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**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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##### **FORM 10-Q**

 

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| **x**                                                                                                                                                                                                                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                              |                                                                                                    |
| **For  the Quarterly Period ended March 31, 2010**                                                                                                                                                                                           |
|                                                                                                                                                                                                                                              |
| **or**                                                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                        |
| **o**                                                                                                                                                                                                                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                              |
| **For  the transition period from                 to                 ** |

 

**CommissionFile Number 000-31311**

 

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**PDFSOLUTIONS, INC.**

(Exact name ofRegistrant as Specified in its Charter)

 
| **Delaware**                                    | **25-1701361**       |
|-------------------------------------------------|----------------------|
| (State or Other  Jurisdiction of                | (I.R.S. Employer     |
| Incorporation or  Organization)                 | Identification  No.) |
|                                            |                 |
| **333  West San Carlos Street, Suite 700** |                 |
| **San  Jose, California**                       | **95110**            |
| (Address of  Principal Executive Offices)       | (Zip Code)           |

 

**(408)280-7900**

(Registrant’sTelephone Number, Including Area Code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large  accelerated filer o                     | Accelerated  filer o         |
|------------------------------------------------|------------------------------|
|                                           |                         |
| Non-accelerated  filer o                       | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |                         |

 

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

 

Thenumber of shares outstanding of the Registrant’s Common Stock as of April 30,2010 was 27,086,113.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                                                                                          | **Page** |
|-----------------------------------------------------------------------------------------------------|----------|
| **PART I  FINANCIAL INFORMATION**                                                              |     |
| Item 1.  Financial Statements                                                                       | 3        |
| Condensed Consolidated Balance Sheets (Unaudited)                                                   | 3        |
| Condensed Consolidated Statements of Operations  (Unaudited)                                        | 4        |
| Condensed Consolidated Statements of Cash Flows  (Unaudited)                                        | 5        |
| Notes to Condensed Consolidated Financial Statements  (Unaudited)                                   | 6        |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 13       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 | 21       |
| Item 4. Controls and Procedures                                                                     | 21       |
| **PART II  OTHER INFORMATION**                                                                 |     |
| Item  1. Legal Proceedings                                                                          | 22       |
| Item  1A. Risk Factors                                                                              | 22       |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                | 22       |
| Item 6.  Exhibits                                                                                   | 23       |
| **SIGNATURES**                                                                                      | 24       |
| **INDEX  TO EXHIBITS**                                                                              | 25       |

 

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**PART I — FINANCIALINFORMATION**

 

**Item 1. Financial Statements.**

 

**PDFSOLUTIONS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                                                                             | ** ** | **March 31,********2010** | ** ** | **December 31,********2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **(In  thousands,**            | ** ** |
| ** **                                                                                                                                                                                                                             | ** ** | **except  par values)**        | ** ** |
| **ASSETS**                                                                                                                                                                                                                             | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| Current assets:                                                                                                                                                                                                                        |       |                           |       |                              |       |
| Cash and cash equivalents                                                                                                                                                                                                              |       | $                              | 34,899     |                              | $          | 34,899 |   |
| Accounts receivable, net of allowance of $254 in  2010 and 2009                                                                                                                                                                        |       | 19,010                         |       | 19,809                            |       |
| Prepaid expenses and other current assets                                                                                                                                                                                              |       | 3,438                          |       | 3,029                             |       |
| Total current assets                                                                                                                                                                                                                   |       | 57,347                         |       | 57,737                            |       |
| Property and equipment, net                                                                                                                                                                                                            |       | 1,297                          |       | 1,573                             |       |
| Non-current investments                                                                                                                                                                                                                |       | 718                            |       | 718                               |       |
| Intangible assets, net                                                                                                                                                                                                                 |       | 2,505                          |       | 2,954                             |       |
| Other non-current assets                                                                                                                                                                                                               |       | 740                            |       | 495                               |       |
| Total assets                                                                                                                                                                                                                           |       | $                              | 62,607     |                              | $          | 63,477 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                          |       |                           |       |                              |       |
| Current liabilities:                                                                                                                                                                                                                   |       |                           |       |                              |       |
| Current portion of long-term debt                                                                                                                                                                                                      |       | $                              | 108        |                              | $          | 115 |   |
| Accounts payable                                                                                                                                                                                                                       |       | 1,055                          |       | 959                               |       |
| Accrued compensation and related benefits                                                                                                                                                                                              |       | 3,565                          |       | 4,438                             |       |
| Taxes payable and other accrued liabilities                                                                                                                                                                                            |       | 2,946                          |       | 3,502                             |       |
| Deferred revenues                                                                                                                                                                                                                      |       | 1,791                          |       | 1,584                             |       |
| Billings in excess of recognized revenues                                                                                                                                                                                              |       | 1,450                          |       | 1,953                             |       |
| Total current liabilities                                                                                                                                                                                                              |       | 10,915                         |       | 12,551                            |       |
| Long-term debt                                                                                                                                                                                                                         |       | 82                             |       | 117                               |       |
| Long-term income taxes payable                                                                                                                                                                                                         |       | 3,035                          |       | 3,218                             |       |
| Other non-current liabilities                                                                                                                                                                                                          |       | 1,636                          |       | 1,704                             |       |
| Total liabilities                                                                                                                                                                                                                      |       | 15,668                         |       | 17,590                            |       |
| Commitments and contingencies (Note 13)                                                                                                                                                                                                |       |                           |       |                              |       |
| Stockholders’ equity:                                                                                                                                                                                                             |       |                           |       |                              |       |
| Preferred stock, $0.00015 par value, 5,000 shares  authorized: no shares issued and outstanding                                                                                                                                        |       | —                         |       | —                            |       |
| Common stock, $0.00015 par value, 70,000 shares  authorized: shares issued 30,669 at March 31, 2010 and 30,194 at  December 31, 2009; shares outstanding 27,071 at March 31, 2010 and  26,651 at December 31, 2009 |       | 4                              |       | 4                                 |       |
| Additional paid-in-capital                                                                                                                                                                                                             |       | 195,996                        |       | 194,081                           |       |
| Treasury stock at cost, 3,598 shares at  March 31, 2010 and 3,543 shares at December 31, 2009                                                                                                                                |       | (18,988                        | )          | (18,715                           | )          |
| Accumulated deficit                                                                                                                                                                                                                    |       | (130,407                       | )          | (130,111                          | )          |
| Accumulated other comprehensive income                                                                                                                                                                                                 |       | 334                            |       | 628                               |       |
| Total stockholders’ equity                                                                                                                                                                                                        |       | 46,939                         |       | 45,887                            |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                        |       | $                              | 62,607     |                              | $          | 63,477 |   |

 

***See notes to unaudited condensed consolidated financialstatements***

 

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**PDF SOLUTIONS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

 
| ** **                                              | ** ** | **Three  Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | **(In  thousands, except per share**   | ** ** |
| ** **                                              | ** ** | **amounts)**                           | ** ** |
| Revenues:                                               |       |                                   |       |   |   |
| Design-to-silicon-yield solutions                       |       | $                                      | 10,417     |   | $ | 7,794 |   |
| Gainshare performance incentives                        |       | 4,835                                  |       | 2,396 |   |
| Total revenues                                          |       | 15,252                                 |       | 10,190 |   |
|                                                    |       |                                   |       |   |   |
| Cost of design-to-silicon-yield solutions:              |       |                                   |       |   |   |
| Direct costs of design-to-silicon-yield solutions       |       | 6,322                                  |       | 6,290 |   |
| Amortization of acquired technology                     |       | 359                                    |       | 359 |   |
| Total cost of design-to silicon-yield solutions         |       | 6,681                                  |       | 6,649 |   |
| Gross profit                                            |       | 8,571                                  |       | 3,541 |   |
|                                                    |       |                                   |       |   |   |
| Operating expenses:                                     |       |                                   |       |   |   |
| Research and development                                |       | 3,962                                  |       | 5,789 |   |
| Selling, general and administrative                     |       | 4,579                                  |       | 4,413 |   |
| Amortization of other acquired intangible assets        |       | 86                                     |       | 87 |   |
| Restructuring charges                                   |       | 1                                      |       | 633 |   |
| Total operating expenses                                |       | 8,628                                  |       | 10,922 |   |
|                                                    |       |                                   |       |   |   |
| Loss from operations                                    |       | (57                                    | )          | (7,381 | ) |
| Interest and other income, net                          |       | 262                                    |       | 324 |   |
| Income (loss) before income taxes                       |       | 205                                    |       | (7,057 | ) |
| Income tax provision                                    |       | 501                                    |       | 264 |   |
| Net loss                                                |       | $                                      | (296       | ) | $ | (7,321 | ) |
|                                                    |       |                                   |       |   |   |
| Net loss per share — basic and diluted             |       | $                                      | (0.01      | ) | $ | (0.28 | ) |
| Weighted average common shares — basic and diluted |       | 26,929                                 |       | 26,092 |   |

 

***See notes to unaudited condensed consolidated financialstatements***

 

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**PDF SOLUTIONS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

 
| ** **                                                                                  | ** ** | **Three  Months Ended********March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | **(In  thousands)**                           | ** ** |
| Operating activities:                                                                       |       |                                          |       |   |   |
| Net loss                                                                                    |       | $                                             | (296       | ) | $ | (7,321 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                |       |                                          |       |   |   |
| Depreciation and amortization                                                               |       | 271                                           |       | 414 |   |
| Stock-based compensation expense                                                            |       | 1,505                                         |       | 1,136 |   |
| Loss on disposal of property and equipment                                                  |       | —                                        |       | 1 |   |
| Amortization of acquired intangible assets                                                  |       | 445                                           |       | 446 |   |
| Deferred taxes                                                                              |       | —                                        |       | (5 | ) |
| Purchases of treasury stock in connection with tax  withholdings on restricted stock grants |       | (273                                          | )          | — |   |
| Changes in operating assets and liabilities:                                                |       |                                          |       |   |   |
| Accounts receivable, net of allowances                                                      |       | 799                                           |       | 4,595 |   |
| Prepaid expenses and other assets                                                           |       | (804                                          | )          | 1,459 |   |
| Accounts payable                                                                            |       | 144                                           |       | 415 |   |
| Accrued compensation and related benefits                                                   |       | (799                                          | )          | (609 | ) |
| Taxes payable and other accrued liabilities                                                 |       | (730                                          | )          | (624 | ) |
| Deferred revenues                                                                           |       | 183                                           |       | 265 |   |
| Billings in excess of recognized revenues                                                   |       | (503                                          | )          | (502 | ) |
| Net cash used in operating activities                                                       |       | (58                                           | )          | (330 | ) |
| Investing activities:                                                                       |       |                                          |       |   |   |
| Maturities and sales of available-for-sale securities                                       |       | —                                        |       | 2,700 |   |
| Purchases of property and equipment                                                         |       | (37                                           | )          | (299 | ) |
| Net cash provided by (used in) investing activities                                         |       | (37                                           | )          | 2,401 |   |
| Financing activities:                                                                       |       |                                          |       |   |   |
| Proceeds from Employee Stock Purchase Plan                                                  |       | 411                                           |       | 417 |   |
| Principal payments on long-term obligations                                                 |       | (31                                           | )          | (51 | ) |
| Net cash provided by financing activities                                                   |       | 380                                           |       | 366 |   |
| Effect of exchange rate changes on cash and cash  equivalents                               |       | (285                                          | )          | (1,343 | ) |
| Net increase in cash and cash equivalents                                                   |       | —                                        |       | 1,094 |   |
| Cash and cash equivalents, beginning of period                                              |       | 34,899                                        |       | 31,686 |   |
| Cash and cash equivalents, end of period                                                    |       | $                                             | 34,899     |   | $ | 32,780 |   |
| Supplemental disclosure of cash flow information:                                           |       |                                          |       |   |   |
| Cash paid during the period for:                                                            |       |                                          |       |   |   |
| Income Taxes                                                                                |       | $                                             | 811        |   | $ | 232 |   |
| Interest                                                                                    |       | $                                             | 3          |   | $ | 7 |   |

 

***See notes to unaudited condensed consolidated financialstatements***

 

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**PDFSOLUTIONS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

 

**1.BASIS OF PRESENTATION**

 

*Basisof Presentation*

 

The interimunaudited condensed consolidated financial statements included herein have beenprepared by PDF Solutions, Inc. (“the Company”), without audit, pursuantto the rules and regulations of the Securities and Exchange Commission (“SEC”),including the instructions to the Quarterly Report on Form 10-Q and Article 10of Regulation S-X. Certain information and footnote disclosures normallyincluded in annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted. The interim unaudited condensed consolidated financialstatements reflect, in the opinion of management, all adjustments necessary(consisting only of normal recurring adjustments), to present a fair statementof results for the interim periods presented. The operating results for anyinterim period are not necessarily indicative of the results that may beexpected for other interim periods or the full fiscal year. The accompanyinginterim unaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and notesthereto in the Company’s Annual Report on Form 10-K/A for the year ended December 31,2009.

 

The condensedconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries after the elimination of all significant intercompanybalances and transactions.

 

*Out-of-PeriodAdjustments* — Inthe three months ended March 31, 2010, the Company recorded out-of-periodadjustments to reverse an accrual for fringe benefits of $155,000 and adjustfor software license fee amortization of $42,000. The correction of these priorperiod errors in the current quarter resulted in a reduction to the Company’snet loss of $197,000 for the three months ended March 31, 2010. Theresulting errors also increased net loss for the year ended December 31,2008 by $155,000 and increased net loss for the three and twelve months ended December 31,2009 by $83,000. Management has assessed the impact of these adjustments anddoes not believe that these amounts were material, either individually or inthe aggregate, to any prior period financial statements, and the impact ofcorrecting these errors in the three months ended March 31, 2010 is notmaterial to the financial statements for the three months ended March 31,2010.

 

*SignificantEstimates* —The preparation of the condensed consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses. Asignificant portion of the Company’s revenues require estimates with respect tototal costs which may be incurred and revenues earned. Actual results coulddiffer from these estimates.

 

*RevenueRecognition* —The Company derives revenue from two sources: Design-to-Silicon-YieldSolutions, which includes Services and Software Licenses, and GainsharePerformance Incentives.

 

*Design-to-Silicon-YieldSolutions* —Revenues that are derived from Design-to-Silicon-Yield solutions come fromservices and software licenses. The Company recognizes revenue for each elementof Design-to-Silicon-Yield solutions as follows:

 

*Services* — The Company generates a significant portion of itsDesign-to-Silicon-Yield solutions revenue from fixed-price solutionimplementation service contracts delivered over a specific period of time.These contracts require accurate estimation of costs to perform obligations andthe overall scope of each engagement. Revenue under contracts for solutionimplementation services is recognized as services are performed using thecost-to-cost percentage of completion method of contract accounting. Losses onsolution implementation contracts are recognized in the period when they becomeevident. Revisions in profit estimates are reflected in the period in which theconditions that require the revisions become known and can be estimated.

 

On occasion, the Company licenses its softwareproducts as a component of its fixed-price service contract. In such instances,the software products are licensed to customers over a specified term of theagreement with support and maintenance to be provided over the license term.Under these arrangements, where vendor-specific objective evidence of fairvalue (“VSOE”) exists for the support and maintenance element, the support andmaintenance revenue is recognized separately over the term of the supportingperiod. The remaining fee is recognized as services are performed using thecost-to-cost percentage of completion method of contract accounting. VSOE formaintenance, in these instances, is generally established based upon anegotiated renewal rate. Under arrangements where software products arelicensed as a component of its fixed-price service contract and where VSOE doesnot exist to allocate a portion of the total fixed-price to the undeliveredelements, revenue is recognized for the total fixed-price as the lesser ofeither the percentage of completion method of contract accounting or ratablyover the longer of either the term of the agreement or the support period.

 

Revenue from related support and maintenance servicesis recognized ratably over the term of the support and maintenance contract,generally one year, while revenue from consulting, installation, and trainingservices is recognized as services are performed. When bundled with softwarelicenses in multiple element arrangements, support and maintenance, consulting(other 

 

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thanfor its fixed-price solution implementations), installation, and trainingrevenue is allocated to each element of a transaction based upon its fair valueas determined by the Company’s VSOE. VSOE for maintenance is generallyestablished based upon negotiated renewal rates while VSOE for consulting,installation, and training services is established based upon the Company’scustomary pricing for such services when sold separately.

 

*Software Licenses* — The Company also licenses its softwareproducts separately from its integrated solution implementations. For softwarelicense arrangements that do not require significant modification orcustomization of the underlying software, software license revenue isrecognized under the residual method when (1) persuasive evidence of anarrangement exists, (2) delivery has occurred, (3) the fee is fixedor determinable, (4) collectability is probable, and (5) thearrangement does not require services that are essential to the functionalityof the software. When arrangements include multiple elements such as supportand maintenance, consulting (other than for its fixed price solutionimplementations), installation, and training, revenue is allocated to eachelement of a transaction based upon its fair value as determined by the Company’sVSOE and such services are recorded as services revenue. VSOE for maintenanceis generally established based upon negotiated renewal rates while VSOE forconsulting, installation, and training services is established based upon theCompany’s customary pricing for such services when sold separately. Revenue forsoftware licenses with extended payment terms is not recognized in excess ofamounts due. For software license arrangements that require significantmodification or customization of the underlying software, the software licenserevenue is recognized as services are performed using the cost-to-costpercentage of completion method of contract accounting, and such revenue isrecorded as services revenue.

 

*GainsharePerformance Incentives* — When the Company enters into a contract to provide yieldimprovement services, the contract usually includes two components: (1) afixed fee for performance by the Company of services delivered over a specificperiod of time; and (2) a gainshare performance incentives component wherethe customer may pay a variable fee, usually after the fixed fee period hasended. Revenue derived from gainshare performance incentives represents profitsharing and performance incentives earned based upon the Company’s customersreaching certain defined operational levels established in related solutionimplementation service contracts. Gainshare performance incentives periods areusually subsequent to the delivery of all contractual services and thereforehave no cost to the Company. Due to the uncertainties surrounding attainment ofsuch operational levels, the Company recognizes gainshare performanceincentives revenue (to the extent of completion of the related solutionimplementation contract) upon receipt of performance reports or other relatedinformation from the customer supporting the determination of amounts andprobability of collection.

 

*SoftwareDevelopment Costs* —Costs for the development of new software products and substantial enhancementsto existing software products are expensed as incurred until technologicalfeasibility has been established, at which time any additional costs would becapitalized. Because the Company believes its current process for developingsoftware is essentially completed concurrently with the establishment oftechnological feasibility, no costs have been capitalized to date.

 

**2.RECENT ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES**

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update on revenue recognition inrelation to****multiple-deliverablerevenue arrangements. This update provides guidance on accounting formultiple-deliverable arrangements to enable vendors to account for products orservices (deliverables) separately rather than as a combined unit. Theamendments in this update will replace the term fair value in the revenueallocation guidance with selling price to clarify that the allocation ofrevenue is based on entity-specific assumptions rather than assumptions of amarketplace participant. This update is effective prospectively for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010. The Company is currently evaluating the impact, ifany, that the adoption of this updated standard will have on its financialresults and position.

 

In October 2009, the FASB issued an Accounting Standards Update onsoftware revenue recognition in relation to revenue arrangements that includesoftware elements. This standard scopes out from software revenue recognitionaccounting revenue arrangements for tangible products that contain both software and non-softwarecomponents that function together to deliver the tangible products’ essentialfunctionality. It also amends the determination of how arrangementconsideration should be allocated to deliverables in a multiple-deliverablerevenue arrangement. This update iseffective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010. The Companyis currently evaluating the impact, if any, that the adoption of this updatewill have on its financial results and position.

 

EffectiveJanuary 1, 2010, the Company adopted FASB’s amendment to an Accounting Standards Update which requiresadditional fair value disclosures.  Thisamendment requires disclosures in relation to inputs and valuation techniquesused to measure fair value as well as disclosures in relation to significanttransfers, beginning in the first quarter of 2010. Additionally, this amendmentrequires the presentation of disaggregated activity within the reconciliation forfair value measurements using significant unobservable inputs (Level 3),beginning in the first quarter of 2011. The adoption of this standarddid not have a material impact on the Company’s financial results and position.

 

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**3. INVESTMENTS**

 

The followingtable summarizes the Company’s investments at March 31, 2010 and December 31,2009 (in thousands):

 
| ** **                           | ** ** | **Amortized********Cost** | ** ** | **Unrealized********Holding********Gains** | ** ** | **Unrealized********Holding********Losses** | ** ** | **Fair********Value** | ** ** |
|--------------------------------------|------------|---------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|
| Auction-rate securities              |       | $                         | 1,000      |                                       | $          | —                                      |       | $                     | (282       | ) | $ | 718 |   |
| Included in non-current  investments |       |                      |       |                                       |       |                                        |       | $                     | 718        |   |
|                                      |            |                           |            |                                            |            |                                             |            |                       |            |  |  |  |  |

 

As of March 31,2010 and December 31, 2009, the Company’s investments consisted entirelyof auction-rate securities. Please refer to Note 12 “Fair Value” for furtherdiscussion of auction-rate securities.

 

**4.ACCOUNTS RECEIVABLE**

 

Accountsreceivable include amounts that are unbilled at the end of the period. Unbilledaccounts receivable are determined on an individual contract basis and wereapproximately $7.1 million and $6.4 million as of March 31, 2010 and December 31,2009, respectively.

 

**5.ACQUIRED INTANGIBLE ASSETS**

 

Impairmenton acquired intangible assets is evaluated on an annual basis (or morefrequently if indicators of impairment exist). Acquired intangible assets areamortized over their useful lives unless these lives are determined to beindefinite. The Company completed its annual impairment test in the fourthquarter of 2009 and found no indicators of impairment.  During the three months ended March 31,2010, there were no indicators of impairment related to the Company’sintangible assets.

 

The followingtable provides information relating to the intangible assets as of March 31,2010 and December 31, 2009 (in thousands):

 
| **Acquired Identifiable  Intangible** | ** ** | **Amortization********Period********(Years)** | ** ** | **March 31, 2010********Gross Carrying********Amount** | ** ** | **Accumulated Amortization** | ** ** | **Foreign********Currency********Translation** | ** ** | **March 31, 2010********Net Carrying********Amount** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Acquired technology                   |       | 4-5                                           |       | $                                                           | 11,800     |                         | $          | (9,988                                         | )          | $                                                         | —     |   | $ | 1,812 |   |
| Brand name                            |       | 4                                             |       | 510                                                         |       | (469                         | )          | —                                         |       | 41                                                        |       |
| Customer relationships and backlog    |       | 1-6                                           |       | 3,420                                                       |       | (3,092                       | )          | —                                         |       | 328                                                       |       |
| Patents and applications              |       | 7                                             |       | 1,400                                                       |       | (1,092                       | )          | —                                         |       | 308                                                       |       |
| Other acquired intangibles            |       | 4                                             |       | 255                                                         |       | (265                         | )          | 26                                             |       | 16                                                        |       |
| Total                                 |       |                                          |       | $                                                           | 17,385     |                         | $          | (14,906                                        | )          | $                                                         | 26         |   | $ | 2,505 |   |

 
| **Acquired Identifiable  Intangible** | ** ** | **Amortization********Period********(Years)** | ** ** | **December 31, 2009********Gross Carrying********Amount** | ** ** | **Accumulated Amortization** | ** ** | **Foreign********Currency********Translation** | ** ** | **December 31,****2009********Net Carrying********Amount** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Acquired technology                   |       | 4-5                                           |       | $                                                              | 11,800     |                         | $          | (9,630                                         | )          | $                                                               | —     |   | $ | 2,170 |   |
| Brand name                            |       | 4                                             |       | 510                                                            |       | (452                         | )          | —                                         |       | 58                                                              |       |
| Customer relationships and backlog    |       | 1-6                                           |       | 3,420                                                          |       | (3,061                       | )          | —                                         |       | 359                                                             |       |
| Patents and applications              |       | 7                                             |       | 1,400                                                          |       | (1,074                       | )          | —                                         |       | 326                                                             |       |
| Other acquired intangibles            |       | 4                                             |       | 287                                                            |       | (258                         | )          | 12                                             |       | 41                                                              |       |
| Total                                 |       |                                          |       | $                                                              | 17,417     |                         | $          | (14,475                                        | )          | $                                                               | 12         |   | $ | 2,954 |   |

 

TheCompany expects the annual amortization of acquired intangible assets to be asfollows (in thousands):

 
| **Year Ending December 31,**   | ** ** | **Amount** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2010 (remaining  nine-month period) |       | $          | 1,135      |   |
| 2011                                |       | 830        |       |
| 2012                                |       | 435        |       |
| 2013                                |       | 74         |       |
| 2014                                |       | 31         |       |
| Total                               |       | $          | 2,505      |   |

 

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**6. STOCKHOLDERS’ EQUITY**

 

Stock-basedcompensation is estimated at the grant date based on the award’s fair value andis recognized on a straight-line basis over the vesting periods of theapplicable stock purchase rights and stock options, generally four years*.* Stock-based compensation expenses before taxes related tothe Company’s employee stock purchase plan and stock-option plans wereallocated as follows (in thousands):

 
| ** **                                | ** ** | **Three  Months********Ended March 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Cost of design-to-silicon-yield solutions |       | $                                             | 602        |   | $ | 389 |   |
| Research and development                  |       | 347                                           |       | 348 |   |
| Selling, general and administrative       |       | 556                                           |       | 399 |   |
| Stock-based compensation expenses         |       | $                                             | 1,505      |   | $ | 1,136 |   |

 

TheCompany estimated the fair value of share-based awards granted during the periodusing the Black-Scholes-Merton option-pricing model with the following weightedaverage assumptions, resulting in the following weighted average fair values:

 
| ** **                                                                                      | ** ** | **Stock Plans********Three Months Ended March 31,** | ** ** | **Employee Stock Purchase Plan********Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2010**                                                 | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Expected life (in  years)                                                                       |       | 5.24                                                     |       | 5.16                                                                      |       | 1.25 |   | 1.25 |   |
| Volatility                                                                                      |       | 62.8                                                     | %          | 61.3                                                                      | %          | 72.6 | % | 79.7 | % |
| Risk-free interest rate                                                                         |       | 2.23                                                     | %          | 2.03                                                                      | %          | 0.58 | % | 1.28 | % |
| Expected dividend                                                                               |       | —                                                   |       | —                                                                    |       | — |   | — |   |
| Weighted average fair  value per share of options granted during the period                     |       | $                                                        | 2.20       |                                                                      | $          | 0.57 |   | — |   | — |   |
| Weighted average fair value per share of employee  stock purchase plan rights during the period |       | —                                                   |       | —                                                                    |       | $ | 1.40 |   | $ | 0.81 |   |
|                                                                                                 |            |                                                          |            |                                                                           |            |  |  |  |  |  |  |  |  |

 

On March 31,2010, the Company has in effect the following stock-based compensation plans:

 

*Stock Plans —*During 2001, the Company terminated the 1996 and 1997Stock Plans as to future option grants, and adopted the 2001 Stock Plan. Underthe Company’s 2001 Stock Plan, on January 1 of each year, starting with2002, the number of shares in the reserve will increase by the lesser of (1) 3,000,000shares, (2) 5% of the outstanding common stock on the last day of theimmediately preceding year, or (3) the number of shares determined by theboard of directors. Under the 2001 Stock Plan, the Company may grant stockpurchase rights and stock options to purchase shares of common stock toemployees, directors and consultants. The exercise price for stock options mustgenerally be at prices not less than the fair market value at the date of grantfor incentive stock options and not less than 85% of fair market value fornon-statutory stock options. Stock options generally expire ten years from thedate of grant and become vested and exercisable ratably over a four-yearperiod.

 

Stockoption activity under the Company’s plans during the three months ended March 31,2010 was as follows:

 
| ** **                                        | ** ** | **Number of********Options********(in thousands)** | ** ** | **Weighted Average********Exercise Price********per Share** | ** ** | **Weighted Average********Remaining********Contractual********Term (years)** | ** ** | **Aggregate********Intrinsic Value********(in thousands)** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Outstanding,  January 1, 2010                |       | 3,849                                              |       | $                                                           | 6.41       |                                                                         |       |                                                       |       |   |
| Granted                                           |       | 153                                                |       | 4.05                                                        |       |                                                                         |       |                                                       |       |
| Exercised                                         |       | —                                             |       | —                                                      |       |                                                                         |       |                                                       |       |
| Canceled                                          |       | (101                                               | )          | 4.76                                                        |       |                                                                         |       |                                                       |       |
| Expired                                           |       | (31                                                | )          | 9.71                                                        |       |                                                                         |       |                                                       |       |
| Outstanding,  March 31, 2010                 |       | 3,870                                              |       | 6.34                                                        |       | 7.80                                                                         |       | $                                                          | 1,165      |   |
| Vested and expected to  vest, March 31, 2010 |       | 3,431                                              |       | 6.62                                                        |       | 7.59                                                                         |       | $                                                          | 970        |   |
| Exercisable, March 31, 2010                  |       | 1,536                                              |       | 9.43                                                        |       | 5.51                                                                         |       | $                                                          | 152        |   |
|                                                   |            |                                                    |            |                                                             |            |                                                                              |            |                                                            |            |  |  |

 

Theaggregate intrinsic value in the table above represents the total intrinsicvalue based on the Company’s closing stock price of $4.36 per share as of March 31,2010, which would have been received by the option holders had all “in-the-money”option holders exercised their options as of that date. No stock options wereexercised during the three months ended March 31, 2010.

 

As of March 31,2010, there was $4.3 million of total unrecognized compensation cost related tononvested stock options. That cost is expected to be recognized over a weightedaverage period of 3.1 years. The total fair value of shares vested during thethree months ended March 31, 2010 was $253,000.

 

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Nonvestedrestricted stock units activity during the three months ended March 31,2010 was as follows:

 
| ** **                       | ** ** | **Shares********(in thousands)** | ** ** | **Weighted Average********Grant Date********Fair Value Per Share** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------------------------------------------|------------|
| Nonvested,  January 1, 2010 |       | 979                              |       | $                                                                  | 6.86       |   |
| Granted                          |       | 28                               |       | 3.98                                                               |       |
| Vested                           |       | (164                             | )          | 4.62                                                               |       |
| Forfeited                        |       | (22                              | )          | 6.39                                                               |       |
| Nonvested, March 31, 2010   |       | 821                              |       | 7.32                                                               |       |
|                                  |            |                                  |            |                                                                    |            |  |

 

As of March 31,2010, there was $4.5 million of total unrecognized compensation cost related tononvested restricted stock units. That cost is expected to be recognized over aweighted average period of 2.1 years. The total compensation expense related toshares vested during the three months ended March 31, 2010 was $966,000.

 

*Employee Stock Purchase Plan*— In July 2001, the Company adopted an EmployeeStock Purchase Plan (“Purchase Plan”), under which eligible employees cancontribute up to 10% of their compensation, as defined in the Purchase Plan,towards the purchase of shares of PDF common stock at a price of 85% of thelower of the fair market value at the beginning of or the end of each six-monthoffering period. Under the Purchase Plan, on January 1 of each year,starting with 2002, the number of shares reserved for issuance willautomatically increase by the lesser of (1) 675,000 shares, (2) 2%of the Company’s outstanding common stock on the last day of the immediatelypreceding year, or (3) the number of shares determined by the board ofdirectors. For the three months ended March 31, 2010, the Purchase Plancompensation expense was $113,000.

 

*Stock Repurchase Program*— On March 26, 2003, the Company’s Board ofDirectors approved a share repurchase program to purchase up to $10.0 millionof its outstanding common stock. This program was completed in August 2007with 988,000 shares repurchased at the average price of $10.12 per share. On October 29,2007, the Board of Directors approved a new program to repurchase up to anadditional $10.0 million of the Company’s common stock on the open market. Theright to repurchase stock under this program will expire on October 29,2010. As of March 31, 2010, 2.6 million shares have been repurchased atthe average price of $3.44 per share under this program and $1.0 millionremained available for future repurchases.

 

**7. RESTRUCTURING**

 

In2008, the Company announced two restructuring plans to better allocate itsresources to improve its operational results in light of current marketconditions, one on April 29, 2008 and the other on October 28, 2008.

 

Forthe plan announced on April 29, 2008, the Company recorded restructuringcharges of $1.5 million during the three months ended June 30, 2008, whichprimarily consisted of employee severance costs of $1.4 million. All severancecosts and related fees were paid out and the activities were completed as of March 31,2009.

 

Forthe plan announced on October 28, 2008, the Company recorded restructuringcharges of $6.4 million, primarily consisting of employee severance costs of$4.5 million and facility exit costs of $1.8 million. Of the $6.4 million,$1,000 was recorded during the three months ended March 31, 2010. Thefollowing table summarizes the activities of these restructuring liabilities(in thousands):

 
| **Restructuring Announced on  October 28, 2008** | ** ** | **Severance** | ** ** | **Facility Exit** | ** ** | **Professional********and Other Fees** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|---------------|------------|-------------------|------------|----------------------------------------|------------|-----------|------------|
| Balances,  January 1, 2008                       |       | $             | —     |              | $          | —                                 |       | $         | —     |   | $ | — |   |
| Restructuring charges                                 |       | 909           |       | 1,251             |       | 36                                     |       | 2,196     |       |
| Adjustment of deferred  rent                          |       | —        |       | (266              | )          | —                                 |       | (266      | )          |
| Non-cash adjustment                                   |       | 36            |       | 266               |       | —                                 |       | 302       |       |
| Payments                                              |       | (85           | )          | (143              | )          | (5                                     | )          | (233      | )          |
| Balances,  December 31, 2008                     |       | 860           |       | 1,108             |       | 31                                     |       | 1,999     |       |
| Restructuring charges                                 |       | 3,515         |       | 783               |       | 214                                    |       | 4,512     |       |
| Payments                                              |       | (4,151        | )          | (558              | )          | (183                                   | )          | (4,892    | )          |
| Balances, December 31, 2009                      |       | 224           |       | 1,333             |       | 62                                     |       | 1,619     |       |
| Restructuring charges (credits)                       |       | 84            |       | 19                |       | (102                                   | )          | 1         |       |
| (Payments) refunds                                    |       | (85           | )          | (170              | )          | 42                                     |       | (213      | )          |
| Balances, March 31, 2010                         |       | $             | 223        |              | $          | 1,182                                  |       | $         | 2          |   | $ | 1,407 |   |

 

As of March 31,2010, of the remaining accrual of $1.4 million, $803,000 was included inaccrued liabilities and $604,000 was included in long-term other liabilities.Accrued severance of $223,000 and accrued professional and other fees of $2,000are expected to be paid out in the second fiscal quarter of 2010. Accruedfacility exit expenses will be paid in accordance with the lease paymentschedule through 2013.

 

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**8.INCOME TAXES**

 

TheCompany accounts for temporary differences between the book and tax basis ofassets and liabilities by recording deferred tax assets and liabilities.**The Company must assess the likelihood that its deferredtax assets will be recovered from future taxable income and, to the extent theCompany believes that recovery is not likely, the Company must establish avaluation allowance. Changes in the Company’s net deferred tax assets andvaluation allowance in a period are recorded through the income tax provisionin the condensed consolidated statements of operations.

 

TheCompany classifies its liabilities related to unrecognized tax benefits aslong-term. The Company includes interest and penalties related to unrecognizedtax benefits within the Company’s income tax provision. As of March 31,2010 and December 31, 2009, the Company had $479,000 and $539,000,respectively, accrued for payment of interest and penalties related tounrecognized tax benefits.

 

Incometax provision for the three months ended March 31, 2010 was $501,000,primarily consisting of foreign withholding taxes of $764,000, partially offsetby a reduction in the Company’s reserves for uncertain tax positions of$325,000. Income tax provision for the three months ended March 31, 2009 was$264,000, primarily consisting of foreign withholding taxes and statutory taxesassociated with the Company’s foreign subsidiaries.

 

TheCompany’s total amount of unrecognized tax benefits as of March 31, 2010was $8.7 million, of which $3.0 million, if recognized, would affect theCompany’s effective tax rate. The Company’s total amount of unrecognized taxbenefits as of December 31, 2009 was $8.3 million, of which $2.7 million,if recognized, would affect the Company’s effective tax rate. As of March 31,2010, the Company has recognized a net amount of $3.0 million as long-termtaxes payable for unrecognized tax benefits in its condensed consolidatedbalance sheet. The Company does not believe that it is reasonably possible thatthe change in unrecognized tax benefits over the next twelve months willmaterially impact its results of operations and financial position.

 

TheCompany conducts business globally and, as a result, files numerousconsolidated and separate income tax returns in the U.S. federal, various stateand foreign jurisdictions. Because the Company used some of the tax attributescarried forward from previous years to tax years that are still open, statutesof limitation remain open for all tax years to the extent of the attributescarried forward into tax year 2001 for federal tax purposes and tax year 2002for California tax purposes. With few exceptions, the Company is no longersubject to income tax examinations in its major foreign subsidiaries’jurisdictions for years before 2004.

 

**9.NET LOSS PER SHARE**

 

Basicnet loss per share is computed by dividing net loss by the weighted averagecommon shares outstanding for the period (excluding outstanding stock optionsand shares subject to repurchase). Diluted net loss per share reflects theweighted average common shares outstanding plus the potential effect ofdilutive securities which are convertible into common shares (using thetreasury stock method), except in cases where the effect would beanti-dilutive. The following is a reconciliation of the numerators anddenominators used in computing basic and diluted net loss per share (inthousands, except per share amounts):

 
| ** **                                        | ** ** | **Three  Months********Ended March 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Net loss                                          |       | $                                             | (296       | ) | $ | (7,321 | ) |
| Denominator for basic calculation:                |       |                                          |       |   |   |
| Weighted average common shares outstanding- basic |       | 26,929                                        |       | 26,092 |   |
| Dilutive items                                    |       |                                          |       |   |   |
| Stock options outstanding                         |       | —                                        |       | — |   |
| Denominator for diluted computation               |       | 26,929                                        |       | 26,092 |   |
| Net loss per share — basic and diluted       |       | $                                             | (0.01      | ) | $ | (0.28 | ) |

 

The following table sets forth potential shares ofcommon stock that are not included in the diluted net loss per sharecalculation above because to do so would be anti-dilutive for the periodsindicated (in thousands):

 
| ** **                       | ** ** | **Three  Months********Ended March 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Outstanding options              |       | 3,870                                         |       | 4,370 |   |
| Nonvested restricted stock units |       | 821                                           |       | 835 |   |
| Total                            |       | 4,691                                         |       | 5,205 |   |

 

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**10. COMPREHENSIVE LOSS**

 

Thecomponents of comprehensive loss are as follows (in thousands):

 
| ** **                                                           | ** ** | **Three Months********Ended March 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Net loss                                                             |       | $                                            | (296       | ) | $ | (7,321 | ) |
| Unrealized loss on  investments, net of income tax effects           |       | —                                       |       | (37 | ) |
| Foreign currency  translation adjustments, net of income tax effects |       | (294                                         | )          | (1,267 | ) |
| Comprehensive loss                                                   |       | $                                            | (590       | ) | $ | (8,625 | ) |

 

**11.CUSTOMER AND GEOGRAPHIC INFORMATION**

 

Operatingsegments are defined as components of an enterprise about which separatefinancial information is available that is evaluated regularly by the chiefoperating decision maker, or group, in deciding how to allocate resources andin assessing performance.

 

TheCompany’s chief operating decision maker, the Chief Executive Officer, reviewsdiscrete financial information presented on a consolidated basis for purposesof making operating decisions and assessing financial performance. Accordinglythe Company considers itself to be in one operating segment, specifically thelicensing and implementation of yield improvement solutions for integratedcircuit manufacturers.

 

TheCompany had revenues from individual customers in excess of 10% of totalrevenues as follows:

 
| ** **   | ** ** | **Three Months********Ended March 31,** | ** ** |
|--------------|------------|----------------------------------------------|------------|
| **Customer** | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| A            |       | 20                                           | %          | * | % |
| B            |       | 15                                           | %          | * | % |
| C            |       | 12                                           | %          | 29 | % |
| D            |       | *                                            | %          | 10 | % |

 

----

*  represents less than 10%

 

TheCompany had gross accounts receivable from the following individual customersin excess of 10% of gross accounts receivable as follows:

 
| **Customer** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------|------------|--------------------------|------------|-----------------------------|------------|
| A            |       | 18                       | %          | 16                          | %          |
| B            |       | 13                       | %          | 10                          | %          |
| C            |       | 19                       | %          | 16                          | %          |
| E            |       | 13                       | %          | *                           | %          |
| F            |       | *                        | %          | 14                          | %          |
| G            |       | *                        | %          | 11                          | %          |
| H            |       | *                        | %          | 10                          | %          |

 

----

*  represents less than 10%

 

Geographicalrevenues from customers based upon the location of the customers’ facilities towhich products were shipped or services were rendered are as follows (inthousands):

 
| ** **    | ** ** | **Three  Months********Ended March 31,** | ** ** |
|---------------|------------|-----------------------------------------------|------------|
| ** **    | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Asia          |       | $                                             | 10,297     |   | $ | 5,458 |   |
| United States |       | 3,381                                         |       | 4,066 |   |
| Europe        |       | 1,574                                         |       | 666 |   |
| Total         |       | $                                             | 15,252     |   | $ | 10,190 |   |

 

**12. FAIR VALUE**

 

Fairvalue is the exit price, or the amount that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants as of the measurement date. The multiple assumptions used to valuefinancial instruments are referred to as inputs, and a hierarchy for inputsused in measuring fair value is established, that maximizes the use ofobservable inputs and minimizes the use of unobservable inputs by requiringthat the most observable inputs be used when available. Observable inputs 

 

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reflect assumptions market participants would use in pricing an assetor liability based on market data obtained from independent sources whileunobservable inputs reflect a reporting entity’s pricing based upon its ownmarket assumptions. These inputs are ranked according to a fair value hierarchythat prioritizes the inputs to valuation techniques used to measure fair valueinto three broad levels.

 
| Level 1 — | Inputs are  quoted prices in active markets for identical assets or liabilities.                                                                                                                                                                                                                                                                   |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                                                               |
| Level 2 — | Inputs are  quoted prices for similar assets or liabilities in an active market, quoted  prices for identical or similar assets or liabilities in markets that are not  active, inputs other than quoted prices that are observable and  market-corroborated inputs which are derived principally from or corroborated  by observable market data. |
|           |                                                                                                                                                                                                                                                                                                                                               |
| Level 3 — | Inputs are  derived from valuation techniques in which one or more significant inputs or  value drivers are unobservable.                                                                                                                                                                                                                          |

 

The following table represents the Company’s assetsmeasured at fair value on a recurring basis as of March 31, 2010 and thebasis for that measurement (in thousands):

 
| **Assets**                 | ** ** | **Total** | ** ** | **Quoted Prices in********Active Markets for********Identical Assets********(Level 1)** | ** ** | **Significant Other********Observable Inputs********(Level 2)** | ** ** | **Significant********Unobservable Inputs********(Level 3)** | ** ** |
|----------------------------|------------|-----------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Money market mutual  funds |       | $         | 25,261     |                                                                                    | $          | 25,261                                                          |       | $                                                           | —     |   | $ | — |   |
| Auction-rate securities    |       | 718       |       | —                                                                                  |       | —                                                          |       | 718                                                         |       |
| Total                      |       | $         | 25,979     |                                                                                    | $          | 25,261                                                          |       | $                                                           | —     |   | $ | 718 |   |

 

The Company holds investments in auction-ratesecurities (“ARS”), which are variable rate debt instruments whose interestrates are reset through a “dutch” auction process at regular intervals,typically every 28 days. All ARS are backed by pools of student loansguaranteed by governmental agencies and private entities, and were ratedAAA/Aaa at the date of acquisition. The liquidity and fair value of thesesecurities has been reduced by the uncertainty in the credit markets and theexposure of these securities to the financial condition of bond insurancecompanies, as evidenced by the rating downgrade of MBIA (bond insurer on one ofthe Company’s ARS) from Aaa to A2, by Moody’s Investor Services on June 19,2008. All ARS have failed to sell at auction since February 2008, and as aresult, their interest rates were reset to the maximum LIBOR + 150 basispoints. The only activity associated with these instruments since February 2008was the repurchase of $500,000 of ARS at par by issuers. As a result of theseauction failures, there was limited active market with observable prices forthese securities as of March 31, 2010; therefore, the Company computed thefair value of these securities based on a discounted cash flow model, usingsignificant level 3 inputs, to take into account the lack of liquidity. TheCompany does not believe that the student loans backing these securities, theprincipal of these assets, is at risk. Furthermore, the Company intends to holdthese securities until the credit markets recover and these securities resumepricing at or near par and it is not more likely than not that the Companywill be required to sell the securities before recovery of the principal. As a result, the Company recorded atemporary impairment to other comprehensive income and classified thesesecurities as non-current investments. The valuation may be revised in futureperiods as market conditions evolve.

 

Therewas no change in the beginning and ending balance of assets measured at fairvalue on a recurring basis using significant unobservable inputs (Level 3)during the three months ended March 31, 2010.

 

**13. Commitments and Contingencies**

 

Item 3, “Legal Proceedings,” on page 22 of the Company’s AnnualReport on Form 10-K/A for the year ended December 31, 2009, providesinformation on certain legal proceedings and claims in which the Company isinvolved. There have been no subsequent material developments to these matters.

 

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

 

**Forward-Looking Statements**

 

Thefollowing discussion of our financial condition and results of operationscontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934. In some cases, you can identify forward-looking statements byterminology such as “may,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “predict,” “potential”, “target” or “continue,” the negative effectof terms like these or other similar expressions. Any statement concerningfuture financial performance (including future revenues, earnings or growthrates), ongoing business strategies or prospects, and possible actions taken byus or our subsidiaries, which may be provided by us are also forward-lookingstatements. These forward-looking statements are only predictions.Forward-looking statements are based on current expectations and projectionsabout future events and are inherently subject to a variety of risks anduncertainties, many of which are beyond our control, which could cause actualresults to differ materially from those anticipated or projected. All forward-lookingstatements included in this document are based on information available to uson the date of filing and we further caution investors that our business andfinancial 

 

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performance are subject to substantial risks and uncertainties. Weassume no obligation to update any such forward-looking statements. Inevaluating these statements, you should specifically consider various factors,including the risk factors set forth at the end of Item 1A in our Annual Reporton Form 10-K/A for the year ended December 31, 2009 filed with theSecurities and Exchange Commission on March 16, 2010.

 

**Overview**

 

We analyze our customers’ integrated circuit (“IC”)design and manufacturing processes to identify, quantify, and correct theissues that cause yield loss to improve our customers’ profitability byimproving time-to-market, increasing yield and reducing total design andmanufacturing costs. We package our solutions in various ways to meet ourcustomers’ specific business and budgetary needs, each of which provides usvarious revenue streams. We receive a mix of fixed fees and variable,performance-based fees for the vast majority of our Yield ImprovementSolutions. The fixed fees are typically reflective of the length of time andthe resources needed to characterize a customer’s manufacturing process andreceive preliminary results of proposed yield improvement suggestions. Thevariable fee, or what we call gainshare, usually depends on our achievingcertain yield targets by a deadline. Variable fees are currently typically tied to wafer volume on the nodesize of the manufacturing facility where we performed the yield improvement. Wereceive license fees and service fees for related installation, integration,training, and maintenance and support services for our software that we licenseon a stand-alone basis.

 

***Industry Trend***

 

Subjectto the current general economic downturn, demand for consumer electronics andcommunications devices continues to drive technological innovation in thesemiconductor industry as the need for products with greater performance, lowerpower consumption, reduced costs and smaller size continues to grow with eachnew product generation. In addition, advances in computing systems and mobiledevices have fueled demand for higher capacity memory chips. To meet thesedemands, IC manufacturers and designers are constantly challenged to improvethe overall performance of their ICs by designing and manufacturing ICs withmore embedded applications to create greater functionality while lowering costper transistor. As a result, both logic and memory manufacturers have migratedto more and more advanced manufacturing nodes, capable of integrating moredevices with higher performance, higher density, and lower power. As this trendcontinues, companies will continually be challenged to improve processcapabilities to optimally produce ICs with minimal random and systematic yieldloss, which is driven by the lack of compatibility between the design and itsrespective manufacturing process. We believe that as volume production of deepsubmicron ICs continues to grow, the difficulties of integrating IC designs withtheir respective processes and ramping new manufacturing processes will createa greater need for products and services that address the yield loss andescalating cost issues the semiconductor industry is facing today and will facein the future.

 

***FinancialHighlights***

 

Financialhighlights for the three months ended March 31, 2010 were as follows:

 

·**            **Total revenues for the three months ended March 31,2010 was $15.3 million, an increase of $5.1 million, or 50%, compared to thethree months ended March 31, 2009. Design-to-Silicon-Yield solutionsrevenues for the three months ended March 31, 2010 was $10.4 million, anincrease of $2.6 million, or 34%, compared to $7.8 million for the three monthsended March 31, 2009. The increase in Design-to-Silicon-Yield solutionsrevenues was primarily the result of increased bookings. Gainshare performanceincentives revenues for the three months ended March 31, 2010 was $4.8million, an increase of $2.4 million, or 102%, compared to the three monthsended March 31, 2009.  The increasewas mainly due to increased wafer production by many of our customers.

 

·**            **Net loss for the three months ended March 31,2010 was $296,000, compared to $7.3 million for the three months ended March 31,2009. The decrease in net loss was primarily attributable to a significantincrease in revenues and a decrease in operating expenses during the threemonths ended March 31, 2010.

 

·**            **Net loss per basic and diluted share was $0.01 for thethree months ended March 31, 2010 compared to $0.28 for the three monthsended March 31, 2009, a decrease in net loss of $0.27 per basic and dilutedshare.

 

·**            **Cash, cash equivalents and investments remainedunchanged at $35.6 million during the three months ended March 31, 2010.

 

**Critical Accounting Policies**

 

Item 7of our Annual Report on Form 10-K/A for the year ended December 31,2009, includes a summary of the significant accounting policies and methodsused in the preparation of our condensed consolidated financial statements. Thefollowing is a brief discussion of the more significant accounting policies andmethods that we use.

 

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***General***

 

Ourdiscussion and analysis of our financial condition and results of operationsare based on our consolidated financial statements, which have been prepared inconformity with accounting principles generally accepted in the United Statesof America. Our preparation of these consolidated financial statements requiresus to make estimates and assumptions that affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities at thedates of the financial statements and the reported amounts of revenues andexpenses during the reporting periods. We based our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances. The most significant estimates and assumptions relate to revenuerecognition, software development costs, recoverability of goodwill andacquired intangible assets, estimated useful lives of acquired intangibles andthe realization of deferred tax assets. Actual amounts may differ from suchestimates under different assumptions or conditions.

 

***Revenue Recognition***

 

We derive revenuesfrom two sources: Design-to-Silicon-Yield Solutions, which include Services andSoftware Licenses, and Gainshare Performance Incentives.

 

*Design-to-Silicon-YieldSolutions* —Revenues that are derived from Design-to-Silicon-Yield solutions comes fromservices and software licenses. We recognize revenue for each element ofDesign-to-Silicon-Yield solutions as follows:

 

*Services* — We generate a significant portionof our Design-to-Silicon-Yield solutions revenues from fixed-price solutionimplementation service contracts delivered over a specific period of time.These contracts require accurate estimation of cost to perform obligations andthe overall scope of each engagement. Revenues under contracts for solutionimplementation services are recognized as services are performed using thecost-to-cost percentage of completion method of contract accounting. Losses onsolution implementation contracts are recognized in the period when they becomeevident. Revisions in profit estimates are reflected in the period in which theconditions that require the revisions become known and can be estimated. If wedo not accurately estimate the resources required or the scope of work to beperformed, or do not manage the projects properly within the planned period oftime or satisfy our obligations under contracts, resulting contract marginscould be materially different than those anticipated when the contracts wereexecuted. Any such reductions in contract margin could have a material negativeimpact on our operating results.

 

Onoccasion, we license our software products as a component of our fixed priceservice contracts. In such instances, the software products are licensed tocustomers over a specified term of the agreement with support and maintenanceto be provided over the license term. Under these arrangements, wherevendor-specific objective evidence of fair value (“VSOE”) exists for thesupport and maintenance element, the support and maintenance revenue isrecognized separately over the term of the supporting period. The remaining feeis recognized as services are performed using the cost-to-cost percentage ofcompletion method of contract accounting. VSOE for maintenance, in theseinstances, is generally established based upon a negotiated renewal rate. Underarrangements where software products are licensed as a component of itsfixed-price service contract and where VSOE does not exist to allocate aportion of the total fixed-price to the undelivered elements, revenue isrecognized for the total fixed-price as the lesser of either the percentage ofcompletion method of contract accounting or ratably over the longer of eitherthe term of the agreement or the support period.

 

Revenues from related support and maintenance servicesare recognized ratably over the term of the support and maintenance contract,generally one year, while revenues from consulting, installation, and trainingservices are recognized as services are performed. When bundled with softwarelicenses in multiple element arrangements, support and maintenance, consulting(other than for our fixed price solution implementations), installation, andtraining revenues are allocated to each element of a transaction based upon itsfair value as determined by our VSOE. VSOE for maintenance is generallyestablished based upon negotiated renewal rates while VSOE for consulting,installation, and training is established based upon our customary pricing forsuch services when sold separately.

 

*SoftwareLicenses* —We also license our software products separately from our integrated solutionimplementations. For software license arrangements that do not requiresignificant modification or customization of the underlying software, softwarelicense revenue is recognized under the residual method when (1) persuasiveevidence of an arrangement exists, (2) delivery has occurred, (3) thefee is fixed or determinable, (4) collectability is probable, and (5) thearrangement does not require services that are essential to the functionalityof the software. When arrangements include multiple elements such as supportand maintenance, consulting (other than for our fixed price solutionimplementations), installation, and training, revenue is allocated to eachelement of a transaction based upon its fair value as determined by our VSOEand such services are recorded as services revenues. VSOE for maintenance isgenerally established based upon negotiated renewal rates while VSOE forconsulting, installation, and training services is established based upon ourcustomary pricing for such services when sold separately. Revenues for softwarelicenses with extended payment terms are not recognized in excess of amounts due.For software license arrangements that require significant modification orcustomization of the underlying software, the software license revenues arerecognized as services are performed using the cost-to-cost percentage ofcompletion method of contract accounting, and such revenues are recorded asservices revenue.

 

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*GainsharePerformance Incentives *— When we enter into a contract to provide yieldimprovement services, the contract usually includes two components: (1) afixed fee for performance by us of services delivered over a specific period oftime; and (2) a gainshare performance incentives component where thecustomer may pay a variable fee, usually after the fixed fee period has ended.Revenues derived from gainshare performance incentives represent profit sharingand performance incentives earned based upon our customers reaching certaindefined operational levels established in related solution implementationservice contracts. Gainshare performance incentives periods are usuallysubsequent to the delivery of all contractual services and therefore have nocost to us. Due to the uncertainties surrounding attainment of such operationallevels, we recognize gainshare performance incentives revenues (to the extentof completion of the related solution implementation contract) upon receipt ofperformance reports or other related information from our customers supportingthe determination of amounts and probability of collection. Gainshareperformance incentives revenues are dependent on many factors which are outsideour control, including among others, continued production of the related ICs byour customers, sustained yield improvements by our customers, and our abilityto enter into new Design-to-Silicon-Yield solutions contracts containingprovisions for gainshare performance incentives.

 

***Software Development Costs***

 

Costs for the development of new software products and substantialenhancements to existing software products are expensed as incurred untiltechnological feasibility has been established, at which time any additionalcosts would be capitalized. Because we believe our current process fordeveloping software is essentially completed concurrently with theestablishment of technological feasibility, no costs have been capitalized todate.

 

***Intangible Assets***

 

As of March 31,2010, and December 31, 2009, the recorded value of our intangible assetswas $2.5 million and $3.0 million, respectively. In assessing the valuation andrecoverability of our long-lived assets, we must make assumptions regardingestimated future cash flows to be derived from the acquired assets. If theseestimates or their related assumptions change in the future, we may be requiredto record impairment charges for these assets, which would have a materialadverse effect on our operating results. During the three months ended March 31,2010, there were no indicators of impairment related to our intangible assets.

 

We arecurrently amortizing our acquired intangible assets over estimated useful livesof one to seven years, which are based on the estimated period of benefit to bederived from such assets. However, a decrease in the estimated useful lives ofsuch assets would cause additional amortization expense or an impairment ofsuch assets in future periods.

 

***Income Taxes***

 

Realization ofdeferred tax assets is dependent on our ability to generate future taxableincome and utilize tax planning strategies. We have recorded a deferred taxasset in the amount that is more likely than not to be realized based oncurrent estimations and assumptions. We evaluate the valuation allowance on aquarterly basis. Any resulting changes to the valuation allowance will resultin an adjustment to income in the period the determination is made.

 

***Stock-BasedCompensation***

 

Stock-basedcompensation is estimated at the grant date based on the award’s fair value andis recognized on a straight-line basis over the vesting periods of theapplicable stock purchase rights and stock options, generally four years. Asstock-based compensation expense recognized is based on awards ultimatelyexpected to vest, it has been reduced for estimated forfeitures. Forfeituresare estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates.

 

Wehave elected to use the Black-Scholes-Merton option-pricing model, whichincorporates various assumptions including volatility, expected life andinterest rates. The expected volatility is based on the historical volatilityof our common stock over the most recent period commensurate with the estimatedexpected life of stock options. The expected life of an award is based onhistorical experience and on the terms and conditions of the stock awardsgranted to employees. The interest rate assumption is based upon observedTreasury yield curve rates appropriate for the expected life of stock options.

 

**RecentAccounting Pronouncements and Accounting Changes**

 

See Note 2 of “Notesto Condensed Consolidated Financial Statements (Unaudited)” of this QuarterlyReport on Form 10-Q for a description of recent accounting pronouncementsand accounting changes, including the expected dates of adoption and estimatedeffects, if any, on our consolidated financial statements.

 

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***Results of Operations***

 

The followingtable sets forth, for the periods indicated, the percentage of total revenuesrepresented by the line items reflected in our condensed consolidatedstatements of operations:

 
| ** **                                        | ** ** | **Three  Months Ended********March 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| Revenues:                                         |       |                                          |       |   |   |
| Design-to-silicon-yield solutions                 |       | 68                                            | %          | 76 | % |
| Gainshare performance incentives                  |       | 32                                            |       | 24 |   |
| Total revenues                                    |       | 100                                           | %          | 100 | % |
| Cost of design-to-silicon-yield solutions:        |       |                                          |       |   |   |
| Direct costs of design-to-silicon-yield solutions |       | 42                                            |       | 62 |   |
| Amortization of acquired technology               |       | 2                                             |       | 3 |   |
| Total cost of design-to-silicon-yield solutions   |       | 44                                            |       | 65 |   |
| Gross profit                                      |       | 56                                            |       | 35 |   |
| Operating expenses:                               |       |                                          |       |   |   |
| Research and development                          |       | 26                                            |       | 57 |   |
| Selling, general and administrative               |       | 30                                            |       | 43 |   |
| Amortization of other acquired intangible assets  |       | 1                                             |       | 1 |   |
| Restructuring charges                             |       | —                                        |       | 6 |   |
| Total operating expenses                          |       | 57                                            |       | 107 |   |
| Loss from operations                              |       | (1                                            | )          | (72 | ) |
| Interest and other income, net                    |       | 2                                             |       | 3 |   |
| Income (loss) before taxes                        |       | 1                                             |       | (69 | ) |
| Income tax provision                              |       | 3                                             |       | 3 |   |
| Net loss                                          |       | (2                                            | )%         | (72 | )% |

 

***Comparison of the Three Months Ended March 31, 2010 and2009***

 
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three  Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **Three  Months Ended March 31,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                   | ** ** |
| **Revenues**                                | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                           | ** ** | **Revenues** | ** ** |
| **(In  thousands, except for percentages)** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** |
| Design-to-silicon-yield solutions           |       | $                                      | 10,417     |       | $          | 7,794      |       | $                    | 2,623      |                                   | 34         | % | 68 | % | 76 | % |
| Gainshare performance incentives            |       | 4,835                                  |       | 2,396      |       | 2,439      |       | 102                  | %          | 32                                     | %          | 24 | % |
| Total                                       |       | $                                      | 15,252     |       | $          | 10,190     |       | $                    | 5,062      |                                   | 50         | % | 100 | % | 100 | % |

 

*Design-to-Silicon-YieldSolutions*.Design-to-Silicon-Yield solutions revenue is derived from services (includingsolution implementations, software support and maintenance, consulting, andtraining) and software licenses, provided during our customer yield improvementengagements as well as during solution product sales.  Design-to-Silicon-Yieldsolutions revenue increased $2.6 million for the three months ended March 31,2010 compared to the three months ended March 31, 2009, primarily due toan increase of $2.3 million in fixed fee integrated solutions and an increaseof $329,000 in software and software related services.  The increases were primarily the result ofincreased bookings. We booked two new fixed-price solution implementationservice contracts and one extension to an existing service contract during thethree months ended March 31, 2010, as compared to zero new servicecontacts and one extension to an existing service contract during the threemonths ended March 31, 2009.  OurDesign-to-Silicon-Yield Solutions revenue may fluctuate in the future and isdependent on a number of factors including our ability to obtain new customersat emerging technology nodes.

 

*GainsharePerformance Incentives*. Gainshare performance incentives revenue represents profit sharingand performance incentives earned based upon our customers reaching certaindefined operational levels. Revenue derived from gainshare performance incentivesincreased $2.4 million for the three months ended March 31, 2010 comparedto the three months ended March 31, 2009. The increase was due to increased wafer production by many of ourcustomers due to increased demand for wafers resulting from low levels ofinventory from the previous period.  Therevenue from gainshare performance incentives was generated from six customersand six engagements for the three months ended March 31, 2010 and sixcustomers and seven engagements for the three months ended March 31, 2009.Our gainshare performance incentives revenue may continue to fluctuate fromperiod to period. Gainshare performance incentives revenue is dependent on manyfactors that are outside our control, including among others, continuedproduction of ICs by our customers, sustained yield improvements by ourcustomers, and our ability to enter into new Design-to-Silicon-Yield solutionscontracts containing provisions for gainshare performance incentives.

 

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| ** **                                        | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three Months Ended March 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended March 31,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                  | ** ** |
| **Cost of Design-to-Silicon-Yield  Solutions**    | ** ** | **2010**                              | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                          | ** ** | **Revenues** | ** ** |
| **(In thousands, except for  percentages)**       | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                            | ** ** |
| Direct costs of design-to-silicon-yield solutions |       | $                                     | 6,322      |       | $          | 6,290      |       | $                    | 32         |                                  | 1          | % | 42 | % | 62 | % |
| Amortization of acquired technology               |       | 359                                   |       | 359        |       | —     |       | —               | %          | 2                                     | %          | 3 | % |
| Total                                             |       | $                                     | 6,681      |       | $          | 6,649      |       | $                    | 32         |                                  | —     | % | 44 | % | 65 | % |

 

*Costsof Design-to-Silicon-Yield Solutions*. Costs of Design-to-Silicon-Yield solutions consistof costs incurred to provide and support our services, costs recognized inconnection with licensing our software, and amortization of acquiredtechnology.

 

*DirectCosts of Design-to-Silicon-Yield Solutions. *Directcosts of Design-to-Silicon-Yield solutions consist of services costs andsoftware licenses costs. Services costs consist of material, labor, overheadcosts, and stock-based compensation charges associated with solutionimplementations. Costs include purchased materials, employee compensation andrelated benefits, travel and facilities-related costs. Software license costsconsist of costs associated with licensing third-party software sold inconjunction with our software products and expenses incurred to produce anddistribute our product documentation.**Directcosts of Design-to-Silicon-Yield solutions was $6.3 million for the threemonths ended March 31, 2010 and 2009. The direct costs of Design-to-Silicon-Yield solutions decreased as apercentage of revenues in the three months ended March 31, 2010 to 42%,compared to 62% in the three months ended March 31, 2009, primarily due toa significant increase in revenues as our costs are relatively fixed innature.  If we do not accurately estimatethe resources required or the scope of work to be performed, or we do notmanage the projects properly within the planned period of time or satisfy ourobligations under contracts, resulting contract margins could be materiallydifferent than those anticipated when the contracts were executed. Any suchreductions in contract margin could have a material negative impact on ouroperating results.

 

*Amortizationof Acquired Technology*. Amortization of acquired technology consists of amortization ofintangible assets acquired as a result of certain business combinations.Amortization of acquired technology expense was $359,000 for each of the threemonths ended March 31, 2010 and 2009. We anticipate amortization ofacquired technology to be $926,000 for the remaining nine months in 2010,$626,000 in 2011 and $263,000 in 2012.

 
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three  Months********Ended March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **Three  Months Ended March 31,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                          | ** ** |
| **Research  and Development**               | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                                  | ** ** | **Revenues** | ** ** |
| **(In  thousands, except for percentages)** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                                    | ** ** |
| Research and development                    |       | $                                      | 3,962      |       | $          | 5,789      |       | $                    | (1,827     | )                                             | (32        | )% | 26 | % | 57 | % |
|                                             |            |                                        |            |            |            |            |            |                      |            |                                               |            |  |  |  |  |  |

 

*Researchand Development.*Researchand development expenses consist primarily of personnel-related costs tosupport product development activities, including compensation and benefits,outside development services, travel and facilities cost allocations, andstock-based compensation charges. Research and development expenses decreased$1.8 million for the three months ended March 31, 2010 compared to thethree months ended March 31, 2009, primarily due to a decrease of $1.1million in personnel expenses and a decrease of $416,000 in the use of outsideservices, both the result of our cost control efforts. We anticipate ourexpenses in research and development will fluctuate in absolute dollars fromperiod to period as a result of cost control initiatives and the timing of whenwe hire personnel as a result of the size and the timing of product developmentprojects.

 
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three  Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **Three  Months Ended March 31,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                   | ** ** |
| **Selling,  General and Administrative**    | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenue**                            | ** ** | **Revenue** | ** ** |
| **(In  thousands, except for percentages)** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** |
| Selling, general and administrative         |       | $                                      | 4,579      |       | $          | 4,413      |       | $                    | 166        |                                   | 4          | % | 30 | % | 43 | % |
|                                             |            |                                        |            |            |            |            |            |                      |            |                                        |            |  |  |  |  |  |

 

*Selling,General and Administrative*. Selling, general and administrative expenses consistprimarily of compensation and benefits for sales, marketing and general andadministrative personnel in addition to outside sales commissions, legal andaccounting services, marketing communications, travel and facilities costallocations, and stock-based compensation charges. Selling, general andadministrative expenses increased $166,000 for the three months ended March 31,2010 compared to the three months ended March 31, 2009, primarily due toan increase of $403,000 in legal fees, partially offset by a decrease of$207,000 in personnel expenses as the result of our cost control efforts.  We anticipate our selling, general andadministrative expenses will fluctuate in absolute dollars from period toperiod as a result of cost control initiatives and to support increased sellingefforts in the future.

 

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| ** **                                            | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three  Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Three  Months Ended March 31,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                   | ** ** |
| **Amortization  of Other Acquired Intangible Assets** | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                           | ** ** | **Revenues** | ** ** |
| **(In  thousands, except for percentages)**           | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** |
| Amortization of other acquired intangible assets      |       | $                                      | 86         |       | $          | 87         |       | $                    | (1         | )                                      | (1         | )% | 1 | % | 1 | % |
|                                                       |            |                                        |            |            |            |            |            |                      |            |                                        |            |  |  |  |  |  |

 

*Amortizationof Other Acquired Intangible Assets*. Amortization of other acquired intangible assetsconsists of amortization of intangibles acquired as a result of certainbusiness combinations. Amortization of other acquired intangible assetsremained flat for the three months ended March 31, 2010 compared to thethree months ended March 31, 2009. We anticipate amortization of otheracquired intangible assets to be $207,000 in the remaining nine months in 2010,$204,000 in 2011, $174,000 in 2012, and $105,000 in 2013 and thereafter.

 
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **Three  Months Ended March 31,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                  | ** ** |
| **Restructuring  Charges**                  | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                          | ** ** | **Revenues** | ** ** |
| **(In thousands, except for  percentages)** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                            | ** ** |
| Restructuring charges                       |       | $                                      | 1          |       | $          | 633        |       | $                    | (632       | )                                     | (100       | )% | — | % | 6 | % |
|                                             |            |                                        |            |            |            |            |            |                      |            |                                       |            |  |  |  |  |  |

 

*RestructuringCharges.*  Restructuringcharges for the three months ended March 31, 2010 decreased $632,000compared to the three months ended March 31, 2009.  Restructuring expenses for the three monthsended March 31, 2009 consisted primarily of severance costs and were theresult of our continued cost control efforts.

 
| ** **                                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                  | ** ** |
| **Interest and Other Income, net**          | ** ** | **2010**                              | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                          | ** ** | **Revenues** | ** ** |
| **(In thousands, except for  percentages)** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                            | ** ** |
| Interest and other income, net              |       | $                                     | 262        |       | $          | 324        |       | $                    | (62        | )                                     | (19        | )% | 2 | % | 3 | % |
|                                             |            |                                       |            |            |            |            |            |                      |            |                                       |            |  |  |  |  |  |

 

*Interestand Other Income, net*.  Interest and other incomedecreased $62,000 for the three months ended March 31, 2010 compared tothe three months ended March 31, 2009, primarily due to a decrease of$118,000 in interest income from lower average cash, cash equivalent, andinvestments balances, partially offset by an increase of $56,000 in gains onforeign currency exchange associated with intercompany payments to fund ourforeign operations. We anticipate interest and other income will fluctuate infuture periods as a result of our projected use of cash.

 
| ** **                                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                  | ** ** |
| **Income Tax Provision**                    | ** ** | **2010**                              | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                          | ** ** | **Revenues** | ** ** |
| **(In thousands, except for  percentages)** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                            | ** ** |
| Income tax provision                        |       | $                                     | 501        |       | $          | 264        |       | $                    | 237        |                                  | 90         | % | 3 | % | 3 | % |
|                                             |            |                                       |            |            |            |            |            |                      |            |                                       |            |  |  |  |  |  |

 

*IncomeTax Provision.*Incometax provision increased $237,000 for the three months ended March 31, 2010to $501,000 as compared to an income tax provision of $264,000 for the threemonths ended March 31, 2009.  Incometax provision for the three months ended March 31, 2010 primarilyconsisted of foreign withholding taxes of $764,000, partially offset by areduction in our reserves for uncertain tax positions of $325,000.  Income tax provision for the three monthsended March 31, 2009 primarily consisted of foreign withholding taxes andstatutory taxes associated with our foreign subsidiaries.

 

**Liquidity and Capital Resources**

 

***Operating Activities***

 

Cashflows from operating activities consist of net loss adjusted for certainnon-cash items and changes in assets and liabilities. Net cash used inoperating activities was $58,000 for the three months ended March 31,2010, decreased $272,000 compared to net cash used by operating activities of$330,000 for the three months ended March 31, 2009. The decrease wasprimarily due to lower net loss, partially offset by changes in accountsreceivable and prepaid expenses and other assets.

 

Accountsreceivable decreased $799,000 during the three months ended March 31, 2010compared to $4.6 million during the three months ended March 31, 2009. Thedecrease in accounts receivable during the three months ended March 31,2010 was primarily due to the timing of billing milestones and paymentsreceived. The decrease in accounts receivable during the three months ended March 31,2009 was primarily due to declines in revenues and the timing of billingmilestones and payments received. Prepaid expenses and other assets increased $804,000 during the threemonths ended March 31, 2010 compared to a decrease of $1.5 million duringthe three months ended March 31, 2009. The increase in prepaid expensesand other assets during the three months ended March 31, 2010 wasprimarily due to purchases of software license rights.  The decrease in prepaid expenses and otherassets during the three months ended March 31, 2009 was primarily due tothe collection of an income tax refund.

 

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***Investing Activities***

 

Cash flows frominvesting activities consist of proceeds from investment maturities and sales,offset by payments for capital expenditures. Net cash used in investingactivities was $37,000 for the three months ended March 31, 2010, comparedto net cash provided by investing activities of $2.4 million for the threemonths ended March 31, 2009. There was no investment maturities and salesduring the three months ended March 31, 2010, whereas proceeds frominvestment maturities and sales were $2.7 million during the three months endedMarch 31, 2009.

 

***Financing Activities***

 

Cash flows fromfinancing activities consist primarily of proceeds from sales of shares throughemployee equity incentive plans, offset by payments for principal payments onlong-term obligations. Net cash provided by financing activities was $380,000for the three months ended March 31, 2010, an increase of $14,000 compared to net cash provided byfinancing activities of $366,000 for the three months ended March 31,2009.

 

***Liquidity***

 

As of March 31,2010, our working capital, defined as total current assets less total currentliabilities, was $46.4 million, compared with $45.2 million as of December 31,2009. Cash and cash equivalents were $34.9 million as of March 31, 2010and December 31, 2009.  Weanticipate that our overall expenses, as well as planned capital expenditures,may constitute a material use of our cash resources. In addition, we may usecash resources to repurchase common stock, fund potential investments in, oracquisitions of complementary products, technologies or businesses. We believethat our existing cash resources and anticipated funds from operations willsatisfy our cash requirements to fund our operating activities, capitalexpenditures and other obligations for at least the next twelve months.However, in the event that during such period, or thereafter, we are notsuccessful in generating sufficient cash flows from operations we may need toraise additional capital through private or public financings, strategicrelationships or other arrangements, which may not be available to us onacceptable terms or at all.

 

As of March 31,2010, our non-current investments included auction-rate securities with a fairvalue of $718,000. The auction-rate securities are measured at fair value usingsignificant unobservable inputs (Level 3 inputs) and accounted forapproximately 3% of total assets that are measured at fair value on a recurringbasis. See Note 12 to “Notes to Condensed Consolidated Financial Statements(Unaudited)” in Part I, and Item 3. “Quantitative and QualitativeDisclosures About Market Risk” in this Quarterly Report on Form 10-Q forfurther discussion.

 

We do not have anyoff-balance sheet arrangements, investments in special purpose entities orundisclosed borrowings or debt, other than operating leases on our facilities.As of March 31, 2010, other than Euro and Japanese Yen denominatedreceivables, we had no foreign currency contracts outstanding.

 

The followingtable summarizes our known contractual obligations (in thousands):

 
| **Contractual obligations**  | ** ** | **2010********(nine months********remaining)** | ** ** | ******2011-2012** | ** ** | ******2013-2014** | ** ** | ******Total** | ** ** |
|------------------------------|------------|------------------------------------------------|------------|-------------------|------------|-------------------|------------|---------------|------------|
| Debt principal (1)           |       | $                                              | 82         |              | $          | 108               |       | $             | —     |   | $ | 190 |   |
| Debt interest                |       | 5                                              |       | 3                 |       | —            |       | 8             |       |
| Operating lease  obligations |       | 2,272                                          |       | 5,085             |       | 1,777             |       | 9,134         |       |
| Total (2)                    |       | $                                              | 2,359      |              | $          | 5,196             |       | $             | 1,777      |   | $ | 9,332 |   |

 

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(1)       Amount represents the repayment of a€400,000 Euros loan with a variable interest rate based on the EURIBOR plus 160basis points.

 

(2)       The contractual obligation table aboveexcludes liabilities for uncertain tax positions of $3.0 million, which are notpracticable to assign to any particular years, due to the inherent uncertaintyof the tax positions.  See Note 8 of “Notes to Condensed ConsolidatedFinancial Statements (Unaudited)” for further discussion.

 

Operatinglease amounts include minimum rental payments under our operating leases forour office facilities, as well as computers, office equipment, and vehiclesthat we utilize under lease agreements. These minimum rental payments includepayments on those facilities abandoned as part of the restructuring activities.These agreements expire at various dates through 2014.

 

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**Item 3. Quantitative and QualitativeDisclosures About Market Risk.**

 

The following discusses our exposure to market riskrelated to changes in interest rates and foreign currency exchange rates. We donot currently own any equity investments, nor do we expect to own any in theforeseeable future. This discussion contains forward-looking statements thatare subject to risks and uncertainties. Actual results could vary materially asa result of a number of factors.

 

*Interest Rate Risk*. As of March 31, 2010, we had cash and cashequivalents of $34.9 million. Cash and cash equivalents consisted of cash andhighly liquid money market instruments. We had no exposure to interest raterisk as of March 31, 2010 as our short-term investment portfolio consistedentirely of money market instruments. Declines in interest rates over time willresult in decreased interest income.

 

As of March 31,2010, we held auction-rate securities (“ARS”) with a par value of $1.0 million.ARS are variable rate debt instruments whose interest rates are reset through a“dutch” auction process at regular intervals, typically every 28 days. Aportion of these securities are insured by third party bond insurers and arecollateralized by student loans guaranteed by governmental agencies and privateentities. The liquidity of the securities has been negatively impacted by theuncertainty in the credit markets and the exposure of these securities to thefinancial condition of bond insurance companies. All of our ARS have failed tosell at auction since February 2008 due to an insufficient number ofbidders. The only activity associated with these instruments since February 2008was the repurchase of $500,000 of ARS at par by issuers. We do not believe thatthe student loans backing these securities, the principal of these assets, isat risk. Furthermore, we intend to hold these securities until the creditmarkets recover and these securities resume pricing at or near par and it is notmore likely than not that we will be required to sell the securities beforerecovery of the principal. We reviewed the value of these securities for impairment as of March 31,2010, and concluded that these securities continued to be temporarily impaired.During the year ended December 31, 2008, there was an unrealized loss of$282,000 recorded as a component of accumulated other comprehensive incomerelated to these auction-rate securities. There was no additional impairmentrecorded during the three months ended March 31, 2010. In future periods,the estimated fair value of our ARS could decline further based on marketconditions, which could result in additional impairment.

 

*Foreign Currency and Exchange Risk.*Certain of our payables and receivables aredenominated in a currency other than the functional currency of the entity.Therefore, a portion of our operating expenditures is subject to foreigncurrency risks. The effect of an immediate 10% adverse change in exchange ratesas of March 31, 2010 would result in a loss of approximately $747,000. Asof March 31, 2010, we did not have outstanding hedging contracts, althoughwe may enter into such contracts in the future. We intend to monitor ourforeign currency exposure. Future exchange rate fluctuations may have amaterial negative impact on our business.

 

**Item 4. Controls and Procedures.**

 

As described in more detail in our Annual Report on Form 10-K/A for theyear ended December 31, 2009, during the course of preparing our financialstatements for the year ended December 31, 2009, we identified a materialweakness in connection with the evaluation of the effectiveness of our internalcontrol over financial reporting pursuant to Section 404 of the Sarbanes-OxleyAct.  Our management, with theparticipation of our principal executive officer and our principal financialofficer, has evaluated the effectiveness of our “disclosure controls andprocedures” (as such items are defined in Rules 13a-15(e) and 15d-15(e) of theSecurities Exchange Act of 1934, as amended (“the Exchange Act”)), as of theend of the period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, our principalexecutive officer and our principal financial officer have concluded that, dueto the material weakness disclosed in our Annual Report on Form 10-K for theyear ended December 31, 2009, our disclosure controls and procedures were noteffective as of the end of the period covered by this Quarterly Report on Form10-Q.

 

In the first quarter ended March 31, 2010, we commenced a process ofdeveloping, adopting and implementing policies and procedures to address suchmaterial weaknesses including:

 

·Establishing a periodicreview of our accounting policies regarding contract costs relating to certainrevenue contracts to ensure such policies are in accordance with generallyaccepted accounting principles in the United States.

 

· Incorporating considerationof the accounting for contract costs into our existing control procedures toensure adequate review of revenue contracts.

 

· Hiring personnel withrequisite experience and providing ongoing training and supervision in the areaof contract cost recognition.

 

There have notbeen any other changes in internal control over financial reporting in theperiod covered by this Quarterly Report on Form 10-Q which have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.  

 

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**PART II — OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

Item 3, “Legal Proceedings,” on page 22 of our Annual Report on Form 10-K/Afor the year ended December 31, 2009, provides information on certainlegal proceedings and claims in which we are involved. There have been nosubsequent material developments to these matters.

 

**Item 1A. Risk Factors.**

 

Item 1A,”Risk Factors,” on pages 12 through 21 of the Company’sAnnual Report on Form 10-K/A for the year ended December 31, 2009,provides information on the significant risks associated with our business.There have been no subsequent material changes to these risks.

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

(c) *Stock Repurchase*. The table below setsforth the information with respect to purchases made by or on behalf of theCompany or any “affiliated purchaser” (as the term is defined in Rule 10b-18(a)(3) underthe Securities Exchange Act of 1934) of our common stock during the threemonths ended March 31, 2010 (in thousands except per share amounts):

 

**ISSUERPURCHASES OF EQUITY SECURITIES**

 
| **Period**                                                       | ** ** | ******Total********Number of********Shares (or********Units)********Purchased** | ** ** | ******Average********Price Paid********Per Share********(or Unit)** | ** ** | **Total  Number of********Shares (or Units)********Purchased as********Part of Publicly********Announced Plans********or Programs (1)** | ** ** | **Maximum  Number (or********Approximate Dollar********Value) of Shares (or********Units) that May Yet Be********Purchased Under the********Plans or Programs(1)** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Month #1 (January 1, 2010 through  January 31, 2010)   |       | —                                                                          |       | $                                                                   | —     |                                                                                                                                         | —     |                                                                                                                                                                    | $          | 1,287 |   |
| Month #2 (February 1, 2010 through  February 28, 2010) |       | —                                                                          |       | —                                                              |       | —                                                                                                                                       |       | $                                                                                                                                                                       | 1,287      |   |
| Month #3 (March 1, 2010 through March 31,  2010)       |       | 55                                                                              |       | 4.68                                                                |       | 55                                                                                                                                           |       | $                                                                                                                                                                       | 1,013      |   |
| Total                                                            |       | 55                                                                              |       | $                                                                   | 4.68       |                                                                                                                                         | 55         |                                                                                                                                                                    |       |   |

 

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(1)     On March 26, 2003, our Board ofDirectors approved a share repurchase program to purchase up to $10.0 millionof our outstanding common stock. The program was completed in August 2007with 988,000 shares repurchased at the average price of $10.12 per share. On October 29,2007, the Board of Directors approved a new program to repurchase up to anadditional $10.0 million of the Company’s common stock on the open market. Theright to repurchase stock under this program will expire on October 29,2010.  As of March 31, 2010, 2.6million shares had been repurchased at the average price of $3.44 per shareunder this program and $1.0 million remained available for future repurchases.

 

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**Item 6. Exhibits.**

** **
| **Exhibit********Number** | ** ** | ******Description**                                                                                                                                                                                                        |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                       |
| 31.01                     |       | Certification of the President and Chief Executive  Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  |
|                      |       |                                                                                                                                                                                                                       |
| 31.02                     |       | Certification of the Chief Financial Officer and  Vice President of Finance pursuant to Exchange Act  Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                       |
| 32.01                     |       | Certification of the President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. *                                         |
|                      |       |                                                                                                                                                                                                                       |
| 32.02                     |       | Certification the Chief Financial Officer and Vice  President of Finance pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                            |

 

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*          As contemplated by SEC Release No. 33-8212,these exhibits are furnished with this Quarterly Report on Form 10-Q andare not deemed filed with the Securities and Exchange Commission and are notincorporated by reference in any filing of PDF Solutions, Inc. under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any filings.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                      | **PDF SOLUTIONS, INC.** |
|---------------------------|-------------------------|
|                      | ** **              |
|                      |                    |
| Date:  May 10,  2010 | By:                     | /s/ JOHN K.  KIBARIAN |
|                      |                    | John K. Kibarian |
|                      |                    | President and  Chief Executive Officer |
|                      |                    | (Principal  Executive Officer) |
|                      |                    |
|                      |                    |
| Date:  May 10, 2010  | By:                     | /s/ JOY E. LEO |
|                      |                    | Joy E. Leo |
|                      |                    | EVP, Chief  Administration Officer and Acting Chief Financial Officer |
|                      |                    | (Principal  Financial Officer) |

 

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**INDEXTO EXHIBITS**

** **
| **Exhibit********Number** | ** ** | ******Description**                                                                                                                                                                                                        |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                       |
| 31.01                     |       | Certification of  the President and Chief Executive Officer pursuant to Exchange Act  Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                 |
|                      |       |                                                                                                                                                                                                                       |
| 31.02                     |       | Certification of  the Chief Financial Officer and Vice President of Finance pursuant to  Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                       |
| 32.01                     |       | Certification of  the President and Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. *                                        |
|                      |       |                                                                                                                                                                                                                       |
| 32.02                     |       | Certification  the Chief Financial Officer and Vice President of Finance pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. *                           |

 

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*          As contemplated by SEC Release No. 33-8212,these exhibits are furnished with this Quarterly Report on Form 10-Q andare not deemed filed with the Securities and Exchange Commission and are notincorporated by reference in any filing of PDF Solutions, Inc. under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any filings.

 

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