##### Table of Contents





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, 2010

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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).    Yes   ̈    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         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

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 $47,103,161, computed by reference to the last sales price ($4.47) 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, 2010).

The number of shares outstanding of the
registrants common stock as of March 1, 2011 was 14,545,183 shares.





Documents
Incorporated by Reference

Portions of the registrants definitive Proxy Statement for the 2011 Annual Shareholders Meeting are
incorporated by reference into Part III.









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CASCADE MICROTECH, INC.

2010 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS



|           |  |                                                                                                              |    |  |    | 
|---------- |  | ------------------------------------------------------------------------------------------------------------ | -- |  | -- | 
|           |  | Page                                                                                                         |   
|           |  |                                                                                                             
|           |  | PART I                                                                                                       |    |  |    | 
|           |  |                                                                                                             
|Item 1.    |  | Business                                                                                                     |    |  | 2  | 
|           |  |                                                                                                             
|Item 1A.   |  | Risk Factors                                                                                                 |    |  | 11 | 
|           |  |                                                                                                             
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |    |  | 22 | 
|           |  |                                                                                                             
|Item 2.    |  | Properties                                                                                                   |    |  | 22 | 
|           |  |                                                                                                             
|Item 3.    |  | Legal Proceedings                                                                                            |    |  | 22 | 
|           |  |                                                                                                             
|Item 4.    |  | RESERVED                                                                                                     |    |  | 22 | 
|           |  |                                                                                                             
|           |  | PART II                                                                                                      |    |  |    | 
|           |  |                                                                                                             
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |    |  | 23 | 
|           |  |                                                                                                             
|Item 6.    |  | Selected Financial Data                                                                                      |    |  | 25 | 
|           |  |                                                                                                             
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |    |  | 26 | 
|           |  |                                                                                                             
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |    |  | 36 | 
|           |  |                                                                                                             
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |    |  | 37 | 
|           |  |                                                                                                             
|Item 9.    |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |    |  | 37 | 
|           |  |                                                                                                             
|Item 9A.   |  | Controls and Procedures                                                                                      |    |  | 37 | 
|           |  |                                                                                                             
|Item 9B.   |  | Other Information                                                                                            |    |  | 38 | 
|           |  |                                                                                                             
|           |  | PART III                                                                                                     |    |  |    | 
|           |  |                                                                                                             
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |    |  | 38 | 
|           |  |                                                                                                             
|Item 11.   |  | Executive Compensation                                                                                       |    |  | 38 | 
|           |  |                                                                                                             
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |    |  | 39 | 
|           |  |                                                                                                             
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |    |  | 39 | 
|           |  |                                                                                                             
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |    |  | 39 | 
|           |  |                                                                                                             
|           |  | PART IV                                                                                                      |    |  |    | 
|           |  |                                                                                                             
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |    |  | 40 | 
|           | 
|Signatures |  |                                                                                                              | 42 | 



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PART I



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

Company Profile

We design, develop, manufacture and market advanced wafer probing and test socket solutions for the electrical measurement and testing of
high performance chips. We design, manufacture and assemble our products in Oregon, Minnesota and Dresden, Germany, with global sales, service and support centers in North America, Germany, Japan, Taiwan, China and Singapore.

Probe stations provide precise and accurate measurement of semiconductor electrical characteristics during chip design or when optimizing the chip
fabrication process. Our 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 probe stations to
address the specific requirements of our customers and generate revenue through the sales of service contracts.

Our analytical probes are
sold to serve as components of our 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 high-volume 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.

In January 2010, we acquired SUSS MicroTec Test Systems GmbH (SUSS Test), a wholly owned subsidiary of SUSS MicroTec AG, based
near Dresden, Germany. The acquisition of SUSS Test, a long-time competitor in the market for probe stations, provides us with an expanded portfolio of products, as well as the engineering and technical resources to help address complex emerging
markets, such as high brightness LED and Cryogenic test.

Industry Background

The convergence of mobile, computer and consumer devices is accelerating, which provides new opportunities for testing complex devices. According to IC Insights, the overall semiconductor market
grew almost 32% in 2010 and is projected to grow another 10% in 2011. Over the next decade, we see three major trends occurring in the market: the continued drive to smaller geometries, the drive for more compactness using 3D/TSV (Through Silicon
Vias) technology and the diversification into integrating the physical interfaces into the semiconductor device package. We are well positioned to take advantage of all these trends.

To reduce the cost and increase the performance of electronic products, semiconductor 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 wireless, communications, microprocessors and other
logic and memory chips. A substantial portion of our revenue is generated from sales of our probe stations and analytical probes to research and



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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 probe stations and our overall operating results depend, in significant part, on the level of capital expenditures related to semiconductor research and development, which in turn depends
upon current and anticipated market demand for chips. While our financial results are impacted by cycles within the semiconductor industry, we believe our business cycles are typically less pronounced than those of other semiconductor equipment
companies. We believe this is due to our greater reliance on our customers research and development capital spending and usage of test consumables rather than on our customers spending purely to increase production capacity.

Products

We design, manufacture and
sell multiple product lines, including 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 a 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 systems will continue to grow with the increasing complexity of new chip processes and designs. 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. 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 probing tools worldwide. We typically offer the widest product options and the
highest electrical measurement performance for most engineering test requirements.

Probe Stations. We offer probe
stations for 300mm, 200mm and 150mm or smaller wafer sizes. 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 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.

We are continually enhancing our products to meet customer and
industry requirements. Two examples are the EDGE module and VueTrack technology. The EDGE module, released for sale in March of 2010, is a field-upgradable retrofit to most Cascade Microtech probe stations, and includes software tools for 1/f
noise modeling and statistical analysis, which support noise measurement up to 10 MHz. In addition, with the new EDGE hardware, we now offer a lower-cost, fully-integrated EDGE measurement system for frequency ranges up to 40 MHz, which includes
site preparation, validation and equipment installation. Both solutions utilize new software with features such as advanced graphical viewer, statistical analysis and automatic report creation. With carefully engineered ultra-low background noise,
EDGE 1/f noise measurement solutions offer low-level noise measurement over the widest commercially available frequency range (1 Hz to 40 MHz) for flicker noise measurement as well as standard DC parametric testing.

In August 2010, we released VueTrack technology for unattended, over-temperature test, which enables automatic probe-to-pad alignment by using a
downward-looking microscope for measuring the probe tips and the wafer locations with the chuck in the same position in which the electrical measurement will be made. By enabling unattended testing over multiple temperatures ranging from -50 to
300°C, VueTrack can eliminate the need for operator intervention and provide increased data throughput and high electrical test accuracy.



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The acquisition of SUSS Test expands our products for testing chips used in communications and computing,
and expands our coverage of other chip testing, such as chips for high-brightness light-emitting diodes, or LEDs, micro-electromechanical systems, or MEMS, cryogenic temperatures and other chip types.

Analytical Probes. We offer over 50 different analytical probe models for engineering and production testing. Our 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 measurements with higher complexities and at higher frequencies up to 500 GHz.
Our acquisition of SUSS Test expands our offerings of analytical probes to include radio frequency (RF) probes for higher and lower temperatures and for higher power.

In 2010, we announced a new repair program aimed at servicing our large installed base, as well as a more direct sales model to engage with customers at a more intimate level.

Production Probe Cards.A production probe card temporarily connects one or more chips on a wafer under test to a high-volume
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
million contact cycles. Production card sales are driven by production unit volumes and the various stages of the integrated circuits (ICs) being tested.

Our Pyramid Probe® card product line offers high electrical speed performance and is commonly used in wireless chip applications. Factors driving wireless and RF chip probing include the growth of
wireless system applications, the trend to more thoroughly test these chips 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.

Utilizing photo-lithographically defined tip technology, we offer the Pyramid-MW, a
dedicated 81 GHz probe card delivering repeatable, reliable measurements for high-yield known good die (KGD). In September 2010, we introduced S-Technology for Pyramid Probe cards. S-Technology Pyramid Probe cards improve contact consistency
at wafer probe, enabling at-speed multisite known-good-die testing and reducing the overall cost-of-ownership. By standardizing force distribution, the cards minimize site-to-site test variation and increase overall test yield. The 20-g per tip
keeps contact resistance to a minimum for up to 2,000 probe tips. S-Technology can be used with all types of solder technologies, including Sn-capped Cu pillars with up to 400-μm pitch.

Test Sockets. A test socket temporarily 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 is also used for 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.



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Customers and Geographic Information

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 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 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 1,000 customers purchased our products in 2010. Our top end-user customers during 2010 included (in alphabetical order): Broadcom, CETC
Institute, Epcos AG, Global Foundries, IBM, RF Micro Devices, Osram, Phillips, Samsung and Taiwan Semiconductor Manufacturing Company.

We
believe our customers consider timely customer service and support to be an important aspect of our relationship. Our 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 2010, 2009 and 2008,
no single customer accounted for 10% or more of our total revenues. Our top 10 customers accounted for approximately 26%, 25% and 27% of our total revenue in each of 2010, 2009 and 2008, respectively

International sales accounted for more than 65% of our total revenue in each of 2010, 2009 and 2008. The following table indicates which regions had
revenues that totaled 10% or more of our total revenues in 2010, 2009 and 2008:



|                        |  |      |      |   |      |  |      |      |  |  |      |  
|----------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|Year Ended December 31, |  | 2010 |      |   | 2009 |  |      | 2008 | 
|United States           |  |      | 25.5 | % |      |  | 31.0 | %    |  |  | 34.1 | %
|Asia Pacific            |  |      | 45.3 | % |      |  | 48.7 | %    |  |  | 47.6 | %
|Europe                  |  |      | 26.2 | % |      |  | 17.0 | %    |  |  | 15.9 | %

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



|              |  |      |        |  |      |   |        | 
|------------- |  | ---- | ------ |  | ---- | - | ------ | 
|December 31,  |  | 2010 |        |  | 2009 |  
|United States |  | $    | 13,732 |  |      | $ | 14,491 | 
|Asia Pacific  |  |      | 766    |  |      |   | 949    | 
|Europe        |  |      | 2,423  |  |      |   | 814    | 
|              |  |      |        |  |      |   |        | 
|              |  | $    | 16,921 |  |      | $ | 16,254 | 
|              |  |      |        |  |      |   |        | 



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Segments

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 operating income of our Systems revenue and our Probes and Sockets revenue. We do not track our assets on a segment level, and, accordingly, that information is not provided. Certain information by segment was as follows (dollars in
thousands):



|                              |  |         |        |   |                  |   |        |                      |  |   |         |   |  |   |         |  
|----------------------------- |  | ------- | ------ | - | ---------------- | - | ------ | -------------------- |  | - | ------- | - |  | - | ------- | -
|Year Ended December 31, 2010  |  | Systems |        |   | ProbesandSockets |   |        | CorporateUnallocated |  |   | Total   |  
|Revenue                       |  | $       | 65,422 |   |                  | $ | 30,377 |                      |  | $ |        |   |  | $ | 95,799  |  
|Gross profit                  |  | $       | 23,354 |   |                  | $ | 12,731 |                      |  | $ |        |   |  | $ | 36,085  |  
|Gross margin                  |  |         | 35.7   | % |                  |   | 41.9   | %                    |  |   |        |   |  |   | 37.7    | %
|Income (loss) from operations |  | $       | 5,353  |   |                  | $ | (2,245 | )                    |  | $ | (13,464 | ) |  | $ | (10,356 | )
|                              |  |         |        |  
|Year Ended December 31, 2009  |  |         |        |   |                  |   |        |                      |  |   |         |  
|Revenue                       |  | $       | 28,951 |   |                  | $ | 24,590 |                      |  | $ |        |   |  | $ | 53,541  |  
|Gross profit                  |  | $       | 9,190  |   |                  | $ | 10,511 |                      |  | $ |        |   |  | $ | 19,701  |  
|Gross margin                  |  |         | 31.7   | % |                  |   | 42.7   | %                    |  |   |        |   |  |   | 36.8    | %
|Loss from operations          |  | $       | (917   | ) |                  | $ | (154   | )                    |  | $ | (9,891  | ) |  | $ | (10,962 | )
|                              |  |         |        |  
|Year Ended December 31, 2008  |  |         |        |   |                  |   |        |                      |  |   |         |  
|Revenue                       |  | $       | 40,870 |   |                  | $ | 35,691 |                      |  | $ |        |   |  | $ | 76,561  |  
|Gross profit                  |  | $       | 13,697 |   |                  | $ | 18,387 |                      |  | $ |        |   |  | $ | 32,084  |  
|Gross margin                  |  |         | 33.5   | % |                  |   | 51.5   | %                    |  |   |        |   |  |   | 41.9    | %
|Income (loss) from operations |  | $       | 6,697  |   |                  | $ | (144   | )                    |  | $ | (44,415 | ) |  | $ | (37,862 | )

Technology

We are a leading innovator in developing electrical measurement 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 to more effectively design and commercialize production probe cards, test sockets and analytical probes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Precision On-Wafer 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. In early 2008, we introduced our Elite 300 probe station which improved low-current and low-voltage measurements. With the acquisition of Suss Test in 2010, our technology capabilities have been further enhanced to enable
precise measurements at cryogenic temperatures and at various pressure levels.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | and continues to evolve and improve. We continue to evolve this technology and introduce new probe card and analytical probe designs using these proprietary technologies. 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 a wider range of test temperatures. As chip elements continue to shrink, we expect to be able to scale and evolve our lithographic 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 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. We also have direct sales offices in China and Taiwan. In most of Europe, we primarily sell our probes stations
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 subsidiaries. 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.



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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.

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 $12.6 million in 2010, $8.4 million in 2009 and $10.5 million in 2008. We are currently devoting
substantial resources to enhancing the functionality of our probe stations and developing new products for adjacent markets. We are also devoting substantial resources to production probe cards that address non-RF applications. At December 31,
2010, we employed 66 research and development engineers. We conduct research and development for all of our product lines at our facilities in Oregon, Germany and Minnesota.

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 at our facilities in Beaverton, Oregon
and Dresden, Germany. We also have a manufacturing facility in Brooklyn Park, 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.

Probe Stations. Our primary competitor in the probes station market was SUSS Microtech AG
until the acquisition of their test division (SUSS Test) in January 2010. However, 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 probe station market are measurement accuracy and versatility, measurement speed, automation features, completeness of the measurement solutions, delivery time and price. We believe that we compete
favorably with respect to these factors.



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Analytical Probes. Our primary competitor in the analytical probe market is GGB
Industries Inc. 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 believe that we compete favorably with respect to these factors.

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 five probe card vendors, FormFactor Inc., Japan Electronic Materials Corporation, Micronics Japan Company, Ltd., Microprobe Inc., 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 Smiths Interconnect, Everett Charles Technologies, Ironwood Electronics, Johnstech International, Loranger International Corporation, Micronics Japan Company, Ltd., Plastronics and Interconnect Devices, Inc. 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, 2010, we had 257 issued patents and 43
pending patent applications in the U.S. and 69 issued foreign patents and 104 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 when we can achieve a significant business advantage from 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.



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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 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 2010. 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, 2010, we had a total of 401 employees. Of these
employees, 248 were located in North America,110 were in located in Europe, 15 were located in Singapore, 14 were located in Japan, 10 were located in Taiwan, and 4 were located in other Asian counties. 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 are 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 sale, use, storage, discharge, disposal and human exposure to such materials. We believe we are in 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.

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, 2010, our backlog was $26.9 million compared with $11.4 million at
December 31, 2009. We typically 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, 2010 backlog in 2011. 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.



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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 Room. The SEC maintains a website at http://www.sec.gov where you can obtain some of our SEC filings. 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 our guidance or analyst expectations 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 of customer orders based on their purchasing cycles;
| | - |  | ----------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In particular, many of our more technically advanced probing
stations can have selling prices from $0.2 million to over $1.0 million. If there are unforeseen delays in shipment or customer acceptance of these more expensive and advanced systems, or of any other significant orders near the end of a quarter,
the recognition of revenue on these orders could be delayed into the following period, significantly affecting both revenue and earnings for the quarter.

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, geo-political changes 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 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.

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.

Consolidation of our customer base 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. In addition, leading-edge chip technology development in the semiconductor
industry has become so expensive that our customers are often teaming up to perform the development work, effectively shrinking our customer base or slowing their purchases of engineering tools.

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, sockets 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, which is typically weighted in the last month of the 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.

We may make acquisitions, which could 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. We may acquire companies, products or technologies in the future, which could pose risks to our operating results due to:



| |  |  | 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 or other assets acquired in the acquisition.
| | - |  | --------------------------------------------------------------------------------



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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 existing 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 2011, 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 are from sole source suppliers and, from time to time, we may experience difficulties in obtaining these materials, components and subassemblies from some suppliers. In the future, 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.

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.

We have long-lived assets, including fixed assets and intangible assets, recorded on our balance sheet. In the future, 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, 2010, we had fixed assets, goodwill and intangible assets of $15.6 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.



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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, |  | 2010 |        |  | 2009 |   |        | 2008 | 
|United States           |  | $    | 24,447 |  |      | $ | 16,599 |      |  | $ | 26,079 | 
|Asia Pacific            |  |      | 43,418 |  |      |   | 26,095 |      |  |   | 36,462 | 
|Europe                  |  |      | 25,109 |  |      |   | 9,105  |      |  |   | 12,146 | 
|Other                   |  |      | 2,825  |  |      |   | 1,742  |      |  |   | 1,874  | 
|                        |  |      |        |  |      |   |        |      |  |   |        | 
|                        |  | $    | 95,799 |  |      | $ | 53,541 |      |  | $ | 76,561 | 
|                        |  |      |        |  |      |   |        |      |  |   |        | 

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 6 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 and import 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, 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,



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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 2010, 2009 and 2008 included the following currency related gains and losses (in thousands):



|                                                       |  |                         |     |   |      |   |      |      |  |   |      |  
|------------------------------------------------------ |  | ----------------------- | --- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                       |  | Year Ended December 31, |    
|                                                       |  | 2010                    |     |   | 2009 |   |      | 2008 | 
|Re-measurement related foreign currency gains (losses) |  | $                       | (26 | ) |      | $ | 198  |      |  | $ | 458  |  
|Losses on foreign currency forward contracts           |  |                         | (73 | ) |      |   | (140 | )    |  |   | (409 | )

Failure to retain key managerial,
technical, sales and marketing personnel, independent manufacturers representatives and distributors 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. 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. 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.

Over half of our revenues are typically 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 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 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.
| | - |  | ------------------------------------------------



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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 $1.1 million, $0.5 million, and $0.5 million, for 2010, 2009 and 2008, 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.

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 2005, we have derived more than 60% 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.



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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.
| | - |  | -------------------------------------------------------------------------------------

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 enhancing our probe stations, refining probe fabrication processes and developing higher performance probe cards, test sockets and analytical probes. 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 or meet our customers needs.

Any disruption in the operations of our manufacturing facilities could harm our
business.

We manufacture most of our products in our facilities located in Beaverton, Oregon; Brooklyn Park, Minnesota; and Dresden,
Germany. 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.



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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.

Some of our customers may experience sudden and unexpected changes in their financial condition, resulting in decreased sales and bad debts.

Global economic changes, or changes in the economic condition of a given region or country could lead to sudden and unexpected negative changes in the
financial condition of our customers, including insolvency and bankruptcy. These changes could have a negative impact on our sales, make it more difficult to collect on receivables and result in bad debts.

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

Subsequent to the acquisition of SUSS Test in January 2010, we began to restructure and integrate the combined
businesses, which resulted in severance charges and inventory write-offs. In the second quarter of 2010, we restructured our sockets business in Minnesota, which resulted in severance charges, inventory write-offs and shorter useful lives of certain
equipment. In the fourth quarter of 2010, in connection with our ongoing integration of the operations of SUSS Test, we announced plans to restructure and consolidate our sales organization and manufacturing operations. Manufacturing operations for
our Systems business will be consolidated at our Dresden, Germany facility over the next 12 months, and manufacturing operations for our Probes business will be consolidated at one of our manufacturing facilities in Beaverton, Oregon over the next 6
months. Our sales offices in Vermont and Arizona were closed in the fourth quarter of 2010.

Total restructuring charges in 2010 were $2.7
million, primarily for severance and inventory write-offs. We expect to incur an additional $0.6 million in severance charges in 2011 related to these plans. These plans could also result in charges related to lease abandonment, additional
write-offs of inventory, and decreased useful lives of fixed assets. The amounts of any such charges, however, are not currently estimable.

In the future, we may undertake additional restructuring or reorganization activities in order to improve operating efficiencies and reduce operating
costs. Such activities require 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 such activities
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 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.



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Furthermore, many countries including those in the European Union (EU) and China have implemented directives
which restrict the sale of new electrical and electronic equipment containing hazardous substance, or make producers of electrical and electronic equipment financially responsible for specified collection, recycling, treatment and disposal of past
and future covered products. We have not incurred any costs or fees or penalties associated with these initiatives and none of our products have been delayed at a customs point-of-entry due to non-compliance with environmental regulations. However,
if it is determined that we do not comply with certain environmental regulations, we may suffer a loss of revenue, be unable to sell in certain markets or countries and suffer competitive disadvantage, and be required to take reserves for costs
associated with compliance with these regulations

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 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.

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 16% and 13%, respectively, of our revenue in 2010 and 2009. Our
customer base is less diversified in probes and sockets than in probe stations. Typically, 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.



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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, changes in tax laws, including pending tax law changes, such as the benefit from export sales and the research and development credit. In particular, the recoverability 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.

We may be exposed to uninsured risks if the type and amount of coverage we carry are not adequate, or the
insurance company is unable honor claims.

We carry insurance in various types and amounts to insure against a range of business related
risks. While we have never experienced a significant uninsured event, if the types of insurance or the insurance limits are not adequate to protect us against all claims, or the insurance company is not able to honor our claims, our results of
operations, financial position and cash flow could be negatively affected.

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

As of March 1, 2011, our executive officers and directors and their affiliates
beneficially owned approximately one-fourth 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 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 typically staggered our board of directors, which makes 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | 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.



|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 clean room within a 59,000 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 14,000 square foot facility that we lease in Brooklyn Park, Minnesota. We lease small sales and service offices in Japan, Germany, China, Taiwan and Singapore. As a
result of the Suss Test acquisition in January 2010, we also lease a 42,000 square foot manufacturing and support facility near Dresden, Germany. Our lease of that facility expires December 31, 2012.



|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. | RESERVED
|------- | --------



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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 trades on the NASDAQ National Market System under the symbol CSCD. 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, 2010 was as
follows:



|          |  |      |      |  |     |   |      | 
|--------- |  | ---- | ---- |  | --- | - | ---- | 
|2010      |  | High |      |  | Low |  
|Quarter 1 |  | $    | 4.75 |  |     | $ | 4.00 | 
|Quarter 2 |  |      | 5.15 |  |     |   | 4.05 | 
|Quarter 3 |  |      | 4.62 |  |     |   | 3.45 | 
|Quarter 4 |  |      | 4.50 |  |     |   | 3.34 | 
|          |  |     
|2009      |  | High |      |  | Low |  
|Quarter 1 |  | $    | 4.68 |  |     | $ | 1.84 | 
|Quarter 2 |  |      | 4.50 |  |     |   | 2.40 | 
|Quarter 3 |  |      | 5.51 |  |     |   | 3.80 | 
|Quarter 4 |  |      | 5.59 |  |     |   | 4.24 | 

As of March 1, 2011, there were
58 shareholders of record and approximately 675 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, 2010, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness and $27.1 million,
net of cash acquired, for our acquisitions of the eVue product line and Gryphics, Inc. and certain assets of Synatron GmbH and SUSS Test.

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 and Electro Scientific Industries, 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.

LOGO



|                         |  |            |        |  |                             |   |        |          |  |   |          |  |  |          |       |  |          |   |        |  |  |   |        | 
|------------------------ |  | ---------- | ------ |  | --------------------------- | - | ------ | -------- |  | - | -------- |  |  | -------- | ----- |  | -------- | - | ------ |  |  | - | ------ | 
|                         |  | BasePeriod |        |  | Indexed ReturnsPeriod Ended |  
|Company/Index            |  | 12/31/05   |        |  | 12/31/06                    |   |        | 12/31/07 |  |   | 12/31/08 |  |  | 12/31/09 |       |  | 12/31/10 |  
|Cascade Microtech, Inc.  |  | $          | 100.00 |  |                             | $ | 103.72 |          |  | $ | 80.68    |  |  | $        | 15.44 |  |          | $ | 36.26  |  |  | $ | 34.44  | 
|Semiconductor Peer Group |  |            | 100.00 |  |                             |   | 112.89 |          |  |   | 95.87    |  |  |          | 36.06 |  |          |   | 64.95  |  |  |   | 70.01  | 
|NASDAQ Composite Index   |  |            | 100.00 |  |                             |   | 109.52 |          |  |   | 120.27   |  |  |          | 71.51 |  |          |   | 102.89 |  |  |   | 120.29 | 



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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)                                         |  | 2010                            |         |   | 2009 |   |         | 2008 |  |   | 2007    |   |  | 2006 |        
|Statement of Operations Data                                                    |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Revenue                                                                         |  | $                               | 95,799  |   |      | $ | 53,541  |      |  | $ | 76,561  |   |  | $    | 89,922  |  |  | $ | 84,852  | 
|Cost of sales                                                                   |  |                                 | 59,714  |   |      |   | 33,840  |      |  |   | 44,477  |   |  |      | 48,801  |  |  |   | 47,810  | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Gross profit                                                                    |  |                                 | 36,085  |   |      |   | 19,701  |      |  |   | 32,084  |   |  |      | 41,121  |  |  |   | 37,042  | 
|Operating expenses:                                                             |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Research and development                                                        |  |                                 | 12,612  |   |      |   | 8,372   |      |  |   | 10,473  |   |  |      | 11,241  |  |  |   | 8,949   | 
|Selling, general and administrative                                             |  |                                 | 33,046  |   |      |   | 21,724  |      |  |   | 29,311  |   |  |      | 27,723  |  |  |   | 24,819  | 
|Amortization of purchased intangibles                                           |  |                                 | 783     |   |      |   | 567     |      |  |   | 2,461   |   |  |      | 1,977   |  |  |   | 130     | 
|Asset impairment charges                                                        |  |                                 |        |   |      |   |        |      |  |   | 27,701  |   |  |      |        |  |  |   |        | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Total operating expenses                                                        |  |                                 | 46,441  |   |      |   | 30,663  |      |  |   | 69,946  |   |  |      | 40,941  |  |  |   | 33,898  | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Income (loss) from operations                                                   |  |                                 | (10,356 | ) |      |   | (10,962 | )    |  |   | (37,862 | ) |  |      | 180     |  |  |   | 3,144   | 
|Other income (expense), net                                                     |  |                                 | 32      |   |      |   | 407     |      |  |   | 1,038   |   |  |      | 1,336   |  |  |   | 1,961   | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Income (loss) before income taxes                                               |  |                                 | (10,324 | ) |      |   | (10,555 | )    |  |   | (36,824 | ) |  |      | 1,516   |  |  |   | 5,105   | 
|Provision (benefit) for income taxes                                            |  |                                 | 15      |   |      |   | (2,906  | )    |  |   | (2,247  | ) |  |      | 586     |  |  |   | 1,495   | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Net income (loss)                                                               |  | $                               | (10,339 | ) |      | $ | (7,649  | )    |  | $ | (34,577 | ) |  | $    | 930     |  |  | $ | 3,610   | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Basic net income (loss) per share attributed to common shareholders             |  | $                               | (0.72   | ) |      | $ | (0.57   | )    |  | $ | (2.65   | ) |  | $    | 0.07    |  |  | $ | 0.31    | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Diluted net income (loss) per share attributed to common shareholders           |  | $                               | (0.72   | ) |      | $ | (0.57   | )    |  | $ | (2.65   | ) |  | $    | 0.07    |  |  | $ | 0.30    | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Shares used in basic per share calculations                                     |  |                                 | 14,286  |   |      |   | 13,319  |      |  |   | 13,071  |   |  |      | 12,550  |  |  |   | 11,482  | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Shares used in diluted per share calculations                                   |  |                                 | 14,286  |   |      |   | 13,319  |      |  |   | 13,071  |   |  |      | 12,840  |  |  |   | 11,959  | 
|                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|                                                                                | 
|                                                                                |  | December 31,                    |        
|Balance Sheet Data                                                              |  | 2010                            |         |   | 2009 |   |         | 2008 |  |   | 2007    |   |  | 2006 |        
|Cash and cash equivalents, short-term marketable securities and restricted cash |  | $                               | 24,445  |   |      | $ | 32,854  |      |  | $ | 32,545  |   |  | $    | 29,421  |  |  | $ | 43,794  | 
|Working capital                                                                 |  |                                 | 50,944  |   |      |   | 56,786  |      |  |   | 58,269  |   |  |      | 58,965  |  |  |   | 68,642  | 
|Total assets                                                                    |  |                                 | 84,545  |   |      |   | 80,944  |      |  |   | 88,456  |   |  |      | 125,281 |  |  |   | 103,786 | 
|Current portion of capital lease obligations                                    |  |                                 | 13      |   |      |   | 11      |      |  |   | 19      |   |  |      | 13      |  |  |   |        | 
|Long-term capital lease obligations, less current portion                       |  |                                 | 18      |   |      |   | 29      |      |  |   | 62      |   |  |      | 51      |  |  |   |        | 
|Other long-term liabilities                                                     |  |                                 | 2,906   |   |      |   | 2,596   |      |  |   | 2,669   |   |  |      | 5,763   |  |  |   | 1,370   | 
|Shareholders equity                                                            |  |                                 | 65,606  |   |      |   | 71,385  |      |  |   | 76,700  |   |  |      | 107,605 |  |  |   | 90,193  | 



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|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

Revenues increased to $95.8 million in 2010 compared to $53.5 million 2009 as the
global economy, and the semiconductor and semiconductor equipment markets in particular, showed improvement. In January 2010 we completed the acquisition of SUSS Test. Our revenues and market share in the Systems business have benefited from the
acquisition of SUSS Test. The improvement in revenue combined with shifts in product mix contributed to increased gross profit and gross margins as we were able to better leverage our fixed overhead costs.

However, acquisition and restructuring-related charges in 2010 negatively affected our financial results. We incurred direct acquisition costs of $0.8
million and restructuring charges totaling $2.7 million in 2010 related to our SUSS Test acquisition and consolidation of certain product lines and facilities. The 2010 restructuring charges were included in our statements of operations as follows
(in thousands):



|                                    |  |   |       | 
|----------------------------------- |  | - | ----- | 
|Cost of sales                       |  | $ | 1,359 | 
|Research and development            |  |   | 127   | 
|Selling, general and administrative |  |   | 1,198 | 
|                                    |  |   |       | 
|                                    |  | $ | 2,684 | 
|                                    |  |   |       | 

In addition, the income tax benefit of $2.9 million in 2009 attributable primarily to the carryback of losses to income
taxes paid in prior years was not available in 2010. As a result, our net loss increased to $10.3 million in 2010 from $7.6 million in 2009.

Outlook for 2011

We expect
semiconductor and semiconductor equipment markets will show continued strength in 2011, which, based on our market position and continued investment in our products, should result in increased revenue for 2011 compared to 2010. Based on our current
backlog, anticipated bookings and normal seasonal pattern in the industry, we expect revenues will be in the range of $24 million to $27 million for the first quarter of 2011.



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Results of Operations

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



|                                      |  |                                 |       |    |      |  |       |      |  |  |       |   
|------------------------------------- |  | ------------------------------- | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | --
|                                      |  | For the Year Ended December 31, |      
|                                      |  | 2010                            |       |    | 2009 |  |       | 2008 | 
|Statement of Operations Data          |  |                                 |       |    |      |  |       |      |  |  |       |   
|Revenue                               |  |                                 | 100.0 | %  |      |  | 100.0 | %    |  |  | 100.0 | % 
|Cost of sales                         |  |                                 | 62.3  |    |      |  | 63.2  |      |  |  | 58.1  |   
|                                      |  |                                 |       |    |      |  |       |      |  |  |       |   
|Gross profit                          |  |                                 | 37.7  |    |      |  | 36.8  |      |  |  | 41.9  |   
|Operating expenses:                   |  |                                 |       |    |      |  |       |      |  |  |       |   
|Research and development              |  |                                 | 13.2  |    |      |  | 15.6  |      |  |  | 13.7  |   
|Selling, general and administrative   |  |                                 | 34.5  |    |      |  | 40.6  |      |  |  | 38.3  |   
|Amortization of purchased intangibles |  |                                 | 0.8   |    |      |  | 1.1   |      |  |  | 3.2   |   
|Asset impairments                     |  |                                 |      |    |      |  |      |      |  |  | 36.2  |   
|                                      |  |                                 |       |    |      |  |       |      |  |  |       |   
|Total operating expenses              |  |                                 | 48.5  |    |      |  | 57.3  |      |  |  | 91.4  |   
|                                      |  |                                 |       |    |      |  |       |      |  |  |       |   
|Loss from operations                  |  |                                 | (10.8 | )  |      |  | (20.5 | )    |  |  | (49.5 | ) 
|Other income, net                     |  |                                 |      |    |      |  | 0.8   |      |  |  | 1.4   |   
|                                      |  |                                 |       |    |      |  |       |      |  |  |       |   
|Loss before income taxes              |  |                                 | (10.8 | )  |      |  | (19.7 | )    |  |  | (48.1 | ) 
|Provision (benefit) for income taxes  |  |                                 |      |    |      |  | (5.4  | )    |  |  | (2.9  | ) 
|                                      |  |                                 |       |    |      |  |       |      |  |  |       |   
|Net loss                              |  |                                 | (10.8 | )% |      |  | (14.3 | )%   |  |  | (45.2 | %)
|                                      |  |                                 |       |    |      |  |       |      |  |  |       |   



|(1) | Percentages may not add due to rounding.
|--- | ----------------------------------------

The
following table summarizes revenue, gross profit and income from operations for each of our segments (dollars in thousands):



|                              |  |         |        |   |                  |   |        |                      |  |   |         |   |  |   |         |  
|----------------------------- |  | ------- | ------ | - | ---------------- | - | ------ | -------------------- |  | - | ------- | - |  | - | ------- | -
|Year Ended December 31, 2010  |  | Systems |        |   | ProbesandSockets |   |        | CorporateUnallocated |  |   | Total   |  
|Revenue                       |  | $       | 65,422 |   |                  | $ | 30,377 |                      |  | $ |        |   |  | $ | 95,799  |  
|Gross profit                  |  | $       | 23,354 |   |                  | $ | 12,731 |                      |  | $ |        |   |  | $ | 36,085  |  
|Gross margin                  |  |         | 35.7   | % |                  |   | 41.9   | %                    |  |   |        |   |  |   | 37.7    | %
|Income (loss) from operations |  | $       | 5,353  |   |                  | $ | (2,245 | )                    |  | $ | (13,464 | ) |  | $ | (10,356 | )
|                              |  |         |        |  
|Year Ended December 31, 2009  |  |         |        |   |                  |   |        |                      |  |   |         |  
|Revenue                       |  | $       | 28,951 |   |                  | $ | 24,590 |                      |  | $ |        |   |  | $ | 53,541  |  
|Gross profit                  |  | $       | 9,190  |   |                  | $ | 10,511 |                      |  | $ |        |   |  | $ | 19,701  |  
|Gross margin                  |  |         | 31.7   | % |                  |   | 42.7   | %                    |  |   |        |   |  |   | 36.8    | %
|Loss from operations          |  | $       | (917   | ) |                  | $ | (154   | )                    |  | $ | (9,891  | ) |  | $ | (10,962 | )
|                              |  |         |        |  
|Year Ended December 31, 2008  |  |         |        |   |                  |   |        |                      |  |   |         |  
|Revenue                       |  | $       | 40,870 |   |                  | $ | 35,691 |                      |  | $ |        |   |  | $ | 76,561  |  
|Gross profit                  |  | $       | 13,697 |   |                  | $ | 18,387 |                      |  | $ |        |   |  | $ | 32,084  |  
|Gross margin                  |  |         | 33.5   | % |                  |   | 51.5   | %                    |  |   |        |   |  |   | 41.9    | %
|Income (loss) from operations |  | $       | 6,697  |   |                  | $ | (144   | )                    |  | $ | (44,415 | ) |  | $ | (37,862 | )

The segment data 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 increased $42.3 million, or 78.9%, to $95.8 million in 2010
compared to $53.5 million in 2009 and decreased $23.1 million, or 30.1%, in 2009 compared to $76.6 million in 2008.

Systems

Revenue in Systems increased $36.4 million, or 126%, to $65.4 million in 2010 compared to $29.0 million in 2009 and decreased $11.9
million, or 29.2%, in 2009 compared to $40.9 million in 2008.



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



|                                                              |  |                      |      |   |                      |  |       |   
|------------------------------------------------------------- |  | -------------------- | ---- | - | -------------------- |  | ----- | --
|                                                              |  | 2010 comparedto 2009 |      |   | 2009 comparedto 2008 | 
|Percentage increase (decrease) in unit sales                  |  |                      | 90.8 | % |                      |  | (22.5 | )%
|Percentage increase (decrease) in average sales price (ASP) |  |                      | 32.6 | % |                      |  | (14.2 | )%

The increase in revenue in 2010 compared
to 2009 was the result of both an increase in unit sales and an increase in ASPs. We realized increased unit sales due to the overall improvement in semiconductor and semiconductor equipment markets during 2010 and our acquisition of SUSS Test in
January 2010. ASP was positively affected by sales mix, as a larger number of high-end 300mm, cryogenic and high-power systems were sold. ASP includes the sales price of any analytical probes, probe cards and accessories purchased with a probe
station.

The decrease in revenue in 2009 compared to 2008 was the result of decreased unit sales and decrease in ASPs. We realized decreased
unit sales in 2009 compared to 2008 due to the global slow-down in semiconductor markets. ASP was negatively affected in 2009 compared to 2008 by changes in our sales mix, as fewer high-end systems were sold in relation to total system sales.

Sales of 300mm, cryogenic and high power systems represented 21%, 11% and 21% of total units sales in 2010, 2009 and 2008, respectively.

Probes and Sockets

Revenue
in Probes and Sockets increased $5.8 million, or 23.5%, to $30.4 million in 2010 compared to $24.6 million in 2009 and decreased $11.1 million, or 31.1%, in 2009 compared to $35.7 million in 2008.

The increase in 2010 compared to 2009 was primarily the result of increased unit sales driven by the overall improvement in semiconductor design and
production markets.

The decrease in 2009 compared to 2008 was primarily the result of lower unit sales driven by the overall decrease in
worldwide semiconductor production.

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 increased $25.9 million, or 76.5%, to $59.7 million in 2010 compared to $33.8 million in 2009 and decreased
$10.7 million, or 23.9%, in 2009 compared to $44.5 million in 2008. Gross margin (gross profit as a percentage of net sales) was 37.7%, 36.8% and 41.9% in 2010, 2009 and 2008, respectively.

The increase in cost of sales in 2010 compared to 2009 was the result of increased sales as discussed above and changes in gross margin as discussed
below.

The decrease in cost of sales in 2009 compared to 2008 was primarily due to the decrease in sales, partially offset by lower gross
margins.

Systems

Systems
gross margins increased to 35.7% in 2010 compared to 31.7% in 2009. Systems gross margins were positively affected in 2010 by changes in sales mix and an increase in average selling prices as described above, as a larger number of high-end systems
were sold. Systems gross margins were negatively affected in 2010 by inventory valuation charges of $1.1 million compared to



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$0.5 million in 2009. Inventory charges in 2010 included restructuring charges of $1.0 million in the first quarter of 2010 for discontinued products following the acquisition of SUSS Test. In
addition, the Systems gross margin in 2010 was negatively affected by purchase price allocation adjustments to value finished goods and work-in-process inventory acquired in the SUSS Test acquisition at their estimated selling price less cost to
sell. Accordingly, when such inventory was sold, it resulted in near zero gross margins. During 2010, $1.0 million of such inventory was sold, with a remaining balance of $0.2 million as of December 31, 2010.

The Systems gross margin decreased to 31.7% in 2009 compared to 33.5% in 2008, primarily due to the overall decrease in sales volume and change in
product mix. We sold fewer 300mm systems in relation to total system sales, which typically yield higher margins than non-300mm systems due to their higher average sales prices and sales of accessories. The decrease in gross margin due to volume and
product mix was partially offset by decreases in salaries, benefits and overhead costs.

Probes and Sockets

The Probes and Sockets gross margin decreased to 41.9% in 2010 compared to 42.7% in 2009. Gross margins in 2010 were negatively affected by sales mix as a
higher number of lower-margin analytical probes that are sourced from third parties were sold due to the acquisition of SUSS Test in January 2010. In addition, we recorded inventory valuation charges of $0.6 million in 2010, compared to $0.4 million
in 2009 and restructuring charges of $0.2 million in the second quarter of 2010 related to our sockets business in Minnesota. The increase in sales positively affected gross margins during 2010 as unallocated fixed overhead costs recorded as period
expenses in cost of sales decreased as compared to 2009.

The Probes and Sockets gross margin decreased to 42.7% in 2009 compared to 51.5% in
2008, primarily due to the decrease in sales volume as production costs for Probes and Sockets have a higher component of fixed overhead than Systems. As sales volumes decline, unallocated fixed overhead costs recorded as a period expense in cost of
sales increase. The impact of the decline in sales volume was partially offset by an overall reduction in salaries, benefits and overhead costs and improvement in yields on certain product lines.

Research and Development

Research and development costs are expensed as incurred and include compensation and related expenses for personnel, materials, consultants and overhead.

Research and development expenses increased $4.2 million, or 50.6%, to $12.6 million in 2010 compared to $8.4 million in 2009 and
decreased $2.1 million, or 20.1%, in 2009 compared to $10.5 million in 2008.

The overall increase in expense in 2010 was primarily the result
of the SUSS Test acquisition in January 2010. These variations consisted of the following:



|                                                |  |                     |           | 
|----------------------------------------------- |  | ------------------- | --------- | 
|                                                |  | 2010Compared to2009 |          
|Increase in wages and benefits due to headcount |  | $                   | 2,269,000 | 
|Increase in professional fees                   |  |                     | 541,000   | 
|Increase in travel, meals and entertainment     |  |                     | 201,000   | 
|Increase in project expenses                    |  |                     | 143,000   | 
|Increase in incentive compensation              |  |                     | 176,000   | 
|Increase in depreciation expense                |  |                     | 134,000   | 
|Increase in allocated occupancy expenses        |  |                     | 108,000   | 
|Increase in software expense                    |  |                     | 106,000   | 
|Increase in severance costs                     |  |                     | 99,000    | 
|Increase in training and seminars               |  |                     | 90,000    | 
|Other, net                                      |  |                     | 333,000   | 
|                                                |  |                     |           | 
|                                                |  | $                   | 4,200,000 | 
|                                                |  |                     |           | 



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##### Table of Contents

|                                                      |  |                     |            |  
|----------------------------------------------------- |  | ------------------- | ---------- | -
|                                                      |  | 2009Compared to2008 |           
|Decrease in wages and benefits due to lower headcount |  | $                   | (1,708,000 | )
|Increase in professional fees                         |  |                     | 244,000    |  
|Decrease in severance costs                           |  |                     | (232,000   | )
|Decrease in travel, meals and entertainment expenses  |  |                     | (148,000   | )
|Decrease in allocated occupancy expenses              |  |                     | (82,000    | )
|Decrease in recruiting expenses                       |  |                     | (124,000   | )
|Decrease in stock-based compensation                  |  |                     | (49,000    | )
|Other, net                                            |  |                     | (1,000     | )
|                                                      |  |                     |            |  
|                                                      |  | $                   | (2,100,000 | )
|                                                      |  |                     |            |  

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 $11.3 million, or 52.1%, to $33.0 million in 2010 compared to $21.7 million in 2009 and decreased $7.6 million, or 25.9%,
in 2009 compared to $29.3 million in 2008.

The overall increase in expense in 2010 compared to 2009 was primarily the result of the SUSS
Test acquisition in January 2010 and the increase in sales. The changes were due to the following:



|                                                        |  |                     |            | 
|------------------------------------------------------- |  | ------------------- | ---------- | 
|                                                        |  | 2010Compared to2009 |           
|Increase in wages and benefits due to headcount         |  | $                   | 4,762,000  | 
|Increase in internal and external sales commissions     |  |                     | 2,162,000  | 
|Increase in professional fees                           |  |                     | 1,169,000  | 
|Increase in travel, meals and entertainment             |  |                     | 953,000    | 
|Increase in severance costs                             |  |                     | 585,000    | 
|Increase in incentive compensation                      |  |                     | 309,000    | 
|Increase in advertising, sales materials and event fees |  |                     | 143,000    | 
|Increase in occupancy expenses                          |  |                     | 321,000    | 
|Increase in departmental supplies                       |  |                     | 230,000    | 
|Increase in board and public company costs              |  |                     | 185,000    | 
|Increase in equipment repairs and maintenance           |  |                     | 137,000    | 
|Other, net                                              |  |                     | 344,000    | 
|                                                        |  |                     |            | 
|                                                        |  | $                   | 11,300,000 | 
|                                                        |  |                     |            | 



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##### Table of Contents

|                                                        |  |                     |            |  
|------------------------------------------------------- |  | ------------------- | ---------- | -
|                                                        |  | 2009Compared to2008 |           
|Decrease in wages and benefits due to lower headcount   |  | $                   | (1,755,000 | )
|Decrease in professional fees                           |  |                     | (890,000   | )
|Decrease in internal and external sales commissions     |  |                     | (529,000   | )
|Decrease in travel, meals and entertainment expenses    |  |                     | (581,000   | )
|Decrease in recruiting and relocation expenses          |  |                     | (165,000   | )
|Decrease in advertising, sales materials and event fees |  |                     | (435,000   | )
|Decrease in stock-based compensation                    |  |                     | (529,000   | )
|Decrease in freight and postage expenses                |  |                     | (208,000   | )
|Decrease in severance and restructuring costs           |  |                     | (451,000   | )
|Decrease in allocated occupancy expenses                |  |                     | (222,000   | )
|Decrease in incentive compensation                      |  |                     | (189,000   | )
|Decrease in equipment repairs and maintenance           |  |                     | (195,000   | )
|Decrease in departmental supplies                       |  |                     | (155,000   | )
|Decrease in loss on disposals of long-lived assets      |  |                     | (396,000   | )
|Decrease in bad debt expense                            |  |                     | (836,000   | )
|Other, net                                              |  |                     | (64,000    | )
|                                                        |  |                     |            |  
|                                                        |  | $                   | (7,600,000 | )
|                                                        |  |                     |            |  

Amortization of Purchased Intangibles

Amortization of purchased intangibles includes amortization related to our prior acquisitions and our January 2010 acquisition of SUSS Test. Amortization expense increased $0.2 million to $0.8 million in
2010 compared to $0.6 million in 2009 and decreased $1.9 million in 2009 compared $2.5 million in 2008. The decrease in 2009 compared to 2008 was due to the asset impairment charge recorded in the fourth quarter of 2008. Net purchased intangibles
totaled $3.1 million at December 31, 2010.

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 foreign currency forward contracts and foreign currency gains and losses. Other income (expense) can also include other miscellaneous non-operating gains and
losses.



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



|                                             |  |                         |     |   |      |   |      |      |  |   |       |  
|-------------------------------------------- |  | ----------------------- | --- | - | ---- | - | ---- | ---- |  | - | ----- | -
|                                             |  | Year Ended December 31, |    
|                                             |  | 2010                    |     |   | 2009 |   |      | 2008 | 
|Interest income, net                         |  | $                       | 70  |   |      | $ | 314  |      |  | $ | 862   |  
|Foreign currency gains (losses)              |  |                         | (26 | ) |      |   | 198  |      |  |   | 458   |  
|Losses on foreign currency forward contracts |  |                         | (73 | ) |      |   | (140 | )    |  |   | (409  | )
|Other                                        |  |                         | 61  |   |      |   | 35   |      |  |   | 127   |  
|                                             |  |                         |     |   |      |   |      |      |  |   |       |  
|                                             |  | $                       | 32  |   |      | $ | 407  |      |  | $ | 1,038 |  
|                                             |  |                         |     |   |      |   |      |      |  |   |       |  

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities. The
decreases in 2010 compared to 2009 was due to a combination of a decrease in the yields on investments and decreased cash and investment balances resulting from our purchase of SUSS Test in January 2010. The decrease in 2009 compared to 2008 was
primarily due to a decrease in interest rates on investments.

Foreign currency gains and losses primarily result from a combination of
changes in foreign currency exchange rates and the net value of monetary assets and liabilities denominated in yen, euro and other foreign currencies. 2009 included an adjustment for foreign currency re-measurement related to 2008, which increased
other income in 2009 by $0.3 million.

Income Taxes

Our provision (benefit) for income taxes totaled $15,000, or 0.1% of loss before income taxes, in 2010, $(2.9) million, or 27.5% of loss before income taxes, in 2009 and $(2.2) million, or 6.1% of loss
before income taxes, in 2008. Generally, the provision for income taxes is the result of the mix of profits (losses) earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates and changes in tax reserves.

Our tax provision in 2010 included tax expense due to taxable income in foreign tax jurisdictions for 2010, offset by a net benefit in
Germany that was primarily related to the release of the valuation allowance against deferred tax assets due to the acquisition of SUSS Test in the first quarter of 2010.

The income tax benefit for 2009 was primarily attributable to a tax relief act signed into law during the fourth quarter of 2009 that increased the carryback of our 2009 net operating losses from 2 to 5
years.

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.

Liquidity and Capital Resources

Net cash used in operating activities in 2010 was $0.8 million and consisted of our net loss of $10.3 million, offset by net non-cash
expenses of $5.7 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net increased by
$8.8 million to $19.7 million at December 31, 2010, compared to $10.9 million at December 31, 2009. The increase in accounts receivable was primarily due to our increased sales in the fourth quarter of 2010 compared to the fourth
quarter of 2009.

Inventories increased by $4.2 million to $20.8 million at December 31, 2010, compared to $16.6 million at
December 31, 2009. The increase in inventory was primarily due to increased purchases to support our increased sales, partially offset by $1.7 million of inventory valuation charges as discussed above. If our actual results are significantly
different than our current expectations for 2011, we may incur additional inventory charges in future periods.



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Accounts payable increased by $2.6 million to $6.4 million at December 31, 2010, compared to $3.8
million at December 31, 2009 primarily due to increased inventory purchases to support our increased sales.

Accrued liabilities
increased by $4.2 million to $6.3 million at December 31, 2010, compared to $2.1 million at December 31, 2009 primarily due to a $1.3 million increase in accrued income taxes due to the timing of payments, a $0.9 million increase in
accrued compensation and benefits due to headcount and the timing of payroll, accrued restructuring costs of $0.3 million, a $0.4 million increase in accrued commissions and a $0.4 million increase in warranties due to increased sales.

Fixed asset purchases of $1.5 million in 2010 were primarily for information technology, production equipment and office related equipment. We anticipate
fixed asset additions for 2011 to be approximately $4.9 million, primarily for production related equipment, facility improvements, research and development tools and information technology.

In January 2010, we utilized $7.1 million of cash and cash equivalents, net of cash acquired, for the purchase of SUSS Test. See Note 3 of Notes to Consolidated Financial Statements for additional
information.

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash and
cash equivalents and short-term marketable securities, which totaled $22.7 million at December 31, 2010.

We continue to evaluate
opportunities for acquisition and expansion and any such transactions, if consummated, may use a portion of our cash and marketable securities.

Seasonality

Typically, our first
quarter revenues are lower than our revenues from the preceding fourth quarter. 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, 2010 (in thousands):



|                           |  |                        |        |  |      |   |        |              |  |   |              |  |  |                |       |  |  |   |     | 
|-------------------------- |  | ---------------------- | ------ |  | ---- | - | ------ | ------------ |  | - | ------------ |  |  | -------------- | ----- |  |  | - | --- | 
|                           |  | Payments Due By Period |       
|Contractual Obligation     |  | Total                  |        |  | 2011 |   |        | 2012 and2013 |  |   | 2014 and2015 |  |  | 2016 andbeyond |      
|Operating Leases           |  | $                      | 14,936 |  |      | $ | 3,365  |              |  | $ | 5,978        |  |  | $              | 5,057 |  |  | $ | 536 | 
|Capital Leases             |  |                        | 32     |  |      |   | 13     |              |  |   | 19           |  |  |                |      |  |  |   |    | 
|Purchase Order Commitments |  |                        | 9,806  |  |      |   | 9,806  |              |  |   |             |  |  |                |      |  |  |   |    | 
|Forward contracts          |  |                        | 1,602  |  |      |   | 1,602  |              |  |   |             |  |  |                |      |  |  |   |    | 
|                           |  |                        |        |  |      |   |        |              |  |   |              |  |  |                |       |  |  |   |     | 
|                           |  | $                      | 26,376 |  |      | $ | 14,786 |              |  | $ | 5,997        |  |  | $              | 5,057 |  |  | $ | 536 | 
|                           |  |                        |        |  |      |   |        |              |  |   |              |  |  |                |       |  |  |   |     | 

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.



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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 origin 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.

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. In 2009, we had specific charges to the bad debt reserve of $61,000 and recoveries of previously reserved accounts of $69,000. In 2010, we had a net reversal of charges to the bad debt
reserve of $0.1 million and recoveries of previously reserved accounts of $242,000.

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.

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. The goodwill
impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its



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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. 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 quarter of 2008 and, as of December 31, 2009, we had no goodwill recorded on our balance sheet.

Goodwill of $1.0 million at December 31, 2010 relates to our acquisition of SUSS Test in January 2010. This goodwill relates to our Systems segment and represents the value of assembled workforce and
other intangible assets that do not qualify for separate recognition. Our impairment test performed in the fourth quarter of 2010 did not indicate impairment of goodwill.

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. 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. Such reviews assess the fair value of the assets based upon estimates of discounted future cash flows that the assets are expected to generate. During 2010, we recorded $0.2 million of write-downs to
property and equipment in connection with our restructuring activities. See Note 17 of Notes to Consolidated Financial Statements. 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. We did not record any impairment charges for long-lived assets during 2009.

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 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 certain temporary differences. 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. We continued to record a
full valuation allowance against our domestic deferred tax assets and certain foreign deferred tax assets in 2009.



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In 2010, we increased our valuation allowance by $1.9 million, which included increases for changes in our
net deferred tax assets during 2010, partially offset by a $0.4 million reduction of our valuation allowance on certain deferred tax assets in Germany in connection with our acquisition of SUSS Test in January 2010. The valuation allowance totaled
$9.2 million and $7.3 million, respectively, at December 31, 2010 and 2009. At December 31, 2010, we had net deferred tax assets on our balance sheet totaling $0.7 million, primarily related to foreign jurisdictions. We may record
additional valuation allowances in the future.

Uncertainty in Income Taxes

We recognize the benefits of tax return positions in our financial statements if we determine that the positions are more-likely-than-not to
be sustained by the taxing authority. Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense within our financial statements. At December 31, 2010, we had total unrecognized tax benefits of $0.3 million. All
unrecognized tax benefits would have an impact on the effective tax rate if recognized. The interest and penalties accrued on unrecognized tax benefits were insignificant.

Stock-Based Compensation

We recognize compensation expense for all share-based
payment awards granted to our employees and directors, including stock options, restricted stock units and stock purchases related to our employee stock purchase plan, based on the estimated fair value of the award on the grant date. We use the
Black-Scholes valuation model to estimate the fair value of stock option awards. The Black-Scholes model requires us to make 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.

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. As of December 31, 2010, we had contracts outstanding for the purchase of Japanese yen totaling
approximately $1.6 million, which mature through June 2011.

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 and, accordingly, gains and losses on our forward exchange contracts are recognized currently as a component of other income
(expense).



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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, 2010, we held cash and cash equivalents, short-term marketable securities and restricted cash and cash equivalents of $24.4
million. Based on the nature of our marketable securities, a decline in interest rates over time would reduce our interest income, but 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. A decrease in interest rates of one percent would cause a corresponding decrease in our annual interest income of
approximately $0.2 million, assuming our December 31, 2010 balances remained constant. In addition, due to the nature of our highly liquid cash equivalents, a change in interest rates would not materially affect the fair value of our cash
equivalents.



|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, 2010 was as follows:



|                                                 |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |  
|------------------------------------------------ |  | ------------ | ------ | - | ------------ | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|In thousands, except per share data              |  | 1st 
Quarter |        |   | 2nd 
Quarter |   |        | 3rd 
Quarter |  |   | 4th 
Quarter |  
|2010                                             |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |  
|Revenue                                          |  | $            | 19,959 |   |              | $ | 23,439 |              |  | $ | 25,273       |   |  | $ | 27,128 |  
|Gross profit                                     |  |              | 5,386  |   |              |   | 8,319  |              |  |   | 10,423       |   |  |   | 11,957 |  
|Net income (loss)                                |  |              | (7,400 | ) |              |   | (2,853 | )            |  |   | (353         | ) |  |   | 267    |  
|Basic and diluted net income (loss) per share(1) |  |              | (0.53  | ) |              |   | (0.20  | )            |  |   | (0.02        | ) |  |   | 0.02   |  
|                                                 |  |              |        |  
|2009                                             |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |  
|Revenue                                          |  | $            | 11,469 |   |              | $ | 12,616 |              |  | $ | 13,971       |   |  | $ | 15,485 |  
|Gross profit                                     |  |              | 3,855  |   |              |   | 4,781  |              |  |   | 5,493        |   |  |   | 5,572  |  
|Net loss                                         |  |              | (4,165 | ) |              |   | (1,576 | )            |  |   | (1,419       | ) |  |   | (489   | )
|Basic and diluted net loss per share(1)          |  |              | (0.31  | ) |              |   | (0.12  | )            |  |   | (0.11        | ) |  |   | (0.04  | )



|(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, 2010.



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Changes in Internal Control Over Financial Reporting

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

Disclosure Controls and Procedures

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

Limitation on Effectiveness of Controls

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



|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 2011 Annual Meeting of Shareholders (the Proxy Statement), which will
be filed within 120 days after the end of our year ended December 31, 2010 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 2011 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 and Executive Compensation in our definitive proxy statement for our 2011 Annual Meeting of Shareholders and is incorporated herein by reference.



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|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, 2010.



|                                                          |  |                                                                                         |         |     |                                                                          |   |      |                                                                                                                                     |  |  |           |    
|--------------------------------------------------------- |  | --------------------------------------------------------------------------------------- | ------- | --- | ------------------------------------------------------------------------ | - | ---- | ----------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- | ---
|Plan Category                                             |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and
rights |         |     | Weighted averageexercise price ofoutstanding options,warrants and
rights |   |      | Number of securitiesremaining available for futureissuance under
equitycompensation plans(excluding securities reflectedin column A | 
|Equity compensation plans approved by shareholders(3)     |  |                                                                                         | 793,703 | (1) |                                                                          | $ | 6.85 |                                                                                                                                     |  |  | 2,375,620 | (2)
|Equity compensation plans not approved by shareholders(4) |  |                                                                                         |        |     |                                                                          |   |     |                                                                                                                                     |  |  |          |    
|                                                          |  |                                                                                         |         |     |                                                                          |   |      |                                                                                                                                     |  |  |           |    
|Total                                                     |  |                                                                                         | 793,703 |     |                                                                          | $ | 6.85 |                                                                                                                                     |  |  | 2,375,620 |    
|                                                          |  |                                                                                         |         |     |                                                                          |   |      |                                                                                                                                     |  |  |           |    



|(1) | Excludes purchase rights accruing under our 2004 Employee Stock Purchase Plan (the Purchase Plan) which had a shareholder approved reserve of 700,000 shares
at December 31, 2010, which was increased to 800,000 shares in January 2011. 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 2,314,847 shares of common stock available for issuance under our 1993 Stock Incentive Plan, 2000 Stock Incentive Plan and 2010 Stock Incentive Plan,
combined and 60,773 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, 2004 Employee Stock Purchase Plan and 2010 Stock Incentive Plan. An additional 100,000 shares were
added to the shares available for issuance pursuant to the 2004 Employee Stock Purchase Plan in January 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Additional information required by this item is included under Security Ownership of Certain Beneficial Owners and Management in our
definitive proxy statement for our 2011 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 in our definitive proxy statement for our 2011
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 2011 Annual Meeting of Shareholders and is incorporated herein by
reference.



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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, 2010 and 2009                                          |  | F-2 
|                                                                                                      | 
|Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and
2008            |  | F-3 
|                                                                                                      | 
|Consolidated Statements of Shareholders Equity for the years ended December 
31, 2010, 2009 and 2008 |  | F-4 
|                                                                                                      | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and
2008            |  | 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.                                         
|            | 
|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 20,
2009.                                                                           
|            | 
|10.4*       |  | Cascade Microtech, Inc. 2004 Employee Stock Purchase Plan, as amended. Incorporated by reference to Exhibit 10.4 to our Form 10-K as filed with the Securities and Exchange
Commission on March 10, 2009.                                            
|            | 
|10.5*       |  | Cascade Microtech, Inc. 2010 Stock Incentive Plan. Incorporated by Reference to our Definitive Proxy Materials for our 2010 annual meeting filed on April 6,
2010.                                                                                   
|            | 
|10.6*       |  | 2010 Long Term Incentive Plan. Incorporated by reference to Current Report on Form 8-K filed on February 11, 2010.                                                                                                                                   
|            | 
|10.7*       |  | Employment Agreement of Steven Sipowicz. Incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-1, File No. 333-113256.                                                                                                  
|            | 
|10.8*       |  | 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.               



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|            |  |                                                                                                                                                                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                
|10.9*       |  | Separation Agreement and Release between Cascade Microtech, Inc. and Steven Sipowicz dated as of March 30, 2010. Incorporated by reference to Current Report on Form 8-K filed
on April 2, 2010.                                                                                                                                           
|            | 
|10.10*      |  | Executive Employment Agreement between Cascade Microtech, Inc. and Michael D. Burger. Incorporated by reference to Current Report on Form 8-K filed on June 21,
2010.                                                                                                                                                                      
|            | 
|10.11       |  | 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.
|            | 
|10.12       |  | 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.                                                              
|            | 
|10.13       |  | 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.                                                             
|            | 
|10.14       |  | 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.                                                                                                                   
|            | 
|10.15       |  | Lease Agreement Between Minnesota Industrial Properties Limited Partnership and Cascade Microtech, Inc. dated as of February 6, 2009. Incorporated by reference to Exhibit
10.1 to our Form 10-Q for the quarterly period ended March 31, 2009 and filed May 6, 2009.                                                                      
|            | 
|10.16       |  | First Amendment of Lease Between Minnesota Industrial Properties Limited Partnership and Cascade Microtech, Inc. dated as of March 19, 2009. Incorporated by reference
to Exhibit 10.2 to our Form 10-Q for the quarterly period ended March 31, 2009 and filed May 6, 2009.                                                               
|            | 
|10.17       |  | Sale and Purchase Agreement dated as of January 27, 2010 by and among Cascade Microtech, Inc., Cascade Microtech KK, SUSS MicroTec AG, SUSS MicroTec KK, and SUSS MicroTec Inc.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on January 28, 2010.                                                                           
|            | 
|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.                                                                                                                                                                                   



41



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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 1, 2011:



CASCADE MICROTECH, INC.(Registrant)By:

/s/ MICHAEL D. BURGERMichael D. BurgerDirector, 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 1, 2011.



|                                        |  |  |  |                                                                                   
|--------------------------------------- |  |  |  | ----------------------------------------------------------------------------------
|SIGNATURE                               |  |  |  | TITLE                                                                             
|                                        |  | 
|/s/ MICHAEL D. BURGER Michael D. Burger |  |  |  | Director, President and Chief Executive Officer (Principal Executive Officer)     
|                                        |  | 
|/s/ JEFF KILLIAN Jeff Killian           |  |  |  | Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
|                                        |  | 
|/s/ ERIC W. STRID Eric W. Strid         |  |  |  | Director and Chief Technology Officer                                             
|                                        |  | 
|/s/ F. PAUL CARLSON F. Paul Carlson     |  |  |  | Chairman of the Board                                                             
|                                        |  | 
|/s/ Dr. JOHN Y. CHEN Dr. John Y. Chen   |  |  |  | Director                                                                          
|                                        |  | 
|/s/ GEORGE P. OLEARY George P. OLeary |  |  |  | Director                                                                          
|                                        |  | 
|/s/ WILLIAM R. SPIVEY William R. Spivey |  |  |  | Director                                                                          
|                                        |  | 
|/s/ RAYMOND A. LINK Raymond A. Link     |  |  |  | Director                                                                          



42



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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, 2010 and 2009, 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, 2010. In connection with our audits of the consolidated financial statements, we also have audited the accompanying 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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, 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.

/s/ KPMG LLP

Portland, Oregon

March 1, 2011



F-1



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##### Table of Contents

Cascade Microtech, Inc.

Consolidated Balance Sheets

(In thousands, except share par value)



|                                                                                                    |  |              |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                    |  | December 31, |        
|                                                                                                    |  | 2010         |         |   | 2009 |  
|Assets                                                                                              |  |              |         |   |      |   |         |  
|Current Assets:                                                                                     |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                           |  | $            | 21,871  |   |      | $ | 19,471  |  
|Short-term marketable securities                                                                    |  |              | 870     |   |      |   | 13,383  |  
|Restricted cash                                                                                     |  |              | 1,704   |   |      |   |        |  
|Accounts receivable, net of allowances of $415 and $974                                             |  |              | 19,718  |   |      |   | 10,877  |  
|Inventories                                                                                         |  |              | 20,764  |   |      |   | 16,624  |  
|Prepaid expenses and other                                                                          |  |              | 788     |   |      |   | 763     |  
|Taxes receivable                                                                                    |  |              | 1,059   |   |      |   | 2,589   |  
|Deferred income taxes, net                                                                          |  |              | 39      |   |      |   | 13      |  
|Assets available for sale                                                                           |  |              | 146     |   |      |   |        |  
|                                                                                                    |  |              |         |   |      |   |         |  
|Total Current Assets                                                                                |  |              | 66,959  |   |      |   | 63,720  |  
|                                                                                                    |  |             
|Long-term marketable securities                                                                     |  |              |        |   |      |   | 750     |  
|Fixed assets, net of accumulated depreciation of $19,820 and $17,775                                |  |              | 9,973   |   |      |   | 12,010  |  
|Goodwill                                                                                            |  |              | 985     |   |      |   |        |  
|Purchased intangible assets, net of accumulated amortization of $2,357 and $1,733                   |  |              | 3,142   |   |      |   | 1,858   |  
|Deferred income taxes, net                                                                          |  |              | 665     |   |      |   | 220     |  
|Other assets, net of accumulated amortization of $3,248 and $3,094                                  |  |              | 2,821   |   |      |   | 2,386   |  
|                                                                                                    |  |              |         |   |      |   |         |  
|Total Assets                                                                                        |  | $            | 84,545  |   |      | $ | 80,944  |  
|                                                                                                    |  |              |         |   |      |   |         |  
|Liabilities and Shareholders Equity                                                                |  |              |         |   |      |   |         |  
|Current Liabilities:                                                                                |  |              |         |   |      |   |         |  
|Current portion of capital leases                                                                   |  | $            | 13      |   |      | $ | 11      |  
|Accounts payable                                                                                    |  |              | 6,384   |   |      |   | 3,765   |  
|Deferred revenue                                                                                    |  |              | 3,338   |   |      |   | 1,071   |  
|Accrued liabilities                                                                                 |  |              | 6,280   |   |      |   | 2,087   |  
|                                                                                                    |  |              |         |   |      |   |         |  
|Total Current Liabilities                                                                           |  |              | 16,015  |   |      |   | 6,934   |  
|                                                                                                    |  |             
|Capital leases, net of current portion                                                              |  |              | 18      |   |      |   | 29      |  
|Deferred revenue                                                                                    |  |              | 109     |   |      |   | 56      |  
|Other long-term liabilities                                                                         |  |              | 2,797   |   |      |   | 2,540   |  
|                                                                                                    |  |              |         |   |      |   |         |  
|Total Liabilities                                                                                   |  |              | 18,939  |   |      |   | 9,559   |  
|                                                                                                    |  |             
|Shareholders Equity:                                                                               |  |              |         |   |      |   |         |  
|Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 14,500 and 13,459 |  |              | 145     |   |      |   | 135     |  
|Additional paid-in capital                                                                          |  |              | 90,967  |   |      |   | 85,584  |  
|Accumulated other comprehensive income (loss)                                                       |  |              | (804    | ) |      |   | 29      |  
|Accumulated deficit                                                                                 |  |              | (24,702 | ) |      |   | (14,363 | )
|                                                                                                    |  |              |         |   |      |   |         |  
|Total Shareholders Equity                                                                          |  |              | 65,606  |   |      |   | 71,385  |  
|                                                                                                    |  |              |         |   |      |   |         |  
|Total Liabilities and Shareholders Equity                                                          |  | $            | 84,545  |   |      | $ | 80,944  |  
|                                                                                                    |  |              |         |   |      |   |         |  

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 per share amounts)



|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                        |  | For the Year Ended December 31, |        
|                                                        |  | 2010                            |         |   | 2009 |   |         | 2008 | 
|Revenue                                                 |  | $                               | 95,799  |   |      | $ | 53,541  |      |  | $ | 76,561  |  
|Cost of sales                                           |  |                                 | 59,714  |   |      |   | 33,840  |      |  |   | 44,477  |  
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Gross profit                                            |  |                                 | 36,085  |   |      |   | 19,701  |      |  |   | 32,084  |  
|                                                        |  |                                 |        
|Operating expenses:                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Research and development                                |  |                                 | 12,612  |   |      |   | 8,372   |      |  |   | 10,473  |  
|Selling, general and administrative                     |  |                                 | 33,046  |   |      |   | 21,724  |      |  |   | 29,311  |  
|Amortization of purchased intangibles                   |  |                                 | 783     |   |      |   | 567     |      |  |   | 2,461   |  
|Asset impairment charges                                |  |                                 |        |   |      |   |        |      |  |   | 27,701  |  
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                |  |                                 | 46,441  |   |      |   | 30,663  |      |  |   | 69,946  |  
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Loss from operations                                    |  |                                 | (10,356 | ) |      |   | (10,962 | )    |  |   | (37,862 | )
|                                                        |  |                                 |        
|Other income (expense):                                 |  |                                 |         |   |      |   |         |      |  |   |         |  
|Interest income, net                                    |  |                                 | 70      |   |      |   | 314     |      |  |   | 862     |  
|Other, net                                              |  |                                 | (38     | ) |      |   | 93      |      |  |   | 176     |  
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Total other income, net                                 |  |                                 | 32      |   |      |   | 407     |      |  |   | 1,038   |  
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Loss before income taxes                                |  |                                 | (10,324 | ) |      |   | (10,555 | )    |  |   | (36,824 | )
|Income tax expense (benefit)                            |  |                                 | 15      |   |      |   | (2,906  | )    |  |   | (2,247  | )
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net loss                                                |  | $                               | (10,339 | ) |      | $ | (7,649  | )    |  | $ | (34,577 | )
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Basic and diluted net loss per share                    |  | $                               | (0.72   | ) |      | $ | (0.57   | )    |  | $ | (2.65   | )
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Shares used in basic and diluted per share calculations |  |                                 | 14,286  |   |      |   | 13,319  |      |  |   | 13,071  |  
|                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  

See accompanying Notes to Consolidated Financial Statements.



F-3



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##### Table of Contents

Cascade Microtech, Inc.

Consolidated Statements of Shareholders Equity for The Years Ended December 31, 2010, 2009 and 2008

(In thousands)



|                                                            |  |              |        |  |         |   |     |               |  |   |                  |   |  |               |      |   |        |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------ | ------ |  | ------- | - | --- | ------------- |  | - | ---------------- | - |  | ------------- | ---- | - | ------ | - | ------- | - |  | - | ------- | -
|                                                            |  |              |        |  |         |   |     | Additional    |  |   | AccumulatedOther |   |  | Retained      |      |   | Total  |  
|                                                            |  | Common Stock |        |  | Paid-In |   |     | Comprehensive |  |   | Earnings         |   |  | Shareholders |     
|                                                            |  | Shares       |        |  | Amount  |   |     | Capital       |  |   | Income (Loss)    |   |  | (Deficit)     |      |   | Equity |  
|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 options            |  |              |       |  |         |   |    |               |  |   | (222             | ) |  |               |     |   |        |   |        |   |  |   | (222    | )
|Unrealized holding gain on investments                      |  |              |       |  |         |   |    |               |  |   |                 |   |  |               | 24   |   |        |   |        |   |  |   | 24      |  
|Net loss                                                    |  |              |       |  |         |   |    |               |  |   |                 |   |  |               |     |   |        |   | (34,577 | ) |  |   | (34,577 | )
|                                                            |  |              |        |  |         |   |     |               |  |   |                  |   |  |               |      |   |        |   |         |   |  |   |         |  
|Balance at December 31, 2008                                |  |              | 13,164 |  |         |   | 132 |               |  |   | 83,213           |   |  |               | 69   |   |        |   | (6,714  | ) |  |   | 76,700  |  
|                                                            |  |              |        |  |         |  
|Common stock issued pursuant to stock plans                 |  |              | 295    |  |         |   | 3   |               |  |   | 546              |   |  |               |     |   |        |   |        |   |  |   | 549     |  
|Value of vested restricted stock withheld for tax liability |  |              |       |  |         |   |    |               |  |   | (161             | ) |  |               |     |   |        |   |        |   |  |   | (161    | )
|Stock-based compensation                                    |  |              |       |  |         |   |    |               |  |   | 1,870            |   |  |               |     |   |        |   |        |   |  |   | 1,870   |  
|Tax benefit related to stock options                        |  |              |       |  |         |   |    |               |  |   | 116              |   |  |               |     |   |        |   |        |   |  |   | 116     |  
|Unrealized holding loss on investments                      |  |              |       |  |         |   |    |               |  |   |                 |   |  |               | (40  | ) |        |   |        |   |  |   | (40     | )
|Net loss                                                    |  |              |       |  |         |   |    |               |  |   |                 |   |  |               |     |   |        |   | (7,649  | ) |  |   | (7,649  | )
|                                                            |  |              |        |  |         |   |     |               |  |   |                  |   |  |               |      |   |        |   |         |   |  |   |         |  
|Balance at December 31, 2009                                |  |              | 13,459 |  |         |   | 135 |               |  |   | 85,584           |   |  |               | 29   |   |        |   | (14,363 | ) |  |   | 71,385  |  
|                                                            |  |              |        |  |         |  
|Common stock issued pursuant to stock plans                 |  |              | 293    |  |         |   | 3   |               |  |   | 499              |   |  |               |     |   |        |   |        |   |  |   | 502     |  
|Value of vested restricted stock withheld for tax liability |  |              |       |  |         |   |    |               |  |   | (165             | ) |  |               |     |   |        |   |        |   |  |   | (165    | )
|Stock-based compensation                                    |  |              |       |  |         |   |    |               |  |   | 1,879            |   |  |               |     |   |        |   |        |   |  |   | 1,879   |  
|Foreign currency translation                                |  |              |       |  |         |   |    |               |  |   |                 |   |  |               | (804 | ) |        |   |        |   |  |   | (804    | )
|Common stock issued for acquisition                         |  |              | 748    |  |         |   | 7   |               |  |   | 3,170            |   |  |               |     |   |        |   |        |   |  |   | 3,177   |  
|Unrealized holding loss on investments                      |  |              |       |  |         |   |    |               |  |   |                 |   |  |               | (29  | ) |        |   |        |   |  |   | (29     | )
|Net loss                                                    |  |              |       |  |         |   |    |               |  |   |                 |   |  |               |     |   |        |   | (10,339 | ) |  |   | (10,339 | )
|                                                            |  |              |        |  |         |   |     |               |  |   |                  |   |  |               |      |   |        |   |         |   |  |   |         |  
|Balance at December 31, 2010                                |  |              | 14,500 |  |         | $ | 145 |               |  | $ | 90,967           |   |  | $             | (804 | ) |        | $ | (24,702 | ) |  | $ | 65,606  |  
|                                                            |  |              |        |  |         |   |     |               |  |   |                  |   |  |               |      |   |        |   |         |   |  |   |         |  

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, |        
|                                                                                                                     |  | 2010                            |         |   | 2009 |   |         | 2008 | 
|Cash flows from operating activities:                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                                             |  | $                               | (10,339 | ) |      | $ | (7,649  | )    |  | $ | (34,577 | )
|Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities, net of
acquisitions: |  |                                 |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                                                        |  |                                 | 4,888   |   |      |   | 4,348   |      |  |   | 5,867   |  
|Stock-based compensation, net                                                                                        |  |                                 | 1,879   |   |      |   | 1,870   |      |  |   | 2,531   |  
|Impairment charges                                                                                                   |  |                                 |        |   |      |   |        |      |  |   | 27,701  |  
|Loss on disposal of long-lived assets                                                                                |  |                                 | 65      |   |      |   | 4       |      |  |   | 523     |  
|Loss on write-down and disposal of assets held for sale                                                              |  |                                 | 118     |   |      |   | 40      |      |  |   | 15      |  
|Loss on write-down of contingent consideration held in escrow                                                        |  |                                 | 115     |   |      |   |        |      |  |   |        |  
|Deferred income taxes                                                                                                |  |                                 | (1,410  | ) |      |   | 103     |      |  |   | (721    | )
|(Increase) decrease, net of the effect of acquisitions, in:                                                          |  |                                 |         |   |      |   |         |      |  |   |         |  
|Accounts receivable, net                                                                                             |  |                                 | (6,758  | ) |      |   | 1,924   |      |  |   | 5,394   |  
|Inventories, net                                                                                                     |  |                                 | 3,833   |   |      |   | 2,455   |      |  |   | (471    | )
|Income taxes receivable                                                                                              |  |                                 | 2,052   |   |      |   | (1,586  | )    |  |   | (1,003  | )
|Prepaid expenses and other                                                                                           |  |                                 | (322    | ) |      |   | 530     |      |  |   | 471     |  
|Increase (decrease), net of effect of acquisitions, in:                                                              |  |                                 |         |   |      |   |         |      |  |   |         |  
|Accounts payable                                                                                                     |  |                                 | 1,673   |   |      |   | (345    | )    |  |   | (48     | )
|Deferred revenue                                                                                                     |  |                                 | 1,184   |   |      |   | (306    | )    |  |   | (150    | )
|Accrued and other long-term liabilities                                                                              |  |                                 | 2,194   |   |      |   | (1,530  | )    |  |   | (1,625  | )
|                                                                                                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) operating activities                                                                  |  |                                 | (828    | ) |      |   | (142    | )    |  |   | 3,907   |  
|                                                                                                                     |  |                                 |        
|Cash flows from investing activities:                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |  
|Purchase of marketable securities                                                                                    |  |                                 | (1,797  | ) |      |   | (20,328 | )    |  |   | (47,483 | )
|Proceeds from sale of marketable securities                                                                          |  |                                 | 15,031  |   |      |   | 37,415  |      |  |   | 45,604  |  
|Purchase of fixed assets                                                                                             |  |                                 | (1,481  | ) |      |   | (1,768  | )    |  |   | (2,708  | )
|Proceeds from sale or disposal of fixed assets and assets held for sale                                              |  |                                 |        |   |      |   | 376     |      |  |   | 296     |  
|Investment in other long-lived assets                                                                                |  |                                 |        |   |      |   | (315    | )    |  |   | (772    | )
|Increase in restricted cash                                                                                          |  |                                 | (1,732  | ) |      |   |        |      |  |   |        |  
|Cash paid for acquisitions, net of cash acquired                                                                     |  |                                 | (7,052  | ) |      |   |        |      |  |   | (1,096  | )
|                                                                                                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                                                                  |  |                                 | 2,969   |   |      |   | 15,380  |      |  |   | (6,159  | )
|                                                                                                                     |  |                                 |        
|Cash flows from financing activities:                                                                                |  |                                 |         |   |      |   |         |      |  |   |         |  
|Principal payments on capital lease obligations                                                                      |  |                                 | (9      | ) |      |   | (21     | )    |  |   | (15     | )
|Excess (reversal of) tax benefits related to stock options                                                           |  |                                 |        |   |      |   | 116     |      |  |   | (222    | )
|Withholding taxes paid on net settlement of vested restricted stock units                                            |  |                                 | (165    | ) |      |   | (161    | )    |  |   | (59     | )
|Proceeds from issuances of common stock                                                                              |  |                                 | 502     |   |      |   | 549     |      |  |   | 1,398   |  
|                                                                                                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                                            |  |                                 | 328     |   |      |   | 483     |      |  |   | 1,102   |  
|                                                                                                                     |  |                                 |        
|Effect of exchange rate changes on cash and cash equivalents                                                         |  |                                 | (69     | ) |      |   |        |      |  |   |        |  
|                                                                                                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                                                     |  |                                 | 2,400   |   |      |   | 15,721  |      |  |   | (1,150  | )
|                                                                                                                     |  |                                 |        
|Cash and cash equivalents:                                                                                           |  |                                 |         |   |      |   |         |      |  |   |         |  
|Beginning of year                                                                                                    |  |                                 | 19,471  |   |      |   | 3,750   |      |  |   | 4,900   |  
|                                                                                                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|End of year                                                                                                          |  | $                               | 21,871  |   |      | $ | 19,471  |      |  | $ | 3,750   |  
|                                                                                                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|Refunds received for income taxes, net                                                                               |  | $                               | 1,478   |   |      | $ | 1,626   |      |  | $ | 1,176   |  
|                                                                                                                     |  |                                 |        
|Supplemental disclosure of non-cash information:                                                                     |  |                                 |         |   |      |   |         |      |  |   |         |  
|Common stock issued in connection with acquisition                                                                   |  | $                               | 3,177   |   |      | $ |        |      |  | $ |        |  
|Fair value of assets acquired from acquisition                                                                       |  |                                 | 21,029  |   |      |   |        |      |  |   |        |  
|Liabilities assumed from acquisition                                                                                 |  |                                 | 5,406   |   |      |   |        |      |  |   |        |  
|Equipment acquired with capital lease                                                                                |  |                                 |        |   |      |   |        |      |  |   | 32      |  
|Increase in asset retirement obligation                                                                              |  |                                 |        |   |      |   | 25      |      |  |   |        |  

See accompanying Notes
to Consolidated Financial Statements.



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Cascade Microtech, Inc.

Notes to Consolidated Financial Statements

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

We design, develop and manufacture advanced wafer probing and test socket solutions for the electrical measurement and testing of high
performance chips. We design, manufacture and assemble our products in Oregon, Germany and Minnesota, with global sales, service and support centers in Germany, 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.

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 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 $5.3 million and $15.0 million at December 31,
2010 and 2009, 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 classify our marketable securities as available-for-sale and, accordingly, record them at fair 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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Restricted Cash

Our restricted cash is held in accounts with banks that have issued guarantees to our customers for advance deposits on goods and services. The guarantees allow the banks to withdraw the restricted cash
from our accounts and return the advanced deposit to the customer if goods are not delivered or services are not properly performed. All of the guarantees expire within 12 months of the balance sheet date and, accordingly, are recorded as a current
asset on our consolidated balance sheets.

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.

Charges (credits) to the allowance for doubtful accounts totaled $(0.1) million, $0.1 million and $0.8 million, respectively, in
2010, 2009 and 2008. Bad debt recoveries were $242,000 in 2010 and insignificant in 2009 and 2008. The allowance for doubtful accounts totaled $0.4 million and $1.0 million, respectively, at December 31, 2010 and 2009. The allowance for
doubtful accounts at December 31, 2009 and 2008 included 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 $1.7 million, $0.9 million and $0.8 million respectively, in 2010, 2009 and 2008.

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 2010, 2009 or 2008.

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. 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



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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. 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 quarter of 2008 and, as of December 31, 2009, we had no goodwill
recorded on our balance sheet.

Goodwill of $1.0 million at December 31, 2010 relates to our acquisition of SUSS MicroTec Test Systems
GmbH (SUSS Test) in January 2010. See Notes 3 and 8. This goodwill relates to our Systems segment and represents the value of assembled workforce and other intangible assets that do not qualify for separate recognition. Our impairment
test performed in the fourth quarter of 2010 did not indicate any impairment of goodwill.

Purchased Intangible Assets

Purchased intangible assets 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.

Other Assets

Other long-term
assets at December 31, 2010 and 2009 included $1.4 million and $1.9 million, respectively, of internally developed patents, net. These assets are amortized using the straight-line method over estimated useful lives of one to eight years and
have no significant residual value. Patent amortization totaled $0.4 million, $0.5 million and $0.5 million, respectively, in 2010, 2009 and 2008 and was included as a component of selling, general and administrative expense. Patents are reviewed
for impairment as discussed below under Accounting for the Impairment of Long-Lived Assets.

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. 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 not to be recoverable, an impairment charge is recognized for the amount by which the carrying value 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. In the fourth quarter of 2008, we performed our review of asset impairment and recorded a $10.2 million
impairment charge against the purchased intangibles assets of Gryphics, Inc. and a $0.1 million impairment charge against our patents. Total asset impairment charges in 2008 were $27.7 million as follows (in thousands):



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

In 2010, we recorded a $0.2 million charge for the write-down of certain equipment in connection with our restructuring
activities. See Note 17. We did not record any impairment charges during 2009.



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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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 collectability is reasonably assured. Generally, we ship our products with origin 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. 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.

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 2010, 2009 or 2008 accounted for 10% or more
of our total revenues. At December 31, 2010 and 2009, no customers represented more than 10% of our gross accounts receivable balance.



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Product Warranty

We estimate a liability for costs to repair or replace products under warranty for a period of approximately twelve months when the related product revenue is recognized. The liability for product
warranties is calculated as a percentage of sales. The percentage is based on historical 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, 2007 |  | $ | 501   |  
|Reductions for warranty charges     |  |   | (728  | )
|Additions to warranty reserve       |  |   | 540   |  
|                                    |  |   |       |  
|Warranty accrual, December 31, 2008 |  |   | 313   |  
|Reductions for warranty charges     |  |   | (489  | )
|Additions to warranty reserve       |  |   | 453   |  
|                                    |  |   |       |  
|Warranty accrual, December 31, 2009 |  |   | 277   |  
|Reductions for warranty charges     |  |   | (634  | )
|Additions to warranty reserve       |  |   | 1,058 |  
|                                    |  |   |       |  
|Warranty accrual, December 31, 2010 |  | $ | 701   |  
|                                    |  |   |       |  

Additions to the warranty reserve in 2010 included accrued warranty costs of $0.5 million assumed with the acquisition of
SUSS Test as discussed in Note 3.

Advertising

Advertising costs, which are included as a component of selling, general and administrative expense, are expensed as incurred and totaled $41,000, $64,000 and $172,000 in 2010, 2009 and 2008,
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 purchases and sales denominated in either the euro or Japanese yen. These foreign exchange contracts are not considered hedges 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 consolidated statements of operations. At December 31, 2010 and 2009, we had $1.6 million and $7.4 million, respectively, of forward exchange contracts outstanding. The unrealized gain
(loss) on contracts outstanding at December 31, 2010 and 2009 was $(39,000) and $49,000, respectively.

Income Taxes

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.

We recognize the benefits of tax return positions
when it is determined that the positions are more-likely-than-not to be sustained by the taxing authority. Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense in the period incurred. At
December 31, 2010, we had total unrecognized tax benefits of $0.3 million. All unrecognized tax benefits would have an impact on the effective tax rate if recognized. The interest and penalties accrued on unrecognized tax benefits were
insignificant.

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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Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing the net income or loss attributed to common shareholders for the period by the weighted average number of shares of common stock outstanding
during the period. Diluted net income (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options and vesting of restricted stock units using the treasury stock method, if dilutive.

Since we were in a loss position for all periods presented, basic loss per share is the same as diluted loss per share for all periods. Potentially
dilutive securities (in thousands) that are not included in the diluted per share calculations because they would be anti-dilutive totaled 1,585, 1,396 and 1,545, respectively, for 2010, 2009 and 2008.

Stock-Based Compensation

We
calculate stock-based compensation expense utilizing fair value-based methodologies and recognize the expense on a straight-line basis over the vesting period of such awards. Compensation expense recorded for awards that do not vest is reversed in
the period that it is determined that the award will not vest.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as changes in shareholders equity exclusive of transactions with owners, such as capital contributions and
dividends. Comprehensive income (loss) was as follows (in thousands):



|                                            |  |                         |         |   |      |   |        |      |  |   |         |  
|------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                            |  | Year Ended December 31, |        
|                                            |  | 2010                    |         |   | 2009 |   |        | 2008 | 
|Net loss                                    |  | $                       | (10,339 | ) |      | $ | (7,649 | )    |  | $ | (34,577 | )
|Unrealized holding gains (losses)           |  |                         | (29     | ) |      |   | (40    | )    |  |   | 24      |  
|Change in cumulative translation adjustment |  |                         | (804    | ) |      |   |       |      |  |   |        |  
|                                            |  |                         |         |   |      |   |        |      |  |   |         |  
|Comprehensive income (loss)                 |  | $                       | (11,172 | ) |      | $ | (7,689 | )    |  | $ | (34,553 | )
|                                            |  |                         |         |   |      |   |        |      |  |   |         |  

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 and results of operations.

Segment Reporting

We operate in two business segments: Systems and Probes and Sockets. 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.

Foreign Currency Translation

The
euro is the functional currency of our manufacturing subsidiary in Germany. Assets and liabilities are translated into U.S. dollars at current exchange rates, and sales and expenses are translated using average rates. Gains and losses from
translation of assets and liabilities are included in accumulated other comprehensive income (loss).



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##### Table of Contents

The functional currency of all other 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 statement of
operations.

NOTE 2. RECENT ACCOUNTING GUIDANCE

Accounting Guidance Recently Adopted

ASU 2010-06

Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements, requires new disclosures about
recurring or nonrecurring fair-value measurements including significant transfers into or out of Level 1 and Level 2 fair-value classifications. It also requires information on purchases, sales, issuances and settlements on a gross basis in the
reconciliation of Level 3 fair-value assets and liabilities. These disclosures are required for fiscal years beginning on or after December 15, 2009 and are included in Note 5 to the extent applicable. The ASU also clarifies existing fair-value
measurement disclosure guidance about the level of disaggregation, inputs and valuation techniques, which are required to be implemented in fiscal years beginning on or after December 15, 2010. Since the requirements of this ASU only relate to
disclosure, the adoption of this guidance did not have an effect on our financial position, results of operations or cash flows.

ASU
2009-14

ASU 2009-14, Certain Revenue Arrangements that Include Software Elements, amends ASC Subtopic 985-605,
Software-Revenue Recognition, to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a products essential functionality. The ASU is effective
prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. In the first quarter of 2010, we early adopted the guidance in ASU 2009-14, which did
not have an effect on our financial position, results of operations or cash flows.

ASU 2009-13

ASU 2009-13, Multiple-Delivered Revenue Arrangements, amends ASC Subtopic 650-25, Revenue Recognition  Multiple Element
Arrangements, to eliminate the requirement that all undelivered elements have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement
fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE of fair value for one or more delivered or undelivered elements in a multiple element arrangement, entities will be required to estimate the selling
prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relevant selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are
based on the entitys estimated selling price. Upon adoption, application of the residual method will no longer be permitted and entities will be required to disclose more information about their multiple-element revenue
arrangements. The ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. In the first quarter of 2010, we early adopted the
guidance in ASU 2009-13, which did not have an effect on our financial position, results of operations or cash flows.

Accounting Guidance
Not Yet Adopted

ASU 2010-17

ASU 2010-17, Revenue Recognition  Milestone Method, provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue
recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of
phases in a drug study or achieving a specific result from the research or development efforts. An entity often recognizes these milestone payments as revenue in their entirety upon achieving the related milestone, commonly referred to as the
milestone method. The amendments in ASU 2010-17 are effective on a prospective basis for milestones achieved in fiscal years, and interim



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periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. We do not
expect the adoption of the guidance in ASU 2010-17 to have any effect on our financial position, results of operations or cash flows.

NOTE
3. ACQUISITION OF SUSS TEST

On January 27, 2010, we entered into a Sale and Purchase Agreement (the Agreement) with SUSS
MicroTec AG (the Seller). Pursuant to the terms of the Agreement, we acquired all of the outstanding capital stock of SUSS MicroTec Test Systems GmbH (SUSS Test), a wholly-owned subsidiary of Seller, along with certain
related assets for a purchase price $15.6 million, including cash in the amount of $12.6 million, 747,530 shares of our common stock valued at $3.2 million and a long-term liability of $0.2 million less an amount receivable of $0.4 million
related to contingent consideration held in escrow (the Acquisition). The Acquisition of SUSS Test, a long-time competitor in the market for engineering probe stations, provides us with an expanded portfolio of products, as well as the
engineering and technical resources to help address complex emerging technologies. A portion of the purchase price, totaling 2.5 million euro (approximately $3.5 million), will be held in escrow for up to 24 months and is subject to claims
against the Seller under circumstances specified in the Agreement.

The allocation of the purchase price was as follows (dollars in
thousands):



|                             |  |   |             |  |  |  |            | 
|---------------------------- |  | - | ----------- |  |  |  | ---------- | 
|                             |  |   | Useful Life | 
|Cash and cash equivalents    |  | $ | 5,572       |  |  |  |           | 
|Accounts receivable          |  |   | 2,286       |  |  |  |           | 
|Inventories                  |  |   | 8,469       |  |  |  |           | 
|Prepaid expenses and other   |  |   | 999         |  |  |  |           | 
|Fixed assets                 |  |   | 475         |  |  |  | 1-5 years  | 
|Goodwill                     |  |   | 1,058       |  |  |  | Indefinite | 
|Purchased intangible assets: |  |   |             |  |  |  |            | 
|Developed technology         |  |   | 1,370       |  |  |  | 6 years    | 
|Customer relationships       |  |   | 800         |  |  |  | 11 years   | 
|                             |  |   |             |  |  |  |            | 
|                             |  |   | 21,029      |  |  |  |            | 
|                             |  |   |             |  |  |  |            | 
|Accounts payable             |  |   | 953         |  |  |  |           | 
|Accrued commissions          |  |   | 815         |  |  |  |           | 
|Customer deposits            |  |   | 1,177       |  |  |  |           | 
|Warranty                     |  |   | 487         |  |  |  |           | 
|Deferred tax liabilities     |  |   | 1,021       |  |  |  |           | 
|Other liabilities            |  |   | 953         |  |  |  |           | 
|                             |  |   |             |  |  |  |            | 
|                             |  |   | 5,406       |  |  |  |            | 
|                             |  |   |             |  |  |  |            | 
|                             |  | $ | 15,623      |  |  |  |            | 
|                             |  |   |             |  |  |  |            | 

In performing our purchase price allocation, we considered, among other factors, the historical financial
performance and estimates of future performance of SUSS Test. To determine the value of the technology and other identifiable intangible assets acquired, we projected such items as revenues, gross margins, operating expenses, future research and
development costs, income taxes and returns on requisite assets. The resulting operating income projections were discounted to a net present value utilizing a discount rate of 19%.

Amortization expense for the purchased intangible assets is approximately $0.3 million per year over the next five years. The overall weighted average amortization period for the above assets as of the
date of acquisition was 7.8 years. Goodwill from the Acquisition is attributable to our Systems segment and represents the value of assembled workforce and other intangible assets that do not qualify for separate recognition. Goodwill will not be
amortized, but will be periodically evaluated for potential impairment. None of the goodwill will be deductible for income tax purposes.



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Acquisition costs incurred of $0.8 million were primarily incurred in the first quarter of 2010 and are
included in our consolidated statement of operations as a component of selling, general and administrative expenses for 2010. Due to restructuring and continued integration of the combined businesses and product lines since the date of acquisition,
it is impractical to determine the revenue and earnings contributed by SUSS Test. Pro forma results of operations are not required as the Acquisition was not significant.

NOTE 4. MARKETABLE SECURITIES

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



|                                |  |      |     |  |      |   |        | 
|------------------------------- |  | ---- | --- |  | ---- | - | ------ | 
|December 31,                    |  | 2010 |     |  | 2009 |  
|Fair value:                     |  |      |     |  |      |   |        | 
|Municipal obligations           |  | $    |    |  |      | $ | 7,610  | 
|Corporate obligations           |  |      | 751 |  |      |   | 4,465  | 
|Corporate equities              |  |      | 119 |  |      |   |       | 
|U.S. agencies                   |  |      |    |  |      |   | 2,058  | 
|                                |  |      |     |  |      |   |        | 
|                                |  | $    | 870 |  |      | $ | 14,133 | 
|                                |  |      |     |  |      |   |        | 
|Cost:                           |  |      |     |  |      |   |        | 
|Municipal obligations           |  | $    |    |  |      | $ | 7,587  | 
|Corporate obligations           |  |      | 751 |  |      |   | 4,461  | 
|Corporate equities              |  |      | 119 |  |      |   |       | 
|U.S. agencies                   |  |      |    |  |      |   | 2,056  | 
|                                |  |      |     |  |      |   |        | 
|                                |  | $    | 870 |  |      | $ | 14,104 | 
|                                |  |      |     |  |      |   |        | 
|Fair value by maturity:         |  |      |     |  |      |   |        | 
|Within one year                 |  | $    | 751 |  |      | $ | 13,383 | 
|One to two years                |  |      |    |  |      |   | 750    | 
|Corporate equities              |  |      | 119 |  |      |   |       | 
|                                |  |      |     |  |      |   |        | 
|                                |  | $    | 870 |  |      | $ | 14,133 | 
|                                |  |      |     |  |      |   |        | 
|Gross unrealized holding gains: |  |      |     |  |      |   |        | 
|Municipal obligations           |  | $    |    |  |      | $ | 23     | 
|Corporate obligations           |  |      |    |  |      |   | 4      | 
|U.S. agencies                   |  |      |    |  |      |   | 2      | 
|                                |  |      |     |  |      |   |        | 
|                                |  | $    |    |  |      | $ | 29     | 
|                                |  |      |     |  |      |   |        | 

Realized gains and losses on marketable securities were immaterial during 2010, 2009 and 2008. At December 31, 2010 and
2009, we had no unrealized losses on our marketable securities.

NOTE 5. FAIR VALUE MEASUREMENTS

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, 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.



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##### Table of Contents

Following are the disclosures related to our financial assets that are reported at fair value on a recurring
basis (in thousands):



|                                              |  |              |       |  |             |  |         |            |  |   |             |  |  |  |         | 
|--------------------------------------------- |  | ------------ | ----- |  | ----------- |  | ------- | ---------- |  | - | ----------- |  |  |  | ------- | 
|                                              |  | December 31, |      
|                                              |  | 2010         |       |  | 2009        | 
|                                              |  | Fair Value   |       |  | Input Level |  |         | Fair Value |  |   | Input Level | 
|Marketable securities  municipal obligations |  | $            |      |  |             |  |        |            |  | $ | 7,610       |  |  |  | Level 2 | 
|Marketable securities  corporate obligations |  | $            | 751   |  |             |  | Level 2 |            |  | $ | 4,465       |  |  |  | Level 2 | 
|Marketable securities- corporate equities     |  | $            | 119   |  |             |  | Level 1 |            |  | $ |            |  |  |  |        | 
|Marketable securities  U.S. agencies         |  | $            |      |  |             |  |        |            |  | $ | 2,058       |  |  |  | Level 2 | 
|Forward sale contracts for Japanese yen       |  | $            | 1,602 |  |             |  | Level 2 |            |  | $ | 1,625       |  |  |  | Level 2 | 
|Forward purchase contract for euros           |  | $            |      |  |             |  |        |            |  | $ | 5,762       |  |  |  | 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 full value of the forward contracts on our balance sheet. We record the net unrealized gain or loss in our balance sheet and as a component of other income (expense).

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

Equipment classified as held for sale at December 31, 2010 of $146,000 is measured at fair value on a non-recurring basis
using the estimated selling prices of similar equipment, net of estimated costs to sell. See Note 17.

NOTE 6. INVENTORIES

Inventories consisted of the following (in thousands):



|                |  |      |        |  |      |   |        | 
|--------------- |  | ---- | ------ |  | ---- | - | ------ | 
|December 31,    |  | 2010 |        |  | 2009 |  
|Raw materials   |  | $    | 12,437 |  |      | $ | 9,780  | 
|Work-in-process |  |      | 2,495  |  |      |   | 1,179  | 
|Finished goods  |  |      | 5,832  |  |      |   | 5,665  | 
|                |  |      |        |  |      |   |        | 
|                |  | $    | 20,764 |  |      | $ | 16,624 | 
|                |  |      |        |  |      |   |        | 

NOTE 7. FIXED ASSETS

Fixed assets consisted of the following (in thousands):



|                              |  |      |         |   |      |   |         |  
|----------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|December 31,                  |  | 2010 |         |   | 2009 |  
|Equipment                     |  | $    | 22,293  |   |      | $ | 22,551  |  
|Leasehold improvements        |  |      | 7,085   |   |      |   | 7,005   |  
|Construction in progress      |  |      | 415     |   |      |   | 229     |  
|                              |  |      |         |   |      |   |         |  
|                              |  |      | 29,793  |   |      |   | 29,785  |  
|Less accumulated depreciation |  |      | (19,820 | ) |      |   | (17,775 | )
|                              |  |      |         |   |      |   |         |  
|                              |  | $    | 9,973   |   |      | $ | 12,010  |  
|                              |  |      |         |   |      |   |         |  

Depreciation expense was $3.7 million, $3.3 million and $2.9 million, respectively, in 2010, 2009 and 2008.

NOTE 8. GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

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



|                                |  |      |       |   |      |   |   | 
|------------------------------- |  | ---- | ----- | - | ---- | - | - | 
|Year Ended December 31,         |  | 2010 |       |   | 2009 |  
|Balance, beginning of period    |  | $    |      |   |      | $ |  | 
|Acquisition of SUSS Test        |  |      | 1,058 |   |      |   |  | 
|Effect of exchange rate changes |  |      | (73   | ) |      |   |  | 
|                                |  |      |       |   |      |   |   | 
|Balance, end of period          |  | $    | 985   |   |      | $ |  | 
|                                |  |      |       |   |      |   |   | 



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##### Table of Contents

Purchased Intangible Assets

Purchased intangible assets, net, included the following (in thousands):



|                                       |  |      |        |   |      |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|December 31,                           |  | 2010 |        |   | 2009 |  
|Customer relationships                 |  | $    | 3,265  |   |      | $ | 2,465  |  
|Accumulated amortization               |  |      | (1,682 | ) |      |   | (1,178 | )
|                                       |  |      |        |   |      |   |        |  
|                                       |  |      | 1,583  |   |      |   | 1,287  |  
|Other                                  |  |      | 2,234  |   |      |   | 1,126  |  
|Accumulated amortization               |  |      | (675   | ) |      |   | (555   | )
|                                       |  |      |        |   |      |   |        |  
|                                       |  |      | 1,559  |   |      |   | 571    |  
|                                       |  |      |        |   |      |   |        |  
|Total purchased intangible assets, net |  | $    | 3,142  |   |      | $ | 1,858  |  
|                                       |  |      |        |   |      |   |        |  

Purchased intangible asset amortization totaled $0.8 million, $0.6 million and $2.5 million, respectively, in 2010, 2009 and
2008 and was included as a component of selling, general and administrative expense.

The estimated amortization of purchased intangible
assets is as follows over the next five years and thereafter (in thousands):



|           |  |   |       | 
|---------- |  | - | ----- | 
|2011       |  | $ | 813   | 
|2012       |  |   | 720   | 
|2013       |  |   | 573   | 
|2014       |  |   | 378   | 
|2015       |  |   | 287   | 
|Thereafter |  |   | 371   | 
|           |  |   |       | 
|           |  | $ | 3,142 | 
|           |  |   |       | 

NOTE 9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):



|                                  |  |      |       |  |      |   |       | 
|--------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|December 31,                      |  | 2010 |       |  | 2009 |  
|Accrued compensation and benefits |  | $    | 1,897 |  |      | $ | 979   | 
|Accrued income taxes              |  |      | 1,342 |  |      |   | 35    | 
|Accrued warranty                  |  |      | 701   |  |      |   | 277   | 
|Accrued commissions               |  |      | 649   |  |      |   | 233   | 
|Straight-line lease accrual       |  |      | 339   |  |      |   | 160   | 
|Accrued restructuring costs       |  |      | 310   |  |      |   |      | 
|Other                             |  |      | 1,042 |  |      |   | 403   | 
|                                  |  |      |       |  |      |   |       | 
|                                  |  | $    | 6,280 |  |      | $ | 2,087 | 
|                                  |  |      |       |  |      |   |       | 



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NOTE 10. INCOME TAXES

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



|                        |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Year Ended December 31, |  | 2010 |         |   | 2009 |   |         | 2008 | 
|Domestic                |  | $    | (11,237 | ) |      | $ | (11,169 | )    |  | $ | (35,546 | )
|Foreign                 |  |      | 913     |   |      |   | 614     |      |  |   | (1,278  | )
|                        |  |      |         |   |      |   |         |      |  |   |         |  
|                        |  | $    | (10,324 | ) |      | $ | (10,555 | )    |  | $ | (36,824 | )
|                        |  |      |         |   |      |   |         |      |  |   |         |  

The income tax expense (benefit) consisted of the following (in thousands):



|                             |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|Year Ended December 31,      |  | 2010 |        |   | 2009 |   |        | 2008 | 
|Current:                     |  |      |        |   |      |   |        |      |  |   |        |  
|Federal                      |  | $    |       |   |      | $ | (3,084 | )    |  | $ | (763   | )
|State                        |  |      | 22     |   |      |   | 31     |      |  |   | 34     |  
|Foreign                      |  |      | 1,521  |   |      |   | 44     |      |  |   | 51     |  
|                             |  |      |        |   |      |   |        |      |  |   |        |  
|Total current                |  |      | 1,543  |   |      |   | (3,009 | )    |  |   | (678   | )
|Deferred:                    |  |      |        |   |      |   |        |      |  |   |        |  
|Federal                      |  |      |       |   |      |   |       |      |  |   | (1,749 | )
|State                        |  |      |       |   |      |   |       |      |  |   | 51     |  
|Foreign                      |  |      | (1,528 | ) |      |   | 103    |      |  |   | 129    |  
|                             |  |      |        |   |      |   |        |      |  |   |        |  
|Total deferred               |  |      | (1,528 | ) |      |   | 103    |      |  |   | (1,569 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |  
|Income tax expense (benefit) |  | $    | 15     |   |      | $ | (2,906 | )    |  | $ | (2,247 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |  

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



|                                                       |  |      |        |   |      |   |        |      |  |   |         |  
|------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|Year Ended December 31,                                |  | 2010 |        |   | 2009 |   |        | 2008 | 
|Federal income tax benefit computed at statutory rates |  | $    | (3,517 | ) |      | $ | (3,588 | )    |  | $ | (12,520 | )
|Difference in foreign tax rate                         |  |      | (34    | ) |      |   | (33    | )    |  |   | (87     | )
|State income taxes, net of federal benefit             |  |      | (36    | ) |      |   | 31     |      |  |   | 12      |  
|Stock-based compensation                               |  |      | 99     |   |      |   | 196    |      |  |   | 457     |  
|Tax credits (R&D and foreign tax credit)               |  |      | (211   | ) |      |   | (166   | )    |  |   | (151    | )
|Expiration of tax credits                              |  |      | 324    |   |      |   | 221    |      |  |   | 259     |  
|Change in valuation allowance                          |  |      | 1,917  |   |      |   | 364    |      |  |   | 5,475   |  
|Tax exempt interest income                             |  |      | (11    | ) |      |   | (89    | )    |  |   | (259    | )
|Unrecognized tax benefits                              |  |      | 142    |   |      |   | 73     |      |  |   | (355    | )
|AMT credit                                             |  |      | 65     |   |      |   | 302    |      |  |   | (477    | )
|Goodwill impairment                                    |  |      |       |   |      |   |       |      |  |   | 4,898   |  
|Foreign earnings not permanently reinvested            |  |      | 822    |   |      |   |       |      |  |   |        |  
|Other                                                  |  |      | 455    |   |      |   | (217   | )    |  |   | 501     |  
|                                                       |  |      |        |   |      |   |        |      |  |   |         |  
|Provision (benefit) for income taxes                   |  | $    | 15     |   |      | $ | (2,906 | )    |  | $ | (2,247  | )
|                                                       |  |      |        |   |      |   |        |      |  |   |         |  



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



|                                                   |  |      |        |   |      |   |        |  
|-------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|December 31,                                       |  | 2010 |        |   | 2009 |  
|Current deferred tax assets:                       |  |      |        |   |      |   |        |  
|Reserves and allowances                            |  | $    | 443    |   |      | $ | 592    |  
|Inventory                                          |  |      | 1,681  |   |      |   | 1,270  |  
|Accrued vacation                                   |  |      | 79     |   |      |   | 67     |  
|Other current deferred tax assets                  |  |      | 284    |   |      |   | 147    |  
|                                                   |  |      |        |   |      |   |        |  
|Gross current deferred tax assets                  |  |      | 2,487  |   |      |   | 2,076  |  
|Valuation allowance                                |  |      | (2,403 | ) |      |   | (2,050 | )
|                                                   |  |      |        |   |      |   |        |  
|Net current deferred tax assets                    |  |      | 84     |   |      |   | 26     |  
|                                                   |  |     
|Current deferred tax liabilities:                  |  |      |        |   |      |   |        |  
|Loss on forward contracts                          |  |      | (45    | ) |      |   | (13    | )
|                                                   |  |      |        |   |      |   |        |  
|Current deferred tax assets, net                   |  |      | 39     |   |      |   | 13     |  
|                                                   |  |     
|Non-current deferred tax assets:                   |  |      |        |   |      |   |        |  
|Reserves and allowances                            |  |      | 158    |   |      |   | 113    |  
|Federal and state net operating loss carryforwards |  |      | 3,511  |   |      |   | 1,368  |  
|Federal and state tax credits                      |  |      | 3,112  |   |      |   | 3,238  |  
|Stock-based compensation                           |  |      | 1,131  |   |      |   | 858    |  
|Other non-current deferred tax assets              |  |      | 1,489  |   |      |   | 1,279  |  
|                                                   |  |      |        |   |      |   |        |  
|Gross non-current deferred tax assets              |  |      | 9,401  |   |      |   | 6,856  |  
|Valuation allowance                                |  |      | (6,817 | ) |      |   | (5,253 | )
|                                                   |  |      |        |   |      |   |        |  
|Net non-current deferred tax assets                |  |      | 2,584  |   |      |   | 1,603  |  
|                                                   |  |     
|Non-current deferred tax liabilities:              |  |      |        |   |      |   |        |  
|Patents                                            |  |      | (549   | ) |      |   | (735   | )
|Foreign earnings                                   |  |      | (822   | ) |      |   |       |  
|Other non-current deferred tax liabilities         |  |      | (548   | ) |      |   | (648   | )
|                                                   |  |      |        |   |      |   |        |  
|Total non-current deferred tax liabilities         |  |      | (1,919 | ) |      |   | (1,383 | )
|                                                   |  |      |        |   |      |   |        |  
|Non-current deferred tax assets, net               |  |      | 665    |   |      |   | 220    |  
|                                                   |  |      |        |   |      |   |        |  
|Net total deferred tax assets                      |  | $    | 704    |   |      | $ | 233    |  
|                                                   |  |      |        |   |      |   |        |  

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.

The net increase in the total valuation allowance was $1.9 million, $0.4 million and $5.5 million, respectively, in 2010, 2009 and 2008. The valuation
allowance as of December 31, 2010 and 2009 was $9.2 million and $7.3 million, respectively. The $1.9 million increase in our valuation allowance in 2010 primarily related to the increase of valuation allowance on net operating loss
carryforwards. The $0.4 million increase in our valuation allowance in 2009 resulted from the changes in our deferred tax assets and liabilities and the maintenance of the valuation allowance against deferred tax assets. In 2008, we recorded a $4.7
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 $0.5 million.

Net deferred tax assets of $0.7 million at December 31, 2010 primarily related to temporary differences in our foreign subsidiaries.

In 2010, there was no income tax benefit for employee stock option transactions. In 2009, income tax benefits attributable to employee stock option transactions of $0.1 million were allocated to
shareholders equity. In 2008, income tax benefits of $0.2 million attributable to employee stock option transactions, which were previously allocated to shareholders equity, were reversed.

We had federal and state research and experimentation credit carryforwards of approximately $2.9 million at December 31, 2010 to offset against
future taxable income. These carryforwards expire beginning 2011 through 2030.



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##### Table of Contents

A reconciliation of unrecognized tax benefits was as follows (in thousands):



|                                                             |  |   |        |  
|------------------------------------------------------------ |  | - | ------ | -
|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    |  
|Increases due to tax positions taken during a prior year     |  |   | 15     |  
|Decreases due to tax positions taken during a prior year     |  |   | (545   | )
|                                                             |  |   |        |  
|Balance, December 31, 2009                                   |  |   | 135    |  
|Increases due to tax positions taken during the current year |  |   | 145    |  
|Decreases due to tax positions taken during a prior year     |  |   | (3     | )
|                                                             |  |   |        |  
|Balance, December 31, 2009                                   |  | $ | 277    |  
|                                                             |  |   |        |  

All of the unrecognized tax benefits at December 31, 2010 would have an impact on the effective tax rate if recognized.
In April 2009, we settled the IRS audit of our 2007 and 2006 tax returns. As a result of the settlement, we released tax contingencies and recorded an income tax benefit of $0.4 million. Interest and penalties released during 2009 and 2008 totaled
$65,000 and $135,000, respectively. Interest and penalties in 2010 were insignificant. Interest and penalties accrued on unrecognized tax benefits as of December 31, 2010 were also insignificant.

The tax years which remained open to examination in our major taxing jurisdictions as of December 31, 2010 were as follows:



|               |  |               
|-------------- |  | --------------
|Jurisdiction   |  | Open Tax Years
|U.S.           |  | 2007-2010     
|Japan          |  | 2004-2010     
|United Kingdom |  | 2008-2009     
|Taiwan         |  | 2009-2010     
|China          |  | 2009-2010     
|Germany        |  | 2009-2010     

We provided for deferred
taxes, net of a full valuation allowance, on a portion of the non-repatriated earnings of our subsidiary in Japan as of December 31, 2010. 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, 2010, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $2.5 million.

NOTE 11. OTHER, NET

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



|                                             |  |      |     |   |      |   |      |      |  |   |       |  
|-------------------------------------------- |  | ---- | --- | - | ---- | - | ---- | ---- |  | - | ----- | -
|Year ended December 31,                      |  | 2010 |     |   | 2009 |   |      | 2008 | 
|Interest income, net                         |  | $    | 70  |   |      | $ | 314  |      |  | $ | 862   |  
|Foreign currency gains (losses)              |  |      | (26 | ) |      |   | 198  |      |  |   | 458   |  
|Losses on foreign currency forward contracts |  |      | (73 | ) |      |   | (140 | )    |  |   | (409  | )
|Other                                        |  |      | 61  |   |      |   | 35   |      |  |   | 127   |  
|                                             |  |      |     |   |      |   |      |      |  |   |       |  
|                                             |  | $    | 32  |   |      | $ | 407  |      |  | $ | 1,038 |  
|                                             |  |      |     |   |      |   |      |      |  |   |       |  



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

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



|                                                                          |  |      |      |  |      |   |      |      |  |   |      | 
|------------------------------------------------------------------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ---- | 
|Year Ended December 31,                                                   |  | 2010 |      |  | 2009 |   |      | 2008 | 
|Weighted average grant-date per share fair value of share options granted |  | $    | 2.42 |  |      | $ | 1.79 |      |  | $ | 4.46 | 
|Total intrinsic value of share options exercised                          |  |      | 23   |  |      |   | 22   |      |  |   | 301  | 
|Fair value of restricted shares vested                                    |  |      | 777  |  |      |   | 547  |      |  |   | 214  | 

No stock-based compensation was
capitalized as a part of an asset during the years ended December 31, 2010, 2009 or 2008.

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



|                                    |  |      |       |  |      |   |       |      |  |   |       | 
|----------------------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|Year Ended December 31,             |  | 2010 |       |  | 2009 |   |       | 2008 | 
|Cost of sales                       |  | $    | 228   |  |      | $ | 289   |      |  | $ | 369   | 
|Research and development            |  |      | 325   |  |      |   | 272   |      |  |   | 324   | 
|Selling, general and administrative |  |      | 1,326 |  |      |   | 1,309 |      |  |   | 1,838 | 
|                                    |  |      |       |  |      |   |       |      |  |   |       | 
|                                    |  | $    | 1,879 |  |      | $ | 1,870 |      |  | $ | 2,531 | 
|                                    |  |      |       |  |      |   |       |      |  |   |       | 

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,      |  | 2010 |             |   | 2009 |  |                   | 2008 | 
|Stock Option Plan            |  |      |             |   |      |  |                   |      | 
|Risk-free interest rate      |  |      | 1.9% -2.8   | % |      |  | 2.3               | %    |  |  | 2.7               | %
|Expected dividend yield      |  |      | 0.0         | % |      |  | 0.0               | %    |  |  | 0.0               | %
|Expected term                |  |      | 6.5 years   |   |      |  | 6.5 years         |      |  |  | 6.5 years         |  
|Expected volatility          |  |      | 60.2% -62.0 | % |      |  | 58.1              | %    |  |  | 54.2              | %
|                             |  |      |            
|Employee Stock Purchase Plan |  |      |             |   |      |  |                   |      | 
|Risk-free interest rate      |  |      | 0.2% -0.3   | % |      |  | 0.2% - 0.7        | %    |  |  | 1.9% - 2.5        | %
|Expected dividend yield      |  |      | 0.0         | % |      |  | 0.0               | %    |  |  | 0.0               | %
|Expected term                |  |      | 6 months    |   |      |  | 6 months 2 years |      |  |  | 6 months 2 years |  
|Expected volatility          |  |      | 49.3% -53.2 | % |      |  | 67.7% - 122.2     | %    |  |  | 29.2% - 43.7      | %

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 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. 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), our 2000 Stock Incentive Plan (the 2000 Plan) and
our 2010 Stock Incentive Plan (the 2010 Plan) (together, the Plans) and provide for the granting of incentive stock options, nonqualified stock options and restricted stock units (RSUs). 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



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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 3.0 million
shares of common stock for issuance under the 2000 Plan and 1.3 million shares under the 2010 Plan.

At December 31, 2010, 731,134
shares were available for future grants, and we had 2,314,847 shares of our common stock reserved for future issuance under the Plans.

Stock
option activity for the year ended December 31, 2010 was as follows:



|                                 |  |                    |          |   |                               |   |      | 
|-------------------------------- |  | ------------------ | -------- | - | ----------------------------- | - | ---- | 
|                                 |  | OptionsOutstanding |          |   | WeightedAverageExercise Price |  
|Outstanding at December 31, 2009 |  |                    | 897,189  |   |                               | $ | 7.10 | 
|Granted                          |  |                    | 276,490  |   |                               |   | 4.17 | 
|Exercised                        |  |                    | (31,962  | ) |                               |   | 3.11 | 
|Forfeited                        |  |                    | (348,014 | ) |                               |   | 5.73 | 
|                                 |  |                    |          |   |                               |   |      | 
|Outstanding at December 31, 2010 |  |                    | 793,703  |   |                               |   | 6.85 | 
|                                 |  |                    |          |   |                               |   |      | 

Certain information regarding options outstanding as of December 31, 2010 was as follows:



|                                            |  |                    |           |  |                    |   |           | 
|------------------------------------------- |  | ------------------ | --------- |  | ------------------ | - | --------- | 
|                                            |  | OptionsOutstanding |           |  | OptionsExercisable |  
|Number                                      |  |                    | 793,703   |  |                    |   | 458,680   | 
|Weighted average exercise price             |  | $                  | 6.85      |  |                    | $ | 8.86      | 
|Aggregate intrinsic value                   |  | $                  | 199,811   |  |                    | $ | 48,214    | 
|Weighted average remaining contractual term |  |                    | 6.1 years |  |                    |   | 3.9 years | 

The aggregate intrinsic value in the
table above is based on our closing stock price of $4.35 on December 31, 2010, which would have been received by the optionees had all of the options with exercise prices less than $4.35 been exercised on that date.

RSU activity for the year ended December 31, 2010 was as follows:



|                                 |  |                      |          |   |                                               |   |      | 
|-------------------------------- |  | -------------------- | -------- | - | --------------------------------------------- | - | ---- | 
|                                 |  | RestrictedStockUnits |          |   | WeightedAverageGrant 
DatePer ShareFair Value |  
|Outstanding at December 31, 2009 |  |                      | 478,441  |   |                                               | $ | 7.32 | 
|Granted                          |  |                      | 608,736  |   |                                               |   | 4.21 | 
|Vested                           |  |                      | (192,726 | ) |                                               |   | 4.03 | 
|Forfeited                        |  |                      | (103,104 | ) |                                               |   | 6.04 | 
|                                 |  |                      |          |   |                                               |   |      | 
|Outstanding at December 31, 2010 |  |                      | 791,347  |   |                                               |   | 5.90 | 
|                                 |  |                      |          |   |                                               |   |      | 

As of December 31, 2010, total unrecognized stock-based compensation related to outstanding, but unvested
stock options and RSUs was $3.4 million, which will be recognized over the weighted average remaining vesting period of 2.7 years.

Significant 2010 Grants

Included
in the above tables were the following grants made in July 2010 in connection with the commencement of employment of our new President and Chief Executive Officer, Mr. Michael D. Burger:



| |  |  | 70,000 RSUs with a fair value of $283,500. 50,000 of those RSUs vest annually at 25% over four years. The remaining 20,000 RSUs vest at 50% after the
first 2 years and 25% per year thereafter; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | an option to purchase 200,000 shares of our common stock at an exercise price equal to the fair market value of the common stock on the date of grant,
which was $4.05. The options vest over 5 years with 20% vesting after the first year and monthly vesting thereafter.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
Mr. Burgers employment is terminated without cause or if Mr. Burger terminates his employment for good reason, the RSUs, stock options and any other equity awards held by Mr. Burger that would have vested
if Mr. Burger had remained an employee after the termination date for an additional period equal to his length of employment, but not less than 12 months, up to a maximum of 18 months, will accelerate and become immediately exercisable. In
addition, if, during the one-year period after a change in control, Mr. Burger terminates his employment for good reason or if his employment is terminated for any reason other than death, disability or cause, then all
RSUs, stock options and other equity awards held by Mr. Burger that would have vested had Mr. Burger remained employed after the termination date for an additional period equal to 24 months will accelerate and become immediately
exercisable.

Also included in the above tables are 60,000 RSUs with a fair value of $297,000 granted in May 2010 in connection with the
hiring of our Chief Financial Officer, Mr. Jeff Killian. These RSUs vest annually at 25% per year over four years.

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 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, resulting in $13,000 of incremental expense to be
recognized over the vesting period.

Employee Stock Purchase Plan

The terms of our 2004 Employee Share Purchase Plan (the 2004 ESPP) provide for an annual increase in available shares of up to 100,000, upon board approval, beginning in
2006. In accordance with these terms, in January 2011, the number of shares of our common stock available for purchase under the 2004 ESPP was increased from 700,000 to 800,000. In 2009, 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 changed the enrollment date to the first trading day on or after May 1 and November 1 of each year. Modification of the 2004 ESPP resulted in incremental
compensation expense of $54,000 in 2009.

Any eligible employee may participate in the 2004 ESPP by completing a subscription agreement which
allows participants to have between 2% and 15% of their compensation withheld to purchase shares of common stock at 85% of the fair market value of a share of common stock on the enrollment date or on the exercise date, whichever is lower. No more
than $12,500 can be withheld to purchase shares of common stock in each offering period. The exercise date is the last trading day of each offering period and participating employees are automatically enrolled in the new offering period. During the
year ended December 31, 2010, we issued 114,249 shares pursuant to the 2004 ESPP at a weighted average price of $3.49 per share, which represented a weighted average discount of $0.62 per share from the fair market value on the dates of
purchase, and 60,773 shares remained available for purchase as of December 31, 2010.

NOTE 13. RELATED PARTY TRANSACTIONS

FEI Company

During 2010 and 2009, we purchased certain equipment and services for $31,000 and $21,000, respectively, from FEI Company (FEI). There were no
purchases from FEI in 2008. At December 31, 2010 and 2009, we had no outstanding payables to FEI. In addition, FEI purchased certain equipment



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from us for a total of $1,100, $2,000 and $14,000, respectively, during 2010, 2009 and 2008. At
December 31, 2010 and 2009 we had no outstanding receivables from FEI. 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 2010, 2009
and 2008, we did not purchase any equipment or services from Raytheon, Inc. However, Raytheon purchased certain equipment from us for a total of $571,000, $382,000 and $296,000, respectively, during 2010, 2009 and 2008. At December 31, 2010 and
2009, we had receivables from Raytheon, Inc. of $31,000 and $145,000, respectively. One of the members of our Board of Directors, Mr. William Spivey, is a member of the Board of Directors of Raytheon, Inc.

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. The 401(k) match was
suspended during the first quarter of 2009 and remained suspended through 2010. Our matching contribution for the savings plan was $22,000 and $364,000 in 2009 and 2008, 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 facilities. We recognize rent expense related to our operating leases based on a straight-line basis over the life of the lease including any
periods of free rent. We also have certain equipment under capital lease with a cost basis of $53,000 and accumulated depreciation of $29,000 at December 31, 2010.

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 |  
|2011                                           |  | $         | 3,365  |  |         | $ | 13 |  
|2012                                           |  |           | 2,993  |  |         |   | 13 |  
|2013                                           |  |           | 2,985  |  |         |   | 6  |  
|2014                                           |  |           | 3,017  |  |         |   |   |  
|2015                                           |  |           | 2,040  |  |         |   |   |  
|Thereafter                                     |  |           | 536    |  |         |   |   |  
|                                               |  |           |        |  |         |   |    |  
|Total minimum lease payments                   |  | $         | 14,936 |  |         |   | 32 |  
|                                               |  |           |        |  |         |   |    |  
|Less amounts representing interest             |  |           |        |  |         |   | (1 | )
|                                               |  |           |        |  |         |   |    |  
|Present value of future minimum lease payments |  |           |        |  |         | $ | 31 |  
|                                               |  |           |        |  |         |   |    |  

Lease expense was $3.0 million, $2.6 million and $2.8 million, respectively, in 2010, 2009 and 2008. Depreciation expense
related to capital leases was $10,000, $10,000 and $15,000, respectively, in 2010, 2009 and 2008.

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

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 operating income of our Systems revenue and our Probes and Sockets revenue. We do not track our assets on a segment level, and, accordingly, that information is not provided.
Certain information by segment was as follows (dollars in thousands):



|                              |  |         |        |   |                  |   |        |                      |  |   |         |   |  |   |         |  
|----------------------------- |  | ------- | ------ | - | ---------------- | - | ------ | -------------------- |  | - | ------- | - |  | - | ------- | -
|Year Ended December 31, 2010  |  | Systems |        |   | ProbesandSockets |   |        | CorporateUnallocated |  |   | Total   |  
|Revenue                       |  | $       | 65,422 |   |                  | $ | 30,377 |                      |  | $ |        |   |  | $ | 95,799  |  
|Gross profit                  |  | $       | 23,354 |   |                  | $ | 12,731 |                      |  | $ |        |   |  | $ | 36,085  |  
|Gross margin                  |  |         | 35.7   | % |                  |   | 41.9   | %                    |  |   |        |   |  |   | 37.7    | %
|Income (loss) from operations |  | $       | 5,353  |   |                  | $ | (2,245 | )                    |  | $ | (13,464 | ) |  | $ | (10,356 | )
|                              |  |         |        |  
|Year Ended December 31, 2009  |  |         |        |   |                  |   |        |                      |  |   |         |  
|Revenue                       |  | $       | 28,951 |   |                  | $ | 24,590 |                      |  | $ |        |   |  | $ | 53,541  |  
|Gross profit                  |  | $       | 9,190  |   |                  | $ | 10,511 |                      |  | $ |        |   |  | $ | 19,701  |  
|Gross margin                  |  |         | 31.7   | % |                  |   | 42.7   | %                    |  |   |        |   |  |   | 36.8    | %
|Loss from operations          |  | $       | (917   | ) |                  | $ | (154   | )                    |  | $ | (9,891  | ) |  | $ | (10,962 | )
|                              |  |         |        |  
|Year Ended December 31, 2008  |  |         |        |   |                  |   |        |                      |  |   |         |  
|Revenue                       |  | $       | 40,870 |   |                  | $ | 35,691 |                      |  | $ |        |   |  | $ | 76,561  |  
|Gross profit                  |  | $       | 13,697 |   |                  | $ | 18,387 |                      |  | $ |        |   |  | $ | 32,084  |  
|Gross margin                  |  |         | 33.5   | % |                  |   | 51.5   | %                    |  |   |        |   |  |   | 41.9    | %
|Income (loss) from operations |  | $       | 6,697  |   |                  | $ | (144   | )                    |  | $ | (44,415 | ) |  | $ | (37,862 | )

No customer accounted for 10% or more of
our total revenue in 2010, 2009 or 2008.

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



|                        |  |      |        |  |      |   |        |      |  |   |        | 
|----------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|Year Ended December 31, |  | 2010 |        |  | 2009 |   |        | 2008 | 
|United States           |  | $    | 24,447 |  |      | $ | 16,599 |      |  | $ | 26,079 | 
|Asia Pacific            |  |      | 43,418 |  |      |   | 26,095 |      |  |   | 36,462 | 
|Europe                  |  |      | 25,109 |  |      |   | 9,105  |      |  |   | 12,146 | 
|Other                   |  |      | 2,825  |  |      |   | 1,742  |      |  |   | 1,874  | 
|                        |  |      |        |  |      |   |        |      |  |   |        | 
|                        |  | $    | 95,799 |  |      | $ | 53,541 |      |  | $ | 76,561 | 
|                        |  |      |        |  |      |   |        |      |  |   |        | 

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



|              |  |      |        |  |      |   |        | 
|------------- |  | ---- | ------ |  | ---- | - | ------ | 
|December 31,  |  | 2010 |        |  | 2009 |  
|United States |  | $    | 13,732 |  |      | $ | 14,491 | 
|Asia Pacific  |  |      | 766    |  |      |   | 949    | 
|Europe        |  |      | 2,423  |  |      |   | 814    | 
|              |  |      |        |  |      |   |        | 
|              |  | $    | 16,921 |  |      | $ | 16,254 | 
|              |  |      |        |  |      |   |        | 

NOTE 17. RESTRUCTURING

2010 Restructuring

Subsequent to the acquisition of SUSS Test in January 2010, we
began to restructure and integrate the combined businesses, which resulted in severance charges and inventory write-offs. In the second quarter of 2010, we restructured our sockets business in Minnesota, which resulted in severance charges,
inventory write-offs and shorter useful lives of certain equipment. In the fourth quarter of 2010, in connection with our ongoing integration of the operations of SUSS Test, we announced plans to restructure and consolidate our sales organization
and manufacturing operations. Manufacturing operations for our Systems business will be consolidated at our Dresden, Germany facility over the next 12 months, and manufacturing operations for our Probes business will be consolidated at one of our



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manufacturing facilities in Beaverton, Oregon over the next 6 months. Our sales offices in Vermont and
Arizona were closed in the fourth quarter of 2010.

Total restructuring charges in 2010 were $2.7 million, primarily for severance and
inventory write-offs.

2008 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 $0.7 million
was transferred from fixed assets to assets held for sale. Sales of assets held for sale resulted in a gain of $0.2 million in 2008. The remaining assets held for sale at December 31, 2008 were written down by $0.2 million to the lower of their
carrying value or estimated fair value less cost to sell of $0.4 million.

The closure of the machine shop and reorganization along functional
lines resulted in a severance charge of $0.5 million. All severance costs related to the restructuring in the third quarter of 2008 had been paid as of December 31, 2008.

Summary

Restructuring costs were as follows (in thousands):



|                                           |  |                         |       |  |      |   |   |      |  |   |      |  
|------------------------------------------ |  | ----------------------- | ----- |  | ---- | - | - | ---- |  | - | ---- | -
|                                           |  | Year Ended December 31, |      
|                                           |  | 2010                    |       |  | 2009 |   |   | 2008 | 
|Termination and severance related          |  | $                       | 1,307 |  |      | $ |  |      |  | $ | 480  |  
|Inventory charges on discontinued products |  |                         | 1,076 |  |      |   |  |      |  |   |     |  
|Equipment write-downs                      |  |                         | 224   |  |      |   |  |      |  |   | 228  |  
|Gain on sale of assets held for sale       |  |                         |      |  |      |   |  |      |  |   | (213 | )
|Lease abandonment and termination          |  |                         | 77    |  |      |   |  |      |  |   |     |  
|                                           |  |                         |       |  |      |   |   |      |  |   |      |  
|                                           |  | $                       | 2,684 |  |      | $ |  |      |  | $ | 495  |  
|                                           |  |                         |       |  |      |   |   |      |  |   |      |  

Restructuring costs were included in our consolidated statement of operations as follows (in thousands):



|                                    |  |                         |       |  |      |   |   |      |  |   |     | 
|----------------------------------- |  | ----------------------- | ----- |  | ---- | - | - | ---- |  | - | --- | 
|                                    |  | Year Ended December 31, |      
|                                    |  | 2010                    |       |  | 2009 |   |   | 2008 | 
|Cost of sales                       |  | $                       | 1,359 |  |      | $ |  |      |  | $ |    | 
|Research and development            |  |                         | 127   |  |      |   |  |      |  |   |    | 
|Selling, general and administrative |  |                         | 1,198 |  |      |   |  |      |  |   | 495 | 
|                                    |  |                         |       |  |      |   |   |      |  |   |     | 
|                                    |  | $                       | 2,684 |  |      | $ |  |      |  | $ | 495 | 
|                                    |  |                         |       |  |      |   |   |      |  |   |     | 

The following table summarizes the charges, expenditures and write-offs and adjustments related to our restructuring
accruals (in thousands):



|                                           |  |                           |   |  |                      |   |       |               |  |   |                            |   |  |                        |        |   |  |   |     | 
|------------------------------------------ |  | ------------------------- | - |  | -------------------- | - | ----- | ------------- |  | - | -------------------------- | - |  | ---------------------- | ------ | - |  | - | --- | 
|Year Ended December 31, 2010               |  | BeginningAccruedLiability |   |  | ChargedtoExpense,Net |   |       | Expend-itures |  |   | Write-Offs
andAdjust-ments |   |  | EndingAccruedLiability |       
|Termination and severance related          |  | $                         |  |  |                      | $ | 1,307 |               |  | $ | (1,222                     | ) |  | $                      | 191    |   |  | $ | 276 | 
|Inventory related to discontinued products |  |                           |  |  |                      |   | 1,076 |               |  |   |                           |   |  |                        | (1,076 | ) |  |   |    | 
|Equipment write-downs                      |  |                           |  |  |                      |   | 224   |               |  |   |                           |   |  |                        | (224   | ) |  |   |    | 
|Lease abandonment and termination          |  |                           |  |  |                      |   | 77    |               |  |   | (43                        | ) |  |                        |       |   |  |   | 34  | 
|                                           |  |                           |   |  |                      |   |       |               |  |   |                            |   |  |                        |        |   |  |   |     | 
|                                           |  | $                         |  |  |                      | $ | 2,684 |               |  | $ | (1,265                     | ) |  | $                      | (1,109 | ) |  | $ | 310 | 
|                                           |  |                           |   |  |                      |   |       |               |  |   |                            |   |  |                        |        |   |  |   |     | 

We expect accrued restructuring costs as of December 31, 2010 to be paid by the end of 2011.

NOTE 18. SUBSEQUENT EVENTS

2004
ESPP

In January 2011, 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 700,000 to 800,000.



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SCHEDULE II

Cascade Microtech, Inc.

Valuation and Qualifying Accounts

Years Ended December 31, 2010,
2009 and 2008

(In thousands)



|                                     |  |                              |       |  |                             |   |       |                                    |  |   |                          |  |  |                        |      |   |  |   |       | 
|------------------------------------ |  | ---------------------------- | ----- |  | --------------------------- | - | ----- | ---------------------------------- |  | - | ------------------------ |  |  | ---------------------- | ---- | - |  | - | ----- | 
|Column A                             |  | Column B                     |       |  | Column C                    |   |       | Column D                           |  |   | Column E                 | 
|Description                          |  | Balanceat Beginningof Period |       |  | Chargedto Costs andExpenses |   |       | Charged toOther Accounts -Describe |  |   | Deductions -Describe (a) |  |  | Balanceat Endof
Period |     
|Year Ended December 31, 2008:        |  |                              |       |  |                             |   |       |                                    |  |   |                          |  |  |                        |      |   |  |   |       | 
|                                     |  |                              |       |  |                            
|Allowance for uncollectible accounts |  | $                            | 203   |  |                             | $ | 828   |                                    |  | $ |                         |  |  | $                      | (2   | ) |  | $ | 1,029 | 
|Inventory reserves                   |  | $                            | 2,149 |  |                             | $ | 827   |                                    |  | $ |                         |  |  | $                      | (151 | ) |  | $ | 2,825 | 
|                                     |  |                              |       |  |                            
|Year Ended December 31, 2009:        |  |                              |       |  |                             |   |       |                                    |  |   |                          |  |  |                        |      |   |  |   |       | 
|                                     |  |                              |       |  |                            
|Allowance for uncollectible accounts |  | $                            | 1,029 |  |                             | $ | 61    |                                    |  | $ |                         |  |  | $                      | (116 | ) |  | $ | 974   | 
|Inventory reserves                   |  | $                            | 2,825 |  |                             | $ | 854   |                                    |  | $ |                         |  |  | $                      | (152 | ) |  | $ | 3,527 | 
|                                     |  |                              |       |  |                            
|Year Ended December 31, 2010:        |  |                              |       |  |                             |   |       |                                    |  |   |                          |  |  |                        |      |   |  |   |       | 
|                                     |  |                              |       |  |                            
|Allowance for uncollectible accounts |  | $                            | 974   |  |                             | $ | (121  | )                                  |  | $ |                         |  |  | $                      | (438 | ) |  | $ | 415   | 
|Inventory reserves                   |  | $                            | 3,527 |  |                             | $ | 1,693 |                                    |  | $ |                         |  |  | $                      | (231 | ) |  | $ | 4,989 | 



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



F-26