##### 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 March 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 000-31311
 
 PDF SOLUTIONS, INC.
  Delaware
    
    25-1701361(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 333 West San Carlos Street, Suite 700San Jose, California
    
    95110(Address of Principal Executive Offices)
    
    (Zip Code)
 (408) 280-7900
 þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Unaudited Condensed Consolidated Balance Sheets
    
    
    3Unaudited Condensed Consolidated Statements of Operations
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34INDEX TO EXHIBITSEXHIBIT 10.01EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  2




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##### Table of Contents



Item 1. Financial Statements.
 PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 March 31,
    
    
    December 31,2007
    
    
    2006(In thousands,except par values)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,083
    
    
    $
    36,451Short-term investments
    
    
    18,419
    
    
    
    16,402Accounts receivable, net of allowance of $295 in 2007 and $294 in 2006
    
    
    35,099
    
    
    
    27,575Prepaid expenses and other current assets
    
    
    2,720
    
    
    
    2,796Deferred tax assets
    
    
    3,087
    
    
    
    2,581Total current assets
    
    
    91,408
    
    
    
    85,805Property and equipment, net
    
    
    3,742
    
    
    
    3,916Goodwill
    
    
    60,997
    
    
    
    60,034Intangible assets, net
    
    
    11,004
    
    
    
    13,605Deferred tax assets
    
    
    6,603
    
    
    
    4,994Other assets
    
    
    533
    
    
    
    503Total assets
    
    $
    174,287
    
    
    $
    168,857LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    289
    
    
    $
    302Accounts payable
    
    
    2,554
    
    
    
    3,182Accrued compensation and related benefits
    
    
    5,364
    
    
    
    3,325Other accrued liabilities
    
    
    2,283
    
    
    
    3,843Taxes payable
    
    
    1,533
    
    
    
    4,767Deferred revenue
    
    
    6,572
    
    
    
    3,705Billings in excess of recognized revenue
    
    
    888
    
    
    
    95Total current liabilities
    
    
    19,483
    
    
    
    19,219Long-term debt
    
    
    1,173
    
    
    
    1,198Long-term taxes payable
    
    
    4,757
    
    
    
    Other liabilities
    
    
    177
    
    
    
    221Total liabilities
    
    
    25,590
    
    
    
    20,638Stockholders equity:Preferred stock, $0.00015 par value, 5,000 shares authorized: no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.00015 par value, 70,000 shares authorized: shares issued and outstanding
27,991 in 2007 and 27,948 in 2006
    
    
    4
    
    
    
    4Additional paid-in-capital
    
    
    169,580
    
    
    
    167,323Treasury stock at cost, 551 shares
    
    
    (5,549
    )
    
    
    (5,549
    )Accumulated deficit
    
    
    (16,783
    )
    
    
    (13,890
    )Accumulated other comprehensive income
    
    
    1,445
    
    
    
    331Total stockholders equity
    
    
    148,697
    
    
    
    148,219Total liabilities and stockholders equity
    
    $
    174,287
    
    
    $
    168,857
 See notes to unaudited condensed consolidated financial statements
 3




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PDF
SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three months Ended March 31,2007
    
    
    2006(In thousands, except per shareamounts)Revenues:Design-to-silicon-yield solutions:Integrated solutions
    
    $
    13,764
    
    
    $
    12,229Software licenses
    
    
    3,485
    
    
    
    2,612Gain share
    
    
    4,893
    
    
    
    5,016Total revenues
    
    
    22,142
    
    
    
    19,857Cost of design-to-silicon-yield solutions:Direct costs of design-to-silicon-yield solutions:Integrated solutions
    
    
    7,708
    
    
    
    6,429Software licenses
    
    
    59
    
    
    
    11Amortization of acquired core technology
    
    
    1,575
    
    
    
    1,266Total cost of design-to silicon-yield solutions
    
    
    9,342
    
    
    
    7,706Gross margin
    
    
    12,800
    
    
    
    12,151Operating expenses:Research and development
    
    
    8,370
    
    
    
    6,256Selling, general and administrative
    
    
    5,844
    
    
    
    4,956Amortization of other acquired intangible assets
    
    
    1,013
    
    
    
    235Total operating expenses
    
    
    15,227
    
    
    
    11,447Income (loss) from operations
    
    
    (2,427
    )
    
    
    704Interest and other income, net
    
    
    496
    
    
    
    635Income (loss) before taxes
    
    
    (1,931
    )
    
    
    1,339Income tax provision
    
    
    424
    
    
    
    1,071Net income (loss)
    
    $
    (2,355
    )
    
    $
    268Net income (loss) per share:Basic
    
    $
    (0.08
    )
    
    $
    0.01Diluted
    
    $
    (0.08
    )
    
    $
    0.01Weighted average common shares:Basic
    
    
    27,980
    
    
    
    26,542Diluted
    
    
    27,980
    
    
    
    28,223
 See notes to unaudited condensed consolidated financial statements
 4




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PDF
SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months EndedMarch 31,2007
    
    
    2006(In thousands)Operating activities:Net income (loss)
    
    $
    (2,355
    )
    
    $
    268Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    493
    
    
    
    570Stock-based compensation expense
    
    
    1,838
    
    
    
    2,168Gain on disposal of property, plant and equipment
    
    
    1
    
    
    
    Amortization of acquired intangible assets
    
    
    2,604
    
    
    
    1,501Tax benefit related to stock-based compensation expense
    
    
    (27
    )
    
    
    492Excess tax benefit from stock-based compensation expense
    
    
    
    
    
    
    (305
    )Deferred taxes
    
    
    (1,529
    )
    
    
    231Changes in operating assets and liabilities, net of effect of acquisition:Accounts receivable, net of allowances
    
    
    (7,525
    )
    
    
    503Prepaid expenses and other assets
    
    
    46
    
    
    
    269Accounts payable
    
    
    (637
    )
    
    
    (751
    )Accrued compensation and related benefits
    
    
    607
    
    
    
    (1,985
    )Other accrued liabilities
    
    
    368
    
    
    
    (229
    )Taxes payable
    
    
    1,833
    
    
    
    87Deferred revenues
    
    
    2,867
    
    
    
    978Billings in excess of recognized revenue
    
    
    793
    
    
    
    (1,014
    )Net cash provided by (used in) operating activities
    
    
    (623
    )
    
    
    2,783Investing activities:Purchases of available-for-sale securities
    
    
    (9,515
    )
    
    
    (27,746
    )Maturities and sales of available-for-sale securities
    
    
    7,671
    
    
    
    2,800Purchases of property and equipment
    
    
    (476
    )
    
    
    (868
    )Payments on business acquired in 2006, net of cash acquired
    
    
    (1,945
    )
    
    
    Net cash used in investing activities
    
    
    (4,265
    )
    
    
    (25,814
    )Financing activities:Exercise of stock options
    
    
    447
    
    
    
    2,375Principal payments on long-term obligations
    
    
    (38
    )
    
    
    (27
    )Excess tax benefit from stock-based compensation expense
    
    
    
    
    
    
    305Net cash provided by financing activities
    
    
    409
    
    
    
    2,653Effect of exchange rate changes on cash
    
    
    111
    
    
    
    7Net decrease in cash and cash equivalents
    
    
    (4,368
    )
    
    
    (20,371
    )Cash and cash equivalents, beginning of period
    
    
    36,451
    
    
    
    60,506Cash and cash equivalents, end of period
    
    $
    32,083
    
    
    $
    40,135Non-cash investing and financing activities:Purchase price adjustments
    
    $
    4
    
    
    $
    Effect of exchange rate changes on goodwill
    
    $
    992
    
    
    $
    Reversal of deferred stock compensation
    
    $
    
    
    
    $
    27Purchase of property and equipment on account
    
    $
    37
    
    
    $
    31Supplemental disclosure of cash flow information:Cash paid during the year for:Taxes
    
    $
    184
    
    
    $
    302Interest
    
    $
    12
    
    
    $
    2
 See notes to unaudited condensed consolidated financial statements
 5




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##### Table of Contents



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




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Software Licenses
 Gain Share
 Stock-Based Compensation
 Share-Based Payment
 2. RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Sabbatical
Leave and Other Similar Benefits Pursuant to FASB Statement No. 43
 The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB
Statement No. 115.
 Accounting for Uncertainty in Income Taxes Income
Taxes
 Fair Value Measurement
 7




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##### Table of Contents



3. INVESTMENTS
  March 31, 2007Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    16,545
    
    
    $
    2
    
    
    $
    
    
    
    $
    16,547Auction rate securities
    
    
    5,050
    
    
    
    
    
    
    
    
    
    
    
    5,050Corporate bonds and notes
    
    
    1,998
    
    
    
    
    
    
    
    
    
    
    
    1,998Money market funds
    
    
    20,225
    
    
    
    
    
    
    
    
    
    
    
    20,225$
    43,818
    
    
    $
    2
    
    
    $
    
    
    
    $
    43,820Included in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,401Included in short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,419Total available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    43,820
  December 31, 2006Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    13,307
    
    
    $
    1
    
    
    $
    
    
    
    $
    13,308Auction rate securities
    
    
    5,050
    
    
    
    
    
    
    
    
    
    
    
    5,050Corporate bonds and notes
    
    
    1,984
    
    
    
    
    
    
    
    (1
    )
    
    
    1,983Money market funds
    
    
    23,744
    
    
    
    
    
    
    
    
    
    
    
    23,744$
    44,085
    
    
    $
    1
    
    
    $
    (1
    )
    
    $
    44,085Included in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,683Included in short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,402Total available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,085
 4. ACCOUNTS RECEIVABLE
  5. NET INCOME (LOSS) PER SHARE
  Three MonthsEnded March 31,2007
    
    
    2006Net income (loss)
    
    $
    (2,355
    )
    
    $
    268Denominator for basic calculation:Weighted average common shares outstanding
    
    
    27,980
    
    
    
    26,542Dilutive itemsStock options outstanding
    
    
    
    
    
    
    1,681Denominator for diluted computation
    
    
    27,980
    
    
    
    28,223Net income (loss) per share  basic
    
    $
    (0.08
    )
    
    $
    0.01Net income (loss) per share  diluted
    
    $
    (0.08
    )
    
    $
    0.01
 8




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##### Table of Contents



Three MonthsEnded March 31,2007
    
    2006Common stock options
    
    
    6,594
    
    
    
    1,402
 6. COMPREHENSIVE INCOME (LOSS)
  Three MonthsEnded March 31,2007
    
    
    2006Net income (loss)
    
    $
    (2,355
    )
    
    $
    268Unrealized gain (loss) on short-term investments
    
    
    2
    
    
    
    (30
    )Foreign currency translation adjustments
    
    
    1,112
    
    
    
    14Comprehensive income (loss)
    
    $
    (1,241
    )
    
    $
    252


9



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7. GOODWILL AND PURCHASED INTANGIBLE ASSETS
 , Goodwill and other Intangible Assets,
   December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 31,Amortization
    
    
    2006
    
    
    
    
    
    
    Purchase
    
    
    
    
    
    
    Foreign
    
    
    2007Period
    
    
    Net Carrying
    
    
    
    
    
    
    Price
    
    
    
    
    
    
    Currency
    
    
    Net Carrying(Years)
    
    
    Amount
    
    
    Acquisition
    
    
    Adjustments
    
    
    Amortization
    
    
    Translation
    
    
    AmountGoodwill
    
    
    N/A
    
    
    $
    60,034
    
    
    $
    
    
    
    $
    (29
    )
    
    $
    
    
    
    $
    992
    
    
    $
    60,997Acquired identifiable intangibles:Acquired core technology
    
    
    4
    
    
    $
    7,901
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,575
    )
    
    $
    
    
    
    $
    6,326Brand name
    
    
    4
    
    
    
    822
    
    
    
    
    
    
    
    
    
    
    
    (157
    )
    
    
    
    
    
    
    665Customer relationships and backlog
    
    
    1 - 6
    
    
    
    4,362
    
    
    
    
    
    
    
    
    
    
    
    (746
    )
    
    
    
    
    
    
    3,616Other acquired intangibles
    
    
    4
    
    
    
    520
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    3
    
    
    
    397Total
    
    
    
    
    
    $
    13,605
    
    
    $
    
    
    
    $
    
    
    
    $
    (2,604
    )
    
    $
    3
    
    
    $
    11,004
 December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,Amortization
    
    
    2005
    
    
    
    
    
    
    Purchase
    
    
    
    
    
    
    Foreign
    
    
    2006Period
    
    
    Net Carrying
    
    
    
    
    
    
    Price
    
    
    
    
    
    
    Currency
    
    
    Net Carrying(Years)
    
    
    Amount
    
    
    Acquisitions
    
    
    Adjustments
    
    
    Amortization
    
    
    Translation
    
    
    AmountGoodwill
    
    
    N/A
    
    
    $
    39,886
    
    
    $
    21,071
    
    
    $
    (923
    )
    
    $
    
    
    
    $
    
    
    
    $
    60,034Acquired identifiable intangibles:Acquired core technology
    
    
    4
    
    
    $
    8,221
    
    
    $
    4,950
    
    
    $
    
    
    
    $
    (5,270
    )
    
    $
    
    
    
    $
    7,901Brand name
    
    
    4
    
    
    
    833
    
    
    
    510
    
    
    
    
    
    
    
    (521
    )
    
    
    
    
    
    
    822Customer relationships and backlog
    
    
    1 - 6
    
    
    
    
    
    
    
    4,860
    
    
    
    
    
    
    
    (498
    )
    
    
    
    
    
    
    4,362Other acquired intangibles
    
    
    4
    
    
    
    733
    
    
    
    255
    
    
    
    
    
    
    
    (477
    )
    
    
    9
    
    
    
    520Total
    
    
    
    
    
    $
    9,787
    
    
    $
    10,575
    
    
    $
    
    
    
    $
    (6,766
    )
    
    $
    9
    
    
    $
    13,605
  Year Ending December 31,
    
    Amount2007 (nine-month period)
    
    $
    5,1642008
    
    
    1,8072009
    
    
    1,8072010
    
    
    1,5412011
    
    
    3752012
    
    
    310Total
    
    $
    11,004
 8. INCOME TAXES
 Accounting for Uncertainty
in Income Taxes  An Interpretation of FASB Statement No. 109
 10




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##### Table of Contents



9. STOCKHOLDERS EQUITY
 Share-Based Payments
 Three MonthsEnded March 31,2007
    
    
    2006Cost of design-to-silicon yield solutions
    
    $
    493
    
    
    $
    621Research and development
    
    
    563
    
    
    
    618Selling, general and administrative
    
    
    782
    
    
    
    929Stock based compensation before income taxes
    
    $
    1,838
    
    
    $
    2,168
  Stock Plans
    
    Employee Stock Purchase PlansThree Months Ended March 31,
    
    Three Months Ended March 31,2007
    
    2006
    
    2007
    
    2006Expected life (in years)
    
    
    6.08
    
    
    
    3.82
    
    
    
    0.73
    
    
    
    1.01Volatility
    
    
    60.7
    %
    
    
    56.1
    %
    
    
    53
    %
    
    
    39.3
    %Risk-free interest rate
    
    
    4.76
    %
    
    
    4.69
    %
    
    
    5.28
    %
    
    
    3.1
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value
of options granted during
the period
    
    $
    7.19
    
    
    $
    8.01
    
    
    
    
    
    
    
    Weighted average fair value
of employee stock issued during the period
    
    
    
    
    
    
    
    
    
    $
    4.14
    
    
    $
    3.54
  Stock Plans 
 11




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##### Table of Contents



Weighted AverageWeighted Average
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsic ValueOptions
    
    
    per Share
    
    
    Term (years)
    
    
    (in 000s)Outstanding, January 1, 2007
    
    
    6,664,094
    
    
    $
    12.11Granted
    
    
    41,500
    
    
    
    11.80Exercised
    
    
    (43,551
    )
    
    
    10.25Forfeited or expired
    
    
    (67,770
    )
    
    
    12.86Outstanding at March 31, 2007
    
    
    6,594,273
    
    
    
    12.11
    
    
    
    7.39
    
    
    $
    6,689Vested and expected to vest
    
    
    6,155,955
    
    
    
    11.98
    
    
    
    7.27
    
    
    $
    6,659Exercisable at March 31, 2007
    
    
    3,595,331
    
    
    $
    10.72
    
    
    
    6.11
    
    
    $
    6,158
    Number of
    
    
    Weighted AverageOptions
    
    
    Grant Date Fair ValueNonvested, January 1, 2007
    
    
    3,244,835
    
    
    $
    7.84Granted
    
    
    41,500
    
    
    
    7.19Vested
    
    
    (238,474
    )
    
    
    6.79Forfeited
    
    
    (48,919
    )
    
    
    7.26Nonvested at March 31, 2007
    
    
    2,998,942
    
    
    
    7.89
  Employee Stock Purchase Plan
 Stock repurchase program
 10. CUSTOMER AND GEOGRAPHIC INFORMATION
 Disclosures about Segments of an Enterprise and Related Information
 12




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##### Table of Contents



Three MonthsEnded March 31,Customer
    
    2007
    
    2006A
    
    
    17
    %
    
    
    30
    %B
    
    
    16
    %
    
    
    11
    %C
    
    
    5
    %
    
    
    10
    %D
    
    
    1
    %
    
    
    10
    %
  Customer
    
    March 31, 2007
    
    December 31, 2006A
    
    
    16
    %
    
    
    12
    %B
    
    
    14
    %
    
    
    12
    %C
    
    
    13
    %
    
    
    18
    %D
    
    
    11
    %
    
    
    10
    %
  Three MonthsEnded March 31,2007
    
    
    2006Asia
    
    $
    12,030
    
    
    $
    9,829United States
    
    
    7,475
    
    
    
    8,868Europe
    
    
    2,637
    
    
    
    1,160Total
    
    $
    22,142
    
    
    $
    19,857
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  13




---



##### Table of Contents



Overview
    Industry Trend
  14




---



##### Table of Contents



Financial Highlights
  
    
    Total revenue for the three months ended March 31, 2007 was $22.1 million, a increase of
12% compared to the three months ended March 31, 2006. Revenue from Design-to-Silicon-Yield
solutions for the three months ended March 31, 2007 increased to $17.2 million compared to
$14.8 million for the three months ended March 31, 2006. The change was a result of
increases in revenues related to both Integrated Solutions and Software Licenses of $1.5 million and $873,000, respectively, over the three months ended March 31, 2006. Gain share revenue for the
three months ended March 31, 2007 decreased slightly to $4.9 million from $5.0 million for
the three months ended March 31, 2006. Our gain share revenue may continue to fluctuate
from quarter to quarter as a result of each customers contractual performance measures for
achieving gain share as well as each customers production volumes in any given period.
    
    Net loss for the three months ended March 31, 2007 was $2.4 million, compared to net
income of $268,000 for the three months ended March 31, 2006. The net loss was primarily
attributable to increases in operating expenses and amortization of acquired intangible
assets, both as a result of the acquisition of Si Automation S.A. in October 2006.
    
    Net loss per basic and diluted share was $0.08 for the three months ended March 31, 2007
compared to net income per diluted share of $0.01 for the three months ended March 31, 2006,
a decrease of $0.09 per diluted share.
    
    Cash, cash equivalents and short-term investments decreased $2.4 million to $50.5 million
during the three months ended March 31, 2007. Net cash used in operating activities for the
three months ended March 31, 2007 totaled $623,000 reflecting  an increase of $7.5 million in accounts receivable,
partially offset by the favorable impact in other operating accounts. Net cash used in
investing activities for the three months ended March 31, 2007 included $1.9 million as
final payments for business acquired and $476,000 to purchase property and equipment. Net
cash provided by financing activities for the three months ended March 31, 2007 totaled $409,000
and was primarily related to the exercise of stock options.
 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 Payment
 17




---



##### Table of Contents



Results of Operations
  Three Months EndedMarch 31,2007
    
    2006Revenues:Design-to-silicon-yield solutions:Integrated solutions
    
    
    62
    %
    
    
    62
    %Software licenses
    
    
    16
    
    
    
    13Gain share
    
    
    22
    
    
    
    25Total revenues
    
    
    100
    %
    
    
    100
    %Cost of design-to-silicon-yield solutions:Direct costs of design-to-silicon-yield solutions:Integrated solutions
    
    
    35
    
    
    
    32Software licenses
    
    
    
    
    
    
    Amortization of acquired core technology
    
    
    7
    
    
    
    6Total cost of design-to silicon-yield solutions
    
    
    42
    
    
    
    38Gross margin
    
    
    58
    
    
    
    62Operating expenses:Research and development
    
    
    38
    
    
    
    32Selling, general and administrative
    
    
    26
    
    
    
    25Amortization of other acquired intangible assets
    
    
    5
    
    
    
    1Total operating expenses
    
    
    69
    
    
    
    58Income (loss) from operations
    
    
    (11
    )
    
    
    4Interest and other income, net
    
    
    2
    
    
    
    3Income (loss) before taxes
    
    
    (9
    )
    
    
    7Income tax provision
    
    
    2
    
    
    
    6Net income (loss)
    
    
    (11
    )%
    
    
    1
    %
 Comparison of the Three Months Ended March 31, 2007 and 2006
 Three Months Ended March 31,2007
    
    
    2006Three Months Ended March 31,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRevenue
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Design-to-silicon-yield solutionsIntegrated solutions
    
    $
    13,764
    
    
    $
    12,229
    
    
    $
    1,535
    
    
    
    13
    %
    
    
    62
    %
    
    
    62
    %Software licenses
    
    
    3,485
    
    
    
    2,612
    
    
    
    873
    
    
    
    33
    %
    
    
    16
    %
    
    
    13
    %Gain share
    
    
    4,893
    
    
    
    5,016
    
    
    
    (123
    )
    
    
    (2
    )%
    
    
    22
    %
    
    
    25
    %Total
    
    $
    22,142
    
    
    $
    19,857
    
    
    $
    2.285
    
    
    
    12
    %
    
    
    100
    %
    
    
    100
    %
 Design-to-Silicon-Yield Solutions
 Integrated solutions
 Software licenses
 18




---



##### Table of Contents



Gain Share
 Three Months Ended March 31,2007
    
    
    2006Three Months Ended March 31,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofCost of Design-to-Silicon Yield Solutions
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs of design-to-silicon-
yield solutions Integrated solutions
    
    $
    7,708
    
    
    $
    6,429
    
    
    $
    1,279
    
    
    
    20
    %
    
    
    35
    %
    
    
    32
    %Software licenses
    
    
    59
    
    
    
    11
    
    
    
    48
    
    
    
    436
    %
    
    
    
    
    
    
    Amortization of acquired core technology
    
    
    1,575
    
    
    
    1,266
    
    
    
    309
    
    
    
    24
    %
    
    
    7
    %
    
    
    6
    %Total
    
    $
    9,342
    
    
    $
    7,706
    
    
    $
    1,636
    
    
    
    21
    %
    
    
    42
    %
    
    
    38
    %
 Direct Costs of Design-to-Silicon-Yield Solutions
 Integrated solutions.
 Software Licenses.
 Amortization of Acquired Core Technology
 Three Months Ended March 31,2007
    
    
    2006Three Months Ended March 31,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    8,370
    
    
    $
    6,256
    
    
    $
    2,114
    
    
    
    34
    %
    
    
    38
    %
    
    
    32
    %
 19




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##### Table of Contents



Research and Development.
 Three Months Ended March 31,2007
    
    
    2006Three Months Ended March 31,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofSelling, General and Administrative
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    5,844
    
    
    $
    4,956
    
    
    $
    888
    
    
    
    18
    %
    
    
    26
    %
    
    
    25
    %
 Selling, General and Administrative
 Three Months Ended March 31,2007
    
    
    2006Three Months Ended March 31,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAmortization of Other Acquired Intangible Assets
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of Other Acquired
Intangible Assets
    
    $
    1,013
    
    
    $
    235
    
    
    $
    778
    
    
    
    331
    %
    
    
    5
    %
    
    
    1
    %
 Amortization of Other Acquired Intangible Assets
 Three Months Ended March 31,2007
    
    
    2006Three Months Ended March 31,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofInterest and Other Income, net
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and Other Income, net
    
    $
    496
    
    
    $
    635
    
    
    $
    (139
    )
    
    
    (22
    )%
    
    
    2
    %
    
    
    3
    %
 Interest and Other Income, net
 Three Months Ended March 31,2007
    
    
    2006Three Months Ended March 31,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofIncome Tax Provision
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Income Tax Provision
    
    $
    424
    
    
    $
    1,071
    
    
    $
    (647
    )
    
    
    (60
    )%
    
    
    2
    %
    
    
    6
    %
 Income Tax Provision.
 20




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##### Table of Contents



Liquidity and Capital Resources
      21




---



##### Table of Contents



Payments due by period2007(Nine monthsContractual obligations
    
    remaining)
    
    
    2008-2009
    
    
    2010-2011
    
    
    Thereafter
    
    
    Other
    
    
    TotalDebt principal (1)
    
    $
    160
    
    
    $
    602
    
    
    $
    481
    
    
    $
    
    
    
    $
    
    
    
    $
    1,243Debt interest
    
    
    19
    
    
    
    36
    
    
    
    13
    

    
    
    
    

    
    
    
    

    
    
    68Capital lease obligations (including interest)
    
    
    99
    
    
    
    134
    
    
    
    11
    

    
    
    
    

    
    
    
    

    
    
    244Operating lease obligations
    
    
    2,089
    
    
    
    924
    
    
    
    311
    

    
    
    
    
    
    
    
    

    
    
    3,324Unrecognized tax benefits (2)
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    

    
    
    4,757
    

    
    
    4,757Total
    
    $
    2,367
    
    
    $
    1,696
    
    
    $
    816
    
    
    $
    
    

    
    $
    4,757
    

    
    $
    9,636
 
  
   Recent Accounting Pronouncements
 Accounting for Sabbatical Leave and
Other Similar Benefits Pursuant to FASB Statement No. 43
 The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB
Statement No. 115
 Accounting for Uncertainty in Income Taxes Income Taxes
 Fair Value Measurement
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  22




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##### Table of Contents



Interest Rate Risk
 Foreign Currency and Exchange Risk.
 
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Controls Over Financial Reporting
 
 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.
  23




---



##### Table of Contents




    
    our customers failure to achieve satisfactory yield improvements using our
Design-to-Silicon-Yield solutions;
    
    a decrease in demand for semiconductors generally or the demand for deep
submicron semiconductors failing to grow as rapidly as expected;
    
    our inability to develop, market, or sell effective solutions that are outside
of our traditional MPS logic focus;
    
    the industry may develop alternative methods to enhance the integration between
the semiconductor design and manufacturing processes due to a rapidly evolving market and
the likely emergence of new technologies;
    
    our existing and potential customers reluctance to understand and accept our innovative gain share fee component; and
    
    our customers concern about our ability to keep highly competitive information confidential.
 We generate a large percentage of our total revenue from a limited number of customers, so the
loss of any one of these customers could significantly reduce our revenue and results of
operations below expectations.
  If integrated device manufacturers of logic integrated circuits reduce investment in new process
technology as a result of a shift to a fabless manufacturing business model, the pool of
potential logic customers for our yield ramp solutions will shrink and our results of operations
may suffer.
  We must effectively manage and support our operations and recent and planned growth in order for
our business strategy to succeed.
  24




---



##### Table of Contents



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.
  We face operational and financial risks associated with international operations.
  25




---



##### Table of Contents




    
    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.
  
    
    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.
 26




---



##### Table of Contents



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.
  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.
  27




---



##### Table of Contents



We have a history of losses, we may incur losses in the future and we may be unable to maintain
profitability.
  
    
    funding for research and development;
    
    expansion of our solution implementation teams;
    
    expansion of our sales and marketing efforts; and
    
    additional non-cash charges relating to amortization of intangibles and stock-based compensation.
  We may experience significant fluctuations in operating results due to the cyclical nature of the
semiconductor industry.
  We must continually attract and retain highly talented executives, engineers, and research and
development personnel or we will be unable to expand our business as planned.
  If our products, technologies, services, and integrated solutions fail to keep pace with the
rapid technological changes in the semiconductor industry, we could lose customers and revenue.
  28




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##### Table of Contents



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.
  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.
  29




---



##### Table of Contents



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.
  We may not be able to expand our business and proprietary technologies if we do not consummate
potential acquisitions or investments or successfully integrate them with our business.
  We may not be able to raise necessary funds to support our growth or execute our strategy.
  30




---



##### Table of Contents



Recent acquisitions may adversely affect our business by diverting managements attention,
increasing our expenses or by being more difficult to integrate than expected.
  
    
    consolidating research and development operations;
    
    retaining key employees;
    
    incorporating acquired products and business technology into our existing product lines;
    
    coordinating effective sales and marketing functions;
    
    preserving research and development, marketing, customer and other important relationships; and
    
    minimizing the diversion of managements attention from ongoing business concerns.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Use of Proceeds
 31




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##### Table of Contents



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 (January 1, 2007 through January 31, 2007)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,451,236Month #2 (February 1, 2007 through February 28, 2007)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,451,236Month #3 (March 1, 2007 through March 31, 2007)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,451,236Total
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    On March 26, 2003, we announced that our Board of Directors had approved a share repurchase
program, pursuant to which up to $10.0 million of our outstanding common stock may be
repurchased; the repurchase program has no set expiration or termination date. As of March 31,
2007, 550,521 shares had been repurchased under this program at a weighted average per share
price of $10.08 and approximately $4.5 million remained available for repurchases. 
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  32




---



##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description3.01
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc. *3.02
    
    Amended and Restated Bylaws of PDF Solutions, Inc. 4.01
    
    Specimen Stock Certificate**4.02
    
    Second Amended and Restated Rights Agreement dated July 6, 2001*10.01
    
    2001 Stock Plan and related agreements31.01
    
    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/A 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. 33




---



##### Table of Contents



SIGNATURES
  Date: May 10, 2007
    
    By:
    
    /s/ JOHN K. KIBARIANJohn K. KibarianPresident and Chief Executive OfficerBy:
    
    /s/ KEITH A. JONESKeith A. JonesChief Financial Officer and Vice President of Finance
 34




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.01
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc.*3.02
    
    Amended and Restated Bylaws of PDF Solutions, Inc. 4.01
    
    Specimen Stock Certificate**4.02
    
    Second Amended and Restated Rights Agreement dated July 6, 2001*10.01
    
    2001 Stock Plan and related agreements31.01
    
    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/A 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.