##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period ended September 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from  to
 Commission File Number 000-31311
 
 PDF SOLUTIONS, INC.
  Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    25-1701361
(I.R.S. Employer
Identification No.)333 West San Carlos Street, Suite 700
San Jose, California
(Address of Principal Executive Offices)
    
    95110
(Zip Code)
 (408) 280-7900
  þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Unaudited Consolidated Balance Sheets
    
    
    2Unaudited Consolidated Statements of Operations
    
    
    3Unaudited Consolidated Statements of Cash Flows
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35INDEX TO EXHIBITSEXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  1




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##### Table of Contents



Item 1. Financial Statements.
 PDF SOLUTIONS, INC.
 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    52,781
    
    
    $
    60,506Short-term investments
    
    
    17,137
    
    
    
    Accounts receivable, net of allowance of $254 in 2006 and 2005
    
    
    23,420
    
    
    
    22,082Prepaid expenses and other current assets
    
    
    2,378
    
    
    
    1,992Deferred tax assets
    
    
    768
    
    
    
    908Total current assets
    
    
    96,484
    
    
    
    85,488Property and equipment, net
    
    
    3,533
    
    
    
    3,328Goodwill
    
    
    38,963
    
    
    
    39,886Intangible assets, net
    
    
    5,284
    
    
    
    9,787Deferred tax assets
    
    
    2,361
    
    
    
    877Other assets
    
    
    1,126
    
    
    
    526Total assets
    
    $
    147,751
    
    
    $
    139,892LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,779
    
    
    $
    1,728Accrued compensation and related benefits
    
    
    2,743
    
    
    
    4,922Other accrued liabilities
    
    
    1,729
    
    
    
    1,469Taxes payable
    
    
    4,262
    
    
    
    4,950Deferred revenue
    
    
    2,702
    
    
    
    2,281Billings in excess of recognized revenue
    
    
    139
    
    
    
    1,604Total current liabilities
    
    
    14,354
    
    
    
    16,954Long-term liabilities
    
    
    252
    
    
    
    257Total liabilities
    
    
    14,606
    
    
    
    17,211Stockholders equity:Preferred stock, $0.00015 par value, 5,000 shares authorized: no shares
issued and outstanding
    
    
    
    
    
    
    Common stock, $0.00015 par value, 70,000 shares authorized: shares
issued and outstanding 26,890 in 2006 and 26,433 in 2005
    
    
    4
    
    
    
    4Additional paid-in-capital
    
    
    152,136
    
    
    
    141,720Treasury stock at cost, 551 shares
    
    
    (5,549
    )
    
    
    (5,549
    )Deferred stock-based compensation
    
    
    
    
    
    
    (27
    )Accumulated deficit
    
    
    (13,460
    )
    
    
    (13,451
    )Accumulated other comprehensive income (loss)
    
    
    14
    
    
    
    (16
    )Total stockholders equity
    
    
    133,145
    
    
    
    122,681Total liabilities and stockholders equity
    
    $
    147,751
    
    
    $
    139,892
 See notes to unaudited consolidated financial statements
 2




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PDF SOLUTIONS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Design-to-silicon-yield solutionsIntegrated solutions
    
    $
    11,153
    
    
    $
    13,834
    
    
    $
    33,859
    
    
    $
    38,658Software licenses
    
    
    3,811
    
    
    
    1,533
    
    
    
    8,217
    
    
    
    8,179Gain share
    
    
    4,400
    
    
    
    3,090
    
    
    
    15,155
    
    
    
    8,069Total revenue
    
    
    19,364
    
    
    
    18,457
    
    
    
    57,231
    
    
    
    54,906Cost and expenses:Cost of design-to-silicon-yield solutions:Direct costs of design-to-silicon-yield solutionsIntegrated solutions
    
    
    6,734
    (1)
    
    
    6,382
    
    
    
    19,808
    (1)
    
    
    17,898Software licenses
    
    
    58
    
    
    
    15
    
    
    
    98
    
    
    
    273Amortization of acquired core technology
    
    
    1,266
    
    
    
    1,266
    
    
    
    3,798
    
    
    
    3,798Research and development
    
    
    6,416
    (1)
    
    
    5,485
    
    
    
    19,543
    (1)
    
    
    16,550Selling, general and administrative
    
    
    5,028
    (1)
    
    
    3,979
    
    
    
    14,850
    (1)
    
    
    12,182Amortization of other acquired intangible assets
    
    
    235
    
    
    
    235
    
    
    
    705
    
    
    
    705Total costs and expenses
    
    
    19,737
    
    
    
    17,362
    
    
    
    58,802
    
    
    
    51,406Income (loss) from operations
    
    
    (373
    )
    
    
    1,095
    
    
    
    (1,571
    )
    
    
    3,500Interest and other income, net
    
    
    892
    
    
    
    463
    
    
    
    2,338
    
    
    
    1,085Income before taxes
    
    
    519
    
    
    
    1,558
    
    
    
    767
    
    
    
    4,585Tax provision (benefit)
    
    
    (51
    )(2)
    
    
    22
    
    
    
    776
    (2)
    
    
    313Net income (loss)
    
    $
    570
    
    
    $
    1,536
    
    
    $
    (9
    )
    
    $
    4,272Net income (loss) per share:Basic
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.17Diluted
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.16Weighted average common shares:Basic
    
    
    26,860
    
    
    
    26,101
    
    
    
    26,694
    
    
    
    25,887Diluted
    
    
    27,621
    
    
    
    27,779
    
    
    
    26,694
    
    
    
    27,298
 
 (1)
    
    Costs and expenses for the three months and for the nine months ended September 30, 2006,
include SFAS No. 123(R) stock-based compensation expense. See Note 1 and Note 9 to the
consolidated financial statements for additional information.(2)
    
    Tax provision (benefit) includes income tax expense from stock-based compensation. See notes to unaudited consolidated financial statements
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PDF SOLUTIONS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  (In thousands)
 Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Operating activities:Net income (loss)
    
    $
    (9
    )
    
    $
    4,272Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    1,532
    
    
    
    1,690Stock-based compensation
    
    
    5,462
    
    
    
    93Amortization of acquired intangible assets
    
    
    4,503
    
    
    
    4,503Tax benefit related to stock-based compensation plans
    
    
    579
    
    
    
    Excess tax benefit from stock-based compensation
    
    
    (286
    )
    
    
    Deferred taxes
    
    
    (1,020
    )
    
    
    (1,533
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,338
    )
    
    
    (1,649
    )Prepaid expenses and other assets
    
    
    (986
    )
    
    
    146Accounts payable
    
    
    1,045
    
    
    
    310Accrued compensation and related benefits
    
    
    (2,179
    )
    
    
    1,087Other accrued liabilities
    
    
    290
    
    
    
    (826
    )Taxes payable
    
    
    (89
    )
    
    
    1,675Deferred revenue
    
    
    421
    
    
    
    (527
    )Billings in excess of recognized revenue
    
    
    (1,465
    )
    
    
    844Net cash provided by operating activities
    
    
    6,460
    
    
    
    10,085Investing activities:Purchases of available-for-sale securities and other investments
    
    
    (42,198
    )
    
    
    Maturities and sales of available-for-sale securities and other investments
    
    
    25,242
    
    
    
    Purchases of property and equipment
    
    
    (1,915
    )
    
    
    (1,784
    )Net cash used in investing activities
    
    
    (18,871
    )
    
    
    (1,784
    )Financing activities:Proceeds from exercise of stock options
    
    
    3,425
    
    
    
    4,687Proceeds from employee stock purchase plan
    
    
    978
    
    
    
    808Principal payments on long-term obligations
    
    
    (36
    )
    
    
    (40
    )Excess tax benefit from stock-based compensation
    
    
    286
    
    
    
    Net cash provided by financing activities
    
    
    4,653
    
    
    
    5,455Effect of exchange rate changes on cash and cash equivalents
    
    
    33
    
    
    
    (75
    )Net increase (decrease) in cash and cash equivalents
    
    
    (7,725
    )
    
    
    13,681Cash and cash equivalents, beginning of period
    
    
    60,506
    
    
    
    45,660Cash and cash equivalents, end of period
    
    $
    52,781
    
    
    $
    59,341Non-cash investing and financing activities:Purchase of property and equipment on account
    
    $
    28
    
    
    $
    210Repurchase of common stock in exchange for shareholder note receivable
    
    $
    
    
    
    $
    742Deferred stock-based compensation
    
    $
    
    
    
    $
    10Reversal of
deferred stock compensation
    
    $
    27
    
    
    $
    Purchase price adjustment
    
    $
    923
    
    
    $
    Supplemental disclosure of cash flow information:Cash paid during the period for:Taxes
    
    $
    1,381
    
    
    $
    153Interest
    
    $
    1
    
    
    $
    
 See notes to unaudited consolidated financial statements
 4




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PDF SOLUTIONS, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
 Basis of Presentation
   Share-Based Payment
 Revenue Recognition
 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts Software Revenue
Recognition,
 Design-to-Silicon-Yield Solutions
 Integrated Solutions
  5




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Software Licenses
 Gain Share
 Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation
 Accounting for Stock-Based Compensation  Transition and Disclosures
 2. RECENT ACCOUNTING PRONOUNCEMENTS
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Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Considering the Effects of Prior Year Misstatements When Quantifying Misstatements
in Current Year Financial Statements
 Fair Value Measurements
 3. INVESTMENTS
  September 30, 2006Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    10,117
    
    
    $
    3
    
    
    $
    
    
    
    $
    10,120Auction rate securities
    
    
    5,550
    
    
    
    
    
    
    
    
    
    
    
    5,550Corporate bonds and notes
    
    
    5,975
    
    
    
    
    
    
    
    (6
    )
    
    
    5,969Money market funds
    
    
    44,488
    
    
    
    
    
    
    
    
    
    
    
    44,488$
    66,130
    
    
    $
    3
    
    
    $
    (6
    )
    
    $
    66,127Included in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    48,990Included in short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,137Total available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    66,127
  December 31, 2005Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMoney market funds
    
    $
    57,652
    
    
    $
    
    
    
    $
    
    
    
    $
    57,652Included in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    57,652Included in short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    57,652
 7




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##### Table of Contents



4. ACCOUNTS RECEIVABLE
  5. NET INCOME (LOSS) PER SHARE
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    570
    
    
    $
    1,536
    
    
    $
    (9
    )
    
    $
    4,272Denominator:Weighted average common shares outstanding
    
    
    26,860
    
    
    
    26,101
    
    
    
    26,694
    
    
    
    25,891Weighted average common shares outstanding subject to repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Denominator for basic calculation
    
    
    26,860
    
    
    
    26,101
    
    
    
    26,694
    
    
    
    25,887Weighted average shares subject to repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Stock options outstanding
    
    
    761
    
    
    
    1,678
    
    
    
    
    
    
    
    1,407Denominator for diluted computation
    
    
    27,621
    
    
    
    27,779
    
    
    
    26,694
    
    
    
    27,298Net income (loss) per share  basic
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.17Net income (loss) per share  diluted
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.16
  Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2006
    
    2005
    
    2006
    
    2005Common stock options
    
    
    2,883
    
    
    
    157
    
    
    
    5,501
    
    
    
    546
 6. COMPREHENSIVE INCOME (LOSS)
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    570
    
    
    $
    1,536
    
    
    $
    (9
    )
    
    $
    4,272Unrealized gain (loss) on short-term investments
    
    
    38
    
    
    
    
    
    
    
    (3
    )
    
    
    Foreign currency translation adjustments
    
    
    (16
    )
    
    
    (6
    )
    
    
    33
    
    
    
    (75
    )Comprehensive income
    
    $
    592
    
    
    $
    1,530
    
    
    $
    21
    
    
    $
    4,197
 7. GOODWILL AND PURCHASED INTANGIBLE ASSETS
 , Goodwill and other Intangible Assets,
  8




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December 31, 2005
    
    
    Purchase Price
    
    
    
    
    
    
    September 30, 2006Net Carrying Amount
    
    
    Adjustments
    
    
    Amortization
    
    
    Net Carrying AmountGoodwill
    
    $
    39,886
    
    
    $
    (923
    )
    
    $
    
    
    
    $
    38,963Acquired identifiable intangibles:Acquired core technology
    
    $
    8,221
    
    
    $
    
    
    
    $
    (3,798
    )
    
    $
    4,423Brand name
    
    
    833
    
    
    
    
    
    
    
    (375
    )
    
    
    458Other acquired intangibles
    
    
    733
    
    
    
    
    
    
    
    (330
    )
    
    
    403Total
    
    $
    9,787
    
    
    $
    
    
    
    $
    (4,503
    )
    
    $
    5,284
 December 31, 2004
    
    
    Purchase Price
    
    
    
    
    
    
    December 31, 2005Net Carrying Amount
    
    
    Adjustments
    
    
    Amortization
    
    
    Net Carrying AmountGoodwill
    
    $
    39,886
    
    
    $
    
    
    
    $
    
    
    
    $
    39,886Acquired identifiable intangibles:Acquired core technology
    
    $
    13,285
    
    
    $
    
    
    
    $
    (5,064
    )
    
    $
    8,221Brand name
    
    
    1,333
    
    
    
    
    
    
    
    (500
    )
    
    
    833Other acquired intangibles
    
    
    1,173
    
    
    
    
    
    
    
    (440
    )
    
    
    733Total
    
    $
    15,791
    
    
    $
    
    
    
    $
    (6,004
    )
    
    $
    9,787
    Year Ending December 31,
    
    Amount2006 (three-month period ending December 31, 2006)
    
    $
    1,5012007
    
    
    3,783Total
    
    $
    5,284
 8. CUSTOMER AND GEOGRAPHIC INFORMATION
 Disclosures about
Segments of an Enterprise and Related Information
   Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,Customer
    
    2006
    
    2005
    
    2006
    
    2005A
    
    
    9
    %
    
    
    11
    %
    
    
    12
    %
    
    
    11
    %G
    
    
    1
    %
    
    
    12
    %
    
    
    5
    %
    
    
    12
    %J
    
    
    1
    %
    
    
    9
    %
    
    
    1
    %
    
    
    13
    %M
    
    
    10
    %
    
    
    4
    %
    
    
    5
    %
    
    
    11
    %O
    
    
    9
    %
    
    
    4
    %
    
    
    10
    %
    
    
    4
    %P
    
    
    18
    %
    
    
    20
    %
    
    
    27
    %
    
    
    11
    %R
    
    
    14
    %
    
    
    
    
    
    
    8
    %
    
    
    
  9




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##### Table of Contents



Customer
    
    September 30, 2006
    
    December 31, 2005A
    
    
    14
    %
    
    
    5
    %J
    
    
    
    
    
    
    18
    %P
    
    
    19
    %
    
    
    25
    %R
    
    
    14
    %
    
    
    1
    %
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Asia
    
    $
    10,396
    
    
    $
    9,522
    
    
    $
    28,626
    
    
    $
    32,400United States
    
    
    7,096
    
    
    
    6,729
    
    
    
    23,585
    
    
    
    16,804Europe
    
    
    1,872
    
    
    
    2,206
    
    
    
    5,020
    
    
    
    5,702Total
    
    $
    19,364
    
    
    $
    18,457
    
    
    $
    57,231
    
    
    $
    54,906
  9. STOCKHOLDERS EQUITY
   Three Months Ended
    
    
    Nine Months Ended
    
    
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006 (1)
    
    
    2006 (1)
    
    
    2005 (2)
    
    
    2005 (2)Cost of design-to-silicon yield solutions
    
    $
    443
    
    
    $
    1,519
    
    
    $
    
    
    
    $
    Research and development
    
    
    443
    
    
    
    1,629
    
    
    
    11
    
    
    
    85Selling, general and administrative
    
    
    621
    
    
    
    2,314
    
    
    
    8
    
    
    
    8Stock based compensation before income taxes
    
    
    1,507
    
    
    
    5,462
    
    
    
    19
    
    
    
    93Income tax expense associated with stock
options
    
    
    8
    
    
    
    72
    
    
    
    
    
    
    
    Stock-based compensation, net of taxes
    
    $
    1,515
    
    
    $
    5,534
    
    
    $
    19
    
    
    $
    93Effect on net income (loss) per share:Basic
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.00
    
    
    $
    0.00Diluted
    
    $
    0.05
    
    
    $
    0.21
    
    
    $
    0.00
    
    
    $
    0.00
 
 (1)
    
    Stock-based compensation expense computed under SFAS No. 123(R)(2)
    
    Stock-based compensation expense computed under APB No.25  10




---



##### Table of Contents



Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2005Net income as reported:
    
    $
    1,536
    
    
    $
    4,272Add: stock-based employee
compensation expense included in
reported net loss under APB No.
25, net of related tax effects
    
    
    19
    
    
    
    93Deduct: total employee
stock-based compensation
determined under fair value based
method for all awards, net of
related tax effects
    
    
    (1,636
    )
    
    
    (4,396
    )Pro forma net income (loss)
    
    $
    (81
    )
    
    $
    (31
    )Basic net income (loss) per share:As reported
    
    $
    0.06
    
    
    $
    0.17Pro forma
    
    $
    (0.00
    )
    
    $
    (0.00
    )Diluted net income per share:As reported
    
    $
    0.06
    
    
    $
    0.16Pro forma
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    11




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##### Table of Contents



Employee
    
    
    
    
    
    EmployeeStock Purchase
    
    
    
    
    
    Stock PurchaseStock Plans
    
    Plan
    
    Stock Plans
    
    PlanThree Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30, 2006
    
    September 30, 2006
    
    September 30, 2006
    
    September 30, 2006Expected life (in years)
    
    
    4.26
    
    
    
    0.25
    
    
    
    4.26
    
    
    
    0.97Volatility
    
    
    56.9
    %
    
    
    60.3
    %
    
    
    58.1
    %
    
    
    52.8
    %Risk-free interest rate
    
    
    4.97
    %
    
    
    5.08
    %
    
    
    4.82
    %
    
    
    3.79
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value of options
granted during the period
    
    $
    6.26
    
    
    
    n/a
    
    
    $
    7.63
    
    
    
    n/aWeighted average fair value of employee stock
    
    
    n/a
    
    
    $
    3.45
    
    
    
    n/a
    
    
    $
    4.14
  Weighted
    
    
    WeightedAverage
    
    
    AverageExercise
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Price
    
    
    Contractual
    
    
    Intrinsic ValueOptions
    
    
    per Share
    
    
    Term (years)
    
    
    (in 000s)Outstanding, January 1, 2006
    
    
    5,674,045
    
    
    $
    11.13Granted
    
    
    376,500
    
    
    
    15.18Exercised
    
    
    (353,057
    )
    
    
    9.70Forfeited or expired
    
    
    (196,204
    )
    
    
    13.16Outstanding at September 30, 2006
    
    
    5,501,284
    
    
    
    11.43
    
    
    
    7.20
    
    
    $
    6,714Exercisable at September 30, 2006
    
    
    3,278,020
    
    
    $
    10.22
    
    
    
    6.24
    
    
    $
    5,632
    WeightedNumber of
    
    AverageOptions
    
    Grant Date Fair ValueNonvested, January 1, 2006
    
    
    2,796,371
    
    
    $
    6.94Granted
    
    
    376,500
    
    
    
    7.63Vested
    
    
    (768,217
    )
    
    
    6.27Forfeited
    
    
    (181,390
    )
    
    
    7.26Nonvested at September 30, 2006
    
    
    2,223,264
    
    
    
    6.86
   Stock Plans 
 12




---



##### Table of Contents



Employee Stock Purchase Plan
 Stock repurchase program
 10. SUBSEQUENT EVENTS
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  Overview
   13




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##### Table of Contents



Industry Trend
  Financial Highlights
   14




---



##### Table of Contents



Critical Accounting Policies
  General
  Revenue Recognition
 Accounting for Performance of Construction-Type
and Certain Production-Type Contracts Software Revenue Recognition
 15




---



##### Table of Contents



Design-to-Silicon-Yield Solutions
 Integrated Solutions
   Software Licenses
 Gain Share
 Software Development Costs
 Computer Software to be Sold, Leased or Otherwise Marketed
 16




---



##### Table of Contents



Goodwill and Acquired Intangible Assets
 Goodwill and Other Intangible
Assets
  Realization of Deferred Tax Assets
  Stock-Based Compensation
 Share-Based Paymen Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 Accounting for Stock-Based Compensation  Transition and Disclosures
 Results of Operations
  17




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenue:Design-to-silicon-yield solutionsIntegrated solutions
    
    
    57
    %
    
    
    75
    %
    
    
    59
    %
    
    
    70
    %Software licenses
    
    
    20
    
    
    
    8
    
    
    
    14
    
    
    
    15Gain share
    
    
    23
    
    
    
    17
    
    
    
    27
    
    
    
    15Total revenue
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost and expenses:Cost of design-to-silicon-yield solutions:Direct costs of design-to-silicon-yield solutionsIntegrated solutions
    
    
    35
    
    
    
    35
    
    
    
    35
    
    
    
    33Software licenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of acquired core technology
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    7Research and development
    
    
    33
    
    
    
    30
    
    
    
    34
    
    
    
    30Selling, general and administrative
    
    
    26
    
    
    
    22
    
    
    
    26
    
    
    
    22Amortization of other acquired intangible assets
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Total costs and expenses
    
    
    102
    
    
    
    95
    
    
    
    103
    
    
    
    93Income (loss) from operations
    
    
    (2
    )
    
    
    5
    
    
    
    (3
    )
    
    
    7Interest and other income, net
    
    
    5
    
    
    
    3
    
    
    
    4
    
    
    
    2Income before taxes
    
    
    3
    
    
    
    8
    
    
    
    1
    
    
    
    9Tax provision (benefit)
    
    
    (
    )
    
    
    
    
    
    
    1
    
    
    
    1Net income (loss)
    
    
    3
    %
    
    
    8
    %
    
    
    
    
    
    
    8
    %
 Comparison of the Three Months Ended September 30, 2006 and 2005
 Three Months Ended September 30,2006
    
    
    2005Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRevenue
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands,
except for %s)Design-to-silicon-yield
solutionsIntegrated solutions
    
    $
    11,153
    
    
    $
    13,834
    
    
    $
    (2,681
    )
    
    
    (19
    )%
    
    
    57
    %
    
    
    75
    %Software licenses
    
    
    3,811
    
    
    
    1,533
    
    
    
    2,278
    
    
    
    149
    %
    
    
    20
    %
    
    
    8
    %Gain share
    
    
    4,400
    
    
    
    3,090
    
    
    
    1,310
    
    
    
    42
    %
    
    
    23
    %
    
    
    17
    %Total
    
    $
    19,364
    
    
    $
    18,457
    
    
    $
    907
    
    
    
    5
    %
    
    
    100
    %
    
    
    100
    %
 Design-to-Silicon-Yield Solutions
 Integrated solutions
 Software licenses
 Gain Share
 18




---



##### Table of Contents



Three Months Ended September 30,2006
    
    
    2005Cost of Design-to-Silicon Yield
    
    Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofSolutions
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs of design-to-silicon-
yield solutions Integrated
solutions
    
    $
    6,734
    
    
    $
    6,382
    
    
    $
    352
    
    
    
    6
    %
    
    
    35
    %
    
    
    35
    %Software licenses
    
    
    58
    
    
    
    15
    
    
    
    43
    
    
    
    287
    %
    
    
    
    
    
    
    Amortization of acquired core
technology
    
    
    1,266
    
    
    
    1,266
    
    
    
    
    
    
    
    
    
    
    
    7
    %
    
    
    7
    %Total
    
    $
    8,058
    
    
    $
    7,663
    
    
    $
    395
    
    
    
    5
    %
    
    
    42
    %
    
    
    42
    %
 Direct Costs of Design-to-Silicon-Yield Solutions
 Integrated solutions.
 Software Licenses.
 Amortization of Acquired Core Technology
 19




---



##### Table of Contents



Three Months Ended September 30,2006
    
    
    2005Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    6,416
    
    
    $
    5,485
    
    
    $
    931
    
    
    
    17
    %
    
    
    33
    %
    
    
    30
    %
 Research and Development.
 Three Months Ended September 30,2006
    
    
    2005Selling, General and
    
    Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAdministrative
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    5,028
    
    
    $
    3,979
    
    
    $
    1,049
    
    
    
    26
    %
    
    
    26
    %
    
    
    22
    %
 Selling, General and Administrative
 Three Months Ended September 30,2006
    
    
    2005Amortization of Other
    
    Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAcquired Intangible Assets
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of Other Acquired
Intangible Assets
    
    $
    235
    
    
    $
    235
    
    
    
    
    
    
    
    
    
    
    
    1
    %
    
    
    1
    %
 Amortization of Other Acquired Intangible Assets
 Three Months Ended September 30,2006
    
    
    2005Interest and Other
    
    Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofIncome, net
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and Other Income, net
    
    $
    892
    
    
    $
    463
    
    
    $
    429
    
    
    
    93
    %
    
    
    5
    %
    
    
    3
    %
 Interest and Other Income, Net
 20




---



##### Table of Contents



Three Months Ended September 30,2006
    
    
    2005Provision/(Benefit) for Income
    
    Three Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofTaxes
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Provision (Benefit) for Income Tax
    
    $
    (51
    )
    
    $
    22
    
    
    $
    (73
    )
    
    
    (332
    )%
    
    
    
    
    
    
    
 Provision/(Benefit) for Income Taxes.
 Comparison of the Nine Months Ended September 30, 2006 and 2005
 Nine Months Ended September 30,2006
    
    
    2005Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRevenue
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Design-to-silicon-yield solutionsIntegrated solutions
    
    $
    33,859
    
    
    $
    38,658
    
    
    $
    (4,799
    )
    
    
    (12
    )%
    
    
    59
    %
    
    
    70
    %Software licenses
    
    
    8,217
    
    
    
    8,179
    
    
    
    38
    
    
    
    
    
    
    
    14
    %
    
    
    15
    %Gain share
    
    
    15,155
    
    
    
    8,069
    
    
    
    7,086
    
    
    
    88
    %
    
    
    27
    %
    
    
    15
    %Total
    
    $
    57,231
    
    
    $
    54,906
    
    
    $
    2,325
    
    
    
    4
    %
    
    
    100
    %
    
    
    100
    %
 Design-to-Silicon-Yield Solutions
 Integrated solutions
 Software licenses
 Gain Share
 Nine Months Ended September 30,2006
    
    
    2005Cost of Design-to-Silicon
    
    Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofYield Solutions
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs of design-to-silicon-
yield solutionsIntegrated solutions
    
    $
    19,808
    
    
    $
    17,898
    
    
    $
    1,910
    
    
    
    11
    %
    
    
    35
    %
    
    
    33
    %Software licenses
    
    
    98
    
    
    
    273
    
    
    
    (175
    )
    
    
    (64
    )%
    
    
    
    
    
    
    Amortization of acquired core
technology
    
    
    3,798
    
    
    
    3,798
    
    
    
    
    
    
    
    
    
    
    
    7
    %
    
    
    7
    %Total
    
    $
    23,704
    
    
    $
    21,969
    
    
    $
    1,735
    
    
    
    8
    %
    
    
    42
    %
    
    
    40
    %
 Direct Costs of Design-to-Silicon-Yield Solutions
 Integrated solutions.
 21




---



##### Table of Contents



Software Licenses.
 Amortization of Acquired Core Technology
 Nine Months Ended September 30,2006
    
    
    2005Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    19,543
    
    
    $
    16,550
    
    
    $
    2,993
    
    
    
    18
    %
    
    
    34
    %
    
    
    30
    %
 Research and Development.
 Nine Months Ended September 30,2006
    
    
    2005Selling, General and
    
    Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAdministrative
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    14,850
    
    
    $
    12,182
    
    
    $
    2,668
    
    
    
    22
    %
    
    
    26
    %
    
    
    22
    %
 Selling, General and Administrative
 Nine Months Ended September 30,2006
    
    
    2005Amortization of Other
    
    Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAcquired Intangible Assets
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of Other Acquired
Intangible Assets
    
    $
    705
    
    
    $
    705
    
    
    
    
    
    
    
    
    
    
    
    1
    %
    
    
    1
    %
 Amortization of Other Acquired Intangible Assets
 Nine Months Ended September 30,2006
    
    
    2005Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofInterest and Other Income, net
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and Other Income, net
    
    $
    2,338
    
    
    $
    1,085
    
    
    $
    1,253
    
    
    
    115
    %
    
    
    4
    %
    
    
    2
    %
 Interest and Other Income, Net
 22




---



##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005Nine Months Ended September 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofProvision for Income Taxes
    
    2006
    
    
    2005
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Provision for Income Tax
    
    $
    776
    
    
    $
    313
    
    
    $
    463
    
    
    
    148
    %
    
    
    1
    %
    
    
    1
    %
 Provision for Income Taxes.
 Liquidity and Capital Resources
     23




---



##### Table of Contents



Year Ending December 31,
    
    Amount2006 (remaining three months)
    
    $
    7172007
    
    
    2,5632008
    
    
    5032009
    
    
    1492010
    
    
    148Thereafter
    
    
    140Total
    
    $
    4,220
 Recent Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Considering the Effects of Prior Year Misstatements When Quantifying Misstatements
in Current Year Financial Statements
 Fair Value Measurements
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Interest Rate Risk
 24




---



##### Table of Contents



Foreign Currency and Exchange Risk
 
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls Over Financial Reporting
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
 If semiconductor designers and manufacturers do not continue to adopt our
Design-to-Silicon-Yield solutions, we may be unable to increase or maintain our revenue.
  
    
    our customers failure to achieve satisfactory yield improvements using our
Design-to-Silicon-Yield solutions;
    
    a decrease in demand for semiconductors generally or the demand for deep submicron
semiconductors failing to grow as rapidly as expected;
    
    the industry may develop alternative methods to enhance the integration between the
semiconductor design and manufacturing processes due to a rapidly evolving market and the
likely emergence of new technologies;
 25




---



##### Table of Contents




    
    our existing and potential customers reluctance to understand and accept our
innovative gain share fee component; and
    
    our customers concern about our ability to keep highly competitive information
confidential.
 We generate a large percentage of our total revenue from a limited number of customers, so the
loss of any one of these customers could significantly reduce our revenue and results of
operations below expectations.
  We must effectively manage and support our operations and recent and planned growth in order for
our business strategy to succeed.
  If we fail to protect our intellectual property rights, customers or potential competitors may
be able to use our technologies to develop their own solutions which could weaken our
competitive position, reduce our revenue, or increase our costs.
  Competition in the market for solutions that address yield improvement and integration between
IC design and manufacturing may intensify in the future, which could slow our ability to grow or
execute our strategy.
  26




---



##### Table of Contents



We face operational and financial risks associated with international operations.
  
    
    some of our key engineers and other personnel who are foreign nationals may have
difficulty gaining access to the United States and other countries in which our customers
or our offices may be located and it may be difficult for us to recruit and retain
qualified technical and managerial employees in foreign offices;
    
    greater difficulty in collecting account receivables resulting in longer collection
periods;
    
    language and other cultural differences may inhibit our sales and marketing efforts and
create internal communication problems among our U.S. and foreign research and development
teams, increasing the difficulty of managing multiple, remote locations performing various
development, quality assurance, and yield ramp analysis projects;
    
    compliance with, and unexpected changes in, a wide variety of foreign laws and
regulatory environments with which we are not familiar, including, among other issues, with
respect to protection of our intellectual property, and a wide variety of trade and export
controls under domestic, foreign, and international law;
    
    currency risk due to the fact that expenses for our international offices are
denominated in the local currency, including the Euro, while virtually all of our revenue
is denominated in U.S. dollars;
    
    quarantine, private travel limitation, or business disruption in regions affecting our
operations, stemming from actual, imminent or perceived outbreak of human pandemic or
contagious disease;
    
    in the event a larger portion of our revenue becomes denominated in foreign currencies,
we would be subject to a potentially significant exchange rate risk; and
    
    economic or political instability, including but not limited to armed conflict,
terrorism, and the resulting disruption to economic activity and business operations.
  27




---



##### Table of Contents




    
    any recurrence of an overall downturn in Asian economies could limit our ability to
retain existing customers and attract new ones in Asia; and
    
    if the U.S. dollar increases in value relative to the Japanese Yen, the cost of our
solutions will be more expensive to existing and potential Japanese customers and therefore
less competitive.
 Our earnings per share and other key operating results may be unusually high in a given quarter,
thereby raising investors expectations, and then unusually low in the next quarter, thereby
disappointing investors, which could cause our stock price to drop.
  
    
    the size and timing of sales volumes achieved by our customers products;
    
    the loss of any of our large customers or an adverse change in any of our large customers businesses;
    
    the size of improvements in our customers yield and the timing of agreement as to those improvements;
    
    our long and variable sales cycle;
    
    changes in the mix of our revenue;
    
    changes in the level of our operating expenses needed to support our projected growth; and
    
    delays in completing solution implementations for our customers.
 Our gain share revenue is dependent on factors outside of our control, including the volume of
integrated circuits, or ICs, our customers are able to sell to their customers.
  Gain share measurement requires data collection and is subject to customer agreement, which can
result in uncertainty and cause quarterly results to fluctuate.
  Changes in the structure of our customer contracts, including the mix between fixed and variable
revenue and the mix of elements, can adversely affect the size and timing of our total revenue.
 28




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It typically takes us a long time to sell our unique solutions to new customers, which can
result in uncertainty and delays in generating additional revenue.
  We have a history of losses, we may incur losses in the future and we may be unable to maintain
profitability.
  
    
    funding for research and development;
    
    expansion of our solution implementation teams;
    
    expansion of our sales and marketing efforts; and
    
    additional non-cash charges relating to amortization of intangibles and stock-based compensation.
  The semiconductor industry is cyclical in nature.
  We must continually attract and retain highly talented executives, engineers, and research and
development personnel or we will be unable to expand our business as planned.
  29




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If our products, technologies, services, and integrated solutions fail to keep pace with the
rapid technological changes in the semiconductor industry, we could lose customers and revenue.
  We intend to pursue additional strategic relationships, which are necessary to maximize our
growth, but could substantially divert management attention and resources.
  
    
    potential industry partners become concerned about our ability to protect their intellectual property;
    
    potential industry partners develop their own solutions to address the need for yield improvement;
    
    our potential competitors establish relationships with industry partners with which we
seek to establish a relationship; or
    
    potential industry partners attempt to restrict our ability to enter into relationships
with their competitors.
 Our solution implementations may take longer than we anticipate, which could cause us to lose
customers and may result in adjustments to our operating results.
  Key executives, including our chief executive officer and our chief strategy officer, are
critical to our business and we cannot guarantee that they will remain with us indefinitely.
  30




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Inadvertent disclosure of our customers confidential information could result in costly
litigation and cause us to lose existing and potential customers.
  Our technologies could infringe the intellectual property rights of others causing costly
litigation and the loss of significant rights.
  Defects in our proprietary technologies, hardware and software tools, and the cost of support to
remedy any such defects could decrease our revenue and our competitive market share.
  We may have difficulty maintaining the effectiveness of our internal control over financial
reporting.
  31




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Change in stock option accounting rules may harm our reported operating results prepared in
accordance with generally accepted accounting principles, our stock price, and our
competitiveness in the employee marketplace.
 Share-Based Payments
 Worldwide events may reduce our revenues and harm our business.
  We may not be able to expand our proprietary technologies if we do not consummate potential
acquisitions or investments or successfully integrate them with our business.
  We may not be able to raise necessary funds to support our growth or execute our strategy.
  Recent acquisitions may adversely affect our business by diverting managements attention,
increasing our expenses or by being more difficult to integrate than expected.
  
    
    consolidating research and development operations;
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##### Table of Contents




    
    retaining key employees;
    
    incorporating acquired products and business technology into our existing product lines;
    
    coordinating effective sales and marketing functions;
    
    preserving research and development, marketing, customer and other important relationships; and
    
    minimizing the diversion of managements attention from ongoing business concerns.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Use of Proceeds
 Stock Repurchases
 ISSUER PURCHASES OF EQUITY SECURITIES
 Total Number of
    
    Maximum Number (orTotal
    
    
    
    
    
    Shares (or Units)
    
    Approximate DollarNumber of
    
    Average
    
    Purchased as
    
    Value) of Shares (orShares (or
    
    Price Paid
    
    Part of Publicly
    
    Units) that May Yet BeUnits)
    
    Per Share
    
    Announced Plans
    
    Purchased Under thePeriod
    
    Purchased
    
    (or Unit)
    
    or Programs (1)
    
    Plans or Programs(1)Month #1 (July 1, 2006 through July 31, 2006)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,451,236Month #2 (August 1, 2006 through August 31, 2006)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,451,236Month #3 (September 1, 2006 through September 30,
2006)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,451,236Total
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    On March 26, 2003, we announced that our Board of Directors had approved a share repurchase
program, pursuant to which up to $10.0 million of our outstanding common stock may be
repurchased; the repurchase program has no set expiration or termination date. As of September
30, 2006, 550,521 shares had been repurchased under this program at a weighted average per
share price of $10.08 and approximately $4.5 million remained available for repurchases. 
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  33




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Item 6. Exhibits.
 ExhibitNumber
    
    Description3.01
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc. *3.02
    
    Amended and Restated Bylaws of PDF Solutions, Inc. 4.01
    
    Specimen Stock Certificate**4.02
    
    Second Amended and Restated Rights Agreement dated July 6, 2001*31.01
    
    Certification of the President and Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.02
    
    Certification of the Chief Financial Officer and Vice President of Finance and
Administration pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.01
    
    Certification of the President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***32.02
    
    Certification the Chief Financial Officer and Vice President of Finance and
Administration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002***
 
 
    
    Incorporated by reference to PDFs Report on Form 10-Q filed August 9, 2005 (File No.
000-31311).*
    
    Incorporated by reference to PDFs Registration Statement on Form S-1, Amendment No. 7 filed
July 9, 2001 (File No. 333-43192).**
    
    Incorporated by reference to PDFs Report on Form 10-Q filed September 6, 2001 (File No.
000-31311).***
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly
Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of PDF Solutions, Inc. under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any filings. 34




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##### Table of Contents



SIGNATURES
  Date: November 9, 2006
    
    By:
    
    /s/ JOHN K. KIBARIAN

John K. KibarianPresident and Chief Executive OfficerBy:
    
    /s/ KEITH A. JONES

Keith A. JonesChief Financial Officer and Vice President of Finance
 35




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EXHIBIT INDEX
 ExhibitNumber
    
    Description3.01
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc.*3.02
    
    Amended and Restated Bylaws of PDF Solutions, Inc. 4.01
    
    Specimen Stock Certificate**4.02
    
    Second Amended and Restated Rights Agreement dated July 6, 2001*31.01
    
    Certification of the President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.02
    
    Certification of the Chief Financial Officer and Vice President of Finance and
Administration pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.01
    
    Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***32.02
    
    Certification the Chief Financial Officer and Vice President of Finance and
Administration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002***
 
 
    
    Incorporated by reference to PDFs Report on Form 10-Q filed August 9, 2005 (File No.
000-31311).*
    
    Incorporated by reference to PDFs Registration Statement on Form S-1, Amendment No. 7 filed
July 9, 2001 (File No. 333-43192).**
    
    Incorporated by reference to PDFs Report on Form 10-Q filed September 6, 2001 (File No.
000-31311).***
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly
Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of PDF Solutions, Inc. under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any filings.