Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period ended June 30, 2010**

 

**or**

 

**£****         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                  to                  **

 

**Commission File Number 000-31311**

 

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**PDF SOLUTIONS, INC.**

(Exactname of Registrant as Specified in its Charter)

 

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

 

**(408) 280-7900**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.Yes x No £

 

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

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes £ No x

 

Thenumber of shares outstanding of the Registrant’s Common Stock as of July 30,2010 was 27,142,120.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                                                                                          | **Page** |
|-----------------------------------------------------------------------------------------------------|----------|
|                                                                                                |     |
| **PART I  FINANCIAL INFORMATION**                                                              |     |
| Item 1.  Financial Statements                                                                       | 3        |
| Condensed  Consolidated Balance Sheets (Unaudited)                                                  | 3        |
| Condensed  Consolidated Statements of Operations (Unaudited)                                        | 4        |
| Condensed Consolidated Statements of Cash Flows  (Unaudited)                                        | 5        |
| Notes to Condensed Consolidated Financial Statements  (Unaudited)                                   | 6        |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 14       |
| Item 3. Quantitative  and Qualitative Disclosures About Market Risk                                 | 23       |
| Item 4. Controls  and Procedures                                                                    | 24       |
| **PART II OTHER INFORMATION**                                                                  |     |
| Item 1. Legal  Proceedings                                                                          | 24       |
| Item 1A. Risk Factors                                                                               | 24       |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                | 25       |
| Item 6. Exhibits                                                                                    | 25       |
| **SIGNATURES**                                                                                      | 26       |
| **INDEX TO EXHIBITS**                                                                               | 27       |

 

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**PART I —FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

**PDF SOLUTIONS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                                                                           | ** ** | **June 30,********2010** | ** ** | **December 31,********2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                                           | ** ** | **(In thousands,**            | ** ** |
| ** **                                                                                                                                                                                                                           | ** ** | **except par values)**        | ** ** |
| **ASSETS**                                                                                                                                                                                                                           | ** ** | ** **                    | ** ** | ** **                        | ** ** |
| Current  assets:                                                                                                                                                                                                                     |       |                          |       |                              |       |
| Cash  and cash equivalents                                                                                                                                                                                                           |       | $                             | 32,092     |                              | $          | 34,899 |   |
| Accounts  receivable, net of allowance of $254 in 2010 and 2009                                                                                                                                                                      |       | 23,378                        |       | 19,809                            |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                           |       | 2,826                         |       | 3,029                             |       |
| Total  current assets                                                                                                                                                                                                                |       | 58,296                        |       | 57,737                            |       |
| Property  and equipment, net                                                                                                                                                                                                         |       | 1,059                         |       | 1,573                             |       |
| Non-current  investments                                                                                                                                                                                                             |       | 718                           |       | 718                               |       |
| Intangible  assets, net                                                                                                                                                                                                              |       | 2,061                         |       | 2,954                             |       |
| Other  non-current assets                                                                                                                                                                                                            |       | 805                           |       | 495                               |       |
| Total  assets                                                                                                                                                                                                                        |       | $                             | 62,939     |                              | $          | 63,477 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                       |       |                          |       |                              |       |
| Current  liabilities:                                                                                                                                                                                                                |       |                          |       |                              |       |
| Accounts  payable                                                                                                                                                                                                                    |       | $                             | 1,202      |                              | $          | 959 |   |
| Accrued  compensation and related benefits                                                                                                                                                                                           |       | 3,704                         |       | 4,438                             |       |
| Taxes  payable and other accrued liabilities                                                                                                                                                                                         |       | 2,575                         |       | 3,502                             |       |
| Deferred  revenue                                                                                                                                                                                                                    |       | 1,680                         |       | 1,584                             |       |
| Billings  in excess of recognized revenue                                                                                                                                                                                            |       | 690                           |       | 1,953                             |       |
| Current  portion of long-term liabilities                                                                                                                                                                                            |       | 98                            |       | 115                               |       |
| Total  current liabilities                                                                                                                                                                                                           |       | 9,949                         |       | 12,551                            |       |
| Long-term  debt                                                                                                                                                                                                                      |       | 50                            |       | 117                               |       |
| Long-term  income taxes payable                                                                                                                                                                                                      |       | 3,181                         |       | 3,218                             |       |
| Other  non-current liabilities                                                                                                                                                                                                       |       | 1,547                         |       | 1,704                             |       |
| Total  liabilities                                                                                                                                                                                                                   |       | 14,727                        |       | 17,590                            |       |
| Stockholders’  equity:                                                                                                                                                                                                          |       |                          |       |                              |       |
| Preferred  stock, $0.00015 par value, 5,000 shares authorized: no shares issued and  outstanding                                                                                                                                     |       | —                        |       | —                            |       |
| Common  stock, $0.00015 par value, 70,000 shares authorized: shares issued 30,757 at  June 30, 2010 and 30,194 at December 31, 2009; shares outstanding  27,142 at June 30, 2010 and 26,651 at December 31, 2009 |       | 4                             |       | 4                                 |       |
| Additional  paid-in-capital                                                                                                                                                                                                          |       | 197,517                       |       | 194,081                           |       |
| Treasury  stock at cost, 3,615 shares at June 30, 2010 and 3,543 shares at  December 31, 2009                                                                                                                              |       | (19,071                       | )          | (18,715                           | )          |
| Accumulated  deficit                                                                                                                                                                                                                 |       | (130,090                      | )          | (130,111                          | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                       |       | (148                          | )          | 628                               |       |
| Total  stockholders’ equity                                                                                                                                                                                                     |       | 48,212                        |       | 45,887                            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                     |       | $                             | 62,939     |                              | $          | 63,477 |   |

 

***See notes to unaudited condensedconsolidated financial statements***

 

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**PDF SOLUTIONS, INC.**

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

 
| ** **                                         | ** ** | **Three Months Ended June 30,**         | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                     | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                         | ** ** | **(In thousands, except per share amounts)** | ** ** |
| ** **                                         | ** ** | ** **                                   | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                          |       |                                         |       |                               |       |   |   |   |   |
| Design-to-silicon-yield  solutions                 |       | $                                            | 10,814     |                               | $          | 7,292 |   | $ | 21,231 |   | $ | 15,086 |   |
| Gainshare  performance incentives                  |       | 4,538                                        |       | 2,291                              |       | 9,373 |   | 4,687 |   |
| Total  revenues                                    |       | 15,352                                       |       | 9,583                              |       | 30,604 |   | 19,773 |   |
|                                               |       |                                         |       |                               |       |   |   |   |   |
| Costs  of design-to-silicon-yield solutions:       |       |                                         |       |                               |       |   |   |   |   |
| Direct  costs of design-to-silicon-yield solutions |       | 5,928                                        |       | 4,863                              |       | 12,250 |   | 11,153 |   |
| Amortization  of acquired technology               |       | 360                                          |       | 360                                |       | 719 |   | 719 |   |
| Total  costs of design-to-silicon-yield solutions  |       | 6,288                                        |       | 5,223                              |       | 12,969 |   | 11,872 |   |
| Gross  profit                                      |       | 9,064                                        |       | 4,360                              |       | 17,635 |   | 7,901 |   |
|                                               |       |                                         |       |                               |       |   |   |   |   |
| Operating  expenses:                               |       |                                         |       |                               |       |   |   |   |   |
| Research  and development                          |       | 4,335                                        |       | 5,069                              |       | 8,297 |   | 10,858 |   |
| Selling,  general and administrative               |       | 4,492                                        |       | 4,108                              |       | 9,071 |   | 8,521 |   |
| Amortization  of other acquired intangible assets  |       | 82                                           |       | 87                                 |       | 168 |   | 174 |   |
| Restructuring  charges (credits)                   |       | (33                                          | )          | 1,202                              |       | (32 | ) | 1,835 |   |
| Total  operating expenses                          |       | 8,876                                        |       | 10,466                             |       | 17,504 |   | 21,388 |   |
|                                               |       |                                         |       |                               |       |   |   |   |   |
| Income  (loss) from operations                     |       | 188                                          |       | (6,106                             | )          | 131 |   | (13,487 | ) |
| Interest  and other income (expense), net          |       | 404                                          |       | (210                               | )          | 666 |   | 114 |   |
| Income  (loss) before income taxes                 |       | 592                                          |       | (6,316                             | )          | 797 |   | (13,373 | ) |
| Income  tax provision                              |       | 275                                          |       | 322                                |       | 776 |   | 586 |   |
| Net  income (loss)                                 |       | $                                            | 317        |                               | $          | (6,638 | ) | $ | 21 |   | $ | (13,959 | ) |
|                                               |       |                                         |       |                               |       |   |   |   |   |
| Net  income (loss) per share:                      |       |                                         |       |                               |       |   |   |   |   |
| Basic                                              |       | $                                            | 0.01       |                               | $          | (0.25 | ) | $ | 0.00 |   | $ | (0.53 | ) |
| Diluted                                            |       | $                                            | 0.01       |                               | $          | (0.25 | ) | $ | 0.00 |   | $ | (0.53 | ) |
|                                               |       |                                         |       |                               |       |   |   |   |   |
| Weighted  average common shares:                   |       |                                         |       |                               |       |   |   |   |   |
| Basic                                              |       | 27,118                                       |       | 26,328                             |       | 27,024 |   | 26,210 |   |
| Diluted                                            |       | 27,357                                       |       | 26,328                             |       | 27,282 |   | 26,210 |   |

 

***See notes to unaudited condensed consolidatedfinancial statements***

 

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**PDF SOLUTIONS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

 
| ** **                                                                                  | ** ** | **Six Months Ended********June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands)**                        | ** ** |
| Operating  activities:                                                                      |       |                                      |       |   |   |
| Net  income (loss)                                                                          |       | $                                         | 21         |   | $ | (13,959 | ) |
| Adjustments  to reconcile net income (loss) to net cash used in operating activities:       |       |                                      |       |   |   |
| Depreciation  and amortization                                                              |       | 505                                       |       | 786 |   |
| Stock-based  compensation expense                                                           |       | 2,975                                     |       | 2,461 |   |
| Purchases  of treasury stock in connection with tax withholdings on restricted stock  units |       | (355                                      | )          | (133 | ) |
| Deferred  taxes                                                                             |       | —                                    |       | 32 |   |
| Amortization  of acquired intangible assets                                                 |       | 887                                       |       | 893 |   |
| Changes  in operating assets and liabilities:                                               |       |                                      |       |   |   |
| Accounts  receivable, net of allowances                                                     |       | (3,569                                    | )          | 8,076 |   |
| Prepaid  expenses and other assets                                                          |       | 156                                       |       | 2,170 |   |
| Accounts  payable                                                                           |       | 312                                       |       | 213 |   |
| Accrued  compensation and related benefits                                                  |       | (632                                      | )          | (1,381 | ) |
| Taxes  payable and other accrued liabilities                                                |       | (1,496                                    | )          | (799 | ) |
| Deferred  revenues                                                                          |       | 88                                        |       | 176 |   |
| Billings  in excess of recognized revenues                                                  |       | (1,263                                    | )          | 49 |   |
| Net  cash used in operating activities                                                      |       | (2,371                                    | )          | (1,416 | ) |
| Investing  activities:                                                                      |       |                                      |       |   |   |
| Maturities  and sales of available-for-sale securities                                      |       | —                                    |       | 7,053 |   |
| Purchases  of property and equipment                                                        |       | (59                                       | )          | (266 | ) |
| Net  cash provided by (used in) investing activities                                        |       | (59                                       | )          | 6,787 |   |
| Financing  activities:                                                                      |       |                                      |       |   |   |
| Proceeds  from exercise of stock options                                                    |       | 50                                        |       | — |   |
| Proceeds  from Employee Stock Purchase Plan                                                 |       | 411                                       |       | 417 |   |
| Principal  payments on long-term obligations                                                |       | (60                                       | )          | (80 | ) |
| Net  cash provided by financing activities                                                  |       | 401                                       |       | 337 |   |
| Effect  of exchange rate changes on cash and cash equivalents                               |       | (778                                      | )          | (1,029 | ) |
| Net  increase (decrease) in cash and cash equivalents                                       |       | (2,807                                    | )          | 4,679 |   |
| Cash  and cash equivalents, beginning of period                                             |       | 34,899                                    |       | 31,686 |   |
| Cash  and cash equivalents, end of period                                                   |       | $                                         | 32,092     |   | $ | 36,365 |   |
|                                                                                        |       |                                      |       |   |   |
| Supplemental  disclosure of cash flow information:                                          |       |                                      |       |   |   |
| Cash  paid during the period for:                                                           |       |                                      |       |   |   |
| Income  taxes                                                                               |       | $                                         | 1,086      |   | $ | 679 |   |
| Interest                                                                                    |       | $                                         | 5          |   | $ | 11 |   |

 

***See notes to unaudited condensed consolidatedfinancial statements***

 

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**PDF SOLUTIONS, INC.**

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

 

**1. BASIS OFPRESENTATION**

 

*Basis ofPresentation*

 

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

 

The condensed consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries after the elimination of all significant intercompany balances andtransactions.

 

*SignificantEstimates* — The preparation of the condensedconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets, liabilities,revenues and expenses. A significant portion of the Company’s revenues requireestimates with respect to total costs which may be incurred and revenuesearned. Actual results could differ from these estimates.

 

*RevenueRecognition* — The Company derives revenues from twosources: Design-to-Silicon-Yield Solutions, which includes Services andSoftware Licenses, and Gainshare Performance Incentives.

 

*Design-to-Silicon-Yield Solutions* — Revenuesthat are derived from Design-to-Silicon-Yield solutions come from services andsoftware licenses. The Company recognizes revenues for each element ofDesign-to-Silicon-Yield solutions as follows:

 

*Services* — The Companygenerates a significant portion of its Design-to-Silicon-Yield solutionsrevenues from fixed-price solution implementation service contracts deliveredover a specific period of time. These contracts require reliable estimation ofcosts to perform obligations and the overall scope of each engagement. Revenuesunder contracts for solution implementation services are recognized as servicesare performed using the cost-to-cost percentage of completion method ofcontract accounting. Losses on solution implementation contracts are recognizedin the period when they become probable. Revisions in profit estimates arereflected in the period in which the conditions that require the revisionsbecome known and can be estimated.

 

Onoccasion, the Company licenses its software products as a component of itsfixed-price service contract. In such instances, the software products arelicensed to customers over a specified term of the agreement with support andmaintenance to be provided over the license term.

 

In October 2009, the Financial Accounting Standards Board(“FASB”) amended theaccounting standards for multiple-deliverable revenuearrangements to:

 

·**       **provideupdated guidance on whether multiple deliverables exist, how the deliverablesin an arrangement should be separated, and how the consideration should beallocated;

 

·**       **require anentity to allocate revenue in an arrangement using estimated selling prices (“ESP”)of deliverables if a vendor does not have vendor-specific objective evidence ofselling price (“VSOE”) or third-party evidence of selling price (“TPE”); and

 

·**       **eliminatethe use of the residual method and require an entity to allocate revenue usingthe relative selling price method.

 

The Company elected to early adopt this accountingstandard on April 1, 2010 on a prospective basis for applicabletransactions originating or materially modified after January 1, 2010.

 

This guidance does not generally change the accountingfor the Company’s software transactions. It only affects revenue arrangementsthat include both solution implementation services and software products. Theamount of product and service revenue recognized in a given period is affectedby the Company’s judgment as to whether an arrangement includes multipledeliverables and, if so, its determination of the fair value of eachdeliverable. In general, VSOE does not exist for the Company’s solutionimplementation services and software products. Because its services andproducts include its unique technology, the Company is 

 

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notable to determine TPE. Therefore, the Company will use ESP in its allocation ofarrangement consideration. In determining ESP, the Company applies significantjudgment as it weighs a variety of factors, based on the facts andcircumstances of the arrangement. The Company typically arrives at an ESP for aproduct or service that is not sold separately by considering company-specificfactors such as geographies, internal costs, gross margin objectives, pricingpractices used to establish bundled pricing, and existing portfolio pricing anddiscounting.

 

Afterfair value is established for each deliverable, the total transaction amount isallocated to each deliverable based upon its fair value. Fees allocated tosolution implementation services are recognized using the cost-to-costpercentage of completion method of contract accounting. Fees allocated tosoftware and related support and maintenance are recognized under softwarerevenue recognition guidance.

 

Prior to the adoption of this new accounting standard,under these arrangements, where VSOE existed for the support and maintenanceelement, the support and maintenance revenue was recognized separately over theterm of the supporting period and the remaining fee was recognized as servicesare performed using the cost-to-cost percentage of completion method ofcontract accounting. Whereas VSOE did not exist to allocate a portion of thetotal fixed-price to the undelivered elements, revenue was recognized for thetotal fixed-price as the lesser of either the percentage of completion methodof contract accounting or ratably over the longer of either the term of theagreement or the support period.

 

The adoption of this new accounting standard increasedtotal revenues for the second quarter of 2010 by approximately $2.1 million andhad no impact on revenue recognized for the first quarter of 2010, as shown inthe following table (in thousands). Due to the nature of the arrangements, the Companyis currently unable to determine the impact of the adoption of this newstandard on future revenues.

 
| ** **     | ** ** | **Three Months  Ended June 30, 2010** | ** ** | **Six Months Ended  June 30, 2010**                                             | ** ** |
|----------------|------------|--------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **As Reported**                            | ** ** | **Pro Forma Basis  as  if the Previous  Accounting  Guidance were********in Effect** | ** ** | **As Reported** | ** ** | **Pro Forma Basis  as  if the Previous  Accounting  Guidance were********in Effect** | ** ** |
| Total revenues |       | $                                          | 15,352     |                                                                                 | $          | 13,250 |   | $ | 30,604 |   | $ | 28,502 |   |
|                |            |                                            |            |                                                                                      |            |  |  |  |  |  |  |  |  |

 

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

 

*Gainshare Performance Incentives* — Whenthe Company enters into a contract to provide yield improvement services, thecontract usually includes two components: (1) a fixed fee for performanceby the Company of services delivered over a specific period of time; and (2) againshare performance incentives component where the customer may pay avariable fee, usually after the fixed fee period has ended. Revenue derivedfrom gainshare performance incentives represents profit sharing and performanceincentives earned based upon the Company’s customers reaching certain definedoperational levels established in related solution implementation servicecontracts. Gainshare performance incentives periods are usually subsequent tothe delivery of all contractual services and therefore have no cost to theCompany. Due to the uncertainties surrounding attainment of such operationallevels, the Company recognizes gainshare performance incentives revenue (to theextent of completion of the related solution implementation contract) uponreceipt of performance reports or other related information from the customersupporting the determination of amounts and probability of collection.

 

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

 

**2. RECENTACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES**

 

InOctober 2009, the FASB issued an Accounting Standards Update (“ASU”) onsoftware revenue recognition in relation to revenue arrangements that includesoftware elements. This standard removes from the scope of software revenuerecognition accounting, revenue arrangements for tangible products that contain bothsoftware and non-software components that function together to deliver thetangible products’ essential functionality. It also amends the determination ofhow arrangement consideration should be allocated to deliverables in amultiple-deliverable revenue arrangement. This update is effective prospectively for revenue arrangements enteredinto or materially modified in fiscal years beginning on or after June 15,2010. Effective April 1, 2010, the Company elected to early adopt thisstandard with prospective application. The adoption of this standardwill not have a material impact on the Company’s financial results andposition.

 

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InOctober 2009, the FASB issued an ASU on revenue recognition in relation to**multiple-deliverable revenue arrangements.This update provides guidance on accounting for multiple-deliverablearrangements to enable vendors to account for products or services(deliverables) separately rather than as a combined unit. The amendments inthis update will replace the term fair value in the revenue allocation guidancewith selling price to clarify that the allocation of revenue is based onentity-specific assumptions rather than assumptions of a marketplaceparticipant. This update is effective prospectively for revenue arrangementsentered into or materially modified in fiscal years beginning on or after June 15,2010. Effective April 1, 2010, the Company elected to early adopt thisstandard with prospective application. Refer to Note 1 “Basis of Presentation”to the Condensed Consolidated Financial Statements for further discussion ofthe impact of the early adoption of this standard on the Company’s financialresults and position.

 

EffectiveJanuary 1, 2010, the Company adopted FASB’s amendment to an ASU which requires additional fair valuedisclosures.  This amendment requiresdisclosures in relation to inputs and valuation techniques used to measure fairvalue as well as disclosures in relation to significant transfers, beginning inthe first quarter of 2010. Additionally, this amendment requires the presentationof disaggregated activity within the reconciliation for fair value measurementsusing significant unobservable inputs (Level 3), beginning in the first quarterof 2011. The adoption of this standard did not have a material impact onthe Company’s financial results and position.

 

**3.INVESTMENTS**

 

The following tablesummarizes the Company’s investments at June 30, 2010 and December 31,2009 (in thousands):

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

 

As of June 30, 2010 andDecember 31, 2009, the Company’s investments consisted entirely of auction-ratesecurities. Please refer to Note 12 “Fair Value” for further discussion ofauction-rate securities.

 

**4. ACCOUNTSRECEIVABLE**

 

Accounts receivable includeamounts that are unbilled at the end of the period. Unbilled accountsreceivable are determined on an individual contract basis and wereapproximately $7.4 million and $6.4 million as of June 30, 2010 and December 31,2009, respectively.

 

**5. ACQUIREDINTANGIBLE ASSETS**

 

Impairment on acquiredintangible assets is evaluated when indicators of impairment exist. Acquiredintangible assets are amortized over their useful lives unless these lives aredetermined to be indefinite. During the six months ended June 30, 2010,there were no indicators of impairment related to the Company’s intangibleassets.

 

The following table providesinformation relating to the intangible assets as of June 30, 2010 and December 31,2009 (in thousands):

 
| **Acquired Identifiable Intangible** | ** ** | **Amortization********Period********(Years)** | ** ** | **June 30, 2010  Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Foreign********Currency********Translation** | ** ** | **June 30, 2010********Net Carrying  Amount** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Acquired  technology                           |       | 4-5                                           |       |                                                     | $          | 11,800                        |       | $                                              | (10,347    | )                                                            | $          | — |   | $ | 1,453 |   |
| Brand  name                                    |       | 4                                             |       |                                                     | 510        |                          | (486       | )                                              | —     |                                                         | 24         |   |
| Customer  relationships and backlog            |       | 1-6                                           |       |                                                     | 3,420      |                          | (3,125     | )                                              | —     |                                                         | 295        |   |
| Patents  and applications                      |       | 7                                             |       |                                                     | 1,400      |                          | (1,111     | )                                              | —     |                                                         | 289        |   |
| Other  acquired intangibles                    |       | 4                                             |       |                                                     | 255        |                          | (277       | )                                              | 22         |                                                         | —     |   |
| Total                                          |       |                                          |       |                                                     | $          | 17,385                        |       | $                                              | (15,346    | )                                                            | $          | 22 |   | $ | 2,061 |   |

 

8

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

 

The Company expects theannual amortization of acquired intangible assets to be as follows (inthousands):

 
| **Year  Ending December 31,** | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
| 2010  (remaining six-month period) |       | $          | 692        |   |
| 2011                               |       | 830        |       |
| 2012                               |       | 435        |       |
| 2013                               |       | 74         |       |
| 2014                               |       | 30         |       |
| Total                              |       | $          | 2,061      |   |

 

**6.STOCKHOLDERS’ EQUITY**

 

Stock-based compensation isestimated at the grant date based on an award’s fair value and is recognized ona straight-line basis over the vesting period of the stock purchase rights orstock options, as applicable, generally four years*.*Stock-based compensation expenses before taxes related to the Company’semployee stock purchase plan and stock-option plans were allocated as follows(in thousands):

 
| ** **                                 | ** ** | **Three Months********Ended June 30,** | ** ** | **Six Months********Ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cost  of design-to-silicon yield-solutions |       | $                                           | 439        |                                      | $          | 444 |   | $ | 1,041 |   | $ | 833 |   |
| Research  and development                  |       | 349                                         |       | 404                                       |       | 696 |   | 752 |   |
| Selling,  general and administrative       |       | 682                                         |       | 477                                       |       | 1,238 |   | 876 |   |
| Stock-based  compensation expenses         |       | $                                           | 1,470      |                                      | $          | 1,325 |   | $ | 2,975 |   | $ | 2,461 |   |

 

The Company estimated thefair value of share-based awards granted during the period using theBlack-Scholes-Merton option-pricing model with the following weighted averageassumptions, resulting in the following weighted average fair values:

 

*Stock Plans:*

 
| ** **                                                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                  | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Expected  life (in years)                                                   |       | 5.24                                 |       | 5.16                               |       | 5.24 |   | 5.16 |   |
| Volatility                                                                  |       | 61.9                                 | %          | 61.7                               | %          | 62.4 | % | 61.3 | % |
| Risk-free  interest rate                                                    |       | 1.95                                 | %          | 3.16                               | %          | 2.10 | % | 2.03 | % |
| Expected  dividend                                                          |       | —                               |       | —                             |       | — |   | — |   |
| Weighted  average fair value per share of options granted during the period |       | $                                    | 2.52       |                               | —     |   | $ | 2.35 |   | $ | 0.57 |   |
|                                                                             |            |                                      |            |                                    |            |  |  |  |  |  |  |  |

 

*Employee Stock Purchase Plan:*

 
| ** **                                                                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                        | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Expected  life (in years)                                                         |       | 1.25                                 |       | 1.25                               |       | 1.25 |   | 1.25 |   |
| Volatility                                                                        |       | 65.6                                 | %          | 80.1                               | %          | 69.8 | % | 79.9 | % |
| Risk-free  interest rate                                                          |       | 0.49                                 | %          | 1.22                               | %          | 0.54 | % | 1.25 | % |
| Expected  dividend                                                                |       | —                               |       | —                             |       | — |   | — |   |
| Weighted  average fair value per share of employee stock issued during the period |       | $                                    | 1.71       |                               | $          | 0.73 |   | $ | 1.52 |   | $ | 0.77 |   |
|                                                                                   |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

On June 30, 2010, theCompany has in effect the following stock-based compensation plans:

 

*StockPlans —*During 2001, the Company terminated the 1996 and1997 Stock Plans as to future option grants, and adopted the 2001 Stock Plan.Under the 2001 Stock Plan, on January 1 of each year, starting with year2002, the number of shares in the reserve will increase by the lesser of (1) 3,000,000shares, (2) 5% of the outstanding common stock on the last day of theimmediately 

 

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preceding year, or (3) thenumber of shares determined by the board of directors. Under the 2001 StockPlan, the Company may grant stock purchase rights and stock options to purchaseshares of common stock to employees, directors and consultants. The exerciseprice for stock options must generally be not less than the fair market valueon the date of grant for incentive stock options and not less than 85% of fairmarket value on the date for non-statutory stock options. Stock optionsgenerally expire ten years from the date of grant and become vested andexercisable ratably over a four-year period.

 

Stock option activity underthe Company’s plans during the six months ended June 30, 2010 was asfollows:

 
| ** **                                       | ** ** | **Number of********Options********(in thousands)** | ** ** | **Weighted Average********Exercise Price********per Share** | ** ** | **Weighted Average********Remaining********Contractual********Term (years)** | ** ** | **Aggregate********Intrinsic Value********(in thousands)** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Outstanding,  January 1, 2010               |       | 3,849                                                        |       | $                                                                          | 6.41       |                                                                                   |       |                                                                 |       |   |
| Granted                                          |       | 291                                                          |       | 4.41                                                                       |       |                                                                                   |       |                                                                 |       |
| Exercised                                        |       | (24                                                          | )          | 2.12                                                                       |       |                                                                                   |       |                                                                 |       |
| Canceled                                         |       | (124                                                         | )          | 4.65                                                                       |       |                                                                                   |       |                                                                 |       |
| Expired                                          |       | (57                                                          | )          | 9.54                                                                       |       |                                                                                   |       |                                                                 |       |
| Outstanding,  June 30, 2010                 |       | 3,935                                                        |       | 6.30                                                                       |       | 7.67                                                                                   |       | $                                                                    | 1,972      |   |
| Vested  and expected to vest, June 30, 2010 |       | 3,531                                                        |       | 6.55                                                                       |       | 7.49                                                                                   |       | $                                                                    | 1,659      |   |
| Exercisable,  June 30, 2010                 |       | 1,543                                                        |       | 9.47                                                                       |       | 5.36                                                                                   |       | $                                                                    | 129        |   |
|                                                  |            |                                                              |            |                                                                            |            |                                                                                        |            |                                                                      |            |  |  |

 

The aggregate intrinsicvalue in the table above represents the total intrinsic value based on theCompany’s closing stock price of $4.80 as of June 30, 2010, which wouldhave been received by the option holders had all “in-the-money” option holdersexercised their options as of that date. The total intrinsic value of optionsexercised during the six months ended June 30, 2010 was $64,000.

 

As of June 30, 2010,there was $4.3 million of total unrecognized compensation cost related tononvested stock options. That cost is expected to be recognized over a weightedaverage period of 2.9 years. The total fair value of options vested during thesix months ended June 30, 2010 was $486,000.

 

Nonvested restricted stockunits activity during the six months ended June 30, 2010 was as follows:

 
| ** **                       | ** ** | **Units********(in thousands)** | ** ** | **Weighted Average********Grant Date********Fair Value** | ** ** |
|----------------------------------|------------|---------------------------------|------------|----------------------------------------------------------|------------|
| Nonvested,  January 1, 2010 |       | 979                             |       | $                                                        | 6.84       |   |
| Granted                          |       | 28                              |       | 3.96                                                     |       |
| Vested                           |       | (228                            | )          | 6.07                                                     |       |
| Forfeited                        |       | (60                             | )          | 5.94                                                     |       |
| Nonvested,  June 30, 2010   |       | 719                             |       | 7.19                                                     |       |
|                                  |            |                                 |            |                                                          |            |  |

 

As of June 30, 2010,there was $3.8 million of total unrecognized compensation cost related tononvested restricted stock units. That cost is expected to be recognized over aweighted average period of 1.8 years. The total compensation expense related toshares vested during the six months ended June 30, 2010 was $1.6 million.

 

*EmployeeStock Purchase Plan*— In July 2001, the Company adopted an EmployeeStock Purchase Plan (“Purchase Plan”), under which eligible employees cancontribute up to 10% of their compensation, as defined in the Purchase Plan,towards the purchase of shares of PDF common stock at a price of 85% of thelower of the fair market value at the beginning of the offering period or theend of each six-month offering period. Under the Purchase Plan, on January 1of each year, starting with 2002, the number of shares reserved for issuancewill automatically increase by the lesser of (1) 675,000 shares,(2) 2% of the Company’s outstanding common stock on the last day of theimmediately preceding year, or (3) the number of shares determined by theboard of directors. For the six months ended June 30, 2010, the PurchasePlan compensation expense was $95,000.

 

*StockRepurchase Program*— On March 26, 2003, the Company’s Board ofDirectors approved a share repurchase program to purchase up to $10.0 millionof its outstanding common stock. The program was completed in August 2007with 988,000 shares repurchased at the average price of $10.12 per share. On October 29,2007, the Board of Directors approved a new program to repurchase up to anadditional $10.0 million of the Company’s common stock on the open market. Theright to repurchase stock under this program will expire on October 29,2010. As of June 30, 2010, 2.6 million shares have been repurchased at theaverage price of $3.45 per share under this program and $930,000 remainedavailable for future repurchases.

 

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**7. RESTRUCTURING**

 

In 2008, the Companyannounced two restructuring plans to better allocate its resources to improveits operational results in light of current market conditions, one on April 29,2008 and the other on October 28, 2008.

 

For the plan announced on April 29,2008, the Company recorded restructuring charges of $1.5 million during thethree months ended June 30, 2008, which primarily consisted of employeeseverance costs of $1.4 million. All severance costs and related fees were paidout and the activities were completed as of March 31, 2009.

 

For the plan announced on October 28,2008, the Company recorded restructuring charges of $6.4 million, primarilyconsisting of employee severance costs of $4.5 million and facility exit costsof $1.8 million. Of the $6.4 million, a credit of $32,000 was recorded duringthe six months ended June 30, 2010. The following table summarizes theactivities of these restructuring liabilities (in thousands):

 
| **Restructuring Announced on October 28, 2008** | ** ** | **Severance** | ** ** | **Facility Exit** | ** ** | **Professional********and Other Fees** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|---------------|------------|-------------------|------------|----------------------------------------|------------|-----------|------------|
| Balances, January 1, 2008                       |       | $             | —     |              | $          | —                                 |       | $         | —     |   | $ | — |   |
| Restructuring charges (credits)                      |       | 909           |       | 1,251             |       | 36                                     |       | 2,196     |       |
| Adjustment of deferred rent                          |       | —        |       | (266              | )          | —                                 |       | (266      | )          |
| Non-cash adjustment                                  |       | 36            |       | 266               |       | —                                 |       | 302       |       |
| (Payments) refunds                                   |       | (85           | )          | (143              | )          | (5                                     | )          | (233      | )          |
| Balances, December 31, 2008                     |       | 860           |       | 1,108             |       | 31                                     |       | 1,999     |       |
| Restructuring charges (credits)                      |       | 3,515         |       | 783               |       | 214                                    |       | 4,512     |       |
| (Payments) refunds                                   |       | (4,151        | )          | (558              | )          | (183                                   | )          | (4,892    | )          |
| Balances, December 31, 2009                     |       | 224           |       | 1,333             |       | 62                                     |       | 1,619     |       |
| Restructuring charges (credits)                      |       | 53            |       | 19                |       | (104                                   | )          | (32       | )          |
| (Payments) refunds                                   |       | (162          | )          | (321              | )          | 42                                     |       | (441      | )          |
| Balances, June 30, 2010                         |       | $             | 115        |              | $          | 1,031                                  |       | $         | —     |   | $ | 1,146 |   |

 

As of June 30, 2010, ofthe remaining accrual of $1.1 million, $601,000 was included in accruedliabilities and $545,000 was included in long-term other liabilities. Accruedseverance of $115,000 is expected to be paid out in the three months ending September 30,2010. Accrued facility exit costs will be paid in accordance with the leasepayment schedule through 2013.

 

**8. INCOMETAXES**

 

The Company accounts fortemporary differences between the book and tax basis of assets and liabilitiesby recording deferred tax assets and liabilities. The Company must assess thelikelihood that its deferred tax assets will be recovered from future taxableincome and, to the extent the Company believes that recovery is not likely, theCompany must establish a valuation allowance. Changes in the Company’s netdeferred tax assets and valuation allowance in a period are recorded throughthe income tax provision in the condensed consolidated statements of operations.

 

The Company classifies itsliabilities related to unrecognized tax benefits as long-term. The Companyincludes interest and penalties related to unrecognized tax benefits within itsincome tax provision. As of June 30, 2010 and December 31, 2009, theCompany had $492,000 and $539,000, respectively, accrued for payment ofinterest and penalties related to unrecognized tax benefits.

 

Income tax provision for thethree and six months ended June 30, 2010 was $275,000 and $776,000,respectively, primarily consisting of foreign withholding taxes and changes inunrecognized tax benefits. Income tax provision for the three and six monthsended June 30, 2009 was $322,000 and $586,000, respectively, primarilyconsisting of foreign withholding taxes and statutory taxes associated with ourforeign subsidiaries.

 

The Company’s total amountof unrecognized tax benefits as of June 30, 2010 was $8.8 million, ofwhich $3.2 million, if recognized, would affect the Company’s effective taxrate. The Company’s total amount of unrecognized tax benefits as of December 31,2009 was $8.3 million, of which $2.7 million, if recognized, would affect theCompany’s effective tax rate. As of June 30, 2010, the Company hasrecognized a net amount of $3.2 million as long-term taxes payable forunrecognized tax benefits in its condensed consolidated balance sheet. TheCompany does not believe that it is reasonably possible that the change inunrecognized tax benefits over the next twelve months will materially impactits results of operations and financial position.

 

The Company conductsbusiness globally and, as a result, files numerous consolidated and separateincome tax returns in the U.S. federal, various state and foreignjurisdictions. Because the Company used some of the tax attributes carriedforward from previous years to tax years that are still open, statutes oflimitation remain open for all tax years to the extent of the attributescarried forward into tax year 2001 for federal tax purposes and tax year 2002for California tax purposes. With few exceptions, the Company is no longersubject to income tax examinations in its major foreign subsidiaries’jurisdictions for years before 2004.

 

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**9. NETINCOME (LOSS) PER SHARE**

 

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

 
| ** **                                                 | ** ** | **Three Months********Ended June 30,** | ** ** | **Six Months********Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)                                         |       | $                                           | 317        |                                      | $          | (6,638 | ) | $ | 21 |   | $ | (13,959 | ) |
| Weighted  average common shares outstanding — basic   |       | 27,118                                      |       | 26,328                                    |       | 27,024 |   | 26,210 |   |
| Dilutive  effect of employee equity plan                   |       | 239                                         |       | —                                    |       | 258 |   | — |   |
| Weighted  average common shares outstanding — diluted |       | 27,357                                      |       | 26,328                                    |       | 27,282 |   | 26,210 |   |
| Net  income (loss) per share:                              |       |                                        |       |                                      |       |   |   |   |   |
| Basic                                                      |       | $                                           | 0.01       |                                      | $          | (0.25 | ) | $ | 0.00 |   | $ | (0.53 | ) |
| Diluted                                                    |       | $                                           | 0.01       |                                      | $          | (0.25 | ) | $ | 0.00 |   | $ | (0.53 | ) |

 

Thefollowing table sets forth potential shares of common stock that are notincluded in the diluted net income (loss) per share calculation above becauseto do so would be anti-dilutive for the periods indicated (in thousands):

 
| ** **                        | ** ** | **Three Months********Ended June 30,** | ** ** | **Six Months********Ended June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Outstanding  options              |       | 3,742                                       |       | 4,249                                     |       | 3,695 |   | 4,310 |   |
| Nonvested  restricted stock units |       | 346                                         |       | 588                                       |       | 364 |   | 712 |   |
| Total                             |       | 4,088                                       |       | 4,837                                     |       | 4,059 |   | 5,022 |   |

 

**10.COMPREHENSIVE LOSS**

 

The components ofcomprehensive loss are as follows (in thousands):

 
| ** **                                                           | ** ** | **Three Months********Ended June 30,** | ** ** | **Six Months********Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)                                                   |       | $                                           | 317        |                                      | $          | (6,638 | ) | $ | 21 |   | $ | (13,959 | ) |
| Unrealized  loss on investments, net of income tax effects           |       | —                                      |       | (24                                       | )          | — |   | (61 | ) |
| Foreign  currency translation adjustments, net of income tax effects |       | (482                                        | )          | 226                                       |       | (777 | ) | (1,041 | ) |
| Comprehensive  loss                                                  |       | $                                           | (165       | )                                         | $          | (6,436 | ) | $ | (756 | ) | $ | (15,061 | ) |

 

**11.CUSTOMER AND GEOGRAPHIC INFORMATION**

 

Operating segments aredefined as components of an enterprise about which separate financialinformation is available that is evaluated regularly by the chief operatingdecision maker, or group, in deciding how to allocate resources and inassessing performance.

 

The Company’s chiefoperating decision maker, the Chief Executive Officer, reviews discretefinancial information presented on a consolidated basis for purposes of makingoperating decisions and assessing financial performance. Accordingly theCompany considers itself to be in one operating segment, specifically thelicensing and implementation of yield improvement solutions for integratedcircuit manufacturers.

 

The Company had revenuesfrom individual customers in excess of 10% of total revenues as follows:

 
| ** **   | ** ** | **Three Months********Ended June 30,** | ** ** | **Six Months********Ended June 30,** | ** ** |
|--------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| **Customer** | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| A            |       | 31                                          | %          | 12                                        | %          | 23 | % | 10 | % |
| B            |       | 15                                          | %          | *                                         | %          | 17 | % | * | % |
| C            |       | 13                                          | %          | 22                                        | %          | 12 | % | 26 | % |
| D            |       | 10                                          | %          | *                                         | %          | 10 | % | * | % |

 

----

*  represents less than 10%

 

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The Company had grossaccounts receivable from the following individual customers in excess of 10% ofgross accounts receivable as follows:

 
| **Customer** | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------|------------|------------------------|------------|----------------------------|------------|
| A            |       | 21                     | %          | 10                         | %          |
| B            |       | 24                     | %          | 16                         | %          |
| C            |       | 16                     | %          | 16                         | %          |
| D            |       | *                      | %          | 14                         | %          |
| E            |       | 12                     | %          | 11                         | %          |
| F            |       | 12                     | %          | *                          | %          |
| G            |       | *                      | %          | 10                         | %          |

 

----

*  represents less than 10%

 

Revenues from customers bygeographic area are as follows (in thousands):

 
| ** **     | ** ** | **Three Months********Ended June 30,** | ** ** | **Six Months********Ended June 30,** | ** ** |
|----------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **2010**                                    | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Asia           |       | $                                           | 11,273     |                                      | $          | 5,586 |   | $ | 21,570 |   | $ | 11,044 |   |
| United  States |       | 2,602                                       |       | 2,978                                     |       | 5,983 |   | 7,044 |   |
| Europe         |       | 1,477                                       |       | 1,019                                     |       | 3,051 |   | 1,685 |   |
| Total          |       | $                                           | 15,352     |                                      | $          | 9,583 |   | $ | 30,604 |   | $ | 19,773 |   |

 

**12. FAIRVALUE**

 

Fair value is the exitprice, or the amount that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants asof the measurement date. The multiple assumptions used to value financialinstruments are referred to as inputs, and a hierarchy for inputs used inmeasuring fair value is established, that maximizes the use of observableinputs and minimizes the use of unobservable inputs by requiring that the mostobservable inputs be used when available. Observable inputs reflect assumptionsmarket participants would use in pricing an asset or liability based on marketdata obtained from independent sources while unobservable inputs reflect areporting entity’s pricing based upon its own market assumptions. These inputsare ranked according to a fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value into three broad levels.

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

 

The following tablerepresents the Company’s assets measured at fair value on a recurring basis asof June 30, 2010 and December 31, 2009 and the basis for thatmeasurement (in thousands):

 
| **Assets**                 | ** ** | **Total** | ** ** | **Quoted Prices in********Active Markets for********Identical Assets********(Level 1)** | ** ** | **Significant Other********Observable Inputs********(Level 2)** | ** ** | **Significant********Unobservable Inputs********(Level 3)** | ** ** |
|----------------------------|------------|-----------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Money  market mutual funds |       | $         | 25,273     |                                                                                    | $          | 25,273                                                          |       | $                                                           | —     |   | $ | — |   |
| Auction-rate  securities   |       | 718       |       | —                                                                                  |       | —                                                          |       | 718                                                         |       |
| Total                      |       | $         | 25,991     |                                                                                    | $          | 25,273                                                          |       | $                                                           | —     |   | $ | 718 |   |

 
| **Assets**                | ** ** | **Total** | ** ** | **Quoted Prices in********Active Markets for********Identical Assets********(Level 1)** | ** ** | **Significant Other********Observable Inputs********(Level 2)** | ** ** | **Significant********Unobservable Inputs********(Level 3)** | ** ** |
|---------------------------|------------|-----------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Money market mutual funds |       | $         | 25,250     |                                                                                    | $          | 25,250                                                          |       | $                                                           | —     |   | $ | — |   |
| Auction-rate securities   |       | 718       |       | —                                                                                  |       | —                                                          |       | 718                                                         |       |
| Total                     |       | $         | 25,968     |                                                                                    | $          | 25,250                                                          |       | $                                                           | —     |   | $ | 718 |   |

 

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The Company holdsinvestments in auction-rate securities (“ARS”), which are variable rate debt instrumentswhose interest rates are reset through a “dutch” auction process at regularintervals, typically every 28 days. All ARS are backed by pools of studentloans guaranteed by governmental agencies and private entities, and were ratedAAA/Aaa at the date of acquisition. The liquidity and fair value of thesesecurities has been reduced by the uncertainty in the credit markets and theexposure of these securities to the financial condition of bond insurancecompanies, as evidenced by the rating downgrade of MBIA (bond insurer on one ofthe Company’s ARS) from Aaa to A2, by Moody’s Investor Services on June 19,2008. All ARS have failed to sell at auction since February 2008, and as aresult, their interest rates were reset to the maximum LIBOR + 150 basispoints. The only activity associated with these instruments since February 2008was the repurchase of $500,000 of ARS at par by issuers. As a result of theseauction failures, there was a limited active market with observable prices forthese securities as of June 30, 2010; therefore, the Company computed thefair value of these securities based on a discounted cash flow model, usingsignificant level 3 inputs, to take into account the lack of liquidity. TheCompany does not believe that the student loans backing these securities, theprincipal of these assets, is at risk. Furthermore, the Company intends to holdthese securities until the credit markets recover and these securities resumepricing at or near par. It is not currently morelikely than not that the Company will be required to sell the securities beforerecovery of the principal. As a result, the Company recorded atemporary impairment to other comprehensive income and classified thesesecurities as non-current investments. The valuation may be revised in futureperiods as market conditions evolve.

 

There was no change in thebeginning and ending balance of assets measured at fair value on a recurringbasis using significant unobservable inputs (Level 3) during the six monthsended June 30, 2010.

 

**13.Commitments and Contingencies**

 

Item 3, “Legal Proceedings,”on page 22 of the Company’s Annual Report on Form 10-K/A for the yearended December 31, 2009, provides information on certain legal proceedingsand claims in which the Company is involved. There have been no subsequentmaterial developments to these matters.

 

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

 

**Forward-LookingStatements**

 

The following discussion ofour financial condition and results of operations contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934. In some cases, youcan identify forward-looking statements by terminology such as “may,” “could,” “should,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “target”or “continue,” the negative effect of terms like these or other similarexpressions. Any statement concerning future financial performance (includingfuture revenues, earnings or growth rates), ongoing business strategies orprospects, and possible actions taken by us or our subsidiaries, which may beprovided by us are also forward-looking statements. These forward-lookingstatements are only predictions. Forward-looking statements are based oncurrent expectations and projections about future events and are inherentlysubject to a variety of risks and uncertainties, many of which are beyond ourcontrol, which could cause actual results to differ materially from thoseanticipated or projected. All forward-looking statements included in thisdocument are based on information available to us on the date of filing and wefurther caution investors that our business and financial performance are subjectto substantial risks and uncertainties. We assume no obligation to update anysuch forward-looking statements. In evaluating these statements, you shouldspecifically consider various factors, including the risk factors set forth atthe end of Item 1A in our Annual Report on Form 10-K/A for the year ended December 31,2009 filed with the Securities and Exchange Commission on March 16, 2010.

 

**Overview**

 

Weanalyze our customers’ integrated circuit (“IC”) design and manufacturingprocesses to identify, quantify, and correct the issues that cause yield lossto improve our customers’ profitability by improving time-to-market, increasingyield and reducing total design and manufacturing costs. We package oursolutions in various ways to meet our customers’ specific business andbudgetary needs, each of which provides us various revenue streams. We receivea mix of fixed fees and variable, performance-based fees for the vast majorityof our Yield Improvement Solutions. The fixed fees are typically reflective of thelength of time and the resources needed to characterize a customer’smanufacturing process and receive preliminary results of proposed yieldimprovement suggestions. The variable fee, or what we call gainshareperformance incentives, usually depends on our achieving certain yield targetsby a deadline.  Variable fees arecurrently typically tied to wafer volume on the node size of the manufacturingfacility where we performed the yield improvement. We receive license fees andservice fees for related installation, integration, training, and maintenanceand support services for our software that we license on a stand-alone basis.

 

***Industry Trend***

 

Subject to the currentgeneral economic environment, demand for consumer electronics andcommunications devices continues to drive technological innovation in thesemiconductor industry as the need for products with greater performance, lowerpower consumption, reduced costs and smaller size continues to grow with eachnew product generation. In addition, advances in computing 

 

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systems and mobile deviceshave fueled demand for higher capacity memory chips. To meet these demands, ICmanufacturers and designers are constantly challenged to improve the overallperformance of their ICs by designing and manufacturing ICs with more embeddedapplications to create greater functionality while lowering cost pertransistor. As a result, both logic and memory manufacturers have migrated tomore and more advanced manufacturing nodes, capable of integrating more deviceswith higher performance, higher density, and lower power. As this trendcontinues, companies will continually be challenged to improve processcapabilities to optimally produce ICs with minimal random and systematic yieldloss, which is driven by the lack of compatibility between the design and itsrespective manufacturing process. We believe that as volume production of deepsubmicron ICs continues to grow, the difficulties of integrating IC designswith their respective processes and ramping new manufacturing processes willcreate a greater need for products and services that address the yield loss andescalating cost issues the semiconductor industry is facing today and will facein the future.

 

***Financial Highlights***

 

Financial highlights for thethree months ended June 30, 2010 were as follows:

 

·**        **Total revenues for the threemonths ended June 30, 2010 were $15.4 million, an increase of $5.8million, or 60%, compared to $9.6 million for the three months ended June 30,2009. Design-to-Silicon-Yield solutions revenues for the three months ended June 30,2010 were $10.8 million, an increase of $3.5 million, or 48%, compared to $7.3million for the three months ended June 30, 2009. The increase inDesign-to-Silicon-Yield solutions revenues was primarily the result ofincreased bookings and the early adoption of a new accounting standard.Gainshare performance incentives revenues for the three months ended June 30,2010 were $4.5 million, an increase of $2.2 million, or 98%, compared to $2.3million for the three months ended June 30, 2009. The increase in revenuesfrom Gainshare performance incentives was primarily the result of increasedvolumes at our customers’ manufacturing facilities.

 

·**        **Net income for the threemonths ended June 30, 2010 was $317,000, compared to a net loss of $6.6million for the three months ended June 30, 2009. The increase in netincome was primarily attributable to significant increases in revenues anddecreases in operating expenses as the result of our cost control efforts.

 

·**        **Net income per basic anddiluted share was $0.01 for the three months ended June 30, 2010 comparedto a net loss of $0.25 for the three months ended June 30, 2009, a changeof $0.26 per basic and diluted share.

 

Financial highlights for thesix months ended June 30, 2010 were as follows:

 

·**        **Total revenues for the sixmonths ended June 30, 2010 were $30.6 million, an increase of $10.8million, or 55%, compared to $19.8 million for the six months ended June 30,2009. Design-to-Silicon-Yield solutions revenues for the six months ended June 30,2010 were $21.2 million, an increase of $6.1 million, or 41%, compared to $15.1million for the six months ended June 30, 2009. The increase inDesign-to-Silicon-Yield solutions revenues was primarily the result ofincreased bookings, and to a lesser extent the early adoption of a newaccounting standard. Gainshare performance incentives revenues for the sixmonths ended June 30, 2010 were $9.4 million, an increase of $4.7 million,or 100%, compared to $4.7 million for the six months ended June 30,2009.  The increase was primarily due toincreased volumes at some of our customers’ manufacturing facilities.

 

·**        **Net income for the sixmonths ended June 30, 2010 was $21,000 compared to a net loss of $14.0million for the six months ended June 30, 2009. The change to net incomewas primarily attributable to significant increases in revenues and decreasesin operating expenses as the result of our cost control efforts.

 

·**        **Net income per basic anddiluted share was $0.00 for the six months ended June 30, 2010 compared toa net loss per basic and diluted share of $0.53 for the six months ended June 30,2009, a change of $0.53 per basic and diluted share.

 

**CriticalAccounting Policies**

 

Item 7 of our Annual Reporton Form 10-K/A for the year ended December 31, 2009, includes asummary of the significant accounting policies and methods used in thepreparation of our condensed consolidated financial statements. The followingis a brief discussion of the more significant accounting policies and methodsthat we use.

 

***General***

 

Our discussion and analysisof our financial condition and results of operations are based on our consolidatedfinancial statements, which have been prepared in conformity with accountingprinciples generally accepted in the United States of America. Our preparationof these consolidated financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. We based our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. The most significant estimates and assumptions relate to 

 

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revenue recognition,software development costs, recoverability of acquired intangible assets,estimated useful lives of acquired intangibles, the realization of deferred taxassets, and stock based compensation. Actual amounts may differ from suchestimates under different assumptions or conditions.

 

***Revenue Recognition***

 

We derive revenues from twosources: Design-to-Silicon-Yield Solutions, which include Services and SoftwareLicenses, and Gainshare Performance Incentives.

 

*Design-to-Silicon-YieldSolutions*— Revenues that are derived fromDesign-to-Silicon-Yield solutions comes from services and software licenses. Werecognize revenues for each element of Design-to-Silicon-Yield solutions as follows:

 

*Services* — We generate asignificant portion of our Design-to-Silicon-Yield solutions revenues fromfixed-price solution implementation service contracts delivered over a specificperiod of time. These contracts require reliable estimation of cost to performobligations and overall scope of each engagement. Revenue under contracts forsolution implementation services is recognized as services are performed usingthe cost-to-cost percentage of completion method of contract accounting. Losseson solution implementation contracts are recognized in the period when theybecome probable. Revisions in profit estimates are reflected in the period inwhich the conditions that require the revisions become known and can beestimated. If we do not accurately estimate the resources required or the scopeof work to be performed, or do not manage the projects properly within theplanned period of time or satisfy our obligations under contracts, resultingcontract margins could be materially different than those anticipated when thecontract was executed. Any such reductions in contract margin could have amaterial negative impact on our operating results.

 

Onoccasion, we have licensed our software products as a component of our fixedprice services contracts. In such instances, the software products are licensedto customers over a specified term of the agreement with support andmaintenance to be provided over the license term.

 

In October 2009, the Financial Accounting Standards Board(“FASB”) amended theaccounting standards for multiple-deliverable revenuearrangements to:

 

·**       **provideupdated guidance on whether multiple deliverables exist, how the deliverablesin an arrangement should be separated, and how the consideration should beallocated;

 

·**       **require anentity to allocate revenue in an arrangement using estimated selling prices (“ESP”)of deliverables if a vendor does not have vendor-specific objective evidence ofselling price (“VSOE”) or third-party evidence of selling price (“TPE”); and

 

·**       **eliminatethe use of the residual method and require an entity to allocate revenue usingthe relative selling price method.

 

We elected to early adopt this accounting standard on April 1,2010 on a prospective basis for applicable transactions originating ormaterially modified after January 1, 2010.

 

The amount of product and service revenue recognizedin a given period is affected by our judgment as to whether an arrangementincludes multiple deliverables and, if so, our determinations of the fair valueof each deliverable. In general, VSOE does not exist for our solutionimplementation services and software products. Because our services andproducts include our unique technology, we are not able to determine TPE.Therefore, we will use ESP in our allocation of arrangement consideration. Indetermining ESP, we apply significant judgment as we weigh a variety offactors, based on the facts and circumstances of the arrangement. We typicallyarrive at an ESP for a product or service that is not sold separately byconsidering company-specific factors such as geographies, internal costs, grossmargin objectives, pricing practices used to establish bundled pricing, andexisting portfolio pricing and discounting.

 

Afterfair value is established for each deliverable, the total transaction amount isallocated to each deliverable based upon its fair value. Fees allocated tosolution implementation services are recognized using the cost-to-costpercentage of completion method of contract accounting. Fees allocated tosoftware and related support and maintenance are recognized under softwarerevenue recognition guidance.

 

*Software Licenses* — We also license oursoftware products separately from our integrated solution implementations. Forsoftware license arrangements that do not require significant modification orcustomization of the underlying software, software license revenue isrecognized under the residual method when (1) persuasive evidence of anarrangement exists, (2) delivery has occurred, (3) the fee is fixedor determinable, (4) collectability is probable, and (5) thearrangement does not require services that are essential to the functionalityof the software. When arrangements include multiple elements such as supportand maintenance, consulting (other than for our fixed price solutionimplementations), installation, and training, revenue is allocated to eachelement of a transaction based upon its fair value as determined by our VSOEand such services are recorded as services revenues. VSOE

 

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for maintenance is generallyestablished based upon negotiated renewal rates while VSOE for consulting,installation and training services is established based upon our customarypricing for such services when sold separately. Revenues for software licenseswith extended payment terms are not recognized in excess of amounts due. Forsoftware license arrangements that require significant modification orcustomization of the underlying software, the software license revenue isrecognized as services are performed using the cost-to-cost percentage ofcompletion method of contract accounting, and such revenues are recorded asservices revenue.

 

*GainsharePerformance Incentives* — When we enter into a contract toprovide yield improvement services, the contract usually includes twocomponents: (1) a fixed fee for performance by us of services deliveredover a specific period of time; and (2) a gainshare performance incentivescomponent where the customer may pay a variable fee, usually after the fixedfee period has ended. Revenue derived from gainshare performance incentivesrepresents profit sharing and performance incentives earned based upon our customersreaching certain defined operational levels established in related solutionimplementation service contracts. Gainshare performance incentives periods areusually subsequent to the delivery of all contractual services and thereforehave no cost to us. Due to the uncertainties surrounding attainment of suchoperational levels, we recognize gainshare performance incentives revenue (tothe extent of completion of the related solution implementation contract) uponreceipt of performance reports or other related information from our customerssupporting the determination of amounts and probability of collection.Gainshare performance incentives revenue is dependent on many factors which areoutside our control, including among others, continued production of therelated ICs by our customers, sustained yield improvements by our customers andour ability to enter into new Design-to-Silicon-Yield solutions contractscontaining provisions for gainshare performance incentives.

 

***Software Development Costs***

 

Costs for the development ofnew software products and substantial enhancements to existing softwareproducts are expensed as incurred until technological feasibility has beenestablished, at which time any additional costs would be capitalized. Becausewe believe our current process for developing software is essentially completedconcurrently with the establishment of technological feasibility, no costs havebeen capitalized to date.

 

***Intangible Assets***

 

Asof June 30, 2010, and December 31, 2009, the recorded value of ourintangible assets was $2.1 million and $3.0 million, respectively. Impairmenton acquired intangible assets is evaluated when indicators of impairment exist.In assessing the valuation and recoverability of our long-lived assets, we mustmake assumptions regarding estimated future cash flows to be derived from theacquired assets. If these estimates or their related assumptions change in thefuture, we may be required to record impairment charges for these assets, whichwould have a material adverse effect on our operating results. During the sixmonths ended June 30, 2010, there were no indicators of impairment relatedto our intangible assets.

 

We are currently amortizingour acquired intangible assets over estimated useful lives of one to sevenyears, which are based on the estimated period of benefit to be derived fromsuch assets. However, a decrease in the estimated useful lives of such assetswould cause additional amortization expense or an impairment of such assets infuture periods.

 

***Income Taxes***

 

Realization of deferred taxassets is dependent on our ability to generate future taxable income andutilize tax planning strategies. We have recorded a deferred tax asset in theamount that is more likely than not to be realized based on current estimationsand assumptions. We evaluate the valuation allowance on a quarterly basis. Anyresulting changes to the valuation allowance will result in an adjustment toincome in the period the determination is made.

 

***Stock-Based Compensation***

 

Stock-based compensation isestimated at the grant date based on an award’s fair value and is recognized ona straight-line basis over the vesting periods of the stock purchase rights andstock options, as applicable, generally four years. As stock-based compensationexpense recognized is based on awards ultimately expected to vest, it has beenreduced for estimated forfeitures. Forfeitures are estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates.

 

We have elected to use theBlack-Scholes-Merton option-pricing model, which incorporates variousassumptions including volatility, expected life and interest rates. Theexpected volatility is based on the historical volatility of our common stockover the most recent period commensurate with the estimated expected life ofstock options. The expected life of an award is based on historical experienceand on the terms and conditions of the stock awards granted to employees. Theinterest rate assumption is based upon observed Treasury yield curve ratesappropriate for the expected life of stock options.

 

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**RecentAccounting Pronouncements and Accounting Changes**

 

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

 

***Results of Operations***

 

The following table sets forth,for the periods indicated, the percentage of total revenue represented by theline items reflected in our condensed consolidated statements of operations:

 
| ** **                                         | ** ** | **Three Months Ended******** June 30,** | ** ** | **Six Months Ended******** June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                          | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                          |       |                                              |       |                                            |       |   |   |   |   |
| Design-to-silicon-yield  solutions                 |       | 70                                                | %          | 76                                              | %          | 69 | % | 76 | % |
| Gainshare  performance incentives                  |       | 30                                                |       | 24                                              |       | 31 |   | 24 |   |
| Total  revenues                                    |       | 100                                               | %          | 100                                             | %          | 100 | % | 100 | % |
| Costs  of design-to-silicon-yield solutions:       |       |                                              |       |                                            |       |   |   |   |   |
| Direct  costs of design-to-silicon-yield solutions |       | 39                                                |       | 51                                              |       | 40 |   | 56 |   |
| Amortization  of acquired technology               |       | 2                                                 |       | 4                                               |       | 2 |   | 4 |   |
| Total  costs of design-to-silicon-yield solutions  |       | 41                                                |       | 55                                              |       | 42 |   | 60 |   |
| Gross  Profit                                      |       | 59                                                |       | 45                                              |       | 58 |   | 40 |   |
| Operating  expenses:                               |       |                                              |       |                                            |       |   |   |   |   |
| Research  and development                          |       | 28                                                |       | 53                                              |       | 27 |   | 55 |   |
| Selling,  general and administrative               |       | 29                                                |       | 43                                              |       | 30 |   | 43 |   |
| Amortization  of other acquired intangible assets  |       | 1                                                 |       | 1                                               |       | — |   | 1 |   |
| Restructuring  charges (credits)                   |       | —                                            |       | 12                                              |       | — |   | 9 |   |
| Total  operating expenses                          |       | 58                                                |       | 109                                             |       | 57 |   | 108 |   |
| Income  (loss) from operations                     |       | 1                                                 |       | (64                                             | )          | 1 |   | (68 | ) |
| Interest  and other income (expense), net          |       | 3                                                 |       | (2                                              | )          | 2 |   | — |   |
| Income  (loss) before taxes                        |       | 4                                                 |       | (66                                             | )          | 3 |   | (68 | ) |
| Income  tax provision                              |       | 2                                                 |       | 3                                               |       | 3 |   | 3 |   |
| Net  income (loss)                                 |       | 2                                                 | %          | (69                                             | )%         | — | % | (71 | )% |

 

***Comparison of the Three Months Ended June 30, 2010 and 2009***

 
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|--------------------------------------|------------|
| **Revenues**                                | ** ** | **Three Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009********% of**                 | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                         | ** ** | **Revenues** | ** ** |
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Design-to-silicon-yield  solutions          |       | $                                    | 10,814     |       | $          | 7,292      |       | $                    | 3,522      |                                 | 48         | % | 70 | % | 76 | % |
| Gainshare  performance incentives           |       | 4,538                                |       | 2,291      |       | 2,247      |       | 98                   | %          | 30                                   | %          | 24 | % |
| Total                                       |       | $                                    | 15,352     |       | $          | 9,583      |       | $                    | 5,769      |                                 | 60         | % | 100 | % | 100 | % |

 

*Design-to-Silicon-YieldSolutions*. Design-to-Silicon-Yield solutions revenues arederived from services (including solution implementations, software support andmaintenance, consulting, and training) and software licenses, provided duringour customer yield improvement engagements as well as during solution productsales. Design-to-Silicon-Yield solutions revenues increased $3.5 millionfor the three months ended June 30, 2010 compared to the three monthsended June 30, 2009, primarily due to an increase of $3.9 million in fixedfee integrated solutions, partially offset by a decrease of $493,000 insoftware and software related services. The increase was primarily the resultof increased bookings and the early adoption of an accounting standard thatenables companies to account for products or services separately rather than asa combined unit in the second quarter of 2010. We booked two new fixed-pricesolution implementation service contracts and one extension to an existingservice contract during the three months ended June 30, 2010, as comparedto one new service contract and one extension to an existing service contractduring the three months ended June 30, 2009.  Our Design-to-Silicon-Yield Solutions revenuemay fluctuate in the future and is dependent on a number of factors includingour ability to obtain new customers at emerging technology nodes.

 

*GainsharePerformance Incentives*. Gainshare performance incentives revenuesrepresent profit sharing and performance incentives earned based upon ourcustomers reaching certain defined operational levels. Revenues derived fromgainshare performance incentives increased $2.2 million for the three monthsended June 30, 2010 compared to the three months ended June 30, 2009,

 

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primarily due to increasesin wafer volumes at some of our customer sites. The revenues from gainshareperformance incentives were generated from five customers and six engagementsfor the three months ended June 30, 2010 and six customers and sevenengagements for the three months ended June 30, 2009. Our gainshareperformance incentives revenues may continue to fluctuate from period toperiod. Gainshare performance incentives revenues are dependent on many factorsthat are outside our control, including among others, continued production ofICs by our customers, sustained yield improvements by our customers, and ourability to enter into new Design-to-Silicon-Yield solutions contractscontaining provisions for gainshare performance incentives.

 
| ** **                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|------------|------------|----------------------------|------------|--------------------------------------|------------|
| **Costs of  Design-to-Silicon-Yield Solutions**    | ** ** | ** Three Months Ended  June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010******** % of** | ** ** | **2009******** % of**           | ** ** |
| **(In  thousands, except for percentages)**        | ** ** | **2010**                                    | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**                 | ** ** | **Revenues**                         | ** ** | **Revenues** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Direct  costs of design-to-silicon-yield solutions |       | $                                           | 5,928      |       | $          | 4,863      |       | $                          | 1,065      |                                 | 22         | % | 39 | % | 51 | % |
| Amortization  of acquired technology               |       | 360                                         |       | 360        |       | —     |       | —                     |       | 2                                    | %          | 4 | % |
| Total                                              |       | $                                           | 6,288      |       | $          | 5,223      |       | $                          | 1,065      |                                 | 20         | % | 41 | % | 55 | % |

 

*Costs ofDesign-to-Silicon-Yield Solutions*. Costs ofDesign-to-Silicon-Yield solutions consist of costs incurred to provide andsupport our services, costs recognized in connection with licensing oursoftware, and amortization of acquired technology.

 

*DirectCosts of Design-to-Silicon-Yield Solutions.*  Direct costs of Design-to-Silicon-Yieldsolutions consist of services costs and software license costs. Services costsconsist of material, labor, overhead costs, and stock-based compensationcharges associated with solution implementations. Costs include purchasedmaterials, employee compensation and related benefits, travel andfacilities-related costs. Software license costs consist of costs associatedwith licensing third-party software sold in conjunction with our softwareproducts and expenses incurred to produce and distribute our productdocumentation.**Direct costs ofDesign-to-Silicon-Yield solutions increased $1.1 million for the three monthsended June 30, 2010 compared to the three months ended June 30, 2009,primarily due to an increase of $230,000 in travel expenses and an increase of$221,000 in the deployment of our pdFasTest products.  The direct costs of Design-to-Silicon-Yieldsolutions decreased as a percentage of revenues in the three months ended June 30,2010 to 39%, compared to 51% in the three months ended June 30, 2009,primarily due to a significant increase in revenues, as our costs arerelatively fixed in nature. If we do not accurately estimate the resourcesrequired or the scope of work to be performed, or we do not manage the projectsproperly within the planned period of time or satisfy our obligations undercontracts, resulting contract margins could be materially different than thoseanticipated when the contracts were executed. Any such reductions in contract margincould have a material negative impact on our operating results.

 

*Amortizationof Acquired Technology*. Amortization of acquired technologyconsists of amortization of intangible assets acquired as a result of certainbusiness combinations. Amortization of acquired technology was $360,000 foreach of the three months ended June 30, 2010 and 2009. We anticipateamortization of acquired technology to be $566,000 for the remaining six monthsin 2010, $626,000 in 2011 and $261,000 in 2012.

 
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|----------------------------|------------|--------------------------------------|------------|
| **Research  and Development**               | ** ** | **Three Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010******** % of** | ** ** | **2009******** % of**           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**                 | ** ** | **Revenues**                         | ** ** | **Revenues** | ** ** |
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Research and development                    |       | $                                    | 4,335      |       | $          | 5,069      |       | $                          | (734       | )                                    | (14        | )% | 28 | % | 53 | % |
|                                             |            |                                      |            |            |            |            |            |                            |            |                                      |            |  |  |  |  |  |

 

*Researchand Development.*Research and development expenses consist primarilyof personnel-related costs to support product development activities, includingcompensation and benefits, outside development services, travel and facilitiescost allocations, and stock-based compensation charges. Research anddevelopment expenses decreased $734,000 for the three months ended June 30,2010 compared to the three months ended June 30, 2009, primarily due to adecrease of $522,000 in personnel expenses and a decrease of $218,000 in theuse of outside services, both the result of our cost control efforts. Weanticipate our expenses in research and development will fluctuate in absolutedollars from period to period as a result of cost control initiatives and thetiming of when we hire personnel as a result of the size and the timing ofproduct development projects.

 
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|----------------------------|------------|--------------------------------------|------------|
| **Selling,  General and Administrative**    | ** ** | **Three Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010******** % of** | ** ** | **2009******** % of**           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**                 | ** ** | **Revenues**                         | ** ** | **Revenues** | ** ** |
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Selling,  general and administrative        |       | $                                    | 4,492      |       | $          | 4,108      |       | $                          | 384        |                                 | 9          | % | 29 | % | 43 | % |
|                                             |            |                                      |            |            |            |            |            |                            |            |                                      |            |  |  |  |  |  |

 

*Selling,General and Administrative*. Selling, general and administrativeexpenses consist primarily of compensation and benefits for sales, marketingand general and administrative personnel in addition to outside salescommissions, legal and accounting services, marketing communications, traveland facilities cost allocations, and stock-based compensation charges. Selling,general and administrative expenses increased $384,000 for the three monthsended June 30, 2010 compared to the three months ended June 30, 2009,primarily due to increases in legal fees. We anticipate our selling, generaland administrative expenses will fluctuate in absolute dollars from period toperiod as a result of cost control initiatives and to support increased sellingefforts in the future.

 

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| ** **                                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|----------------------------|------------|--------------------------------------|------------|
| **Amortization  of Other Acquired Intangible Assets** | ** ** | **Three Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010******** % of** | ** ** | **2009******** % of**           | ** ** |
| **(In thousands,  except for percentages)**           | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**                 | ** ** | **Revenues**                         | ** ** | **Revenues** | ** ** |
| ** **                                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Amortization  of other acquired intangible assets     |       | $                                    | 82         |       | $          | 87         |       | $                          | (5         | )                                    | (6         | )% | 1 | % | 1 | % |
|                                                       |            |                                      |            |            |            |            |            |                            |            |                                      |            |  |  |  |  |  |

 

*Amortizationof Other Acquired Intangible Assets*. Amortization of other acquiredintangible assets consists of amortization of intangibles acquired as a resultof certain business combinations. Amortization of other acquired intangibleassets remained flat for the three months ended June 30, 2010 compared tothe three months ended June 30, 2009. We anticipate amortization of otheracquired intangible assets to be $126,000 in the remaining six months in 2010,$204,000 in 2011, $174,000 in 2012 and $105,000 in 2013 and thereafter.

 
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|----------------------------|------------|--------------------------------------|------------|
| **Restructuring  Charges (Credits)**        | ** ** | **Three Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010******** % of** | ** ** | **2009******** % of**           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**                 | ** ** | **Revenues**                         | ** ** | **Revenues** | ** ** |
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Restructuring  charges (credits)            |       | $                                    | (33        | )          | $          | 1,202      |       | $                          | (1,235     | )                                    | (103       | )% | — | % | 12 | % |
|                                             |            |                                      |            |            |            |            |            |                            |            |                                      |            |  |  |  |  |  |

 

*RestructuringCharges (Credits).*  Restructuring charges (credits) for thethree months ended June 30, 2010 decreased $1.2 million compared to thethree months ended June 30, 2009. Restructuringcredits for the three months ended June 30, 2010 consisted primarily of acredit related to a change in our estimate of severance costs. Restructuringcharges for the three months ended June 30, 2009 consisted primarily ofseverance costs and were the result of our cost control efforts.

 
| ** **                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|----------------------------|------------|--------------------------------------|------------|
| **Interest  and Other Income (Expense), net**                  | ** ** | **Three Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010******** % of** | ** ** | **2009******** % of**           | ** ** |
| **(In thousands, except for percentages)** | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**                 | ** ** | **Revenues**                         | ** ** | **Revenues** | ** ** |
| ** **                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Interest  and other income (expense), net                      |       | $                                    | 404        |       | $          | (210       | )          | $                          | 614        |                                 | 292        | % | 3 | % | (2 | )% |
|                                                                |            |                                      |            |            |            |            |            |                            |            |                                      |            |  |  |  |  |  |

 

*Interestand Other Income (Expense), net*. Interest and other income(expense), net changed by $614,000 for the three months ended June 30,2010 compared to interest and other income (expense), net of $210,000 for thethree months ended June 30, 2009, primarily due to increase in gains onforeign currency exchange associated with intercompany payments to fund ourforeign operations. We anticipate interest and other income will fluctuate infuture periods as a result of our projected use of cash.

 
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|----------------------------|------------|--------------------------------------|------------|
| **Income Tax  Provision**                   | ** ** | **Three Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010******** % of** | ** ** | **2009******** % of**           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**                 | ** ** | **Revenues**                         | ** ** | **Revenues** | ** ** |
| ** **                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Income  tax provision                       |       | $                                    | 275        |       | $          | 322        |       | $                          | (47        | )                                    | (15        | )% | 2 | % | 3 | % |
|                                             |            |                                      |            |            |            |            |            |                            |            |                                      |            |  |  |  |  |  |

 

*Income TaxProvision. *Income taxprovision decreased $47,000 for the three months ended June 30, 2010compared to the three months ended June 30, 2009. Income tax provision forthe three months ended June 30, 2010 primarily consisted of foreignwithholding taxes.  Income tax provisionfor the three months ended June 30, 2009 primarily consisted of foreignwithholding taxes and statutory taxes associated with our foreign subsidiaries.

 

***Comparison of the Six Months Ended June 30, 2010 and 2009***

 
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|------------------------------------|------------|
| **Revenues**                                | ** ** | **Six Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **2010********% of** | ** ** | **2009******** % of**         | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change**           | ** ** | **Revenues**                       | ** ** | **Revenues** | ** ** |
|                                        |       |                               |       |       |       |       |       |                 |       |                               |       |   |   |
| Design-to-silicon-yield  solutions          |       | $                                  | 21,231     |       | $          | 15,086     |       | $                    | 6,145      |                               | 41         | % | 69 | % | 76 | % |
| Gainshare  performance incentives           |       | 9,373                              |       | 4,687      |       | 4,686      |       | 100                  | %          | 31                                 | %          | 24 | % |
| Total                                       |       | $                                  | 30,604     |       | $          | 19,773     |       | $                    | 10,831     |                               | 55         | % | 100 | % | 100 | % |

 

*Design-to-Silicon-YieldSolutions*. Design-to-Silicon-Yield solutions revenuesincreased $6.1 million for the six months ended June 30, 2010 compared tothe six months ended June 30, 2009, primarily due to increase in fixed feeintegrated solutions. We booked four new fixed-price solution implementationservice contracts and two extensions to existing service contracts during thesix months ended June 30, 2010, as compared to one new service contractand two extensions to existing service contracts during the six months ended June 30,2009.

 

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*GainsharePerformance Incentives*. Revenues derived from gainshare performanceincentives increased $4.7 million for the six months ended June 30, 2010compared to the six months ended June 30, 2009, primarily due to increasesin wafer volumes at some of our customer sites. Revenues derived from gainshareperformance incentives were generated from six customers and seven engagementsfor the six months ended June 30, 2010 and six customers and eightengagements for the six months ended June 30, 2009.

 
| ** **                                         | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Costs of  Design-to-Silicon-Yield Solutions**    | ** ** | **Six Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **% of**   | ** ** | **% of**                           | ** ** |
| **(In  thousands, except for percentages)**        | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change** | ** ** | **Revenues**                       | ** ** | **Revenues** | ** ** |
|                                               |       |                               |       |       |       |       |       |       |       |                               |       |   |   |
| Direct  costs of design-to-silicon-yield solutions |       | $                                  | 12,250     |       | $          | 11,153     |       | $          | 1,097      |                               | 10         | % | 40 | % | 56 | % |
| Amortization  of acquired technology               |       | 719                                |       | 719        |       | —     |       | —     | %          | 2                                  |       | 4 |   |
| Total                                              |       | $                                  | 12,969     |       | $          | 11,872     |       | $          | 1,097      |                               | 9          | % | 42 | % | 60 | % |

 

*Costs ofDesign-to-Silicon-Yield Solutions*.

 

*DirectCosts of Design-to-Silicon-Yield Solutions. *Direct costs of Design-to-Silicon-Yield solutions increased $1.1 millionfor the six months ended June 30, 2010 compared to the six months ended June 30,2009, primarily due to an increase of $532,000 in the deployment of ourpdFasTest products and an increase of $318,000 in travel expenses.  The direct costs of Design-to-Silicon-Yieldsolutions decreased as a percentage of revenues in the six months ended June 30,2010 to 40%, compared to 56% in the six months ended June 30, 2009,primarily due to a significant increase in revenues as our costs are relativelyfixed in nature.

 

*Amortizationof Acquired Technology*. Amortization of acquired technology was$719,000 for each of the six months ended June 30, 2010 and 2009.

 
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Research  and Development**               | ** ** | **Six Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **% of**   | ** ** | **% of**                           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change** | ** ** | **Revenues**                       | ** ** | **Revenues** | ** ** |
|                                        |       |                               |       |       |       |       |       |       |       |                               |       |   |   |
| Research  and development                   |       | $                                  | 8,297      |       | $          | 10,858     |       | $          | (2,561     | )                                  | (24        | )% | 27 | % | 55 | % |
|                                             |            |                                    |            |            |            |            |            |            |            |                                    |            |  |  |  |  |  |

 

*Researchand Development. *Research anddevelopment expenses decreased $2.6 million for the six months ended June 30,2010 compared to the six months ended June 30, 2009, primarily due to adecrease of $1.5 million in personnel expenses and a decrease of $634,000 inthe use of outside services, both the results of our cost control efforts.

 
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Selling,  General and Administrative**    | ** ** | **Six Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **% of**   | ** ** | **% of**                           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change** | ** ** | **Revenues**                       | ** ** | **Revenues** | ** ** |
|                                        |       |                               |       |       |       |       |       |       |       |                               |       |   |   |
| Selling,  general and administrative        |       | $                                  | 9,071      |       | $          | 8,521      |       | $          | 550        |                               | 6          | % | 30 | % | 43 | % |
|                                             |            |                                    |            |            |            |            |            |            |            |                                    |            |  |  |  |  |  |

 

*Selling,General and Administrative*. Selling, general andadministrative expenses increased $550,000 for the six months ended June 30,2010 compared to the six months ended June 30, 2009, primarily due toincreases in legal fees.

 
| ** **                                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Amortization  of Other Acquired Intangible Assets** | ** ** | **Six Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **% of**   | ** ** | **% of**                           | ** ** |
| **(In  thousands, except for percentages)**           | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change** | ** ** | **Revenues**                       | ** ** | **Revenues** | ** ** |
|                                                  |       |                               |       |       |       |       |       |       |       |                               |       |   |   |
| Amortization  of other acquired intangible assets     |       | $                                  | 168        |       | $          | 174        |       | $          | (6         | )                                  | (3         | )% | — | % | 1 | % |
|                                                       |            |                                    |            |            |            |            |            |            |            |                                    |            |  |  |  |  |  |

 

*Amortizationof Other Acquired Intangible Assets*. Amortization of otheracquired intangible assets for the six months ended June 30, 2010decreased $6,000 compared to the six months ended June 30, 2009.

 
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Restructuring  Charges (Credits)**        | ** ** | **Six Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **% of**   | ** ** | **% of**                           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change** | ** ** | **Revenues**                       | ** ** | **Revenues** | ** ** |
|                                        |       |                               |       |       |       |       |       |       |       |                               |       |   |   |
| Restructuring  charges (credits)            |       | $                                  | (32        | )          | $          | 1,835      |       | $          | (1,867     | )                                  | (102       | )% | — | % | 9 | % |
|                                             |            |                                    |            |            |            |            |            |            |            |                                    |            |  |  |  |  |  |

 

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*RestructuringCharges (Credits)*. Restructuring charges (credits) for the six monthsended June 30, 2010 changed by $1.9 million compared to the six monthsended June 30, 2009.  Restructuring credits for the six months ended June 30, 2010consisted primarily of a credit of severance costs. Restructuring charges forthe six months ended June 30, 2009 consisted primarily of employeeseverance costs as the result of our cost control efforts.

 
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Interest  and Other Income, net**         | ** ** | **Six Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **% of**   | ** ** | **% of**                           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change** | ** ** | **Revenues**                       | ** ** | **Revenues** | ** ** |
|                                        |       |                               |       |       |       |       |       |       |       |                               |       |   |   |
| Interest  and other income, net             |       | $                                  | 666        |       | $          | 114        |       | $          | 552        |                               | 484        | % | 2 | % | — | % |
|                                             |            |                                    |            |            |            |            |            |            |            |                                    |            |  |  |  |  |  |

 

*Interestand Other Income, net*. The increase in interest and other income,net of $552,000 for the six months ended June 30, 2010 compared to the sixmonths ended June 30, 2009 was primarily due to an increase of $730,000 ingains on foreign currency exchange associated with intercompany payments tofund our foreign operations, partially offset by a decrease of $177,000 ininterest income from lower average cash and cash equivalent and investmentsbalances coupled with lower interest rates.

 
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Income Tax  Provision**                   | ** ** | **Six Months Ended June 30,** | ** ** | **$**      | ** ** | **%**      | ** ** | **% of**   | ** ** | **% of**                           | ** ** |
| **(In  thousands, except for percentages)** | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **Change** | ** ** | **Revenues**                       | ** ** | **Revenues** | ** ** |
|                                        |       |                               |       |       |       |       |       |       |       |                               |       |   |   |
| Income  tax provision                       |       | $                                  | 776        |       | $          | 586        |       | $          | 190        |                               | 32         | % | 3 | % | 3 | % |
|                                             |            |                                    |            |            |            |            |            |            |            |                                    |            |  |  |  |  |  |

 

*Income TaxProvision.*Income tax provision increased $190,000 for the sixmonths ended June 30, 2010 to $776,000 as compared to the income taxprovision of $586,000 for thesix months ended June 30, 2009. Income taxprovision for the six months ended June 30, 2010 primarily consisted offoreign withholding taxes and changes in unrecognized tax benefits. Income taxprovision for the six months ended June 30, 2009 primarily consisted offoreign withholding taxes and statutory taxes associated with our foreignsubsidiaries.

 

**Liquidityand Capital Resources**

 

***Operating Activities***

 

Cash flows from operatingactivities consist of net income (loss) adjusted for certain non-cash items andchanges in assets and liabilities. Net cash used in operating activities was$2.4 million for the six months ended June 30, 2010, an increase of $1.0million compared to $1.4 million for the six months ended June 30, 2009,primarily due to changes in accounts receivable and prepaid expenses and otherassets, partially offset by the generation of net income.

 

Accounts receivableincreased $3.6 million during the six months ended June 30, 2010 comparedto a decrease of $8.1 million during the six months ended June 30, 2009.The increase in accounts receivable during the six months ended June 30,2010 was primarily due to increased revenues and the timing of billingmilestones and payments received. The decrease in accounts receivable duringthe six months ended June 30, 2009 was primarily due to declines inrevenues and the timing of billing milestones and payments received. Prepaidexpenses and other assets decreased $156,000 during the six months ended June 30,2010 compared to $2.2 million during the six months ended June 30, 2009.The decrease in prepaid expenses and other assets during the six months ended June 30,2010 was primarily due to the collection of income tax refunds, partiallyoffset by the purchases of software license rights.

 

***Investing Activities***

 

Cash flows from investingactivities consist of proceeds from investment maturities and sales, offset bypayments for investments acquired and payments for capital expenditures. Netcash used in investing activities was $59,000 for the six months ended June 30,2010, compared to net cash provided by investing activities of $6.8 million forthe six months ended June 30, 2009. There were no investment maturitiesand sales during the six months ended June 30, 2010, whereas proceeds frominvestment maturities and sales were $7.1 million during the six months ended June 30,2009.

 

***Financing Activities***

 

Cash flows from financingactivities consist primarily of proceeds from sales of shares through employeeequity incentive plans, offset by principal payments on long-term obligations.Net cash provided by financing activities was $401,000 for the six months endedJune 30, 2010, an increase of $64,000 compared to$337,000 for the six months ended June 30, 2009.

 

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***Liquidity***

 

As of June 30, 2010,our working capital, defined as total current assets less total currentliabilities, was $48.3 million, compared with $45.2 million as of December 31,2009. Cash and cash equivalents were $32.1 million as of June 30, 2010, adecrease of $2.8 million, compared to $34.9 million as of December 31,2009. The decrease in cash and cash equivalents was primarily attributable tothe timing of billing and payments received. We anticipate that our overallexpenses, as well as planned capital expenditures, may constitute a materialuse of our cash resources. In addition, we may use cash resources to repurchasecommon stock, fund potential investments in, or acquisitions of complementaryproducts, technologies or businesses. We believe that our existing cashresources and anticipated funds from operations will satisfy our cashrequirements to fund our operating activities, capital expenditures and otherobligations for at least the next twelve months. However, in the event thatduring such period, or thereafter, we are not successful in generatingsufficient cash flows from operations we may need to raise additional capitalthrough private or public financings, strategic relationships or otherarrangements, which may not be available to us on acceptable terms or at all.

 

As of June 30, 2010,our non-current investments included auction-rate securities with a fair valueof $718,000. The auction-rate securities are measured at fair value usingsignificant unobservable inputs (Level 3 inputs) and accounted forapproximately 3% of total assets that are measured at fair value on a recurringbasis. See Note 12 to “Notes to Condensed Consolidated Financial Statements(Unaudited)” in Part I, and Item 3 “Quantitative and QualitativeDisclosures About Market Risk” in this Quarterly Report on Form 10-Q forfurther discussion.

 

We do not have anyoff-balance sheet arrangements, investments in special purpose entities orundisclosed borrowings or debt, other than operating leases on our facilities.As of June 30, 2010, other than Euro and Japanese Yen denominatedreceivables and payables, we had no foreign currency contracts outstanding.

 

The following tablesummarizes our known contractual obligations (in thousands):

 
| **Contractual  obligations** | ** ** | **2010******** (six months******** Remaining)** | ** ** | **2011-2012** | ** ** | **2013-2014** | ** ** | **Total** | ** ** |
|------------------------------|------------|-----------------------------------------------------------|------------|---------------|------------|---------------|------------|-----------|------------|
| Debt  principal (1)          |       | $                                                         | 49         |          | $          | 99            |       | $         | —     |   | $ | 148 |   |
| Debt  interest               |       | 3                                                         |       | 3             |       | —        |       | 6         |       |
| Operating  lease obligations |       | 1,523                                                     |       | 5,077         |       | 1,777         |       | 8,377     |       |
| Total  (2)                   |       | $                                                         | 1,575      |          | $          | 5,179         |       | $         | 1,777      |   | $ | 8,531 |   |

 

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(1)       Amount represents therepayment of a 400,000 Euros loan with a variable interest rate based on theEURIBOR plus 160 basis points.

 

(2)       The contractual obligationtable above excludes liabilities for uncertain tax positions of $3.2 million,which are not practicable to assign to any particular years, due to theinherent uncertainty of the tax positions.  See Note 8 of “Notes toCondensed Consolidated Financial Statements (Unaudited)” for furtherdiscussion.

 

Operating lease amountsinclude minimum rental payments under our operating leases for our officefacilities, as well as computers, office equipment, and vehicles that weutilize under lease agreements. These agreements expire at various datesthrough 2013.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

 

The following discusses ourexposure to market risk related to changes in interest rates and foreigncurrency exchange rates. We do not currently own any equity investments, nor dowe expect to own any in the foreseeable future. This discussion containsforward-looking statements that are subject to risks and uncertainties. Actualresults could vary materially as a result of a number of factors.

 

*InterestRate Risk*. As of June 30, 2010, we had cash and cashequivalents of $32.1 million. Cash and cash equivalents consisted of cash andhighly liquid money market instruments. We had no exposure to interest raterisk as of June 30, 2010 as our short-term investment portfolio consistedentirely of money market instruments. Declines in interest rates over time willresult in decreased interest income.

 

As of June 30, 2010, weheld auction-rate securities (“ARS”) with a par value of $1.0 million. ARS arevariable rate debt instruments whose interest rates are reset through a “dutch”auction process at regular intervals, typically every 28 days. A portion ofthese securities are insured by third party bond insurers and arecollateralized by student loans guaranteed by governmental agencies and privateentities. The liquidity of the securities has been negatively impacted by theuncertainty in the credit markets and the exposure of these securities to thefinancial condition of bond insurance companies. All of our ARS have failed tosell at auction since February 2008 due to an insufficient number ofbidders. The only activity associated with these instruments since February 2008was

 

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the repurchase of $500,000of ARS at par by issuers. We do not believe that the student loans backingthese securities, the principal of these assets, is at risk. Furthermore, we intendto hold these securities until the credit markets recover and these securitiesresume pricing at or near par andit is not more likely than not that we will be required to sell the securitiesbefore recovery of the principal. We reviewed the value ofthese securities for impairment as of June 30, 2010, and concluded thatthese securities continued to be temporarily impaired. During the year ended December 31,2009, there was an unrealized loss of $282,000 recorded as a component ofaccumulated other comprehensive income related to these auction-ratesecurities. There was no additional impairment recorded during the six monthsended June 30, 2010. In future periods, the estimated fair value of ourARS could decline further based on market conditions, which could result inadditional impairment.

 

*ForeignCurrency and Exchange Risk.*Certain of our payables andreceivables are denominated in a currency other than the functional currency ofthe entity. Therefore, a portion of our operating expenditures is subject toforeign currency risks. The effect of an immediate 10% adverse change inexchange rates as of June 30, 2010 would result in a loss of approximately$1.1 million. As of June 30, 2010, we did not have outstanding hedgingcontracts, although we may enter into such contracts in the future. We intendto monitor our foreign currency exposure. Future exchange rate fluctuations mayhave a material negative impact on our business.

 

**Item 4.Controls and Procedures.**

 

Asdescribed in more detail in our Annual Report on Form 10-K/A for the yearended December 31, 2009, during the course of preparing our financialstatements for the year ended December 31, 2009, we identified a materialweakness in connection with the evaluation of the effectiveness of our internalcontrol over financial reporting pursuant to Section 404 of theSarbanes-Oxley Act.  Our management, withthe participation of our principal executive officer and our principalfinancial officer, has evaluated the effectiveness of our “disclosure controlsand procedures” (as such items are defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (“theExchange Act”)), as of the end of the period covered by this Quarterly Reporton Form 10-Q.  Based on that evaluation, our principal executiveofficer and our principal financial officer have concluded that, due to thematerial weakness disclosed in our Annual Report on Form 10-K for the yearended December 31, 2009, our disclosure controls and procedures were noteffective as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

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

 

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

 

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

 

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

 

Therehave not been any other changes in internal control over financial reporting inthe period covered by this Quarterly Report on Form 10-Q which havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

Item 3, “Legal Proceedings,”on page 22 of our Annual Report on Form 10-K/A for the year ended December 31,2009, provides information on certain legal proceedings and claims in which weare involved. There have been no subsequent material developments to thesematters.

 

**Item 1A. *Risk Factors***

 

The Company cautionsinvestors that its financial performance and any forward-looking statement itmakes are subject to risks and uncertainties. Various important factors maycause the Company’s future results to differ materially from those projected inany forward-looking statement. These factors were disclosed in, but are notlimited to, the items within the Company’s most recent Annual Report on Form10-K/A, Part I, Item 1A. There have not been any subsequent material changes tosuch risk factors since December 31, 2009.

 

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**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.**

 

(c) *Stock Repurchase*. The table below setsforth the information with respect to purchases made by or on behalf of theCompany or any “affiliated purchaser” (as the term is defined in Rule 10b-18(a)(3) underthe Securities Exchange Act of 1934) of our common stock during the threemonths ended June 30, 2010 (in thousands except per share amounts):

 

**ISSUER PURCHASES OF EQUITY SECURITIES**

 
| **Period**                                                 | ** ** | **Total******** Number of******** Shares (or******** Units)******** Purchased** | ** ** | **Average******** Price Paid******** Per Share******** (or Unit)** | ** ** | **Total Number of******** Shares (or  Units)******** Purchased as******** Part of  Publicly******** Announced  Plans******** or Programs  (1)** | ** ** | **Maximum Number (or******** Approximate  Dollar******** Value) of  Shares (or******** Units) that  May Yet Be******** Purchased  Under the******** Plans or  Programs(1)** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Month  #4 (April 1, 2010 through April 30, 2010) |       | —                                                                                              |       | $                                                                                 | —     |                                                                                                                                                                          | —     |                                                                                                                                                                                                      | $          | 1,013 |   |
| Month  #5 (May 1, 2010 through May 31, 2010)     |       | 1,095                                                                                               |       | 4.95                                                                              |       | 1,095                                                                                                                                                                         |       | $                                                                                                                                                                                                         | 1,008      |   |
| Month  #6 (June 1, 2010 through June 30, 2010)   |       | 16,063                                                                                              |       | 4.83                                                                              |       | 16,063                                                                                                                                                                        |       | $                                                                                                                                                                                                         | 930        |   |
| Total                                                      |       | 17,158                                                                                              |       | $                                                                                 | 4.84       |                                                                                                                                                                          | 17,158     |                                                                                                                                                                                                      |       |   |

 

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(1)     On March 26, 2003, ourBoard of Directors approved a share repurchase program to purchase up to $10.0million of our outstanding common stock. The program was completed in August 2007with 988,000 shares repurchased at the average price of $10.12 per share. On October 29,2007, the Board of Directors approved a new program to repurchase up to anadditional $10.0 million of the Company’s common stock on the open market. Theright to repurchase stock under this program will expire on October 29,2010.  As of June 30, 2010, 2.6million shares had been repurchased at the average price of $3.45 per shareunder this program and $930,000 remained available for future repurchases.

 

**Item 6.Exhibits.**

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

 

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*          As contemplated by SECRelease No. 33-8212, these exhibits are furnished with this QuarterlyReport on Form 10-Q and are not deemed filed with the Securities andExchange Commission and are not incorporated by reference in any filing of PDFSolutions, Inc. under the Securities Act of 1933 or the SecuritiesExchange Act of 1934, whether made before or after the date hereof andirrespective of any general incorporation language in any filings.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                      | **PDF SOLUTIONS, INC.**                                          |
|---------------------------|-----------------------------------------------------------------------|
|                      | ** **                                                            |
|                      |                                                                  |
| Date: August 9, 2010 | By:                                                                   | /s/ JOHN K. KIBARIAN |
|                      | John K. Kibarian                                                      |
|                      | President and Chief  Executive Officer                                |
|                      | (Principal Executive  Officer)                                        |
|                      |                                                                  |
|                      |                                                                  |
| Date: August 9, 2010 | By:                                                                   | /s/ JOY E. LEO |
|                      | Joy E. Leo                                                            |
|                      | EVP, Chief Administration  Officer and Acting Chief Financial Officer |
|                      | (Principal Financial  Officer)                                        |

 

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**INDEX TO EXHIBITS**

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

 

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*          As contemplated by SECRelease No. 33-8212, these exhibits are furnished with this QuarterlyReport on Form 10-Q and are not deemed filed with the Securities andExchange Commission and are not incorporated by reference in any filing of PDFSolutions, Inc. under the Securities Act of 1933 or the SecuritiesExchange Act of 1934, whether made before or after the date hereof andirrespective of any general incorporation language in any filings.

 

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