##### 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 September 30, 2008
 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
    
    25-1701361(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)333 West San Carlos Street, Suite 700San Jose, California
    
    95110(Address of Principal Executive Offices)
    
    (Zip Code)
 (408) 280-7900
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I FINANCIAL INFORMATION
    
    3Item 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
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    27Item 4. Controls and Procedures
    
    27PART II OTHER INFORMATION
    
    28Item 1. Legal Proceedings
    
    28Item 1A. Risk Factors
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    36Item 3. Defaults Upon Senior Securities
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    36Item 5. Other Information
    
    36Item 6. Exhibits
    
    37SIGNATURES
    
    38INDEX TO EXHIBITS
    
    39EX-31.01EX-31.02EX-32.01EX-32.02
  2




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##### Table of Contents



Item 1. Financial Statements.
 PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 September 30,
    
    
    December 31,2008
    
    
    2007(In thousands,except par values)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,026
    
    
    $
    35,315Short-term investments
    
    
    15,178
    
    
    
    9,949Accounts receivable, net of allowance of $254 in 2008 and 2007
    
    
    33,355
    
    
    
    38,526Prepaid expenses and other current assets
    
    
    5,543
    
    
    
    5,030Total current assets
    
    
    81,102
    
    
    
    88,820Property and equipment, net
    
    
    3,049
    
    
    
    3,621Non-current investments
    
    
    841
    
    
    
    Goodwill
    
    
    64,103
    
    
    
    65,170Intangible assets, net
    
    
    10,342
    
    
    
    12,818Deferred tax assets and other non-current assets
    
    
    600
    
    
    
    8,922Total assets
    
    $
    160,037
    
    
    $
    179,351LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    393
    
    
    $
    421Accounts payable
    
    
    1,810
    
    
    
    3,469Accrued compensation and related benefits
    
    
    5,874
    
    
    
    5,950Other accrued liabilities
    
    
    2,292
    
    
    
    2,604Taxes payable
    
    
    31
    
    
    
    208Deferred revenue
    
    
    2,966
    
    
    
    3,159Billings in excess of recognized revenue
    
    
    115
    
    
    
    553Total current liabilities
    
    
    13,481
    
    
    
    16,364Long-term debt
    
    
    550
    
    
    
    907Long-term taxes payable
    
    
    3,339
    
    
    
    5,581Other liabilities
    
    
    1,295
    
    
    
    29Total liabilities
    
    
    18,665
    
    
    
    22,881Stockholders 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 29,331 in 2008 and
29,122 in 2007; shares outstanding 27,580 in 2008 and 27,933 in 2007
    
    
    4
    
    
    
    4Additional paid-in-capital
    
    
    187,373
    
    
    
    181,566Treasury stock at cost, 1,751 shares in 2008 and 1,190 shares in 2007
    
    
    (14,632
    )
    
    
    (11,524
    )Accumulated deficit
    
    
    (33,569
    )
    
    
    (16,892
    )Accumulated other comprehensive income
    
    
    2,196
    
    
    
    3,316Total stockholders equity
    
    
    141,372
    
    
    
    156,470Total liabilities and stockholders equity
    
    $
    160,037
    
    
    $
    179,351
 See notes to unaudited condensed consolidated financial statements
 3




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PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per share amounts)Revenues:Design-to-silicon-yield solutions
    
    $
    13,348
    
    
    $
    17,261
    
    
    $
    43,824
    
    
    $
    52,318Gainshare performance incentives
    
    
    5,417
    
    
    
    6,807
    
    
    
    16,402
    
    
    
    17,590Total revenues
    
    
    18,765
    
    
    
    24,068
    
    
    
    60,226
    
    
    
    69,908Cost of design-to-silicon-yield solutions:Direct costs of design-to-silicon-yield solutions
    
    
    7,152
    
    
    
    8,100
    
    
    
    22,185
    
    
    
    22,976Amortization of acquired technology
    
    
    631
    
    
    
    1,331
    
    
    
    1,893
    
    
    
    4,516Total cost of design-to silicon-yield solutions
    
    
    7,783
    
    
    
    9,431
    
    
    
    24,078
    
    
    
    27,492Gross margin
    
    
    10,982
    
    
    
    14,637
    
    
    
    36,148
    
    
    
    42,416Operating expenses:Research and development
    
    
    7,835
    
    
    
    9,008
    
    
    
    26,045
    
    
    
    26,175Selling, general and administrative
    
    
    5,401
    
    
    
    5,789
    
    
    
    17,346
    
    
    
    18,278Amortization of other acquired intangible assets
    
    
    194
    
    
    
    985
    
    
    
    583
    
    
    
    3,029Restructuring charges
    
    
    
    
    
    
    
    
    
    
    1,471
    
    
    
    Total operating expenses
    
    
    13,430
    
    
    
    15,782
    
    
    
    45,445
    
    
    
    47,482Loss from operations
    
    
    (2,448
    )
    
    
    (1,145
    )
    
    
    (9,297
    )
    
    
    (5,066
    )Interest and other income (loss), net
    
    
    (343
    )
    
    
    322
    
    
    
    397
    
    
    
    1,347Loss before taxes
    
    
    (2,791
    )
    
    
    (823
    )
    
    
    (8,900
    )
    
    
    (3,719
    )Income tax provision
    
    
    9,433
    
    
    
    116
    
    
    
    7,777
    
    
    
    276Net loss
    
    $
    (12,224
    )
    
    $
    (939
    )
    
    $
    (16,677
    )
    
    $
    (3,995
    )Net loss per share  basic and diluted
    
    $
    (0.44
    )
    
    $
    (0.03
    )
    
    $
    (0.60
    )
    
    $
    (0.14
    )Weighted average common shares  basic and diluted
    
    
    27,540
    
    
    
    28,223
    
    
    
    27,663
    
    
    
    28,127
 See notes to unaudited condensed consolidated financial statements
 4




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PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months EndedSeptember 30,2008
    
    
    2007(In thousands)Operating activities:Net loss
    
    $
    (16,677
    )
    
    $
    (3,995
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    1,447
    
    
    
    1,513Stock-based compensation expense
    
    
    5,450
    
    
    
    5,453Losses on sale of investment security and disposal of fixed assets
    
    
    450
    
    
    
    Amortization of acquired intangible assets
    
    
    2,476
    
    
    
    7,594Tax benefit related to stock-based compensation expense
    
    
    
    
    
    
    223Excess tax benefit from stock-based compensation expense
    
    
    
    
    
    
    (43
    )Deferred taxes
    
    
    8,446
    
    
    
    (3,706
    )Changes in operating assets and liabilities, net of effect of acquisition:Accounts receivable
    
    
    5,213
    
    
    
    (5,034
    )Prepaid expenses and other assets
    
    
    189
    
    
    
    11Accounts payable
    
    
    (1,638
    )
    
    
    (1,081
    )Accrued compensation and related benefits
    
    
    (28
    )
    
    
    662Other accrued liabilities
    
    
    983
    
    
    
    (489
    )Taxes payable
    
    
    (2,496
    )
    
    
    3,815Deferred revenues
    
    
    (232
    )
    
    
    516Billings in excess of recognized revenue
    
    
    (438
    )
    
    
    206Net cash provided by operating activities
    
    
    3,145
    
    
    
    5,645Investing activities:Purchases of available-for-sale securities
    
    
    (27,094
    )
    
    
    (20,840
    )Maturities and sales of available-for-sale securities
    
    
    20,665
    
    
    
    26,221Purchases of property and equipment
    
    
    (1,007
    )
    
    
    (1,654
    )Payments on business acquired, net of cash acquired
    
    
    
    
    
    
    (4,584
    )Net cash used in investing activities
    
    
    (7,436
    )
    
    
    (857
    )Financing activities:Proceeds from exercise of stock options
    
    
    63
    
    
    
    1,337Proceeds from employee stock purchase plan
    
    
    590
    
    
    
    782Purchases of treasury stock
    
    
    (3,108
    )
    
    
    (4,452
    )Principal payments on long-term obligations
    
    
    (361
    )
    
    
    (267
    )Principal payments on notes to stockholders
    
    
    
    
    
    
    (416
    )Excess tax benefit from stock-based compensation expense
    
    
    
    
    
    
    43Net cash used in financing activities
    
    
    (2,816
    )
    
    
    (2,973
    )Effect of exchange rate changes on cash
    
    
    (1,182
    )
    
    
    195Net increase (decrease) in cash and cash equivalents
    
    
    (8,289
    )
    
    
    2,010Cash and cash equivalents, beginning of period
    
    
    35,315
    
    
    
    36,451Cash and cash equivalents, end of period
    
    $
    27,026
    
    
    $
    38,461Non-cash investing and financing activities:Stock issued for business acquired
    
    $
    
    
    
    $
    2,874Supplemental disclosure of cash flow information:Cash paid during the year for:Taxes
    
    $
    1,837
    
    
    $
    518Interest
    
    $
    31
    
    
    $
    36
 See notes to unaudited 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
 Services
  6




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Software Licenses
 Gainshare Performance Incentives
 2. RECENT ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES
 Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133
 Business Combinations,
 7




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Fair
Value Measurement, Accounting for Certain Investments in Debt and Equity Securities Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13, Effective Date of FASB Statement No. 157 Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active,
 The
Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115
 3. INVESTMENTS
  September 30, 2008Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    11,687
    
    
    $
    
    
    
    $
    (10
    )
    
    $
    11,677Agency obligations
    
    
    6,510
    
    
    
    
    
    
    
    (8
    )
    
    
    6,502Auction-rate securities
    
    
    1,000
    
    
    
    
    
    
    
    (159
    )
    
    
    841Corporate securities
    
    
    400
    
    
    
    
    
    
    
    (2
    )
    
    
    398$
    19,597
    
    
    $
    
    
    
    $
    (179
    )
    
    $
    19,418Included in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,399Included in short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,178Included in non-current investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    841Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,418
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December 31, 2007Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    12,500
    
    
    $
    3
    
    
    $
    
    
    
    $
    12,503Auction-rate securities
    
    
    4,450
    
    
    
    
    
    
    
    
    
    
    
    4,450Agency discount notes
    
    
    1,543
    
    
    
    
    
    
    
    
    
    
    
    1,543$
    18,493
    
    
    $
    3
    
    
    $
    
    
    
    $
    18,496Included in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,547Included in short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,949Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,496
  4. ACCOUNTS RECEIVABLE
  5. NET LOSS PER SHARE
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (12,224
    )
    
    $
    (939
    )
    
    $
    (16,677
    )
    
    $
    (3,995
    )Denominator for basic calculation:Weighted average common shares outstanding
    
    
    27,540
    
    
    
    28,223
    
    
    
    27,663
    
    
    
    28,127Dilutive itemsStock options outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted computation
    
    
    27,540
    
    
    
    28,223
    
    
    
    27,663
    
    
    
    28,127Net loss per share  basic and diluted
    
    $
    (0.44
    )
    
    $
    (0.03
    )
    
    $
    (0.60
    )
    
    $
    (0.14
    )
 9




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##### Table of Contents



6. COMPREHENSIVE INCOME (LOSS)
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (12,224
    )
    
    $
    (939
    )
    
    $
    (16,677
    )
    
    $
    (3,995
    )Unrealized gain (loss) on investments, net of income tax effects
    
    
    (97
    )
    
    
    
    
    
    
    (182
    )
    
    
    1Foreign currency translation adjustments, net of income tax effects
    
    
    (3,002
    )
    
    
    1,066
    
    
    
    (938
    )
    
    
    2,463Comprehensive income (loss)
    
    $
    (15,323
    )
    
    $
    127
    
    
    $
    (17,797
    )
    
    $
    (1,531
    )
 7. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
 , Goodwill and other Intangible Assets,
  December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 30,Amortization
    
    
    2007
    
    
    
    
    
    
    Purchase
    
    
    
    
    
    
    Foreign
    
    
    2008Period
    
    
    Net Carrying
    
    
    
    
    
    
    Price
    
    
    
    
    
    
    Currency
    
    
    Net Carrying(Years)
    
    
    Amount
    
    
    Acquisition
    
    
    Adjustments
    
    
    Amortization
    
    
    Translation
    
    
    AmountGoodwill
    
    
    N/A
    
    
    $
    65,170
    
    
    $
    
    
    
    $
    (215
    )
    
    $
    
    
    
    $
    (852
    )
    
    $
    64,103Acquired identifiable
intangibles:Acquired technology
    
    
    4-5
    
    
    $
    9,184
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,893
    )
    
    $
    
    
    
    $
    7,291Brand name
    
    
    4
    
    
    
    361
    
    
    
    
    
    
    
    
    
    
    
    (96
    )
    
    
    
    
    
    
    265Customer relationships
and backlog
    
    
    6
    
    
    
    1,812
    
    
    
    
    
    
    
    
    
    
    
    (282
    )
    
    
    
    
    
    
    1,530Patent and applications
    
    
    7
    
    
    
    1,283
    
    
    
    
    
    
    
    
    
    
    
    (150
    )
    
    
    
    
    
    
    1,133Other acquired
intangibles
    
    
    4
    
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    122Total
    
    
    
    
    
    $
    12,818
    
    
    $
    
    
    
    $
    
    
    
    $
    (2,476
    )
    
    $
    
    
    
    $
    10,342
 December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,Amortization
    
    
    2006
    
    
    
    
    
    
    Purchase
    
    
    
    
    
    
    Foreign
    
    
    2007Period
    
    
    Net Carrying
    
    
    
    
    
    
    Price
    
    
    
    
    
    
    Currency
    
    
    Net Carrying(Years)
    
    
    Amount
    
    
    Acquisition
    
    
    Adjustments
    
    
    Amortization
    
    
    Translation
    
    
    AmountGoodwill
    
    
    N/A
    
    
    $
    60,034
    
    
    $
    2,155
    
    
    $
    6
    
    
    $
    
    
    
    $
    2,975
    
    
    $
    65,170Acquired identifiable
intangibles:Acquired technology
    
    
    4-5
    
    
    $
    7,901
    
    
    $
    6,430
    
    
    $
    
    
    
    $
    (5,147
    )
    
    $
    
    
    
    $
    9,184Brand name
    
    
    4
    
    
    
    822
    
    
    
    
    
    
    
    
    
    
    
    (461
    )
    
    
    
    
    
    
    361Customer relationships and
backlog
    
    
    1-6
    
    
    
    4,362
    
    
    
    
    
    
    
    
    
    
    
    (2,550
    )
    
    
    
    
    
    
    1,812Patent and applications
    
    
    7
    
    
    
    
    
    
    
    1,400
    
    
    
    
    
    
    
    (117
    )
    
    
    
    
    
    
    1,283Other acquired intangibles
    
    
    4
    
    
    
    520
    
    
    
    
    
    
    
    
    
    
    
    (362
    )
    
    
    20
    
    
    
    178Total
    
    
    
    
    
    $
    13,605
    
    
    $
    7,830
    
    
    $
    
    
    
    $
    (8,637
    )
    
    $
    20
    
    
    $
    12,818
  10




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##### Table of Contents



Year Ending December 31,
    
    Amount2008 (remaining three-month period)
    
    $
    8252009
    
    
    3,2962010
    
    
    3,0292011
    
    
    1,8612012
    
    
    1,0482013 and thereafter
    
    
    283Total
    
    $
    10,342
 8. INCOME TAXES
 Accounting for Income Taxes
    9. STOCKHOLDERS EQUITY
 Share-Based Payment
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of design-to-silicon yield solutions
    
    $
    453
    
    
    $
    435
    
    
    $
    1,383
    
    
    $
    1,405Research and development
    
    
    537
    
    
    
    553
    
    
    
    1,843
    
    
    
    1,731Selling, general and administrative
    
    
    723
    
    
    
    682
    
    
    
    2,224
    
    
    
    2,317Stock-based compensation expenses
    
    $
    1,713
    
    
    $
    1,670
    
    
    $
    5,450
    
    
    $
    5,453
 11




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##### Table of Contents



Stock Plans:
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Expected life (in years)
    
    
    5.77
    
    
    
    6.07
    
    
    
    5.77
    
    
    
    6.05Volatility
    
    
    58.6
    %
    
    
    59.4
    %
    
    
    58.6
    %
    
    
    59.9
    %Risk-free interest rate
    
    
    3.48
    %
    
    
    4.88
    %
    
    
    3.27
    %
    
    
    4.92
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair
value of options
granted during the
period
    
    $
    2.75
    
    
    $
    7.14
    
    
    $
    3.13
    
    
    $
    6.53
 Employee Stock Purchase Plan:
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Expected life (in years)
    
    
    1.26
    
    
    
    0.25
    
    
    
    1.31
    
    
    
    0.76Volatility
    
    
    69.8
    %
    
    
    57.4
    %
    
    
    60.8
    %
    
    
    52.2
    %Risk-free interest rate
    
    
    2.33
    %
    
    
    5.02
    %
    
    
    2.80
    %
    
    
    5.15
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair
value of employee stock
issued during the
period
    
    $
    2.43
    
    
    $
    3.14
    
    
    $
    3.13
    
    
    $
    4.00
  Stock Plans 
  Weighted AverageWeighted Average
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsic ValueOptions
    
    
    per Share
    
    
    Term (years)
    
    
    (in 000s)Outstanding at January 1, 2008
    
    
    8,014,920
    
    
    $
    11.42Granted
    
    
    659,500
    
    
    
    5.60Exercised
    
    
    (12,115
    )
    
    
    5.21Forfeited or expired
    
    
    (4,250,993
    )
    
    
    13.04Outstanding at September 30, 2008
    
    
    4,411,312
    
    
    
    9.02
    
    
    
    7.38
    
    
    $
    297Vested and expected to vest
    
    
    4,095,845
    
    
    
    9.09
    
    
    
    7.24
    
    
    $
    278Exercisable at September 30, 2008
    
    
    2,019,430
    
    
    
    9.26
    
    
    
    5.46
    
    
    $
    199
    12




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##### Table of Contents



Weighted-AverageGrant-DateShares
    
    Fair ValueNonvested at January 1, 2008
    
    
    133,000
    
    
    $
    10.73Granted
    
    
    793,480
    
    
    
    8.54Vested
    
    
    (44,330
    )
    
    
    10.73Forfeited
    
    
    
    
    
    
    Nonvested at September 30, 2008
    
    
    882,150
    
    
    
    8.76
  Employee Stock Purchase Plan
 Stock Repurchase Program
  Weighted-AverageShares Repurchased
    
    
    Price per Share
    
    
    Amount RepurchasedCumulative balance at January 1, 2008
    
    
    201
    
    
    $
    7.57
    
    
    $
    1,523Repurchase of common stock
    
    
    562
    
    
    
    5.53
    
    
    
    3,108Cumulative balance at September 30, 2008
    
    
    763
    
    
    
    6.07
    
    
    $
    4,631
 10. RESTRUCTURING
  13




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##### Table of Contents



Restructuring
    
    Severance
    
    
    Professional and Others FeesBalance at January 1, 2008
    
    $
    
    
    
    $
    Restructuring charges
    
    
    1,350
    
    
    
    121Payments
    
    
    (1,263
    )
    
    
    (121
    )Balance at September 30, 2008
    
    $
    87
    
    
    $
    0
  11. CUSTOMER AND GEOGRAPHIC INFORMATION
 Disclosures about Segments of an Enterprise and Related Information
   Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,Customer
    
    2008
    
    2007
    
    2008
    
    2007A
    
    
    21
    %
    
    
    20
    %
    
    
    19
    %
    
    
    18
    %B
    
    
    19
    %
    
    
    16
    %
    
    
    16
    %
    
    
    16
    %C
    
    
    4
    %
    
    
    10
    %
    
    
    5
    %
    
    
    9
    %
  Customer
    
    September 30, 2008
    
    December 31, 2007A
    
    
    29
    %
    
    
    27
    %B
    
    
    16
    %
    
    
    15
    %C
    
    
    7
    %
    
    
    11
    %
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Asia
    
    $
    10,499
    
    
    $
    13,792
    
    
    $
    33,032
    
    
    $
    37,820United States
    
    
    5,307
    
    
    
    6,668
    
    
    
    16,072
    
    
    
    22,377Europe
    
    
    2,959
    
    
    
    3,608
    
    
    
    11,122
    
    
    
    9,711Total
    
    $
    18,765
    
    
    $
    24,608
    
    
    $
    60,226
    
    
    $
    69,908
  12. FAIR VALUE
  14




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##### Table of Contents



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.
  Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsAssets
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Money market mutual funds
    
    $
    2,025
    
    
    $
    2,025
    
    
    $
    
    
    
    $
    Commercial paper
    
    
    11,677
    
    
    
    
    
    
    
    11,677
    
    
    
    Agency obligations
    
    
    6,502
    
    
    
    
    
    
    
    6,502
    
    
    
    Auction-rate securities
    
    
    841
    
    
    
    
    
    
    
    
    
    
    
    841Corporate securities
    
    
    398
    
    
    
    
    
    
    
    398
    
    
    
    Total
    
    $
    21,443
    
    
    $
    2,025
    
    
    $
    18,577
    
    
    $
    841
  15




---



##### Table of Contents



Available-For-SaleSecuritiesBeginning balance at January 1, 2008
    
    $
    Total gains and losses (realized / unrealized):Included in earnings
    
    
    Included in other comprehensive income
    
    
    (159
    )Purchases, issuances, and settlements
    
    
    (500
    )Transfers, in Level 3
    
    
    1,500Ending balance at September 30, 2008
    
    $
    841The amount of total gains or losses for the
period included in earnings attributable to the
change in unrealized gains or losses relating to
assets still held at September 30, 2008
    
    $
    
 13. SUBSEQUENT EVENTS
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  Overview
  16




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##### Table of Contents



Industry Trend
  Financial Highlights
  
    
    Total revenue for the three months ended September 30, 2008 was $18.8 million, a decrease
of $5.3 million, or 22% compared to the three months ended September 30, 2007. Revenue from
Design-to-Silicon-Yield solutions for the three months ended September 30, 2008 decreased
$3.9 million to $13.3 million from the three months ended September 30, 2007. Revenue from
gainshare performance incentives for the three months ended September 30, 2008 decreased
$1.4 million to $5.4 million from the three months ended September 30, 2007. The decrease in
Design-to-Silicon Yield solutions revenue was primarily the result of lower bookings, as
customers have delayed purchases for capacity expansion and investment in leading-edge
technology. The dramatic downturn in the semiconductor industry combined with weakness in
worldwide economies has been the primary contributors to this shortfall. The decrease in
revenue from gainshare performance incentives was primarily the result of reduced volumes in
customer manufacturing facilities.
    
    Net loss for the three months ended September 30, 2008 was $12.2 million, an increase of
$11.3 million compared to $939,000 for the three months ended September 30, 2007. The
increase in net loss was primarily attributable to the establishment of a valuation
allowance against deferred tax assets and decreases in revenue, partially offset by
decreases in operating expenses, the result of cost control efforts.
    
    Net loss per basic and diluted share was $0.44 for the three months ended September 30,
2008 compared to $0.03 for the three months ended September 30, 2007, an increase in net
loss of $0.41 per basic and diluted share.
 17




---



##### Table of Contents




    
    Total revenue for the nine months ended September 30, 2008 was $60.2 million, a decrease
of $9.7 million, or 14% compared to the nine months ended September 30, 2007. Revenue from
Design-to-Silicon-Yield solutions for the nine months ended September 30, 2008 decreased
$8.5 million to $43.8 million from the nine months ended September 30, 2007. Revenue from
gainshare performance incentives for the nine months ended September 30, 2008 decreased $1.2
million to $16.4 million from the nine months ended September 30, 2007. The decrease in
revenue for the nine months ended September 30, 2008 was primarily due to the aforementioned
circumstances impacting the most recent three months results.
    
    Net loss for the nine months ended September 30, 2008 was $16.7 million, increased $12.7
million compared to $4.0 million for the nine months ended September 30, 2007. The increase
in net loss was primarily attributable to the establishment of a valuation allowance against
deferred tax assets, decreases in revenue, and increased expenses associated with our
restructuring plan, partially offset by decreases in operating expenses, the result of such
restructuring.
    
    Net loss per basic and diluted share was $0.60 for the nine months ended September 30,
2008 compared to $0.14 for the nine months ended September 30, 2007, an increase in net loss
of $0.46 per basic and diluted share.
    
    Cash, cash equivalents and investments decreased $2.2 million to $43.0 million during the
nine months ended September 30, 2008, primarily due to the repurchase of $3.1 million of our
common stock.
 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
 Services
 18




---



##### Table of Contents



Software Licenses
 Gainshare Performance Incentives
 Software Development Costs
 Computer Software to be Sold, Leased or Otherwise Marketed
 19




---



##### Table of Contents



Goodwill and Acquired Intangible Assets
 Goodwill and Other Intangible Assets
  Income Taxes
  Stock-Based Compensation
 Share-Based Payment
 Recent Accounting Pronouncements and Accounting Changes
  20




---



##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Revenues:Design-to-silicon-yield solutions
    
    
    71
    %
    
    
    72
    %
    
    
    73
    %
    
    
    75
    %Gainshare performance incentives
    
    
    29
    
    
    
    28
    
    
    
    27
    
    
    
    25Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of design-to-silicon-yield solutions:Direct cost of design-to-silicon-yield solutions
    
    
    38
    
    
    
    33
    
    
    
    37
    
    
    
    33Amortization of acquired technology
    
    
    3
    
    
    
    6
    
    
    
    3
    
    
    
    6Total cost of design-to-silicon-yield solutions
    
    
    41
    
    
    
    39
    
    
    
    40
    
    
    
    39Gross margin
    
    
    59
    
    
    
    61
    
    
    
    60
    
    
    
    61Operating expenses:Research and development
    
    
    42
    
    
    
    38
    
    
    
    43
    
    
    
    38Selling, general and administrative
    
    
    29
    
    
    
    24
    
    
    
    29
    
    
    
    26Amortization of other acquired intangible assets
    
    
    1
    
    
    
    4
    
    
    
    1
    
    
    
    4Restructuring charges
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Total operating expenses
    
    
    72
    
    
    
    66
    
    
    
    75
    
    
    
    68Loss from operations
    
    
    (13
    )
    
    
    (5
    )
    
    
    (15
    )
    
    
    (7
    )Interest and other income (loss), net
    
    
    (2
    )
    
    
    1
    
    
    
    
    
    
    
    2Loss before taxes
    
    
    (15
    )
    
    
    (4
    )
    
    
    (15
    )
    
    
    (5
    )Income tax provision
    
    
    50
    
    
    
    
    
    
    
    13
    
    
    
    Net loss
    
    
    (65
    )%
    
    
    (4
    )%
    
    
    (28
    )%
    
    
    (5
    )%
 Comparison of the Three Months Ended September 30, 2008 and 2007
 Three Months Ended September 30,2008
    
    
    2007Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRevenue
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Design-to-silicon-yield solutions
    
    $
    13,348
    
    
    $
    17,261
    
    
    $
    (3,913
    )
    
    
    (23
    )%
    
    
    71
    %
    
    
    72
    %Gainshare performance incentives
    
    
    5,417
    
    
    
    6,807
    
    
    
    (1,390
    )
    
    
    (20
    )%
    
    
    29
    %
    
    
    28
    %Total
    
    $
    18,765
    
    
    $
    24,068
    
    
    $
    (5,303
    )
    
    
    (22
    )%
    
    
    100
    %
    
    
    100
    %
 Design-to-Silicon-Yield Solutions
 Gainshare Performance Incentives
 21




---



##### Table of Contents



Three Months Ended September 30,2008
    
    
    2007Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofCost of Design-to-Silicon-Yield Solutions
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs of design-to-silicon-yield
solutions
    
    $
    7,152
    
    
    $
    8,100
    
    
    $
    (948
    )
    
    
    (12
    )%
    
    
    38
    %
    
    
    33
    %Amortization of acquired technology
    
    
    631
    
    
    
    1,331
    
    
    
    (700
    )
    
    
    (53
    )%
    
    
    3
    %
    
    
    6
    %Total
    
    $
    7,783
    
    
    $
    9,431
    
    
    $
    (1,648
    )
    
    
    (17
    )%
    
    
    41
    %
    
    
    39
    %
 Costs of Design-to-Silicon-Yield Solutions
 Direct costs of Design-to-Silicon-Yield Solutions.
 Amortization of Acquired Technology
 Three Months Ended September 30,2008
    
    
    2007Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    7,835
    
    
    $
    9,008
    
    
    $
    (1,173
    )
    
    
    (13
    )%
    
    
    42
    %
    
    
    38
    %
 Research and Development.
 Three Months Ended September 30,2008
    
    
    2007Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofSelling, General and Administrative
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    5,401
    
    
    $
    5,789
    
    
    $
    (388
    )
    
    
    (7
    )%
    
    
    29
    %
    
    
    24
    %
 Selling, General and Administrative
 22




---



##### Table of Contents



Three Months Ended September 30,2008
    
    
    2007Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAmortization of Other Acquired Intangible Assets
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of other acquired intangible assets
    
    $
    194
    
    
    $
    985
    
    
    $
    (791
    )
    
    
    (80
    )%
    
    
    1
    %
    
    
    4
    %
 Amortization of Other Acquired Intangible Assets
 Three Months Ended September 30,2008
    
    
    2007Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofInterest and Other Income (Loss), net
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and other income (loss), net
    
    $
    (343
    )
    
    $
    322
    
    
    $
    (665
    )
    
    
    (207
    )%
    
    
    (2
    )%
    
    
    1
    %
 Interest
and Other Income (loss), net
 Three Months Ended September 30,2008
    
    
    2007Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofIncome Tax Provision
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Income tax provision
    
    $
    9,433
    
    
    $
    116
    
    
    $
    9,317
    
    
    
    8,032
    %
    
    
    50
    %
    
    
    
    %
 Income Tax Provision.
 Comparison of the Nine Months Ended September 30, 2008 and 2007
 Nine Months Ended September 30,2008
    
    
    2007Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRevenue
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Design-to-silicon-yield solutions
    
    $
    43,824
    
    
    $
    52,318
    
    
    $
    (8,494
    )
    
    
    (16
    )%
    
    
    73
    %
    
    
    75
    %Gainshare performance incentives
    
    
    16,402
    
    
    
    17,590
    
    
    
    (1,188
    )
    
    
    (7
    )%
    
    
    27
    %
    
    
    25
    %Total
    
    $
    60,226
    
    
    $
    69,908
    
    
    $
    (9,682
    )
    
    
    (14
    )%
    
    
    100
    %
    
    
    100
    %
 Design-to-Silicon-Yield Solutions
 Gainshare Performance Incentives
 23




---



##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofCost of Design-to-Silicon-Yield Solutions
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs of design-to-silicon-yield
solutions
    
    $
    22,185
    
    
    $
    22,976
    
    
    $
    (791
    )
    
    
    (3
    )%
    
    
    37
    %
    
    
    33
    %Amortization of acquired technology
    
    
    1,893
    
    
    
    4,516
    
    
    
    (2,623
    )
    
    
    (58
    )%
    
    
    3
    %
    
    
    6
    %Total
    
    $
    24,078
    
    
    $
    27,492
    
    
    $
    (3,414
    )
    
    
    (12
    )%
    
    
    40
    %
    
    
    39
    %
 Costs of Design-to-Silicon-Yield Solutions
 Direct Costs of Design-to-Silicon-Yield Solutions.
 Amortization of Acquired Technology
 Nine Months Ended September 30,2008
    
    
    2007Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    26,045
    
    
    $
    26,175
    
    
    $
    (130
    )
    
    
    
    %
    
    
    43
    %
    
    
    38
    %
 Research and Development.
 Nine Months Ended September 30,2008
    
    
    2007Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofSelling, General and Administrative
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    17,346
    
    
    $
    18,278
    
    
    $
    (932
    )
    
    
    (5
    )%
    
    
    29
    %
    
    
    26
    %
 Selling, General and Administrative
 Nine Months Ended September 30,2008
    
    
    2007Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAmortization of Other Acquired Intangible Assets
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of other acquired intangible assets
    
    $
    583
    
    
    $
    3,029
    
    
    $
    (2,446
    )
    
    
    (81
    )%
    
    
    1
    %
    
    
    4
    %
 Amortization of Other Acquired Intangible Assets
 Nine Months Ended September 30,2008
    
    
    2007Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRestructuring Charges
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Restructuring charges
    
    $
    1,471
    
    
    $
    
    
    
    $
    1,471
    
    
    
    N/A
    
    
    
    2
    %
    
    
    
    %
 Restructuring Charges
 24




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##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofInterest and Other Income, net
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and other income, net
    
    $
    397
    
    
    $
    1,347
    
    
    $
    (950
    )
    
    
    (71
    )%
    
    
    
    %
    
    
    2
    %
 Interest
and Other Income, net
 Nine Months Ended September 30,2008
    
    
    2007Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofIncome Tax Provision
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Income tax provision
    
    $
    7,777
    
    
    $
    276
    
    
    $
    7,501
    
    
    
    2,718
    %
    
    
    13
    %
    
    
    
    %
 Income Tax Provision.
 Liquidity and Capital Resources
 Operating Activities
   Investing Activities
  25




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##### Table of Contents



Financing Activities
  Liquidity
     Payments due by period2008(Three monthsContractual obligations
    
    remaining)
    
    
    2009-2010
    
    
    2011-2012
    
    
    Thereafter
    
    
    Other
    
    
    TotalDebt principal (1)
    
    $
    28
    
    
    $
    732
    
    
    $
    113
    
    
    $
    
    
    
    $
    
    
    
    $
    873Debt interest
    
    
    6
    
    
    
    32
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    43Capital lease obligations (including interest)
    
    
    25
    
    
    
    48
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    75Operating lease obligations
    
    
    783
    
    
    
    5,534
    
    
    
    4,828
    
    
    
    1,679
    
    
    
    
    
    
    
    12,824Unrecognized tax benefits (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,339
    
    
    
    3,339Total
    
    $
    842
    
    
    $
    6,346
    
    
    $
    4,948
    
    
    $
    1,679
    
    
    $
    3,339
    
    
    $
    17,154
 
 (1)
    
    Amount represents the repayment of an interest free loan of 550,000 and a 400,000 Euros
loan with 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.  26




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Interest Rate Risk
  Foreign Currency and Exchange Risk.
 
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Controls Over Financial Reporting
 27




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 Accounting for Contingencies
 
 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 slowing of demand for nanometer
scale semiconductors;
    
    our inability to develop, market, or sell effective solutions that are outside of our
traditional MPS logic focus;
    
    our existing and potential customers delay in their adoption of the next process
technology;
    
    the development in the industry of alternative methods to enhance the integration between
the semiconductor design and manufacturing processes due to a rapidly evolving market and
the emergence of new technologies;
    
    our existing and potential customers reluctance to understand and accept our innovative
gainshare performance incentives fee component; and
    
    our customers concern about our ability to keep highly competitive information
confidential.
 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.
  28




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##### Table of Contents



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.
  If we do not effectively manage and support our operations and integrate recent and planned
growth, our business strategy may fail.
  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.
  Competition in the market for yield improvement solutions and increased integration between IC
design and manufacturing may intensify in the future, which could impede our ability to grow or
execute our strategy.
  29




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##### Table of Contents



We face operational and financial risks associated with international operations that could
negatively impact our revenue.
  
    
    some of our key engineers and other personnel are foreign nationals and they 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, inconsistencies among, 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
operational regulations and 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;
    
    currency risk associated with cash denominated in foreign
currencies, including the Euro, held by foreign subsidiaries we have
acquired;
    
    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;
    
    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, interference with information or communication networks or systems, and the
resulting disruption to economic activity and business operations.
  
    
    a downturn in Asian economies which 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.
  30




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##### Table of Contents



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.
 Revenue from our gainshare performance incentives is dependent on factors outside of our control,
including the volume of integrated circuits that our customers are able to sell to their
customers.
  Measurement of our gainshare performance incentives requires data collection and is subject to
customer agreement, which can result in uncertainty and cause quarterly results to fluctuate.
  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.
  31




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##### Table of Contents



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 our operating results due to the cyclical nature of
the semiconductor industry.
  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.
  32




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##### Table of Contents



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.
  Key executive officers are critical to our business and we cannot guarantee that they will remain
with us indefinitely.
  33




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##### Table of Contents



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.
  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.
  34




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##### Table of Contents



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.
 If we were required to write down all or part of our goodwill, our net earnings and net worth
could be significantly, negatively affected.
  Changes in effective tax rates could negatively affect our operating results.
  The uncertainty in the credit markets might impact the value of certain auction-rate securities
we have and we might have to record impairment charges in the future.
  35




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Use of Proceeds
 Stock Repurchase
 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 (July 1, 2008 through July 31, 2008)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,866,140Month 2 (August 1, 2008 through August 31, 2008)
    
    
    81,300
    
    
    $
    6.11
    
    
    
    81,300
    
    
    $
    5,369,356Month 3 (September 1, 2008 through September 30, 2008)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,369,356Total
    
    
    81,300
    
    
    $
    6.11
    
    
    
    81,300
 
 (1)
    
    On March 26, 2003, our Board of Directors approved a share repurchase program to purchase up
to $10.0 million of our outstanding common stock. The program was completed in August 2007
with 988,000 shares repurchased at the average price of $10.12. On October 29, 2007, the Board
of Directors approved a new program to repurchase up to an additional $10.0 million of the
Companys common stock on the open market. The right of repurchase stock under this program
will expire on October 29, 2010. As of September 30, 2008, 763,000 shares had been repurchased
at the average price of $6.07 under this program and $5.4 million remained available for
repurchase. 
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  36




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##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description3.01
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc. dated July 31, 2000. (1)3.02
    
    Amended and Restated Bylaws of PDF Solutions, Inc., effective as of August 1, 2005. (2)4.01
    
    Specimen Stock Certificate. (3)4.02
    
    Second Amended and Restated Rights Agreement dated July 6, 2001. (1)10.01
    
    2001 Stock Plan and related agreements, effective as of July 31, 2001, as amended on October 31, 2006.
(4)10.02
    
    2001 Employee Stock Purchase Plan and related agreements, as adopted on September 12, 2001. (1)10.03
    
    Asset Purchase Agreement among PDF Solutions, Inc. and Triant Holdings, Inc. and Triant Technologies
(2005) Inc., dated August 27, 2008. (5)31.01
    
    Certification of the President and Chief Executive Officer 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 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. (6)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. (6)
 
 (1)
    
    Incorporated by reference to PDFs Registration Statement on Form S-1, Amendment No. 7 filed
July 9, 2001 (File No. 333-43192).(2)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed August 9, 2005 (File No.
000-31311).(3)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed September 6, 2001 (File No.
000-31311).(4)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed May 10, 2007 (File No.
000-31311).(5)
    
    Incorporated by reference to PDFs Report on Form 8-K filed September 4, 2008 (File No.
000-31311).(6)
    
    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. 37




---



##### Table of Contents



SIGNATURES
  By:
    /s/ JOHN K. KIBARIANJohn K. KibarianPresident and Chief Executive OfficerBy:
    /s/ KEITH A. JONESKeith A. JonesChief Financial Officer and Vice President of Finance  38




---



##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description3.01
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc. dated July 31, 2000. (1)3.02
    
    Amended and Restated Bylaws of PDF Solutions, Inc., effective as of August 1, 2005. (2)4.01
    
    Specimen Stock Certificate. (3)4.02
    
    Second Amended and Restated Rights Agreement dated July 6, 2001. (1)10.01
    
    2001 Stock Plan and related agreements, effective as of July 31, 2001, as amended on October 31, 2006. (4)10.02
    
    2001 Employee Stock Purchase Plan and related agreements, as adopted on September 12, 2001. (1)10.03
    
    Asset Purchase Agreement among PDF Solutions, Inc. and Triant Holdings, Inc. and Triant Technologies
(2005) Inc., dated August 27, 2008. (5)31.01
    
    Certification of the President and Chief Executive Officer 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 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. (6)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. (6)
 
 (1)
    
    Incorporated by reference to PDFs Registration Statement on Form S-1, Amendment No. 7 filed
July 9, 2001 (File No. 333-43192).(2)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed August 9, 2005 (File No.
000-31311).(3)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed September 6, 2001 (File No.
000-31311).(4)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed May 10, 2007 (File No.
000-31311).(5)
    
    Incorporated by reference to PDFs Report on Form 8-K filed September 4, 2008 (File No.
000-31311).(6)
    
    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. 39