##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period ended June 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from  to
 Commission File Number 000-31311
 
 PDF SOLUTIONS, INC.
  Delaware
    
    25-1701361(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)333 West San Carlos Street, Suite 700San Jose, California
    
    95110(Address of Principal Executive Offices)
    
    (Zip Code)
 (408) 280-7900
 þ o
  Large accelerated filer o
    
    Accelerated filer
þ

    Non-accelerated
filer o (Do not check if a smaller reporting company)

    Smaller reporting company
o
 o þ




---



##### 



TABLE OF CONTENTS
 PagePART
I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26PART II OTHER INFORMATION
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    37INDEX TO EXHIBITS
    
    
    38EXHIBIT 10.03EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  2




---



##### Table of Contents



Item 1. Financial Statements.
 PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 June 30,
    
    
    December 31,2008
    
    
    2007(In thousands,except par values)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    30,487
    
    
    $
    35,315Short-term investments
    
    
    12,708
    
    
    
    9,949Accounts receivable, net of allowance of $254 in 2008 and 2007
    
    
    35,506
    
    
    
    38,526Prepaid expenses and other current assets
    
    
    3,771
    
    
    
    3,354Deferred tax assets
    
    
    1,514
    
    
    
    1,676Total current assets
    
    
    83,986
    
    
    
    88,820Property and equipment, net
    
    
    3,344
    
    
    
    3,621Non-current investments
    
    
    1,262
    
    
    
    Goodwill
    
    
    67,264
    
    
    
    65,170Intangible assets, net
    
    
    11,184
    
    
    
    12,818Deferred tax assets and other assets
    
    
    10,825
    
    
    
    8,922Total assets
    
    $
    177,865
    
    
    $
    179,351LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    418
    
    
    $
    421Accounts payable
    
    
    2,378
    
    
    
    3,469Accrued compensation and related benefits
    
    
    6,574
    
    
    
    5,950Other accrued liabilities
    
    
    2,253
    
    
    
    2,604Taxes payable
    
    
    75
    
    
    
    208Deferred revenue
    
    
    3,600
    
    
    
    3,159Billings in excess of recognized revenue
    
    
    110
    
    
    
    553Total current liabilities
    
    
    15,408
    
    
    
    16,364Long-term debt
    
    
    911
    
    
    
    907Long-term taxes payable
    
    
    5,670
    
    
    
    5,581Other liabilities
    
    
    724
    
    
    
    29Total liabilities
    
    
    22,713
    
    
    
    22,881Stockholders equity:Preferred stock, $0.00015 par value, 5,000 shares authorized: no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.00015 par value, 70,000 shares authorized: shares issued 29,170 in 2008 and
29,122 in 2007; shares outstanding 27,501 in 2008 and 27,933 in 2007
    
    
    4
    
    
    
    4Additional paid-in-capital
    
    
    185,333
    
    
    
    181,566Treasury stock at cost, 1,670 shares in 2008 and 1,190 shares in 2007
    
    
    (14,135
    )
    
    
    (11,524
    )Accumulated deficit
    
    
    (21,345
    )
    
    
    (16,892
    )Accumulated other comprehensive income
    
    
    5,295
    
    
    
    3,316Total stockholders equity
    
    
    155,152
    
    
    
    156,470Total liabilities and stockholders equity
    
    $
    177,865
    
    
    $
    179,351
 See notes to unaudited condensed consolidated financial statements
 3




---



##### Table of Contents



PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per share amounts)Revenues:Design-to-silicon-yield solutions
    
    $
    15,452
    
    
    $
    17,808
    
    
    $
    30,476
    
    
    $
    35,057Gainshare performance incentives
    
    
    5,662
    
    
    
    5,890
    
    
    
    10,985
    
    
    
    10,783Total revenues
    
    
    21,114
    
    
    
    23,698
    
    
    
    41,461
    
    
    
    45,840Cost of design-to-silicon-yield solutions:Direct costs of design-to-silicon-yield solutions
    
    
    7,267
    
    
    
    7,109
    
    
    
    15,033
    
    
    
    14,876Amortization of acquired technology
    
    
    631
    
    
    
    1,610
    
    
    
    1,262
    
    
    
    3,185Total cost of design-to silicon-yield solutions
    
    
    7,898
    
    
    
    8,719
    
    
    
    16,295
    
    
    
    18,061Gross margin
    
    
    13,216
    
    
    
    14,979
    
    
    
    25,166
    
    
    
    27,779Operating expenses:Research and development
    
    
    9,134
    
    
    
    8,797
    
    
    
    18,210
    
    
    
    17,167Selling, general and administrative
    
    
    5,646
    
    
    
    6,645
    
    
    
    11,945
    
    
    
    12,489Amortization of other acquired intangible assets
    
    
    195
    
    
    
    1,031
    
    
    
    389
    
    
    
    2,044Restructuring charges
    
    
    1,471
    
    
    
    
    
    
    
    1,471
    
    
    
    Total operating expenses
    
    
    16,446
    
    
    
    16,473
    
    
    
    32,015
    
    
    
    31,700Loss from operations
    
    
    (3,230
    )
    
    
    (1,494
    )
    
    
    (6,849
    )
    
    
    (3,921
    )Interest and other income, net
    
    
    251
    
    
    
    529
    
    
    
    740
    
    
    
    1,025Loss before taxes
    
    
    (2,979
    )
    
    
    (965
    )
    
    
    (6,109
    )
    
    
    (2,896
    )Income tax provision (benefit)
    
    
    (1,039
    )
    
    
    (264
    )
    
    
    (1,656
    )
    
    
    160Net loss
    
    $
    (1,940
    )
    
    $
    (701
    )
    
    $
    (4,453
    )
    
    $
    (3,056
    )Net loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.16
    )
    
    $
    (0.11
    )Weighted average common shares  basic and diluted
    
    
    27,608
    
    
    
    28,155
    
    
    
    27,724
    
    
    
    28,067
 See notes to unaudited condensed consolidated financial statements
 4




---



##### Table of Contents



PDF SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six Months EndedJune 30,2008
    
    
    2007(In thousands)Operating activities:Net loss
    
    $
    (4,453
    )
    
    $
    (3,056
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    1,014
    
    
    
    985Stock-based compensation expense
    
    
    3,737
    
    
    
    3,783Losses on disposal of property, plant and equipment
    
    
    3
    
    
    
    Amortization of acquired intangible assets
    
    
    1,651
    
    
    
    5,261Tax benefit (shortfall) related to stock-based compensation expense
    
    
    (33
    )
    
    
    76Excess tax benefit from stock-based compensation expense
    
    
    
    
    
    
    (26
    )Deferred taxes
    
    
    (2,873
    )
    
    
    (2,183
    )Changes in operating assets and liabilities, net of effect of acquisition:Accounts receivable, net of allowances
    
    
    3,103
    
    
    
    (4,748
    )Prepaid expenses and other assets
    
    
    (360
    )
    
    
    (102
    )Accounts payable
    
    
    (1,233
    )
    
    
    (987
    )Accrued compensation and related benefits
    
    
    508
    
    
    
    (63
    )Other accrued liabilities
    
    
    351
    
    
    
    (375
    )Taxes payable
    
    
    (69
    )
    
    
    2,090Deferred revenues
    
    
    367
    
    
    
    1,532Billings in excess of recognized revenue
    
    
    (443
    )
    
    
    272Net cash provided by operating activities
    
    
    1,270
    
    
    
    2,459Investing activities:Purchases of available-for-sale securities
    
    
    (16,805
    )
    
    
    (16,315
    )Maturities and sales of available-for-sale securities
    
    
    12,810
    
    
    
    14,771Purchases of property and equipment
    
    
    (604
    )
    
    
    (1,376
    )Payments on business acquired, net of cash acquired
    
    
    
    
    
    
    (1,883
    )Net cash used in investing activities
    
    
    (4,599
    )
    
    
    (4,803
    )Financing activities:Proceeds from exercise of stock options
    
    
    63
    
    
    
    1,057Proceeds from employee stock purchase plan
    
    
    
    
    
    
    782Purchases of treasury stock
    
    
    (2,611
    )
    
    
    Principal payments on long-term obligations
    
    
    (113
    )
    
    
    (129
    )Principal payments on notes to stockholders
    
    
    
    
    
    
    (416
    )Excess tax benefit from stock-based compensation expense
    
    
    
    
    
    
    26Net cash provided by (used in) financing activities
    
    
    (2,661
    )
    
    
    1,320Effect of exchange rate changes on cash
    
    
    1,162
    
    
    
    225Net decrease in cash and cash equivalents
    
    
    (4,828
    )
    
    
    (799
    )Cash and cash equivalents, beginning of period
    
    
    35,315
    
    
    
    36,451Cash and cash equivalents, end of period
    
    $
    30,487
    
    
    $
    35,652Non-cash investing and financing activities:Amount due to Fabbrix stockholders
    
    $
    
    
    
    $
    2,701Supplemental disclosure of cash flow information:Cash paid during the year for:Taxes
    
    $
    1,334
    
    
    $
    228Interest
    
    $
    21
    
    
    $
    24
 See notes to unaudited condensed consolidated financial statements
 5




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Fair
Value Measurement, Accounting for Certain Investments in Debt and Equity Securities Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13, Effective Date of
FASB Statement No. 157
 The
Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115
 3. INVESTMENTS
  June 30, 2008Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    16,207
    
    
    $
    1
    
    
    $
    (1
    )
    
    $
    16,207Agency obligations
    
    
    2,460
    
    
    
    2
    
    
    
    (1
    )
    
    
    2,461Auction-rate securities
    
    
    1,400
    
    
    
    
    
    
    
    (138
    )
    
    
    1,262Corporate securities
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    400$
    20,467
    
    
    $
    3
    
    
    $
    (140
    )
    
    $
    20,330Included in cash and
cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,360Included in short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,708Included in non-current
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,262Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    20,330
 December 31, 2007Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueCommercial paper
    
    $
    12,500
    
    
    $
    3
    
    
    $
    
    
    
    $
    12,503Auction-rate securities
    
    
    4,450
    
    
    
    
    
    
    
    
    
    
    
    4,450Agency discount notes
    
    
    1,543
    
    
    
    
    
    
    
    
    
    
    
    1,543$
    18,493
    
    
    $
    3
    
    
    $
    
    
    
    $
    18,496Included in cash and
cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,547Included in short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,949Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,496
 8




---



##### Table of Contents



4. ACCOUNTS RECEIVABLE
  5. NET INCOME (LOSS) PER SHARE
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (1,940
    )
    
    $
    (701
    )
    
    $
    (4,453
    )
    
    $
    (3,056
    )Denominator for basic calculation:Weighted average common shares outstanding
    
    
    27,608
    
    
    
    28,155
    
    
    
    27,724
    
    
    
    28,067Dilutive itemsStock options outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted computation
    
    
    27,608
    
    
    
    28,155
    
    
    
    27,724
    
    
    
    28,067Net loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.16
    )
    
    $
    (0.11
    )
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2008
    
    2007
    
    2008
    
    2007Outstanding options
    
    
    7,827
    
    
    
    6,854
    
    
    
    7,928
    
    
    
    6,724
 6. COMPREHENSIVE INCOME (LOSS)
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (1,940
    )
    
    $
    (701
    )
    
    $
    (4,453
    )
    
    $
    (3,056
    )Unrealized gain (loss) on investments, net of income tax effects
    
    
    (43
    )
    
    
    (1
    )
    
    
    (85
    )
    
    
    1Foreign currency translation adjustments, net of income tax effects
    
    
    106
    
    
    
    286
    
    
    
    2,064
    
    
    
    1,397Comprehensive loss
    
    $
    (1,877
    )
    
    $
    (416
    )
    
    $
    (2,474
    )
    
    $
    (1,658
    )
 7. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
 , Goodwill and other Intangible Assets,
 9




---



##### Table of Contents



December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 30,Amortization
    
    
    2007
    
    
    
    
    
    
    Purchase
    
    
    
    
    
    
    Foreign
    
    
    2008Period
    
    
    Net Carrying
    
    
    
    
    
    
    Price
    
    
    
    
    
    
    Currency
    
    
    Net Carrying(Years)
    
    
    Amount
    
    
    Acquisition
    
    
    Adjustments
    
    
    Amortization
    
    
    Translation
    
    
    AmountGoodwill
    
    
    N/A
    
    
    $
    65,170
    
    
    $
    
    
    
    $
    (23
    )
    
    $
    
    
    
    $
    2,117
    
    
    $
    67,264Acquired identifiable
intangibles:Acquired technology
    
    
    4-5
    
    
    $
    9,184
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,262
    )
    
    $
    
    
    
    $
    7,922Brand name
    
    
    4
    
    
    
    361
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    297Customer relationships
and backlog

    
    1-6

    
    

    1,812

    
    
 
    

    
    

    

    
    

    (187
    )

    
 
    

    
    

    1,625Patent and applications
    
    
    7
    
    
    
    1,283
    
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    1,183Other acquired intangibles
    
    
    4
    
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    17
    
    
    
    157Total
    
    
    
    
    
    $
    12,818
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,651
    )
    
    $
    17
    
    
    $
    11,184
 December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,Amortization
    
    
    2006
    
    
    
    
    
    
    Purchase
    
    
    
    
    
    
    Foreign
    
    
    2007Period
    
    
    Net Carrying
    
    
    
    
    
    
    Price
    
    
    
    
    
    
    Currency
    
    
    Net Carrying(Years)
    
    
    Amount
    
    
    Acquisition
    
    
    Adjustments
    
    
    Amortization
    
    
    Translation
    
    
    AmountGoodwill
    
    
    N/A
    
    
    $
    60,034
    
    
    $
    2,155
    
    
    $
    6
    
    
    $
    
    
    
    $
    2,975
    
    
    $
    65,170Acquired identifiable
intangibles:Acquired technology
    
    
    4-5
    
    
    $
    7,901
    
    
    $
    6,430
    
    
    $
    
    
    
    $
    (5,147
    )
    
    $
    
    
    
    $
    9,184Brand name
    
    
    4
    
    
    
    822
    
    
    
    
    
    
    
    
    
    
    
    (461
    )
    
    
    
    
    
    
    361Customer relationships
and backlog
     

    1-6

    
    
 
    4,362

    
    

    

    
    
 
    

    
    

    (2,550
    )

    
 
    

    
    

    1,812Patent and applications
    
    
    7
    
    
    
    
    
    
    
    1,400
    
    
    
    
    
    
    
    (117
    )
    
    
    
    
    
    
    1,283Other acquired intangibles
    
    
    4
    
    
    
    520
    
    
    
    
    
    
    
    
    
    
    
    (362
    )
    
    
    20
    
    
    
    178Total
    
    
    
    
    
    $
    13,605
    
    
    $
    7,830
    
    
    $
    
    
    
    $
    (8,637
    )
    
    $
    20
    
    
    $
    12,818
   Year Ending December 31,
    
    Amount2008 (remaining six-month period)
    
    $
    1,6542009
    
    
    3,3052010
    
    
    3,0332011
    
    
    1,8612012
    
    
    1,0482013 and thereafter
    
    
    283Total
    
    $
    11,184
 8. INCOME TAXES
    10




---



##### Table of Contents



9. STOCKHOLDERS EQUITY
 Share-Based Payment
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of design-to-silicon yield solutions
    
    $
    400
    
    
    $
    478
    
    
    $
    930
    
    
    $
    970Research and development
    
    
    711
    
    
    
    615
    
    
    
    1,306
    
    
    
    1,178Selling, general and administrative
    
    
    643
    
    
    
    852
    
    
    
    1,501
    
    
    
    1,635Stock-based compensation expenses before income taxes
    
    $
    1,754
    
    
    $
    1,945
    
    
    $
    3,737
    
    
    $
    3,783
  Stock Plans:
 Three Months Ended June 30,
    

Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Expected life (in years)
    
    
    5.77
    
    
    
    6.05
    
    
    
    5.77
    
    
    
    6.05Volatility
    
    
    59.2
    %
    
    
    59.9
    %
    
    
    58.7
    %
    
    
    60.0
    %Risk-free interest rate
    
    
    3.23
    %
    
    
    4.95
    %
    
    
    3.07
    %
    
    
    4.93
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value of options granted during the period
    
    $
    3.07
    
    
    $
    6.33
    
    
    $
    3.45
    
    
    $
    6.41
 Employee Stock Purchase Plan:
 Three Months Ended June 30,
    

Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Expected life (in years)
    
    
    1.33
    
    
    
    0.98
    
    
    
    1.33
    
    
    
    0.98Volatility
    
    
    54.9
    %
    
    
    50.0
    %
    
    
    54.9
    %
    
    
    50.0
    %Risk-free interest rate
    
    
    3.10
    %
    
    
    5.21
    %
    
    
    3.10
    %
    
    
    5.21
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value of employee stock issued during the period
    
    $
    3.60
    
    
    $
    4.36
    
    
    $
    3.60
    
    
    $
    4.36
  Stock Plans 
 11




---



##### Table of Contents



Weighted AverageWeighted Average
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsic ValueOptions
    
    
    per Share
    
    
    Term (years)
    
    
    (in 000s)Outstanding, January 1, 2008
    
    
    8,014,920
    
    
    $
    11.42Granted
    
    
    359,500
    
    
    
    6.20Exercised
    
    
    (12,115
    )
    
    
    5.21Forfeited or expired
    
    
    (535,537
    )
    
    
    11.81Outstanding at June 30, 2008
    
    
    7,826,768
    
    
    
    11.17
    
    
    
    7.00
    
    
    $
    491Vested and expected to vest
    
    
    7,391,147
    
    
    
    11.23
    
    
    
    6.88
    
    
    $
    465Exercisable at June 30, 2008
    
    
    4,567,597
    
    
    
    11.46
    
    
    
    5.71
    
    
    $
    357
     Weighted AverageMeasurementShares
    
    Date Fair ValueNonvested, January 1, 2008
    
    
    133,000
    
    
    $
    9.01Granted
    
    
    
    
    
    
    Vested
    
    
    (36,020
    )
    
    
    5.28Forfeited
    
    
    
    
    
    
    Nonvested, June 30, 2008
    
    
    96,980
    
    
    
    5.95
  Employee Stock Purchase Plan
 Stock Repurchase Program
 12




---



##### Table of Contents



Weighted-AverageSix Months Ended June 30, 2008
    
    Shares Repurchased
    
    
    Price per Share
    
    
    Amount RepurchasedCumulative balance, January 1, 2008
    
    
    201
    
    
    $
    7.57
    
    
    $
    1,523Repurchase of common stock
    
    
    481
    
    
    
    5.43
    
    
    
    2,611Cumulative balance, June 30, 2008
    
    
    682
    
    
    
    6.06
    
    
    $
    4,134
 10. RESTRUCTURING
  Restructuring
    
    Severance
    
    
    Professional and Others FeesBalance at January 1, 2008
    
    $
    
    
    
    $
    Restructuring charges
    
    
    1,350
    
    
    
    121Payments
    
    
    (1,018
    )
    
    
    (101
    )Balance at June 30, 2008
    
    $
    332
    
    
    $
    20
  11. CUSTOMER AND GEOGRAPHIC INFORMATION
 Disclosures about Segments of an Enterprise and Related Information
   Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,Customer
    
    2008
    
    2007
    
    2008
    
    2007A
    
    
    17
    %
    
    
    19
    %
    
    
    17
    %
    
    
    17
    %B
    
    
    14
    %
    
    
    15
    %
    
    
    15
    %
    
    
    16
    %C
    
    
    11
    %
    
    
    
    
    
    
    6
    %
    
    
    D
    
    
    2
    %
    
    
    11
    %
    
    
    2
    %
    
    
    9
    %
  Customer
    
    June 30, 2008
    
    December 31, 2007A
    
    
    29
    %
    
    
    27
    %B
    
    
    14
    %
    
    
    15
    %E
    
    
    10
    %
    
    
    11
    %
 13




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Asia
    
    $
    12,135
    
    
    $
    11,998
    
    
    $
    22,534
    
    
    $
    24,028United States
    
    
    5,156
    
    
    
    8,234
    
    
    
    10,764
    
    
    
    15,709Europe
    
    
    3,823
    
    
    
    3,466
    
    
    
    8,163
    
    
    
    6,103Total
    
    $
    21,114
    
    
    $
    23,698
    
    
    $
    41,461
    
    
    $
    45,840
  12. FAIR VALUE
   Level 1 -
    
    Inputs are quoted prices in active markets for identical assets or liabilities.Level 2 -
    
    Inputs are quoted prices for similar assets or liabilities in an active market,
quoted prices for identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable and market-corroborated inputs which are
derived principally from or corroborated by observable market data.Level 3 -
    
    Inputs are derived from valuation techniques in which one or more significant inputs
or value drivers are unobservable.
  Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsAssets
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Money market mutual funds
    
    $
    2,323
    
    
    $
    2,323
    
    
    $
    
    
    
    $
    Commercial paper
    
    
    16,207
    
    
    
    
    
    
    
    16,207
    
    
    
    Agency obligations
    
    
    2,461
    
    
    
    
    
    
    
    2,461
    
    
    
    Auction-rate securities
    
    
    1,262
    
    
    
    
    
    
    
    
    
    
    
    1,262Corporate securities
    
    
    400
    
    
    
    
    
    
    
    400
    
    
    
    Total
    
    $
    22,653
    
    
    $
    2,323
    
    
    $
    19,068
    
    
    $
    1,262
  14




---



##### Table of Contents



Available-For-SaleSecuritiesBeginning balance, January 1, 2008
    
    $
    Total gains and losses (realized / unrealized):Included in earnings
    
    
    Included in other comprehensive income, before income tax effects
    
    
    (138
    )Purchases, issuances, and settlements
    
    
    (100
    )Transfers, in and/or (out) of Level 3
    
    
    1,500Ending balance, June 30, 2008
    
    $
    1,262The amount of total gains or losses for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets still held at June 30, 2008
    
    $
    
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  Overview
   15




---



##### Table of Contents



Industry Trend
  Financial Highlights
  
    
    Total revenue for the three months ended June 30, 2008 was $21.1 million, a decrease of
$2.6 million, or 11% compared to the three months ended June 30, 2007. Revenue from
Design-to-Silicon-Yield solutions for the three months ended June 30, 2008 decreased $2.4
million to $15.5 million compared to $17.8 million for the three months ended June 30, 2007.
Revenue from gainshare performance incentives for the three months ended June 30, 2008
decreased $228,000 to $5.7 million from the three months ended June 30, 2007.
    
    Net loss for the three months ended June 30, 2008 was $1.9 million, increased $1.2
million compared to $701,000 for the three months ended June 30, 2007. The increase in net
loss was primarily attributable to the decrease in revenue and to the expense associated
with the restructuring plan, partially offset by an increase in income tax benefit.
    
    Net loss per basic and diluted share was $0.07 for the three months ended June 30, 2008
compared to $0.02 for the three months ended June 30, 2007, an increase in net loss of $0.05
per basic and diluted share.
  
    
    Total revenue for the six months ended June 30, 2008 was $41.5 million, a decrease of
$4.4 million, or 10% compared to the six months ended June 30, 2007. Revenue from
Design-to-Silicon-Yield solutions for the six months ended June 30, 2008 decreased $4.6
million to $30.5 million compared to $35.1 million for the six months ended June 30, 2007.
Revenue from gainshare performance incentives for the six months ended June 30, 2008
increased $202,000 to $11.0 million from the six months ended June 30, 2007.
    
    Net loss for the six months ended June 30, 2008 was
$4.5 million, increased $1.4 million
compared to $3.1 million for the six months ended June 30, 2007. The increase in net loss
was primarily attributable to the decrease in revenue and to the expense associated with the
restructuring plan, partially offset by an increase in income tax benefit.
    
    Net loss per basic and diluted share was $0.16 for the six months ended June 30, 2008
compared to $0.11 for the six months ended June 30, 2007, an increase in net loss of $0.05
per basic and diluted share.
 16




---



##### Table of Contents




    
    Cash, cash equivalents and investments decreased $807,000 to $44.5 million during the six
months ended June 30, 2008, primarily due to the repurchase of $2.6 million of our common
stock and payment for restructuring charges of $1.2 million.
 Critical Accounting Policies
  General
  Revenue Recognition
 Accounting for Performance of Construction-Type and Certain Production-Type
Contracts Software Revenue Recognition
 Design-to-Silicon-Yield Solutions
 Services
   17




---



##### Table of Contents



Software Licenses
 Gainshare Performance Incentives
 Software Development Costs
 Computer Software to be Sold, Leased or Otherwise Marketed
 Goodwill and Acquired Intangible Assets
 Goodwill and Other Intangible Assets
  18




---



##### Table of Contents



Income Taxes
  Stock-Based Compensation
 Share-Based Payment
 Recent Accounting Pronouncements and Accounting Changes
  Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Revenues:Design-to-silicon-yield solutions
    
    
    73
    %
    
    
    75
    %
    
    
    74
    %
    
    
    76
    %Gainshare performance incentives
    
    
    27
    
    
    
    25
    
    
    
    26
    
    
    
    24Total revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of design-to-silicon-yield solutions:Direct cost of design-to-silicon-yield solutions
    
    
    34
    
    
    
    30
    
    
    
    36
    
    
    
    32Amortization of acquired technology
    
    
    3
    
    
    
    7
    
    
    
    3
    
    
    
    7Total cost
of design-to-silicon-yield solutions
    
    
    37
    
    
    
    37
    
    
    
    39
    
    
    
    39Gross margin
    
    
    63
    
    
    
    63
    
    
    
    61
    
    
    
    61Operating expenses:Research and development
    
    
    43
    
    
    
    37
    
    
    
    44
    
    
    
    38Selling, general and administrative
    
    
    27
    
    
    
    28
    
    
    
    29
    
    
    
    28Amortization of other acquired intangible assets
    
    
    1
    
    
    
    4
    
    
    
    1
    
    
    
    4Restructuring charges
    
    
    7
    
    
    
    
    
    
    
    4
    
    
    
    Total operating expenses
    
    
    78
    
    
    
    69
    
    
    
    78
    
    
    
    70Loss from operations
    
    
    (15
    )
    
    
    (6
    )
    
    
    (17
    )
    
    
    (9
    )Interest and other income, net
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    2Loss before taxes
    
    
    (14
    )
    
    
    (4
    )
    
    
    (15
    )
    
    
    (7
    )Income tax provision (benefit)
    
    
    (5
    )
    
    
    (1
    )
    
    
    (4
    )
    
    
    Net loss
    
    
    (9
    )%
    
    
    (3
    )%
    
    
    (11
    )%
    
    
    (7
    )%
 19




---



##### Table of Contents



Comparison of the Three Months Ended June 30, 2008 and 2007
 Three Months Ended June 30,2008
    
    
    2007Three Months Ended June 30,


$



%




% of



% ofRevenue
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Design-to-silicon-yield solutions
    
    $
    15,452
    
    
    $
    17,808
    
    
    $
    (2,356
    )
    
    
    (13
    )%
    
    
    73
    %
    
    
    75
    %Gainshare performance incentives
    
    
    5,662
    
    
    
    5,890
    
    
    
    (228
    )
    
    
    (4
    )%
    
    
    27
    %
    
    
    25
    %Total
    
    $
    21,114
    
    
    $
    23,698
    
    
    $
    (2,584
    )
    
    
    (11
    )%
    
    
    100
    %
    
    
    100
    %
 Design-to-Silicon-Yield Solutions
 Gainshare Performance Incentives
 Three Months Ended June 30,2008
    
    
    2007Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofCost of Design-to-Silicon-Yield Solutions
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs
of design-to-silicon-yield solutions
    
    $
    7,267
    
    
    $
    7,109
    
    
    $
    158
    
    
    
    2
    %
    
    
    34
    %
    
    
    30
    %Amortization of acquired technology
    
    
    631
    
    
    
    1,610
    
    
    
    (979
    )
    
    
    (61
    )%
    
    
    3
    %
    
    
    7
    %Total
    
    $
    7,898
    
    
    $
    8,719
    
    
    $
    (821
    )
    
    
    (9
    )%
    
    
    37
    %
    
    
    37
    %
 Costs of Design-to-Silicon-Yield Solutions
 Direct costs of Design-to-Silicon-Yield Solutions.
 Amortization of Acquired Technology
 20




---



##### Table of Contents



Three Months Ended June 30,2008
    
    
    2007Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    9,134
    
    
    $
    8,797
    
    
    $
    337
    
    
    
    4
    %
    
    
    43
    %
    
    
    37
    %
 Research and Development.
 Three Months Ended June 30,2008
    
    
    2007Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofSelling, General and Administrative
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    5,646
    
    
    $
    6,645
    
    
    $
    (999
    )
    
    
    (15
    )%
    
    
    27
    %
    
    
    28
    %
 Selling, General and Administrative
 Three Months Ended June 30,2008
    
    
    2007Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAmortization of Other Acquired Intangible Assets
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of other acquired intangible assets
    
    $
    195
    
    
    $
    1,031
    
    
    $
    (836
    )
    
    
    (81
    )%
    
    
    1
    %
    
    
    4
    %
 Amortization of Other Acquired Intangible Assets
 Three Months Ended June 30,2008
    
    
    2007Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRestructuring Charges
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Restructuring charges
    
    $
    1,471
    
    
    $
    
    
    
    $
    1,471
    
    
    
    N/A
    
    
    
    7
    %
    
    
    
    %
 Restructuring Charges
 21




---



##### Table of Contents



Three Months Ended June 30,2008
    
    
    2007Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofInterest and Other Income, net
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and other income, net
    
    $
    251
    
    
    $
    529
    
    
    $
    (278
    )
    
    
    (53
    )%
    
    
    1
    %
    
    
    2
    %
 Interest and Other Income, net
 Three Months Ended June 30,2008
    
    
    2007Three Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofIncome Tax Benefit
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Income tax benefit
    
    $
    (1,039
    )
    
    $
    (264
    )
    
    $
    (775
    )
    
    
    294
    %
    
    
    (5
    )%
    
    
    (1
    )%
 Income Tax  Benefit.
 Comparison of the Six Months Ended June 30, 2008 and 2007
 Six Months Ended June 30,2008
    
    
    2007Six Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRevenue
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Design-to-silicon-yield solutions
    
    $
    30,476
    
    
    $
    35,057
    
    
    $
    (4,581
    )
    
    
    (13
    )%
    
    
    74
    %
    
    
    76
    %Gainshare performance incentives
    
    
    10,985
    
    
    
    10,783
    
    
    
    202
    
    
    
    2
    %
    
    
    26
    %
    
    
    24
    %Total
    
    $
    41,461
    
    
    $
    45,840
    
    
    $
    (4,379
    )
    
    
    (10
    )%
    
    
    100
    %
    
    
    100
    %
 Design-to-Silicon-Yield Solutions
 Gainshare Performance Incentives
 Six Months Ended June 30,2008
    
    
    2007Six Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofCost of Design-to-Silicon-Yield Solutions
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Direct costs of design-to-silicon-yield
solutions
    
    $
    15,033
    
    
    $
    14,876
    
    
    $
    157
    
    
    
    1
    %
    
    
    36
    %
    
    
    32
    %Amortization of acquired technology
    
    
    1,262
    
    
    
    3,185
    
    
    
    (1,923
    )
    
    
    (60
    )%
    
    
    3
    %
    
    
    7
    %Total
    
    $
    16,295
    
    
    $
    18,061
    
    
    $
    (1,766
    )
    
    
    (10
    )%
    
    
    39
    %
    
    
    39
    %
 Costs of Design-to-Silicon-Yield Solutions
 Direct Costs of Design-to-Silicon-Yield Solutions.
 22




---



##### Table of Contents



Amortization of Acquired Technology
 Six Months Ended June 30,2008
    
    
    2007Six Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofResearch and Development
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Research and development
    
    $
    18,210
    
    
    $
    17,167
    
    
    $
    1,043
    
    
    
    6
    %
    
    
    44
    %
    
    
    38
    %
 Research and Development.
 Six Months Ended June 30,2008
    
    
    2007Six Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofSelling, General and Administrative
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Selling, general and administrative
    
    $
    11,945
    
    
    $
    12,489
    
    
    $
    (544
    )
    
    
    (4
    )%
    
    
    29
    %
    
    
    28
    %
 Selling, General and Administrative
 Six Months Ended June 30,2008
    
    
    2007Six Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofAmortization of Other Acquired Intangible Assets
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Amortization of other acquired intangible assets
    
    $
    389
    
    
    $
    2,044
    
    
    $
    (1,655
    )
    
    
    (81
    )%
    
    
    1
    %
    
    
    4
    %
 Amortization of Other Acquired Intangible Assets
 Six Months Ended June 30,2008
    
    
    2007Six Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofRestructuring Charges
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Restructuring charges
    
    $
    1,471
    
    
    $
    
    
    
    $
    1,471
    
    
    
    N/A
    
    
    
    4
    %
    
    
    
    %
 Restructuring Charges
 Six Months Ended June 30,2008
    
    
    2007Six Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofInterest and Other Income, net
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Interest and other income, net
    
    $
    740
    
    
    $
    1,025
    
    
    $
    (285
    )
    
    
    (28
    )%
    
    
    2
    %
    
    
    2
    %
 Interest and Other Income, net
 23




---



##### Table of Contents



Six Months Ended June 30,2008
    
    
    2007Six Months Ended June 30,
    
    
    $
    
    
    %
    
    
    % of
    
    
    % ofIncome Tax Provision (Benefit)
    
    2008
    
    
    2007
    
    
    Change
    
    
    Change
    
    
    Revenue
    
    
    Revenue(In thousands, except for %s)Income tax provision (benefit)
    
    $
    (1,656
    )
    
    $
    160
    
    
    $
    (1,816
    )
    
    
    (1,135
    )%
    
    
    (4
    )%
    
    
    
    %
 Income Tax Provision (Benefit).
 Liquidity and Capital Resources
 Operating Activities
   Investing Activities
  Financing Activities
  24




---



##### Table of Contents



Liquidity
     Payments due by period2008(Six monthsContractual obligations
    
    remaining)
    
    
    2009-2010
    
    
    2011-2012
    
    
    Thereafter
    
    
    Other
    
    
    TotalDebt principal (1)
    
    $
    270
    
    
    $
    827
    
    
    $
    127
    
    
    $
    
    
    
    $
    
    
    
    $
    1,224Debt interest
    
    
    14
    
    
    
    36
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    55Capital lease obligations (including interest)
    
    
    55
    
    
    
    55
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    112Operating lease obligations
    
    
    1,213
    
    
    
    5,661
    
    
    
    4,854
    
    
    
    1,681
    
    
    
    
    
    
    
    13,409Unrecognized tax benefits (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,670
    
    
    
    5,670Total
    
    $
    1,552
    
    
    $
    6,579
    
    
    $
    4,988
    
    
    $
    1,681
    
    
    $
    5,670
    
    
    $
    20,470
 
 (1)
    
    Amount represents the repayment of an interest free loan of 550,000
and a 400,000 euros loan with a variable interest rate based on the
EURIBOR plus 160 basis points.(2)
    
    Due to the inherent uncertainty of the tax positions, it is not
practicable to assign this liability to any particular years in the
table.  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  25




---



##### 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.
 Accounting for Contingencies
 26




---



##### Table of Contents



Item 1A. Risk Factors
 If semiconductor designers and manufacturers do not continue to adopt our Design-to-Silicon-Yield
solutions, we may be unable to increase or maintain our revenue.
  
    
    our customers failure to achieve satisfactory yield improvements using our
Design-to-Silicon-Yield solutions;
    
    a decrease in demand for semiconductors generally or the slowing of demand for nanometer
scale semiconductors;
    
    our inability to develop, market, or sell effective solutions that are outside of our
traditional MPS logic focus;
    
    our existing and potential customers delay in their adoption of the next process
technology;
    
    the development in the industry of alternative methods to enhance the integration between
the semiconductor design and manufacturing processes due to a rapidly evolving market and
the emergence of new technologies;
    
    our existing and potential customers reluctance to understand and accept our innovative
gainshare performance incentives fee component; and
    
    our customers concern about our ability to keep highly competitive information
confidential.
 We generate a large percentage of our total revenue from a limited number of customers, so the
loss of any one of these customers could significantly reduce our revenue and results of
operations below expectations.
  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.
  27




---



##### Table of Contents



If we do not effectively manage and support our operations and integrate recent and planned
growth, our business strategy may fail.
  If we fail to protect our intellectual property rights, customers or potential competitors may be
able to use our technologies to develop their own solutions which could weaken our competitive
position, reduce our revenue, or increase our costs.
  Competition in the market for yield improvement solutions and increased integration between IC
design and manufacturing may intensify in the future, which could impede our ability to grow or
execute our strategy.
  28




---



##### Table of Contents



We face operational and financial risks associated with international operations that could
negatively impact our revenue.
  
    
    some of our key engineers and other personnel are foreign nationals and they may have
difficulty gaining access to the United States and other countries in which our customers or
our offices may be located and it may be difficult for us to recruit and retain qualified
technical and managerial employees in foreign offices;
    
    greater difficulty in collecting account receivables resulting in longer collection
periods;
    
    language and other cultural differences may inhibit our sales and marketing efforts and
create internal communication problems among our U.S. and foreign research and development
teams, increasing the difficulty of managing multiple, remote locations performing various
development, quality assurance, and yield ramp analysis projects;
    
    compliance with, inconsistencies among, and unexpected changes in, a wide variety of
foreign laws and regulatory environments with which we are not familiar, including, among
other issues, with respect to protection of our intellectual property, and a wide variety of
operational regulations and trade and export controls under domestic, foreign, and
international law;
    
    currency risk due to the fact that expenses for our international offices are denominated
in the local currency, including the Euro, while virtually all of our revenue is denominated
in U.S. dollars;
    
    quarantine, private travel limitation, or business disruption in regions affecting our
operations, stemming from actual, imminent or perceived outbreak of human pandemic or
contagious disease;
    
    in the event a larger portion of our revenue becomes denominated in foreign currencies,
we would be subject to a potentially significant exchange rate risk; and
    
    economic or political instability, including but not limited to armed conflict,
terrorism, interference with information or communication networks or systems, and the
resulting disruption to economic activity and business operations.
  
    
    a downturn in Asian economies which could limit our ability to retain existing customers
and attract new ones in Asia; and
    
    if the U.S. dollar increases in value relative to the Japanese Yen, the cost of our
solutions will be more expensive to existing and potential Japanese customers and therefore
less competitive.
  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;
 29




---



##### Table of Contents




    
    the size of improvements in our customers yield and the timing of agreement as to those
improvements;
    
    our long and variable sales cycle;
    
    changes in the mix of our revenue;
    
    changes in the level of our operating expenses needed to support our projected
growth; and
    
    delays in completing solution implementations for our customers.
 Revenue from our gainshare performance incentives is dependent on factors outside of our control,
including the volume of integrated circuits that our customers are able to sell to their
customers.
  Measurement of our gainshare performance incentives requires data collection and is subject to
customer agreement, which can result in uncertainty and cause quarterly results to fluctuate.
  Changes in the structure of our customer contracts, including the mix between fixed and variable
revenue and the mix of elements, can adversely affect the size and timing of our total revenue.
  30




---



##### Table of Contents



It typically takes us a long time to sell our unique solutions to new customers, which can result
in uncertainty and delays in generating additional revenue.
  We have a history of losses, we may incur losses in the future and we may be unable to maintain
profitability.
  
    
    funding for research and development;
    
    expansion of our solution implementation teams;
    
    expansion of our sales and marketing efforts; and
    
    additional non-cash charges relating to amortization of intangibles and stock-based
compensation.
  We may experience significant fluctuations in our operating results due to the cyclical nature of
the semiconductor industry.
  We must continually attract and retain highly talented executives, engineers, and research and
development personnel or we will be unable to expand our business as planned.
  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.
  31




---



##### 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 executive officers 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.
  32




---



##### Table of Contents



Our technologies could infringe the intellectual property rights of others causing costly
litigation and the loss of significant rights.
  Defects in our proprietary technologies, hardware and software tools, and the cost of support to
remedy any such defects could decrease our revenue and our competitive market share.
  Failing to maintain the effectiveness of our internal control over financial reporting could
cause the cost related to remediation to increase and could cause our stock price to decline.
  We may not be able to expand our business and proprietary technologies if we do not consummate
potential acquisitions or investments or successfully integrate them with our business.
  We may not be able to raise necessary funds to support our growth or execute our strategy.
  33




---



##### 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.
 If we were required to write down all or part of our goodwill, our net earnings and net worth
could be significantly, negatively affected.
  Changes in effective tax rates could negatively affect our operating results.
  The uncertainty in the credit markets might impact the value of certain auction-rate securities
we have and we might have to record impairment charges in the future.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Use of Proceeds
 34




---



##### Table of Contents



Stock Repurchase
 ISSUER PURCHASES OF EQUITY SECURITIES
 Total Number of
    
    
    Maximum Number (orTotal
    
    
    
    
    
    
    Shares (or Units)
    
    
    Approximate DollarNumber of
    
    
    Average
    
    
    Purchased as
    
    
    Value) of Shares (orShares (or
    
    
    Price Paid
    
    
    Part of Publicly
    
    
    Units) that May Yet BeUnits)
    
    
    Per Share
    
    
    Announced Plans
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    (or Unit)
    
    
    or Programs (1)
    
    
    Plans or Programs(1)Month #1 (April 1, 2008 through April 30, 2008)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,353,005Month #2 (May 1, 2008 through May 31, 2008)
    
    
    283,500
    
    
    $
    5.24
    
    
    
    283,500
    
    
    $
    5,866,140Month #3 (June 1, 2008 through June 30, 2008)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,866,140Total
    
    
    283,500
    
    
    $
    5.24
    
    
    
    283,500
 
 (1)
    
    On March 26. 2003, our Board of Directors approved a share repurchase program to purchase up
to $10.0 million of our outstanding common stock. The program was completed in August 2007
with 988,000 shares repurchased at the average price of $10.12. On October 29, 2007, the Board
of Directors approved a new program to repurchase up to an additional $10.0 million of the
Companys common stock on the open market. The right of repurchase stock under this program
will expire on October 29, 2010. As of June 30, 2008, 682,000 shares had been repurchased at
the average price of $6.06 under this program and $5.9 million remained available for
repurchase. 
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
    Election of Director
    
    Votes For
    
    Votes WithheldThomas Caulfield, Ph.D.  Class I Director
    
    
    23,504,408
    
    
    
    721,425Albert Y.C. Yu, Ph.D.  Class I Director
    
    
    23,306,758
    
    
    
    919,075R. Stephen Heinrichs  Class I Director
    
    
    23,306,758
    
    
    
    919,075
   Votes for
    
    Votes Against
    
    Votes Abstained
    
    Broker Non-votes24,176,560
    
    49,090
    
    183
    
    0
 
 Item 5. Other Information.
  
 35




---



##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description3.01
    
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc. dated July 31, 2000. (1)3.02
    
    
    Amended and Restated Bylaws of PDF Solutions, Inc., effective as of August 1, 2005. (2)4.01
    
    
    Specimen Stock Certificate. (3)4.02
    
    
    Second Amended and Restated Rights Agreement dated July 6, 2001. (1)10.01
    
    
    2001 Stock Plan and related agreements, effective as of July 31, 2001, as amended on October 31, 2006. (4)10.02
    
    
    2001 Employee Stock Purchase Plan and related agreements, as adopted on June 12, 2001. (1)10.03
    
    
    Offer letter to Joy E. Leo dated July 14, 2008 (6)31.01
    
    
    Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.02
    
    
    Certification of the Chief Financial Officer and Vice President of Finance pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.01
    
    
    Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (5)32.02
    
    
    Certification the Chief Financial Officer and Vice President of Finance pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (5)
 
 (1)
    
    Incorporated by reference to PDFs Registration Statement on Form S-1, Amendment No. 7 filed
July 9, 2001 (File No. 333-43192).(2)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed August 9, 2005 (File No.
000-31311).(3)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed September 6, 2001 (File No.
000-31311).(4)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed May 10, 2007 (File No.
000-31311).(5)
    
    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.(6)
    
    Indicates management contract or compensatory plan or arrangement. 36




---



##### Table of Contents



SIGNATURES
  By:
    /s/ JOHN K. KIBARIANJohn K. KibarianPresident and Chief Executive OfficerBy:
    /s/ KEITH A. JONESKeith A. JonesChief Financial Officer and Vice President of Finance  37




---



##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description3.01
    
    
    Third Amended and Restated Certificate of Incorporation of PDF Solutions, Inc. dated July 31, 2000. (1)3.02
    
    
    Amended and Restated Bylaws of PDF Solutions, Inc., effective as of August 1, 2005. (2)4.01
    
    
    Specimen Stock Certificate. (3)4.02
    
    
    Second Amended and Restated Rights Agreement dated July 6, 2001. (1)10.01
    
    
    2001 Stock Plan and related agreements, effective as of July 31, 2001, as amended on October 31, 2006. (4)10.02
    
    
    2001 Employee Stock Purchase Plan and related agreements, as adopted on June 12, 2001. (1)10.03
    
    
    Offer letter to Joy E. Leo dated July 14, 2008 (6)31.01
    
    
    Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.02
    
    
    Certification of the Chief Financial Officer and Vice President of Finance pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.01
    
    
    Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (5)32.02
    
    
    Certification the Chief Financial Officer and Vice President of Finance pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (5)
 
 (1)
    
    Incorporated by reference to PDFs Registration Statement on Form S-1, Amendment No. 7 filed
July 9, 2001 (File No. 333-43192).(2)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed August 9, 2005 (File No.
000-31311).(3)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed September 6, 2001 (File No.
000-31311).(4)
    
    Incorporated by reference to PDFs Report on Form 10-Q filed May 10, 2007 (File No.
000-31311).(5)
    
    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.(6)
    
    Indicates management contract or compensatory plan or arrangement. 38