2008, 569,583 shares were available for future grants, and we had 2,002,803 shares of our common stock reserved for future issuance under the Plans.

Stock option activity for the year ended December 31, 2008 was as follows:



|                                 |  |                    |   |  |                              |      
|-------------------------------- |  | ------------------ | - |  | ---------------------------- | -----
|                                 |  | OptionsOutstanding |   |  | WeightedAverageExercisePrice
|Outstanding at December 31, 2007 |  | 1,316,369          |   |  | $                            | 10.44
|Granted                          |  | 100,000            |   |  |                              | 8.06 
|Exercised                        |  | (120,131           | ) |  |                              | 5.73 
|Forfeited                        |  | (283,018           | ) |  |                              | 12.39
|                                 |  |                    |   |  |                              |      
|Outstanding at December 31, 2008 |  | 1,013,220          |   |  |                              | 10.22
|                                 |  |                    |   |  |                              |      

Certain information regarding options outstanding as of December 31, 2008 was as follows:



|                                            |  |                    |           |                    |   |          
|------------------------------------------- |  | ------------------ | --------- | ------------------ | - | ---------
|                                            |  | OptionsOutstanding |           | OptionsExercisable
|Number                                      |  |                    | 1,013,220 |                    |   | 783,078  
|Weighted average exercise price             |  | $                  | 10.22     |                    | $ | 10.04    
|Aggregate intrinsic value                   |  |                    |          |                    |   |         
|Weighted average remaining contractual term |  |                    | 5.4 years |                    |   | 4.7 years

The aggregate intrinsic value in the table above is based on our closing stock price of $1.95 on
December 31, 2008. No options were outstanding at December 31, 2008 with an exercise price of less than $1.95 per share.



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Restricted stock unit activity during 2008 was as follows:



|                                 |  |                      |   |  |                                           |      
|-------------------------------- |  | -------------------- | - |  | ----------------------------------------- | -----
|                                 |  | RestrictedStockUnits |   |  | WeightedAverageGrantDatePerShareFairValue
|Outstanding at December 31, 2007 |  | 181,007              |   |  | $                                         | 11.22
|Granted                          |  | 351,997              |   |  |                                           | 5.41 
|Vested                           |  | (52,377              | ) |  |                                           | 3.65 
|Forfeited                        |  | (55,865              | ) |  |                                           | 11.08
|                                 |  |                      |   |  |                                           |      
|Outstanding at December 31, 2008 |  | 424,762              |   |  |                                           | 7.36 
|                                 |  |                      |   |  |                                           |      

As of December 31, 2008, total unrecognized stock-based compensation related to outstanding,
but unvested options and restricted stock units was $3.1 million, which will be recognized over the weighted average remaining vesting period of 1.6 years.

Employee Stock Purchase Plan

In February 2004, our board of directors approved the 2004 Employee Share Purchase Plan
(the 2004 ESPP) and the reservation of 400,000 shares of our common stock thereunder. The terms of the 2004 ESPP provide for an annual increase in available shares of up to 100,000, upon board approval, beginning in
2006. In 2008, the number of shares reserved under the 2004 ESPP was increased by 100,000 shares for a total available of 500,000 shares of our common stock. There was no increase in the number of available shares in 2007 or 2006. The 2004
ESPP consists of two-year offering periods with four consecutive, overlapping six-month purchase periods commencing on the first trading day on or after February 1 and August 1 each year (the Enrollment Date). Any eligible
employee may participate in the 2004 ESPP by completing a subscription agreement which allows participants to purchase up to 5,000 shares per six-month purchase period, at a purchase price of 85% of the fair market value of a share of common stock
on the Enrollment Date or on the exercise date, whichever is lower. The exercise date is the last trading day of each offering period. If the purchase price is lower on the exercise date than on the Enrollment Date, the two-year offering period will
terminate and a new two-year offering period will begin. Participating employees are automatically enrolled in the new offering period. During the year ended December 31, 2008, we issued 120,436 shares pursuant to the 2004 ESPP at a weighted
average price of $5.90 per share, which represented a weighted average discount of $1.04 per share from the fair market value on the dates of purchase, and 161,819 shares remained available for purchase as of December 31, 2008.

NOTE 13. RELATED PARTY TRANSACTIONS

FEI Company

During 2007 and 2006 we purchased certain equipment and services for $31,000 and $318,000, respectively, from FEI Company
(FEI). There were no purchases from FEI in 2008. In addition, FEI purchased certain equipment from us for a total of $14,000, $3,000 and $122,000, respectively, during 2008, 2007 and 2006. At December 31, 2008 and 2007, we had a
receivable from FEI of $11,000 and $3,000, respectively. One of the members of our Board of Directors, Mr. Raymond A. Link, is the Executive Vice President and Chief Financial Officer of FEI.

Raytheon, Inc.

During 2008, 2007 and 2006, we
did not purchase any equipment or services from Raytheon, Inc. However, Raytheon purchased certain equipment from us for a total of $296,000, $232,000 and $408,000, respectively, during 2008, 2007 and 2006. At December 31, 2008 and 2007, we had
a receivable from Raytheon, Inc. of $29,000 and $22,000, respectively. One of the members of our Board of Directors, Mr. William Spivey, is a member of the Board of Directors of Raytheon, Inc.



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NOTE 14. EMPLOYEE BENEFIT PLAN

We sponsor a 401(k) savings plan which allows eligible employees to contribute a certain percentage of their salary. We match 50% of eligible employees contributions, up to a maximum of 3% of the employees
earnings. Our matching contribution for the savings plan was $364,000, $296,000 and $271,000 in 2008, 2007 and 2006, respectively.

NOTE 15. COMMITMENTS
AND CONTINGENCIES

Leases and Subleases

We lease office and manufacturing space under operating leases that expire at various dates through 2015. In addition to lease expense, we pay real property taxes, insurance and repair and maintenance expenses for our
corporate office and manufacturing facility. We recognize rent expense related to our operating leases based on a straight-line basis over the life of the lease. We also lease certain equipment with a cost basis of $86,000 and accumulated
depreciation of $21,000 at December 31, 2008.

Future minimum lease payments under non-cancelable operating leases and capital leases
with initial or remaining terms in excess of one year are as follows (in thousands):



|                                               |  |           |        |         |   |    |  
|---------------------------------------------- |  | --------- | ------ | ------- | - | -- | -
|Year Ending December 31,                       |  | Operating |        | Capital |  
|2009                                           |  | $         | 2,636  |         | $ | 23 |  
|2010                                           |  |           | 2,647  |         |   | 23 |  
|2011                                           |  |           | 2,523  |         |   | 23 |  
|2012                                           |  |           | 2,224  |         |   | 15 |  
|2013                                           |  |           | 2,274  |         |   | 2  |  
|Thereafter                                     |  |           | 3,743  |         |   |   |  
|                                               |  |           |        |         |   |    |  
|Total minimum lease payments                   |  | $         | 16,047 |         |   | 86 |  
|                                               |  |           |        |         |   |    |  
|Less amounts representing interest             |  |           |        |         |   | (5 | )
|                                               |  |           |        |         |   |    |  
|Present value of future minimum lease payments |  |           |        |         | $ | 81 |  
|                                               |  |           |        |         |   |    |  

Lease expense was $2.8 million, $2.8 million and $2.6 million, respectively, in 2008, 2007 and
2006. Depreciation expense related to capital leases was $15,000, $10,000 and $8,000, respectively, in 2008, 2007 and 2006.

Legal Proceedings

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.



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NOTE 16. SEGMENT REPORTING AND ENTERPRISE-WIDE DISCLOSURES

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 17 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):



|                             |  |         |        |   |                  |   |        |       |  |   |        |  
|---------------------------- |  | ------- | ------ | - | ---------------- | - | ------ | ----- |  | - | ------ | -
|Year Ended December 31, 2008 |  | Systems |        |   | ProbesandSockets |   |        | Total | 
|Revenue                      |  | $       | 40,870 |   |                  | $ | 35,691 |       |  | $ | 76,561 |  
|Gross Profit                 |  | $       | 13,697 |   |                  | $ | 18,387 |       |  | $ | 32,084 |  
|Gross Margin                 |  |         | 33.5   | % |                  |   | 51.5   | %     |  |   | 41.9   | %
|                             |  |         |       
|Year Ended December 31, 2007 |  |         |        |   |                  |   |        |       | 
|Revenue                      |  | $       | 56,349 |   |                  | $ | 33,573 |       |  | $ | 89,922 |  
|Gross Profit                 |  | $       | 23,382 |   |                  | $ | 17,739 |       |  | $ | 41,121 |  
|Gross Margin                 |  |         | 41.5   | % |                  |   | 52.8   | %     |  |   | 45.7   | %
|                             |  |         |       
|Year Ended December 31, 2006 |  |         |        |   |                  |   |        |       | 
|Revenue                      |  | $       | 54,448 |   |                  | $ | 30,404 |       |  | $ | 84,852 |  
|Gross Profit                 |  | $       | 22,283 |   |                  | $ | 14,759 |       |  | $ | 37,042 |  
|Gross Margin                 |  |         | 40.9   | % |                  |   | 48.5   | %     |  |   | 43.7   | %

No customer accounted for 10% or more of our total revenue in 2008, 2007 or 2006.

Our revenues by geographic area were as follows (in thousands):



|                        |  |      |        |      |   |        |  |   |       
|----------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|Year Ended December 31, |  | 2008 |        | 2007 |   | 2006  
|United States           |  | $    | 26,079 |      | $ | 32,965 |  | $ | 32,221
|Asia Pacific            |  |      | 36,462 |      |   | 38,229 |  |   | 37,829
|Europe                  |  |      | 12,146 |      |   | 16,746 |  |   | 12,400
|Other                   |  |      | 1,874  |      |   | 1,982  |  |   | 2,402 
|                        |  |      |        |      |   |        |  |   |       
|                        |  | $    | 76,561 |      | $ | 89,922 |  | $ | 84,852
|                        |  |      |        |      |   |        |  |   |       

Long-lived assets, exclusive of long-term investments and deferred income taxes, by geographic
area were as follows (in thousands):



|              |  |      |        |      |   |       
|------------- |  | ---- | ------ | ---- | - | ------
|December 31,  |  | 2008 |        | 2007
|United States |  | $    | 16,712 |      | $ | 47,469
|Asia Pacific  |  |      | 674    |      |   | 549   
|Europe        |  |      | 1,074  |      |   | 1,600 
|              |  |      |        |      |   |       
|              |  | $    | 18,460 |      | $ | 49,618
|              |  |      |        |      |   |       



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##### Table of Contents

NOTE 17. 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 $711,000 was transferred
from fixed assets to assets held for sale. Sales of assets held for sale resulted in a gain of $213,000 in 2008, which was included in selling, general and administrative expense. The remaining assets held for sale at December 31, 2008 were
written down by $228,000 to the lower of their carrying value or estimated fair value less cost to sell of $400,000. The write-down at December 31, 2008 was included in selling, general and administrative expense.

The closure of the machine shop and reorganization along functional lines resulted in a severance charge of $480,000, which was included in selling,
general and administrative expense in 2008. All severance costs related to the restructuring in the third quarter of 2008 have been paid as of December 31, 2008.

NOTE 18. SUBSEQUENT EVENTS

Stock Option Exchange

Effective January 29, 2009, we offered our U.S. employees, other than current members of our Board of Directors and our executive officers (the
Eligible Employees), the ability to exchange outstanding stock options with an exercise price equal to or greater than $7.00 per share (the Eligible Options) for a lesser number of restricted stock units (the Option
Exchange). Eligible Employees had until February 27, 2009 to exchange Eligible Options at a ratio of 5 options for every 1 restricted stock unit (RSU). Each RSU represents a contingent right to receive one share of our common
stock upon vesting. The vesting is contingent on continued employment and will occur in four equal annual installments on the first through fourth anniversaries of the grant date, with full vesting occurring on the fourth anniversary of the grant
date. A total of 77 employees participated in the Option Exchange, and a total of 169,590 stock options with a fair value of $70,000 were exchanged for a total of 33,918 RSUs with a fair value of $83,000.

2004 ESPP

In January 2009, pursuant to the
terms of the 2004 ESPP, and upon approval by our Board of Directors, the number of shares of our common stock available for purchase under the 2004 ESPP was increased from 500,000 to 600,000. In addition, the Board of Directors authorized an
amendment of the 2004 ESPP to reduce the offering period of the plan from two-years to six-months, and change the Enrollment Date to the first trading day on or after May 1 and November 1 of each year. This amendment will be effective as
of May 1, 2009.



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##### Table of Contents

SCHEDULE II

Cascade Microtech, Inc.

Valuation and Qualifying Accounts

Years Ended December 31, 2008, 2007 and 2006

(In thousands)



|                                     |  |                              |       |                             |   |                                       |          |   |                          |          |  |                        |      |   |  |   |      
|------------------------------------ |  | ---------------------------- | ----- | --------------------------- | - | ------------------------------------- | -------- | - | ------------------------ | -------- |  | ---------------------- | ---- | - |  | - | -----
|Column A                             |  | Column B                     |       | Column C                    |   |                                       | Column D |   |                          | Column E
|Description                          |  | Balanceat Beginningof Period |       | Chargedto Costs andExpenses |   | Charged toOtherAccounts -Describe (a) |          |   | Deductions -Describe (b) |          |  | Balanceat End ofPeriod
|Year Ended December 31, 2006:        |  |                              |       |                             |   |                                       |          |   |                          |          |  |                        |      |   |  |   |      
|Allowance for uncollectible accounts |  | $                            | 97    |                             | $ | 114                                   |          | $ |                         |          |  | $                      | (58  | ) |  | $ | 153  
|Inventory reserves                   |  | $                            | 1,860 |                             | $ | 285                                   |          | $ |                         |          |  | $                      | (202 | ) |  | $ | 1,943
|Year Ended December 31, 2007:        |  |                              |       |                             |   |                                       |          |   |                          |          |  |                        |      |   |  |   |      
|Allowance for uncollectible accounts |  | $                            | 153   |                             | $ | 67                                    |          | $ | (6                       | )        |  | $                      | (11  | ) |  | $ | 203  
|Inventory reserves                   |  | $                            | 1,943 |                             | $ | 519                                   |          | $ |                         |          |  | $                      | (313 | ) |  | $ | 2,149
|Year Ended December 31, 2008:        |  |                              |       |                             |   |                                       |          |   |                          |          |  |                        |      |   |  |   |      
|Allowance for uncollectible accounts |  | $                            | 203   |                             | $ | 829                                   |          | $ |                         |          |  | $                      | (3   | ) |  | $ | 1,029
|Inventory reserves                   |  | $                            | 2,149 |                             | $ | 827                                   |          | $ |                         |          |  | $                      | (151 | ) |  | $ | 2,825



|(a) | Charges to this account relate to changes in foreign currency exchange rates.
|--- | -----------------------------------------------------------------------------

|(b) | Charges to the accounts included in this column are for the purposes for which the reserves were created.
|--- | ---------------------------------------------------------------------------------------------------------



F-26