##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period ended June 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from to
 Commission File Number 000-31311
 PDF SOLUTIONS, INC.
  Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    25-1701361
(I.R.S. Employer
Identification No.)
 333 West San Carlos Street, Suite 700
San Jose, California
(Address of Principal Executive Offices)
    
    95110
(Zip Code)
 (408) 280-7900
 þ o
  o þ o
 o þ




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##### Table of Contents



TABLE OF CONTENTS
  
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25PART II OTHER INFORMATION
    
    
    25Item 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35INDEX TO EXHIBITS
    
    
    36EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
 2




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##### Table of Contents



Item 1. Financial Statements.
 PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 (In thousands, except par values)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    35,652
    
    
    $
    36,451Short-term investments
    
    
    18,300
    
    
    
    16,402Accounts receivable, net of allowance of $295 in 2007 and $294 in 2006
    
    
    32,323
    
    
    
    27,575Prepaid expenses and other current assets
    
    
    2,936
    
    
    
    2,796Deferred tax assets
    
    
    2,231
    
    
    
    2,581Total current assets
    
    
    91,442
    
    
    
    85,805Property and equipment, net
    
    
    4,005
    
    
    
    3,916Goodwill
    
    
    63,386
    
    
    
    60,034Intangible assets, net
    
    
    16,179
    
    
    
    13,605Deferred tax assets
    
    
    5,155
    
    
    
    4,994Other assets
    
    
    474
    
    
    
    503Total assets
    
    $
    180,641
    
    
    $
    168,857LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    291
    
    
    $
    302Accounts payable
    
    
    2,395
    
    
    
    3,182Accrued compensation and related benefits
    
    
    4,704
    
    
    
    3,325Other accrued liabilities
    
    
    5,245
    
    
    
    3,843Taxes payable
    
    
    1,404
    
    
    
    4,767Deferred revenue
    
    
    5,237
    
    
    
    3,705Billings in excess of recognized revenue
    
    
    367
    
    
    
    95Total current liabilities
    
    
    19,643
    
    
    
    19,219Long-term debt
    
    
    1,130
    
    
    
    1,198Long-term taxes payable
    
    
    5,145
    
    
    
    Other liabilities
    
    
    127
    
    
    
    221Total liabilities
    
    
    26,045
    
    
    
    20,638Stockholders 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 and outstanding
28,421 in 2007 and 27,948 in 2006
    
    
    4
    
    
    
    4Additional paid-in-capital
    
    
    175,895
    
    
    
    167,323Treasury stock at cost, 551 shares
    
    
    (5,549
    )
    
    
    (5,549
    )Accumulated deficit
    
    
    (17,483
    )
    
    
    (13,890
    )Accumulated other comprehensive income
    
    
    1,729
    
    
    
    331Total stockholders equity
    
    
    154,596
    
    
    
    148,219Total liabilities and stockholders equity
    
    $
    180,641
    
    
    $
    168,857
 See notes to condensed consolidated financial statements
 3




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PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (In thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Design-to-silicon-yield solutions:Integrated solutions
    
    $
    16,032
    
    
    $
    10,477
    
    
    $
    29,796
    
    
    $
    22,706Software licenses
    
    
    1,776
    
    
    
    1,794
    
    
    
    5,261
    
    
    
    4,406Gain share
    
    
    5,890
    
    
    
    5,739
    
    
    
    10,783
    
    
    
    10,755Total revenue
    
    
    23,698
    
    
    
    18,010
    
    
    
    45,840
    
    
    
    37,867Cost of design-to-silicon-yield solutions:Direct costs
of design-to-silicon-yield solutions:Integrated solutions
    
    
    7,082
    
    
    
    6,645
    
    
    
    14,790
    
    
    
    13,074Software licenses
    
    
    27
    
    
    
    29
    
    
    
    86
    
    
    
    40Amortization of acquired technology
    
    
    1,610
    
    
    
    1,266
    
    
    
    3,185
    
    
    
    2,532Total cost of design-to silicon-yield solutions
    
    
    8,719
    
    
    
    7,940
    
    
    
    18,061
    
    
    
    15,646Gross margin
    
    
    14,979
    
    
    
    10,070
    
    
    
    27,779
    
    
    
    22,221Operating expenses:Research and development
    
    
    8,797
    
    
    
    6,871
    
    
    
    17,167
    
    
    
    13,127Selling, general and administrative
    
    
    6,645
    
    
    
    4,866
    
    
    
    12,489
    
    
    
    9,822Amortization of other acquired intangible assets
    
    
    1,031
    
    
    
    235
    
    
    
    2,044
    
    
    
    470Total operating expenses
    
    
    16,473
    
    
    
    11,972
    
    
    
    31,700
    
    
    
    23,419Loss from operations
    
    
    (1,494
    )
    
    
    (1,902
    )
    
    
    (3,921
    )
    
    
    (1,198
    )Interest and other income, net
    
    
    529
    
    
    
    811
    
    
    
    1,025
    
    
    
    1,446Income (loss) before taxes
    
    
    (965
    )
    
    
    (1,091
    )
    
    
    (2,896
    )
    
    
    248Income tax provision (benefit)
    
    
    (264
    )
    
    
    (244
    )
    
    
    160
    
    
    
    827Net loss
    
    $
    (701
    )
    
    $
    (847
    )
    
    $
    (3,056
    )
    
    $
    (579
    )Net loss per share:Basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )
    
    $
    (0.02
    )Weighted average common shares:Basic and diluted
    
    
    28,155
    
    
    
    26,680
    
    
    
    28,067
    
    
    
    26,611
 See notes to condensed consolidated financial statements
 4




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PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six Months EndedJune 30,2007
    
    
    2006(In thousands)Operating activities:Net loss
    
    $
    (3,056
    )
    
    $
    (579
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    985
    
    
    
    1,160Stock-based compensation expense
    
    
    3,783
    
    
    
    3,954Amortization of acquired intangible assets
    
    
    5,261
    
    
    
    3,002Tax benefit related to stock-based compensation expense
    
    
    76
    
    
    
    513Excess tax benefit from stock-based compensation expense
    
    
    (26
    )
    
    
    (265
    )Changes in operating assets and liabilities, net of effect of acquisition:Accounts receivable, net of allowances
    
    
    (4,748
    )
    
    
    1,499Prepaid expenses and other assets
    
    
    (102
    )
    
    
    10Deferred taxes
    
    
    (2,183
    )
    
    
    (80
    )Accounts payable
    
    
    (987
    )
    
    
    551Accrued compensation and related benefits
    
    
    (63
    )
    
    
    (2,831
    )Other accrued liabilities
    
    
    (375
    )
    
    
    (70
    )Taxes payable
    
    
    2,090
    
    
    
    (206
    )Deferred revenue
    
    
    1,532
    
    
    
    708Billings in excess of recognized revenue
    
    
    272
    
    
    
    (1,524
    )Net cash provided by operating activities
    
    
    2,459
    
    
    
    5,842Investing activities:Purchases of available-for-sale securities
    
    
    (16,315
    )
    
    
    (40,654
    )Maturities and sales of available-for-sale securities
    
    
    14,771
    
    
    
    11,500Purchases of property and equipment
    
    
    (1,376
    )
    
    
    (1,263
    )Payments on businesses acquired, net of cash acquired
    
    
    (1,883
    )
    
    
    Net cash used in investing activities
    
    
    (4,803
    )
    
    
    (30,417
    )Financing activities:Proceeds from exercise of stock options
    
    
    1,057
    
    
    
    2,794Proceeds from employee stock purchase plan
    
    
    782
    
    
    
    978Principal payments on long-term obligations
    
    
    (129
    )
    
    
    (26
    )Principal
payments on notes to stockholders
    
    
    (416
    )
    
    
    Excess tax benefit from stock-based compensation expense
    
    
    26
    
    
    
    265Net cash provided by financing activities
    
    
    1,320
    
    
    
    4,011Effect of exchange rate changes on cash
    
    
    225
    
    
    
    44Net decrease in cash and cash equivalents
    
    
    (799
    )
    
    
    (20,520
    )Cash and cash equivalents, beginning of period
    
    
    36,451
    
    
    
    60,506Cash and cash equivalents, end of period
    
    $
    35,652
    
    
    $
    39,986Non-cash investing and financing activities:Purchase price adjustments
    
    $
    9
    
    
    $
    Amount due
to Fabbrix stockholders
    
    $
    2,701
    
    
    $
    Reversal of deferred stock compensation
    
    $
    
    
    
    $
    27Purchase of property and equipment on account
    
    $
    10
    
    
    $
    186Supplemental disclosure of cash flow information:Cash paid during the year for:Taxes
    
    $
    228
    
    
    $
    659Interest
    
    $
    24
    
    
    $
    1
 See notes to condensed consolidated financial statements
 5




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PDF SOLUTIONS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. BASIS OF PRESENTATION
 Basis of Presentation
    Revenue Recognition Accounting for Performance of Construction-Type and Certain Production-Type Contracts Software Revenue Recognition,
 Design-to-Silicon-Yield Solutions
 Integrated Solutions
   6




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Software Licenses
 Gain Share
 Stock-Based Compensation
 Share-Based Payment
 2. BUSINESS COMBINATIONS
   7




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AmortizationPeriodPreliminary Allocation of Purchase Price
    
    (Years)
    
    
    AmountFair value of tangible assets
    
    
    
    
    
    $
    406Fair value of intangible assets:Developed technology
    
    
    5
    
    
    
    6,430Patent and applications
    
    
    7
    
    
    
    1,400Goodwill
    
    
    N/A
    
    
    
    2,155Total assets acquired
    
    
    
    
    
    
    10,391Deferred tax liability
    
    
    
    
    
    
    (3,210
    )Notes to
stockholders
    
    
    
    
    
    
    (416
    )Accrued liabilities
    
    
    
    
    
    
    (364
    )Accounts payable
    
    
    
    
    
    
    (219
    )Total liabilities assumed
    
    
    
    
    
    
    (4,209
    )Total consideration, net
    
    
    
    
    
    $
    6,182
   Six Months Ended June 30,2007
    
    
    2006Revenue
    
    $
    45,840
    
    
    $
    37,867Net loss
    
    $
    (4,288
    )
    
    $
    (1,196
    )Pro forma
net loss per share  basic and diluted
    
    $
    (0.15
    )
    
    $
    (0.04
    )
  3. RECENT ACCOUNTING PRONOUNCEMENTS
 Fair Value Measurement
 The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115.
 4. INVESTMENTS
  June 30, 2007Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    18,618
    
    
    $
    1
    
    
    $
    
    
    
    $
    18,619Auction rate securities
    
    
    5,050
    
    
    
    
    
    
    
    
    
    
    
    5,050Repurchase agreements
    
    
    1,225
    
    
    
    
    
    
    
    
    
    
    
    1,225Money market funds
    
    
    1,027
    
    
    
    
    
    
    
    
    
    
    
    1,027$
    25,920
    
    
    $
    1
    
    
    $
    
    
    
    $
    25,921Included in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,621Included in short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,300Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,921
 8




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December 31, 2006Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    13,307
    
    
    $
    1
    
    
    $
    
    
    
    $
    13,308Auction rate securities
    
    
    5,050
    
    
    
    
    
    
    
    
    
    
    
    5,050Corporate bonds and notes
    
    
    1,984
    
    
    
    
    
    
    
    (1
    )
    
    
    1,983Money market funds
    
    
    23,744
    
    
    
    
    
    
    
    
    
    
    
    23,744$
    44,085
    
    
    $
    1
    
    
    $
    (1
    )
    
    $
    44,085Included in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,683Included in short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,402Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,085
 5. ACCOUNTS RECEIVABLE
  6. NET INCOME (LOSS) PER SHARE
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (701
    )
    
    $
    (847
    )
    
    $
    (3,056
    )
    
    $
    (579
    )Denominator:Weighted average common shares outstanding
    
    
    28,155
    
    
    
    26,680
    
    
    
    28,067
    
    
    
    26,611Dilutive items:Stock options outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted computation
    
    
    28,155
    
    
    
    26,680
    
    
    
    28,067
    
    
    
    26,611Net loss per share  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )
    
    $
    (0.02
    )
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Common stock options
    
    
    6,854
    
    
    
    5,609
    
    
    
    6,724
    
    
    
    5,604
 7. COMPREHENSIVE INCOME (LOSS)
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (701
    )
    
    $
    (847
    )
    
    $
    (3,056
    )
    
    $
    (579
    )Unrealized loss on short term investments
    
    
    (1
    )
    
    
    (11
    )
    
    
    1
    
    
    
    (41
    )Foreign currency translation adjustments
    
    
    286
    
    
    
    35
    
    
    
    1,397
    
    
    
    49Comprehensive loss
    
    $
    (416
    )
    
    $
    (823
    )
    
    $
    (1,658
    )
    
    $
    (571
    )
 9




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8. GOODWILL AND PURCHASED INTANGIBLE ASSETS
 , Goodwill and Other Intangible Assets,
  December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 30,Amortization

    
    
    2006
    
    
    
    
    
    
    Purchase
    
    
    
    
    
    
    Foreign
    
    
    2007Period

    
    
    Net Carrying
    
    
    
    
    
    
    Price
    
    
    
    
    
    
    Currency
    
    
    Net Carrying(Years)
    
    
    Amount
    
    
    Acquisition
    
    
    Adjustments
    
    
    Amortization
    
    
    Translation
    
    
    AmountGoodwill
    
    
    N/A
    
    
    $
    60,034
    
    
    $
    2,155
    
    
    $
    (34
    )
    
    $
    
    
    
    $
    1,231
    
    
    $
    63,386Acquired identifiable
intangibles:Acquired technology
    
    
    4 - 5
    
    
    $
    7,901
    
    
    $
    6,430
    
    
    $
    
    
    
    $
    (3,185
    )
    
    $
    
    
    
    $
    11,146Brand name
    
    
    4
    
    
    
    822
    
    
    
    
    
    
    
    
    
    
    
    (314
    )
    
    
    
    
    
    
    508Customer relationships
and backlog
    
    
    1 - 6
    
    
    
    4,362
    
    
    
    
    
    
    
    
    
    
    
    (1,492
    )
    
    
    
    
    
    
    2,870Patent and applications
    
    
    7
    
    
    
    
    
    
    
    1,400
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    1,383Other acquired intangibles
    
    
    4
    
    
    
    520
    
    
    
    
    
    
    
    
    
    
    
    (253
    )
    
    
    5
    
    
    
    272Total
    
    
    
    
    
    $
    13,605
    
    
    $
    7,830
    
    
    $
    
    
    
    $
    (5,261
    )
    
    $
    5
    
    
    $
    16,179
 December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,Amortization
    
    
    2005
    
    
    
    
    
    
    Purchase
    
    
    
    
    
    
    Foreign
    
    
    2006Period
    
    
    Net Carrying
    
    
    
    
    
    
    Price
    
    
    
    
    
    
    Currency
    
    
    Net Carrying(Years)
    
    
    Amount
    
    
    Acquisitions
    
    
    Adjustments
    
    
    Amortization
    
    
    Translation
    
    
    AmountGoodwill
    
    
    N/A
    
    
    $
    39,886
    
    
    $
    21,071
    
    
    $
    (923
    )
    
    $
    
    
    
    $
    
    
    
    $
    60,034Acquired identifiable
intangibles:Acquired technology
    
    
    4
    
    
    $
    8,221
    
    
    $
    4,950
    
    
    $
    
    
    
    $
    (5,270
    )
    
    $
    
    
    
    $
    7,901Brand name
    
    
    4
    
    
    
    833
    
    
    
    510
    
    
    
    
    
    
    
    (521
    )
    
    
    
    
    
    
    822Customer relationships
and backlog
    
    
    1 - 6
    
    
    
    
    
    
    
    4,860
    
    
    
    
    
    
    
    (498
    )
    
    
    
    
    
    
    4,362Other acquired intangibles
    
    
    4
    
    
    
    733
    
    
    
    255
    
    
    
    
    
    
    
    (477
    )
    
    
    9
    
    
    
    520Total
    
    
    
    
    
    $
    9,787
    
    
    $
    10,575
    
    
    $
    
    
    
    $
    (6,766
    )
    
    $
    9
    
    
    $
    13,605
    Year Ending December 31,
    
    Amount2007 (six-month period)
    
    $
    3,3732008
    
    
    3,2932009
    
    
    3,2932010
    
    
    3,0282011
    
    
    1,8612012 and thereafter
    
    
    1,331Total
    
    $
    16,179
 10




---



##### Table of Contents



9. INCOME TAXES
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
      10. STOCKHOLDERS EQUITY
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of design-to-silicon yield solutions
    
    $
    478
    
    
    $
    455
    
    
    $
    970
    
    
    $
    1,076Research and development
    
    
    615
    
    
    
    568
    
    
    
    1,178
    
    
    
    1,186Selling, general and administrative
    
    
    852
    
    
    
    764
    
    
    
    1,635
    
    
    
    1,692Stock-based compensation before income taxes
    
    $
    1,945
    
    
    $
    1,787
    
    
    $
    3,783
    
    
    $
    3,954
  Stock Plans:
 Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2007
    
    2006
    
    2007
    
    2006Expected life (in years)
    
    
    6.05
    
    
    
    4.26
    
    
    
    6.05
    
    
    
    4.26Volatility
    
    
    59.9
    %
    
    
    58.1
    %
    
    
    60.0
    %
    
    
    58.3
    %Risk-free interest rate
    
    
    4.95
    %
    
    
    4.94
    %
    
    
    4.93
    %
    
    
    4.78
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value of options granted during the period
    
    $
    6.33
    
    
    $
    6.93
    
    
    $
    6.41
    
    
    $
    7.93
 11




---



##### Table of Contents



Employee Stock Purchase Plan:
 Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2007
    
    2006
    
    2007
    
    2006Expected life (in years)
    
    
    0.98
    
    
    
    1.21
    
    
    
    0.98
    
    
    
    1.21Volatility
    
    
    50.0
    %
    
    
    49.5
    %
    
    
    50.0
    %
    
    
    49.5
    %Risk-free interest rate
    
    
    5.21
    %
    
    
    3.35
    %
    
    
    5.21
    %
    
    
    3.35
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value of employee stock
    
    $
    4.36
    
    
    $
    4.32
    
    
    $
    4.36
    
    
    $
    4.32
  Stock Plans 
  Weighted AverageWeighted Average
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsic ValueOptions
    
    
    per Share
    
    
    Term (years)
    
    
    (in 000s)Outstanding, January 1, 2007
    
    
    6,664,094
    
    
    $
    12.11Granted
    
    
    494,500
    
    
    
    10.60Exercised
    
    
    (124,457
    )
    
    
    8.52Forfeited or expired
    
    
    (179,884
    )
    
    
    13.32Outstanding at June 30, 2007
    
    
    6,854,253
    
    
    
    12.03
    
    
    
    7.32
    
    
    $
    8,241Vested and expected to vest
    
    
    6,407,551
    
    
    
    11.94
    
    
    
    7.20
    
    
    $
    8,099Exercisable at June 30, 2007
    
    
    3,648,898
    
    
    
    10.83
    
    
    
    5.93
    
    
    $
    7,166
    Number of
    
    
    Weighted AverageOptions
    
    
    Grant Date Fair ValueNonvested, January 1, 2007
    
    
    3,244,835
    
    
    $
    7.84Granted
    
    
    494,500
    
    
    
    6.41Vested
    
    
    (454,625
    )
    
    
    6.83Forfeited
    
    
    (79,355
    )
    
    
    7.48Nonvested at
June 30, 2007
    
    
    3,205,355
    
    
    
    7.74
  Employee Stock Purchase Plan
 12




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##### Table of Contents



Stock repurchase program
 11. CUSTOMER AND GEOGRAPHIC INFORMATION
 Disclosures about Segments of an Enterprise and Related Information
   Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,Customer
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006A
    
    
    19
    %
    
    
    15
    %
    
    
    17
    %
    
    
    13
    %B
    
    
    15
    %
    
    
    32
    %
    
    
    16
    %
    
    
    31
    %C
    
    
    5
    %
    
    
    13
    %
    
    
    7
    %
    
    
    11
    %
  Customer
    
    June 30, 2007
    
    December 31, 2006A
    
    
    17
    %
    
    
    12
    %B
    
    
    14
    %
    
    
    18
    %D
    
    
    11
    %
    
    
    10
    %E
    
    
    5
    %
    
    
    12
    %
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Asia
    
    $
    11,997
    
    
    $
    8,401
    
    
    $
    24,027
    
    
    $
    18,230United States
    
    
    5,565
    
    
    
    7,621
    
    
    
    13,040
    
    
    
    16,489Europe
    
    
    6,136
    
    
    
    1,988
    
    
    
    8,773
    
    
    
    3,148Total
    
    $
    23,698
    
    
    $
    18,010
    
    
    $
    45,840
    
    
    $
    37,867
  12. SIGNIFICANT RELATED PARTY TRANSACTIONS
  13




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  Overview
   14




---



##### Table of Contents



Industry Trend
  Financial Highlights
  
    
    Total revenue for the three months ended June 30, 2007 was $23.7 million, a increase of
32% compared to the three months ended June 30, 2006. Revenue from Design-to-Silicon-Yield
solutions for the three months ended June 30, 2007 increased to $17.8 million compared to
$12.3 million for the three months ended June 30, 2006. The change was primarily a result of
increases in revenues related to Integrated Solutions of $5.6 million over the three months
ended June 30, 2006. Gain share revenue for the three months ended June 30, 2007 increased
slightly to $5.9 million from $5.7 million for the three months ended June 30, 2006. Our
gain share revenue may continue to fluctuate from quarter to quarter as a result of each
customers contractual performance measures for achieving gain share as well as each
customers production volumes in any given period.
    
    Net loss for the three months ended June 30, 2007 was $701,000, compared to net loss of
$847,000 for the three months ended June 30, 2006. The decrease in net loss was primarily
attributable to the increase in revenue coupled with a higher gross
margin, which was partially offset by the increases in
operating expenses and amortization of acquired intangible assets, both as a result of the
acquisitions of Si Automation S.A. in October 2006 and Fabbrix,
Inc. in May 2007. The gross margin for the three months ended
June 30, 2007 was 63% of the total revenue, an increase from 56%
for the three months ended June 30, 2006 as a result from
improved service margins on Integrated Solutions, and generally, a
more favorable mix of overall revenue elements.
    
    Net loss per basic and diluted share was $0.02 for the three months ended June 30, 2007
compared to net loss per basic and diluted share of $0.03 for the three months ended June
30, 2006.
  
    
    Total revenue for the six months ended June 30, 2007 was $45.8 million, a increase of 21%
compared to the six months ended June 30, 2006. Revenue from Design-to-Silicon-Yield
solutions for the six months ended June 30, 2007 increased to $35.1 million compared to
$27.1 million for the six months ended June 30, 2006. The change was a result of increases
in revenues related to both Integrated Solutions and Software Licenses of $7.1 million and
$855,000, respectively, over the six months ended June 30, 2006. Gain share revenue remained
flat at $10.8 million for both the six months ended June 30, 2007 and June 30, 2006.
 15




---



##### Table of Contents




    
    Net loss for the six months ended June 30, 2007 was $3.1 million, compared to net loss of
$579,000 for the six months ended June 30, 2006. The net loss was primarily attributable to
increases in operating expenses and amortization of acquired intangible assets, both
primarily the result of the acquisition of Si Automation S.A. in October 2006.
    
    Net loss per basic and diluted share was $0.11 for the six months ended June 30, 2007
compared to net loss per basic and diluted share of $0.02 for the six months ended June 30,
2006, an increase of $0.09 per diluted share.
    
    Cash, cash equivalents and short-term investments increased by $1.1 million from $52.9
million at December 31, 2006 to $54.0 million as of June 30, 2007. Net cash provided by
operating activities for the six months ended June 30, 2007
totaled $2.5 million. Net cash
used in investing activities for the six months ended June 30, 2007 included $1.9 million as
final payments for our acquisition of Si Automation S.A. and $1.4 million to purchase
property and equipment. Net cash provided by financing activities for the six months ended
June 30, 2007 totaled $1.3 million and was primarily related to the exercise of stock
options and purchases under the employee stock purchase plan,
partially offset by $545,000 in debt payments. The fluctuations in foreign
exchange rates favorably impacted our cash balance by $225,000.
 Critical Accounting Policies
  General
  Revenue Recognition
 Accounting for Performance of Construction-Type and Certain
Production-Type Contracts Software Revenue Recognition,
 Design-to-Silicon-Yield Solutions
 Integrated Solutions
  16




---



##### Table of Contents



Software
Licenses
 Gain Share
 Software Development Costs
 Computer
Software to be Sold, Leased or Otherwise Marketed.
 Goodwill and Acquired Intangible Assets
 Goodwill and Other Intangible Assets.
  17




---



##### Table of Contents



Realization of Deferred Tax Assets
  Stock-Based Compensation
 Share-Based Payment
 Results of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Design-to-silicon-yield solutionsIntegrated solutions
    
    
    68
    %
    
    
    58
    %
    
    
    65
    %
    
    
    60
    %Software licenses
    
    
    7
    
    
    
    10
    
    
    
    11
    
    
    
    12Gain share
    
    
    25
    
    
    
    32
    
    
    
    24
    
    
    
    28Total revenue
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of design-to-silicon-yield solutions:Direct costs of design-to-silicon-yield solutionsIntegrated solutions
    
    
    30
    
    
    
    37
    
    
    
    32
    
    
    
    35Software licenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of acquired technology
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    7Total cost of design-to silicon-yield solutions
    
    
    37
    
    
    
    44
    
    
    
    39
    
    
    
    42Gross margin
    
    
    63
    
    
    
    56
    
    
    
    61
    
    
    
    58Operating expenses:Research and development
    
    
    37
    
    
    
    39
    
    
    
    38
    
    
    
    35Selling, general and administrative
    
    
    28
    
    
    
    27
    
    
    
    28
    
    
    
    26Amortization of other acquired intangible assets
    
    
    4
    
    
    
    1
    
    
    
    4
    
    
    
    1Total operating expenses
    
    
    69
    
    
    
    67
    
    
    
    70
    
    
    
    62Loss from operations
    
    
    (6
    )
    
    
    (11
    )
    
    
    (9
    )
    
    
    (4
    )Interest and other income, net
    
    
    2
    
    
    
    5
    
    
    
    2
    
    
    
    4Loss before taxes
    
    
    (4
    )
    
    
    (6
    )
    
    
    (7
    )
    
    
    0Income tax provision (benefit)
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    2Net loss
    
    
    (3
    )%
    
    
    (5
    )%
    
    
    (7
    )%
    
    
    (2
    )%
 Comparison of the Three Months Ended June 30, 2007 and 2006
 Three Months Ended June 30,2007
    
    
    2006Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRevenue
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Design-to-silicon-yield solutionsIntegrated solutions
    
    $
    16,032
    
    
    $
    10,477
    
    
    $
    5,555
    
    
    
    53
    %
    
    
    68
    %
    
    
    58
    %Software licenses
    
    
    1,776
    
    
    
    1,794
    
    
    
    (18
    )
    
    
    (1
    )%
    
    
    7
    %
    
    
    10
    %Gain share
    
    
    5,890
    
    
    
    5,739
    
    
    
    151
    
    
    
    3
    %
    
    
    25
    %
    
    
    32
    %Total
    
    $
    23,698
    
    
    $
    18,010
    
    
    $
    5,688
    
    
    
    32
    %
    
    
    100
    %
    
    
    100
    %
 18




---



##### Table of Contents



Design-to-Silicon-Yield Solutions
 Integrated
Solutions
 Software
Licenses
 Gain Share
 Three Months Ended June 30,2007
    
    
    2006Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofCost of Design-to-Silicon Yield Solutions
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs of design-to-silicon-
yield solutions:Integrated solutions
    
    $
    7,082
    
    
    $
    6,645
    
    
    $
    437
    
    
    
    7
    %
    
    
    30
    %
    
    
    37
    %Software licenses
    
    
    27
    
    
    
    29
    
    
    
    (2
    )
    
    
    (7
    )%
    
    
    
    
    
    
    Amortization of acquired technology
    
    
    1,610
    
    
    
    1,266
    
    
    
    344
    
    
    
    27
    %
    
    
    7
    %
    
    
    7
    %Total
    
    $
    8,719
    
    
    $
    7,940
    
    
    $
    779
    
    
    
    10
    %
    
    
    37
    %
    
    
    44
    %
 Direct Costs of Design-to-Silicon-Yield Solutions
 Integrated
Solutions.
 Software Licenses.
 Amortization of Acquired Technology
 19




---



##### Table of Contents



Three Months Ended June 30,2007
    
    
    2006Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    8,797
    
    
    $
    6,871
    
    
    $
    1,926
    
    
    
    28
    %
    
    
    37
    %
    
    
    39
    %
 Research and Development.
 Three Months Ended June 30,2007
    
    
    2006Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofSelling, General and Administrative
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    6,645
    
    
    $
    4,866
    
    
    $
    1,779
    
    
    
    37
    %
    
    
    28
    %
    
    
    27
    %
 Selling, General and Administrative
 Three Months Ended June 30,2007
    
    
    2006Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAmortization of Other Acquired Intangible Assets
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of other acquired intangible
assets
    
    $
    1,031
    
    
    $
    235
    
    
    $
    796
    
    
    
    339
    %
    
    
    4
    %
    
    
    1
    %
 Amortization of Other Acquired Intangible Assets
 Three Months Ended June 30,2007
    
    
    2006Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofInterest and Other Income, net
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and other income, net
    
    $
    529
    
    
    $
    811
    
    
    $
    (282
    )
    
    
    (35
    )%
    
    
    2
    %
    
    
    5
    %
 Interest and Other Income, net
 20




---



##### Table of Contents



Three Months Ended June 30,2007
    
    
    2006Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofIncome Tax Provision
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Income tax provision
    
    $
    (264
    )
    
    $
    (244
    )
    
    $
    (20
    )
    
    
    8
    %
    
    
    (1
    )%
    
    
    (1
    )%
 Income Tax Provision.
 Comparison of the Six Months Ended June 30, 2007 and 2006
 Six Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006$
    
    
    %
    
    
    % of
    
    
    % ofRevenue
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Design-to-silicon-yield
solutions:Integrated solutions
    
    $
    29,796
    
    
    $
    22,706
    
    
    $
    7,090
    
    
    
    31
    %
    
    
    65
    %
    
    
    60
    %Software licenses
    
    
    5,261
    
    
    
    4,406
    
    
    
    855
    
    
    
    19
    %
    
    
    11
    %
    
    
    12
    %Gain share
    
    
    10,783
    
    
    
    10,755
    
    
    
    28
    
    
    
    
    
    
    
    24
    %
    
    
    28
    %Total
    
    $
    45,840
    
    
    $
    37,867
    
    
    $
    7,973
    
    
    
    21
    %
    
    
    100
    %
    
    
    100
    %
 Design-to-Silicon-Yield Solutions
 Integrated
Solutions
 Software
Licenses
 Gain Share
 Six Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006$
    
    
    %
    
    
    % of
    
    
    % ofCost of Design-to-Silicon Yield Solutions
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs of design-to-silicon-
yield solutions:Integrated solutions
    
    $
    14,790
    
    
    $
    13,074
    
    
    $
    1,716
    
    
    
    13
    %
    
    
    32
    %
    
    
    35
    %Software licenses
    
    
    86
    
    
    
    40
    
    
    
    46
    
    
    
    115
    %
    
    
    
    
    
    
    Amortization of acquired technology
    
    
    3,185
    
    
    
    2,532
    
    
    
    653
    
    
    
    26
    %
    
    
    7
    %
    
    
    7
    %Total
    
    $
    18,061
    
    
    $
    15,646
    
    
    $
    2,415
    
    
    
    15
    %
    
    
    39
    %
    
    
    42
    %
 Direct Costs of Design-to-Silicon-Yield Solutions
 Integrated
Solutions.
 Software Licenses.
 21




---



##### Table of Contents



Amortization of Acquired Technology
 Six Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006$
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    17,167
    
    
    $
    13,127
    
    
    $
    4,040
    
    
    
    31
    %
    
    
    38
    %
    
    
    35
    %
 Research and Development.
 Six Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006$
    
    
    %
    
    
    % of
    
    
    % ofSelling, General and Administrative
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    12,489
    
    
    $
    9,822
    
    
    $
    2,667
    
    
    
    27
    %
    
    
    28
    %
    
    
    26
    %
 Selling, General and Administrative
 Six Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006Amortization of Other
    
    
    
    
    
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAcquired Intangible Assets
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of other
acquired intangible assets
    
    $
    2,044
    
    
    $
    470
    
    
    $
    1,574
    
    
    
    335
    %
    
    
    4
    %
    
    
    1
    %
 Amortization of Other Acquired Intangible Assets
 Six Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006$
    
    
    %
    
    
    % of
    
    
    % ofInterest and Other Income, net
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and other income, net
    
    $
    1,025
    
    
    $
    1,446
    
    
    $
    (421
    )
    
    
    (29
    )%
    
    
    2
    %
    
    
    4
    %
 Interest and Other Income, Net
 Six Months Ended June 30,
    
    
    
    
    
    
    
    
    
    
    Six Months Ended June 30,2007
    
    
    2006$
    
    
    %
    
    
    % of
    
    
    % ofIncome Tax Provision
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Income tax provision
    
    $
    160
    
    
    $
    827
    
    
    $
    (667
    )
    
    
    (81
    )%
    
    
    0
    %
    
    
    2
    %
 Income Tax Provision.
 22




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##### Table of Contents



Liquidity and Capital Resources
      23




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##### Table of Contents



Payments due by period2007(Six monthsContractual obligations
    
    remaining)
    
    
    2008-2009
    
    
    2010-2011
    
    
    Thereafter
    
    
    Other
    
    
    TotalDebt principal (1)
    
    $
    135
    
    
    $
    608
    
    
    $
    487
    
    
    $
    
    
    
    $
    
    
    
    $
    1,230Debt interest
    
    
    14
    
    
    
    39
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    67Capital lease obligations (including interest)
    
    
    64
    
    
    
    136
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    211Operating lease obligations
    
    
    1,498
    
    
    
    1,303
    
    
    
    362
    
    
    
    
    
    
    
    
    
    
    
    3,163Unrecognized tax benefits (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,145
    
    
    
    5,145Total
    
    $
    1,711
    
    
    $
    2,086
    
    
    $
    874
    
    
    $
    
    
    
    $
    5,145
    
    
    $
    9,816
 
 (1)
    
    Amount represents the repayment of an interest free loan of 550,000 and a 400,000
loan which carries a variable interest rate based on the EURIBOR plus 160 basis points.(2)
    
    Due to the inherent uncertainty of the tax positions, it is not practicable to assign this
liability to any particular years in the table.  Recent Accounting Pronouncements
 Fair Value Measurement
 The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Interest Rate Risk
 24




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##### Table of Contents



Foreign Currency and Exchange Risk.
 
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Controls Over Financial Reporting
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
 If semiconductor designers and manufacturers do not continue to adopt our Design-to-Silicon-Yield
solutions, we may be unable to increase or maintain our revenue.
  
    
    our customers failure to achieve satisfactory yield improvements using our
Design-to-Silicon-Yield solutions;
    
    a decrease in demand for semiconductors generally or the demand for deep submicron
semiconductors failing to grow as rapidly as expected;
    
    our inability to develop, market, or sell effective solutions that are outside of our
traditional MPS logic focus;
    
    the industry may develop alternative methods to enhance the integration between the
semiconductor design and manufacturing processes due to a rapidly evolving market and the
likely emergence of new technologies;
    
    our existing and potential customers reluctance to understand and accept our innovative gain share fee component; and
    
    our customers concern about our ability to keep highly competitive information confidential.
 25




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##### Table of Contents



We generate a large percentage of our total revenue from a limited number of customers, so the
loss of any one of these customers could significantly reduce our revenue and results of
operations below expectations.
  If integrated device manufacturers of logic integrated circuits reduce investment in new process
technology as a result of a shift to a fabless manufacturing business model, the pool of potential
logic customers for our yield ramp solutions will shrink and our results of operations may suffer.
  We must effectively manage and support our operations and recent and planned growth in order for
our business strategy to succeed.
  If we fail to protect our intellectual property rights, customers or potential competitors may be
able to use our technologies to develop their own solutions which could weaken our competitive
position, reduce our revenue, or increase our costs.
  26




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##### Table of Contents



Competition in the market for solutions that address yield improvement and integration between IC
design and manufacturing may intensify in the future, which could slow our ability to grow or
execute our strategy.
  We face operational and financial risks associated with international operations.
  
    
    some of our key engineers and other personnel who are foreign nationals may have
difficulty gaining access to the United States and other countries in which our customers or
our offices may be located and it may be difficult for us to recruit and retain qualified
technical and managerial employees in foreign offices;
    
    greater difficulty in collecting account receivables resulting in longer collection
periods;
    
    language and other cultural differences may inhibit our sales and marketing efforts and
create internal communication problems among our U.S. and foreign research and development
teams, increasing the difficulty of managing multiple, remote locations performing various
development, quality assurance, and yield ramp analysis projects;
    
    compliance with, and unexpected changes in, a wide variety of foreign laws and regulatory
environments with which we are not familiar, including, among other issues, with respect to
protection of our intellectual property, and a wide variety of trade and export controls
under domestic, foreign, and international law;
    
    currency risk due to the fact that expenses for our international offices are denominated
in the local currency, including the Euro, while virtually all of our revenue is denominated
in U.S. dollars;
    
    quarantine, private travel limitation, or business disruption in regions affecting our
operations, stemming from actual, imminent or perceived outbreak of human pandemic or
contagious disease;
 27




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##### Table of Contents




    
    in the event a larger portion of our revenue becomes denominated in foreign currencies,
we would be subject to a potentially significant exchange rate risk; and
    
    economic or political instability, including but not limited to armed conflict,
terrorism, and the resulting disruption to economic activity and business operations.In Japan, in particular, we face the following additional risks:
    
    any recurrence of an overall downturn in Asian economies could limit our ability to
retain existing customers and attract new ones in Asia; and
    
    if the U.S. dollar increases in value relative to the Japanese Yen, the cost of our
solutions will be more expensive to existing and potential Japanese customers and therefore
less competitive.
 Our earnings per share and other key operating results may be unusually high in a given
quarter, thereby raising investors expectations, and then unusually low in the next quarter,
thereby disappointing investors, which could cause our stock price to drop.
  
    
    the size and timing of sales volumes achieved by our customers products;
    
    the loss of any of our large customers or an adverse change in any of our large customers businesses;
    
    the size of improvements in our customers yield and the timing of agreement as to those improvements;
    
    our long and variable sales cycle;
    
    changes in the mix of our revenue;
    
    changes in the level of our operating expenses needed to support our projected growth; and
    
    delays in completing solution implementations for our customers.
 Our gain share revenue is dependent on factors outside of our control, including the volume of
integrated circuits, or ICs, our customers are able to sell to their customers.
  Gain share measurement requires data collection and is subject to customer agreement, which can
result in uncertainty and cause quarterly results to fluctuate.
  28




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##### Table of Contents



Changes in the structure of our customer contracts, including the mix between fixed and variable
revenue and the mix of elements, can adversely affect the size and timing of our total revenue.
  It typically takes us a long time to sell our unique solutions to new customers, which can result
in uncertainty and delays in generating additional revenue.
  We have a history of losses, we may incur losses in the future and we may be unable to maintain
profitability.
  
    
    funding for research and development;
    
    expansion of our solution implementation teams;
    
    expansion of our sales and marketing efforts; and
    
    additional non-cash charges relating to amortization of intangibles and stock-based compensation.
  We may experience significant fluctuations in operating results due to the cyclical nature of the
semiconductor industry.
  29




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##### Table of Contents



We must continually attract and retain highly talented executives, engineers, and research and
development personnel or we will be unable to expand our business as planned.
  If our products, technologies, services, and integrated solutions fail to keep pace with the rapid
technological changes in the semiconductor industry, we could lose customers and revenue.
  We intend to pursue additional strategic relationships, which are necessary to maximize our
growth, but could substantially divert management attention and resources.
  
    
    potential industry partners become concerned about our ability to protect their intellectual property;
    
    potential industry partners develop their own solutions to address the need for yield improvement;
    
    our potential competitors establish relationships with industry partners with which we seek to establish a relationship; or
    
    potential industry partners attempt to restrict our ability to enter into relationships with their competitors.
 Our solution implementations may take longer than we anticipate, which could cause us to lose
customers and may result in adjustments to our operating results.
  30




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##### Table of Contents



Key executives, including our chief executive officer and our chief strategy officer, are critical
to our business and we cannot guarantee that they will remain with us indefinitely.
  Inadvertent disclosure of our customers confidential information could result in costly
litigation and cause us to lose existing and potential customers.
  Our technologies could infringe the intellectual property rights of others causing costly
litigation and the loss of significant rights.
  Defects in our proprietary technologies, hardware and software tools, and the cost of support to
remedy any such defects could decrease our revenue and our competitive market share.
  Failing to maintain the effectiveness of our internal control over financial reporting could cause
the cost related to remediation to increase and could cause our stock price to decline.
  31




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##### Table of Contents



We may not be able to expand our business and proprietary technologies if we do not consummate
potential acquisitions or investments or successfully integrate them with our business.
  We may not be able to raise necessary funds to support our growth or execute our strategy.
  Recent acquisitions may adversely affect our business by diverting managements attention,
increasing our expenses or by being more difficult to integrate than expected.
  
    
    consolidating research and development operations;
    
    retaining key employees;
    
    incorporating acquired products and business technology into our existing product lines;
    
    coordinating effective sales and marketing functions;
    
    preserving research and development, marketing, customer and other important relationships; and
    
    minimizing the diversion of managements attention from ongoing business concerns.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Use of Proceeds
 Stock Repurchases
 32




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##### Table of Contents



ISSUER PURCHASES OF EQUITY SECURITIES
 Total Number of
    
    Maximum Number (orTotal
    
    
    
    Shares (or Units)
    
    Approximate DollarNumber of
    
    Average
    
    Purchased as
    
    Value) of Shares (orShares (or
    
    Price Paid
    
    Part of Publicly
    
    Units) that May Yet BeUnits)
    
    Per Share
    
    Announced Plans
    
    Purchased Under thePeriod
    
    Purchased
    
    (or Unit)
    
    or Programs (1)
    
    Plans or Programs(1)Month #1 (April 1, 2007 through April 30, 2007)
    
    
    
    
    
    
    
    $
    4,451,236Month #2 (May 1, 2007 through May 31, 2007)
    
    
    
    
    
    
    
    $
    4,451,236Month #3 (June 1, 2007 through June 30, 2007)
    
    
    
    
    
    
    
    $
    4,451,236Total
    
    
    
    
    
    
 
 (1)
    
    On March 26, 2003, we announced that our Board of Directors had approved a share repurchase
program, pursuant to which up to $10.0 million of our outstanding common stock may be
repurchased; the repurchase program has no set expiration or termination date. As of June 30,
2007, 550,521 shares had been repurchased under this program at a weighted average per share
price of $10.08 and approximately $4.5 million remained available for repurchases. 
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
    Election of Director
    
    Votes For
    
    Votes WithheldSusan H. Billat  Class III Director
    
    
    24,945,939
    
    
    
    244,550John K. Kibarian, Ph.D.  Class III Director
    
    
    25,040,713
    
    
    
    149,776
   Votes for
    
    Votes Against
    
    Votes Abstained
    
    Broker Non-votes25,040,199
    
    
    146,907
    
    
    
    3,383
    
    
    
    0
 
 Item 5. Other Information.
  33




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##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description3.01
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc. *3.02
    
    Amended and Restated Bylaws of PDF Solutions, Inc. 4.01
    
    Specimen Stock Certificate **4.02
    
    Second Amended and Restated Rights Agreement dated July 6, 2001*10.01
    
    2001 Stock Plan and related agreements ***31.01
    
    Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification of the Chief Financial Officer and Vice President of Finance and Administration pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.01
    
    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 and Administration pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ****
 
 
    
    Incorporated by reference to PDFs Report on Form 10-Q filed August 9, 2005 (File No.
000-31311).*
    
    Incorporated by reference to PDFs Registration Statement on Form S-1, Amendment No. 7 filed
July 9, 2001 (File No. 333-43192).**
    
    Incorporated by reference to PDFs Report on Form 10-Q filed September 6, 2001 (File No.
000-31311).***
    
    Incorporated by reference to PDFs Report on Form 10-Q filed May 10, 2007 (File No.
000-31311).****
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly
Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of PDF Solutions, Inc. under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any filings. 34




---



##### Table of Contents



SIGNATURES
  Date: August 9, 2007
    By:
    /s/ JOHN K. KIBARIANJohn K. KibarianPresident and Chief Executive OfficerBy:
    /s/ KEITH A. JONESKeith A. JonesChief Financial Officer and Vice President of Finance 35




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.01
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc.*3.02
    
    Amended and Restated Bylaws of PDF Solutions, Inc. 4.01
    
    Specimen Stock Certificate **4.02
    
    Second Amended and Restated Rights Agreement dated July 6, 2001*10.01
    
    2001 Stock Plan and related agreements ***31.01
    
    Certification of the President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.02
    
    Certification of the Chief Financial Officer and Vice President of Finance and Administration
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.01
    
    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 and Administration pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ****
 
 
    
    Incorporated by reference to PDFs Report on Form 10-Q filed August 9, 2005 (File No.
000-31311).*
    
    Incorporated by reference to PDFs Registration Statement on Form S-1, Amendment No. 7 filed
July 9, 2001 (File No. 333-43192).**
    
    Incorporated by reference to PDFs Report on Form 10-Q filed September 6, 2001 (File No.
000-31311).***
    
    Incorporated by reference to PDFs Report on Form 10-Q
filed May 10, 2007 (File No.
000-31311).****
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly
Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of PDF Solutions, Inc. under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any filings. 36