Table of Contents

** **

 

** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

----

 

**Form 10-K/A**

**(Amendment No. 1)**

 
| **(Mark One)** |
|----------------|
| **x**          | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **     | **For the  fiscal year ended December 31, 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** |

 

**000-31311**

**(Commission file number)**

 

----

** **

**PDF SOLUTIONS, INC.**

(Exact name of registrant as specified in itscharter)

 

----

 

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

 

**(408) 280-7900**

(Registrant’s telephone number, including area code)

** **

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|
| Common  Stock, $0.00015 par value |       | The  NASDAQ Stock Market LLC                                                |

 

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

 

Indicate by check mark if theregistrant is a well-known seasoned issuer (as defined in Rule 405 of theSecurities Act).  Yes o  No x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  x

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).  Yes o  No x

 

The aggregate market value ofthe voting stock held by non-affiliates of the registrant was approximately$80.6 million as of June 30, 2008, the last business day of the registrant’smost recently completed second quarter, based upon the closing sale price onthe NASDAQ Global Market reported for such date.  Shares of Common Stock held by each officerand director and by each person who owns 10% or more of the outstanding CommonStock have been excluded in that such persons may be deemed to beaffiliates.  This determination ofaffiliate status is not necessarily a conclusive determination for otherpurposes.

 

There were 26,258,240 sharesof the registrant’s Common Stock outstanding as of March 6, 2009.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

The following documents (orparts thereof) are incorporated by reference into the following parts of this Form 10-K/A:

 

None.

 

 

 

----

Table of Contents

 

**EXPLANATORYNOTE**

 

ThisAmendment No. 1 (the “Amendment”) to the Annual Report on Form 10-K for PDFSolutions, Inc. (the “Company”) for the year ended December 31, 2008 is beingfiled to provide information in Part III that was previously incorporated byreference from the Company’s anticipated proxy statement for the 2009 annualmeeting of stockholders, which was expected to be held in May 2009.  The Company has delayed the date of the 2009annual meeting, and as a result, has amended the original Form 10-K filed bythe Company with the Securities and Exchange Commission on March 16, 2009 (the“Original 10-K”) to include the required disclosures in Part III.  This Amendment should be read in conjunctionwith the Original 10-K and the Company’s other filings made with the Securitiesand Exchange Commission.  This Amendmentdoes not have any effect on the reported net income, cash flows orstockholders’ equity of the Company. Except as otherwise expressly stated herein, this Amendment does notreflect events occurring after the filing of the Original 10-K, or modify orupdate any other parts or exhibits to the Original 10-K and those unaffectedparts or exhibits are not included in this Amendment.

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Amendment includesforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 (the “Securities Act”) and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”).  Our actual results could differ materiallyfrom those projected in the forward-looking statements as a result of a numberof factors, risks and uncertainties discussed in this Amendment.  The words “may,” “will,” “anticipate,” “continue,”“could,” “projected,” “expects,” “believes,” “intends,” and “assumes,” thenegative of these terms and similar expressions are used to identifyforward-looking statements.  Allforward-looking statements and information included herein is given as of thefiling date of this Amendment with the Securities and Exchange Commission andbased on information available to us at the time of this report and futureevents or circumstances could differ significantly from these forward-lookingstatements.  Unless required by law, weundertake no obligation to update publicly any such forward-looking statements.

 

2

----

Table of Contents

 

**TABLE OFCONTENTS**

 
| **PART III** |
|-------------------|
| Item 10.          | Directors,  Executive Officers and Corporate Governance | 4 |
| Item 11.          | Executive  Compensation | 6 |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters | 18 |
| Item 13.          | Certain  Relationships and Related Transactions and Director Independence | 21 |
| Item 14.          | Principal  Accounting Fees and Services | 23 |
| Item 15.          | Exhibits | 24 |

 

3

----

Tableof Contents

 

**PART III**

 

**ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**

 

Thenames of our directors who serve on the Company’s Board of Directors (the “Board”),their ages as of March 31, 2009 and other information about them are setforth below:

 
| **Name**                | ** ** | **Position**                                               | ** ** | **Age** |
|-------------------------|------------|------------------------------------------------------------|------------|---------|
| Thomas Caulfield, Ph.D  |       | Director                                                   |       | 50      |
| R. Stephen Heinrichs    |       | Director                                                   |       | 62      |
| John K. Kibarian, Ph.D. |       | Chief Executive  Officer, President and Director           |       | 45      |
| Lucio L. Lanza          |       | Chairman of the Board                                      |       | 64      |
| Kimon Michaels, Ph.D.   |       | Vice President, Design  For Manufacturability and Director |       | 43      |
| Albert Y.C. Yu, Ph.D.   |       | Director                                                   |       | 68      |

 

*Thomas Caulfield, Ph.D.,* has served as a director of the Companysince September 2006.  Dr. Caulfield,who has been appointed Chairman of the Nominating Committee, currently servesas Executive Vice President of Sales, Marketing & CustomerSatisfaction for Novellus Systems Inc. Prior to joining Novellus in October 2005,Dr. Caulfield had been employed at IBM for 16 years, serving in severalexecutive management positions.  Mostrecently he served as Vice President of 300MM Semiconductor Operations andwas responsible for IBM’s premiere semiconductor facility in East Fishkill, NewYork.  Prior to joining IBM, Dr. Caulfieldworked at Philips Laboratory as a senior member of the research staff and beganhis working career at Columbia University. Dr. Caulfield received a B.S. in Physics from St. LawrenceUniversity and a B.S., M.S., and a Ph.D in Materials Science/Metallurgy fromColumbia University.

 

*R. Stephen Heinrichs* has served as a director of the Company since August 2005and as the Lead Independent Director since June 2007.  Mr. Heinrichs, who has been appointedChairman of the Audit and Corporate Governance Committee, currently is aprivate investor and serves on a number of private company boards ofdirectors.  Mr. Heinrichs bringsover 30 years of experience in finance and operations through positions held inpublic and private companies, including most recently, before his retirement in2001, as Chief Financial Officer of Avistar Communications Corporation, apublicly-held video communications company he co-founded and for which hecontinues to serve as a director on the board of directors.  From January 2003, until the company wasacquired in 2005, Mr. Heinrichs was also a member of the board ofdirectors of Artisan Components****and was its audit committeechairman.  Mr. Heinrichs received aB.S. in Accounting from California State University Fresno and is a CertifiedPublic Accountant.

 

*John K. Kibarian, Ph.D*., one of our co-founders, has served asPresident of the Company since November 1991 and as our Chief ExecutiveOfficer since July 2000.  Dr. Kibarianhas served as a director of the Company since December 1992.  Dr. Kibarian received a B.S. inElectrical Engineering, an M.S. E.C.E. and a Ph.D. E.C.E. from Carnegie MellonUniversity.

 

*Lucio L. Lanza* has served as the Chairman of the Board since April 2004and as a director of the Company since November 1995.  Mr. Lanza is currently the managingdirector of Lanza techVentures, an early stage venture capital and investmentfirm, which he founded in January 2001, and a private investor and serveson a number of private company boards of directors.  From 1990 to December 2000, Mr. Lanzaserved as partner of U.S. Venture Partners, a venture capital firm.  Mr. Lanza served as chairman of theboard of directors of Artisan Components, Inc., acquired by ARM HoldingsPLC, a semiconductor intellectual property

 

4

----

Tableof Contents

 

company, from November 1997 until December 2004and as a director of that company since March 1996.  Mr. Lanza has served as a director ofARM Holdings, PLC since December 2004. Mr. Lanza received a doctoratein electronic engineering from Politecnico of Milano.

 

*Kimon Michaels, Ph.D*., one of our co-founders, has served in vicepresidential capacities for the Company since March 1993 includingcurrently as Vice President, Design for Manufacturability, and as a director ofthe Company since November 1995.  Healso served as Chief Financial Officer from November 1995 to July 1998.  Dr. Michaels received a B.S. inElectrical Engineering, an M.S. E.C.E. and a Ph.D. E.C.E. from Carnegie MellonUniversity.

 

*Albert Y.C. Yu, Ph.D*., has served as a director of the Company since August 2005.  Dr. Yu, who has been appointed Chairmanof the Compensation Committee, currently is active in private venture capitalinvesting and serves the board of directors of several high technologycompanies. Previously, Dr. Yu had been employed with Intel Corporation foralmost 30 years until his retirement in 2002. At Intel, he held numerous technical and executive management positions,including Senior Vice President and a member of the Corporate ManagementCommittee, with responsibilities for corporate strategy, microprocessors,chipsets, and software.  Dr. Yureceived a B.S. from the California Institute of Technology, and an M.S. andPh.D. from Stanford University, all in electrical engineering.

 

The Company’s amended and restated certificate ofincorporation provides that directors shall be divided into three classes, witheach class serving for staggered, three-year terms.  Pursuant to the Company’s amended andrestated bylaws, the Board has set the number of directors at seven, consistingof three Class I directors, two Class II directors, and two Class IIIdirectors.  We currently only have one Class IIIdirector; the Board has not appointed a successor following Susan H. Billat’sresignation from the Board on August 4, 2008.  The term of office for the Class Idirectors will expire at the annual meeting of the stockholders following thefiscal year ended December 31, 2010; the term of office for the Class IIdirectors will expire at the annual meeting of the stockholders to be held in2009; and the term of office for the Class III director will expire at theannual meeting of the stockholders following the fiscal year ended December 31,2009.  The terms of the directors, andthe members and chairs of each of the committees of the Board, are identifiedin the following table:

 
| **Director**               | ** ** | **Nominating Committee** | ** ** | **Compensation Committee** | ** ** | **Audit and Corporate Governance Committee** | ** ** | **Special   Options Committee** | ** ** | **Strategic Committee** | ** ** |
|----------------------------|------------|--------------------------|------------|----------------------------|------------|----------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| John K. Kibarian, Ph.D.(3) |       |                     |       |                       |       |                                         |       | X                               |       | X                       |       |
| Lucio L. Lanza*(2)         |       |                     |       |                       |       | X                                            |       |                            |       | X                       |       |
| Kimon Michaels, Ph.D.(2)   |       |                     |       |                       |       |                                         |       |                            |       |                    |       |
| Thomas Caulfield, Ph.D.(1) |       | Chair                    |       | X                          |       | X                                            |       |                            |       |                    |       |
| Albert Y.C. Yu, Ph.D.(1)   |       | X                        |       | Chair                      |       |                                         |       |                            |       |                    |       |
| R. Stephen Heinrichs(1)    |       | X                        |       | X                          |       | Chair                                        |       |                            |       | X                       |       |

** **

----

*      Chairmanof the Board

(1)   ClassI Director

(2)   ClassII Director

(3)   ClassIII Director

 

## ***SECTION 16(A) BENEFICIAL OWNERSHIPREPORTING COMPLIANCE***

 

Section 16(a) of the Exchange Act requiresour directors, our executive officers and persons who own more than 10% of thecommon stock (collectively, the “Reporting Persons”) to file initial reports ofownership and changes in ownership of our common stock.  Reporting Persons are required by SECregulations to furnish us with copies of all Section 16(a) reportsthey file.  To our knowledge, based 

 

5

----

Table of Contents

 

solely on our review of the copies of such reportsreceived or written representations from certain Reporting Persons that noother reports were required, we believe that during the fiscal year ended December 31,2008, all Reporting Persons complied with all applicable filing requirementsunder Section 16(a) of the Exchange Act.

 

# **CORPORATE GOVERNANCE**

# ** **

The Company provides information on its website aboutits corporate governance policies, including the Company’s Code of Ethics,which applies to the Company’s President, Chief Executive Officer, ChiefFinancial Officer and Vice President, Finance and charters for the committeesof the Board.  These materials can befound at *www.pdf.com* under the “Governance” linkon the “Investor” tab.

 

# **AUDIT AND CORPORATE GOVERNANCE COMMITTEE**

# ** **

We renamed our Audit Committee of the Board ofDirectors the Audit and Corporate Governance Committee of the Board ofDirectors, effective as of February 3, 2009, and, in conjunction with therenaming of the committee, we adopted a revised charter for the committee toreflect its corporate governance-related duties.  The Audit and Corporate Governance Committeeis a separately-designated committee established in accordance with Section 3(a)(58)(A) ofthe Exchange Act.

 

The Audit and Corporate Governance committee iscomprised of three independent directors within the meaning of the rules ofthe SEC and NASDAQ Marketplace Rules:  Dr. Caulfield,Mr. Heinrichs, and Mr. Lanza.  Mr. Heinrichsserves as the Chairman of the Audit and Corporate Governance committee.  The functions of the Audit and CorporateGovernance Committee include: recommending the engagement of the independent registered publicaccounting firm; monitoring the effectiveness of our internal and external auditefforts; monitoring and assessing the effectiveness of our financial andaccounting organization and the quality of our system of internal accountingcontrols; and overseeing all aspects of the Company’s corporate governancefunctions on behalf of the Board and make recommendations on corporategovernance issues.** **The Sarbanes-Oxley Act of 2002 andrules adopted by the SEC require us to disclose whether the Audit andCorporate Governance Committee includes at least one member who is an “auditcommittee financial expert” within the meaning of such Act and rules.  The Board has determined that R. StephenHeinrichs qualifies as its “audit committee financial expert.”  The Board believes that Mr. Heinrichsqualifies as such an expert in light of his more than 30 years experiencein finance and operations, holding various positions in public and privatecompanies including acting as the Chief Financial Officer of AvistarCommunications Corporation and serving on the board of directors and as theaudit committee chairman of Artisan Components, acquired by ARM HoldingsPLC.  Mr. Heinrichs received a B.S.in Accounting from California State University Fresno and is a Certified PublicAccountant.  As a result of suchbackground and experience, the Board believes that Mr. Heinrichspossesses: an understanding of generally accepted accounting principles andfinancial statements; the ability to assess the general application of suchprinciples in connection with accounting estimates, accruals and reserves;experience analyzing and evaluating financial statements that present a breadthand level of complexity of accounting issues generally comparable to those ofthe Company; an understanding of internal control over financial reporting; andan understanding of Audit and Corporate Governance Committee functions.

 

**ITEM 11.  EXECUTIVECOMPENSATION.**

## *** ***

## ***COMPENSATION DISCUSSION AND ANALYSIS***

## *** ***

We maintain an executive compensation program for ourNamed Executive Officers comprised of fixed and performance-variableelements.  The individuals listed in theSummary Compensation Table in this Amendment are referred to as the “NamedExecutive Officers.”  The design andoperation of our 

 

6

----

Table of Contents

 

executivecompensation program reflect the following objectives, established by ourCompensation Committee with input from our Board and other management teammembers:

 

·                  to recruit and retain talented leadership;

 

·                  to implement measurable performance targets;

 

·                  to tie executive compensation withstockholder value;

 

·                  to emphasize performance-based compensationthat is progressively weighted with seniority level; and

 

·                  to maintain an executive compensation programthat encourages our Named Executive Officers to adhere to high ethicalstandards.

 

There are four main elements of each Named ExecutiveOfficer’s total compensation that address and fulfill these objectives.  These elements, described in more detailbelow, are:

 

·                  base salary;

 

·                  performance bonus;

 

·                  long-term equity incentives; and

 

·                  perquisites, health and welfare benefits andother compensation.

 

The compensation that each Named Executive Officerreceives is a combination of these elements. The Company has chosen these elements because they align the interestsof our stockholders with those of our Named Executive Officers by focusing oncompensation that includes pay that links individual performance to the Company’sperformance, short-term and long-term performance goals, equity-based benefitsthat promote an ownership mentality with the Company, and benefits that ensurehealthy and productive employees.

 

***HowOur Executives’ Compensation is Determined***

*** ***

Our Compensation Committee develops, reviews andapproves each element of compensation for our Company as a whole and for eachof our Named Executive Officers.  TheCompensation Committee also regularly assesses the effectiveness andcompetitiveness of the program and the elements that we use to determine compensation.

 

In the first quarter of each year, the CompensationCommittee reviews the previous year’s performance of each of our NamedExecutive Officers.  In connection withthis review, the Compensation Committee reviews and adjusts, as appropriate,annual base salaries for our Named Executive Officers, determines theirdiscretionary incentive bonuses based on their prior year’s performance andreviews their total compensation against market data.  The Compensation Committee also, on occasion,meets with our Chief Executive Officer to obtain recommendations with respectto the Company’s compensation programs and practices generally.  The Compensation Committee considers, but isnot bound to accept, management’s recommendations with respect to NamedExecutive Officer compensation.

 

The Compensation Committee discusses our ChiefExecutive Officer’s compensation package with him, but makes decisions withrespect to his compensation without him present.  The Compensation Committee has the ultimateauthority to make decisions with respect to the compensation of our NamedExecutive Officers.

 

7

----

Table of Contents

 

In making compensation decisions, it has been thepractice of the Compensation Committee to review the historical levels of eachelement of a Named Executive Officer’s total compensation and to compare eachelement with that of other named executive officers in an appropriate marketcomparison group, which includes other comparable high-technology companieswithin our industry of similar size in terms of revenue and marketcapitalization.  In prior years, thecomparison of each Named Executive Officer’s compensation to marketcompensation data has been prepared by our internal human resources staff withthe assistance of an external compensation consultant.  Our staff refers to, among other things,****market data obtained from both Radford High-Tech ExecutiveSurveys and proxy data from peer companies. This data has then been presented to our Chief Executive Officer and theCompensation Committee in accordance with the process described above.

 

Even though the Compensation Committee reviews marketcompensation data, we do not believe that it is appropriate to establishcompensation levels based solely on benchmarking.  Our Compensation Committee relies upon thejudgment of its members in making compensation decisions, after reviewing theperformance of the Company and carefully evaluating a Named Executive Officer’sperformance during the year against established goals, leadership qualities,operational performance, business responsibilities, career with the Company,current compensation arrangements, and long-term potential to enhance stockholdervalue.  While competitive marketcompensation paid by other companies is one of the many factors that theCompensation Committee considers in assessing the reasonableness ofcompensation, the Compensation Committee does not attempt to maintain a certaintarget percentile within a peer group or otherwise rely entirely on that datato determine Named Executive Officer compensation.  Instead, the Compensation Committeeincorporates flexibility into our compensation programs and in the assessmentprocess to respond to and adjust for the evolving business environment.  We strive to achieve an appropriate mixbetween equity incentive awards and cash payments in order to meet ourobjectives, however we do not rigidly apply any particular apportionment goaland it does not control our compensation decisions.  Our mix of compensation elements is designedto reward recent results and motivate long-term performance through acombination of cash and equity incentive awards.  We believe the most important indicator of whetherour compensation objectives are being met is our ability to motivate our NamedExecutive Officers to deliver superior performance and to retain them tocontinue their careers with the Company on a cost-effective basis.

 

***BaseSalaries***

*** ***

In general, base salaries for our Named Executive Officers areinitially established through arms-length negotiation at the time the executiveis hired, taking into account such executive’s qualifications, experience,prior salary and competitive salary information for companies that arecomparable to ours.  Base salaries of our NamedExecutive Officers are reviewed annually and adjustments to basesalaries are based on the scope of an executive’s responsibilities, individualcontribution, prior experience and sustained performance.  Decisions regarding salary increases takeinto account the Named Executive Officer’s current salary and the amounts paidto the Named Executive Officer’s peers outside the company.  In addition to considering the competitivepay practices of other companies, we also consider the amounts paid to a NamedExecutive Officer’s peers inside the Company by conducting an internal analysiswhich compares the pay of each Named Executive Officer to other members of themanagement team.  Base salaries are alsoreviewed in the case of promotions or other significant changes inresponsibility.  Base salaries are notautomatically increased if the Compensation Committee believes that otherelements of compensation are more appropriate in light of our stated objectives.  This strategy is consistent with our intentof offering compensation that is both cost-effective and contingent on theachievement of performance objectives.

 

8

----

Table of Contents

 

In the first quarter of 2008, the CompensationCommittee reviewed the base salaries for all of the Named Executive Officersemployed by us at that time and established the base salaries to be in effectduring fiscal year 2008.  These basesalaries were set based on the Compensation Committee’s analysis of theforegoing factors.  Pursuant to thisdetermination, the base salary of Mr. Hartgring was increased to $240,000in February 2008 and the base salaries of all of our other Named ExecutiveOfficers remained the same.  The actualbase salaries paid to all of our Named Executive Officers for 2008 are setforth in the “Summary Compensation Table” below.

 

***PerformanceBonuses***

*** ***

It is the Compensation Committee’s objective to ensurethat performance bonuses made to the Named Executive Officers are tied to theCompany’s overall financial performance and stockholder value.  At the beginning of each fiscal year, theBoard establishes annual financial goals for the Company to meet by the end ofthe fiscal year. Additionally, at the end of each fiscal quarter, the Boardestablishes specific numbers-based financial targets for the next quarter.  At the end of each fiscal year, theCompensation Committee determines, based on the financial performance of theCompany for the fiscal year, whether to establish a performance bonus pool and,if so, the size of such performance bonus pool. If a performance bonus pool has been created, then the CompensationCommittee evaluates each Named Executive Officer’s level of performance andcontribution toward the Company’s overall financial performance and determineswhether to award a bonus to each Named Executive Officer and the size of suchbonus.  This structuring of discretionaryperformance bonuses based on a pay-for-performance method motivates and rewardsthe Named Executive Officers for their contributions to strong annual businessperformance by making a substantial portion of their total cash compensationreceived variable and dependent upon the Company’s annual financialperformance, as determined at the discretion of the Compensation Committee.

 

In fiscal year 2008, the primary financial performancemeasures for funding the performance bonus pool consisted of total revenue(determined in accordance with generally accepted accounting principles in theUnited States of America, or GAAP), non-GAAP net income and non-GAAP net incomeper share.  In addition, the Company alsolooked at certain non-GAAP financial measures that exclude the effects of thefollowing: stock-based compensation expense, amortization of acquiredtechnology and intangible assets, restructuring charges, impairment of goodwilland certain intangible assets, and their related income tax effects.  The Company’s management believes that thesenon-GAAP financial measures provide a useful supplemental analysis of theCompany’s ongoing operations in light of the fact that none of these categoriesof expense has a current effect on the future uses of cash (with the exceptionof restructuring charges) nor do they have value with regards to the generationof current or future revenues.  TheCompany believes that concurrently evaluating both GAAP and non-GAAP dataprovides valuable supplemental information on its financial operating results,allows the Company to assess its profitability and performance, and provides anappropriate basis for analyzing whether and to what extent to fund theexecutive performance bonus pool.

 

Although management uses these non-GAAP financialmeasures internally to measure profitability and performance, these non-GAAPresults are not considered an alternative to, or a substitute for, GAAPfinancial information, and may be different from similarly titled non-GAAPmeasures used by other companies.  Inparticular, these non-GAAP financial measures are not a substitute for GAAPmeasures of income as a measure of performance, or to cash flows fromoperating, investing and financing activities as a measure of liquidity.  When the Company presents its financialresults to investors, we provide a reconciliation of these non-GAAP financialmeasures to the comparable GAAP financial measures.

 

After completing the review discussed above, theCompensation Committee decided not to establish a performance bonus pool for2008.

 

9

----

Table of Contents

 

***Long-TermEquity Incentives***

*** ***

The goals of our long-term, equity-based incentiveawards are to align the interests of our Named Executive Officers with theinterests of our stockholders and to provide each Named Executive Officer withan incentive to manage the Company from the perspective of an owner with anequity stake in the business.  Becausevesting is based on continued service, our equity-based incentives alsofacilitate the retention of our Named Executive Officers through the vestingperiod of the awards.  In determining thesize of the long-term equity incentives to be awarded to our Named ExecutiveOfficers, we take into account a number of internal factors, such as therelative job scope, the value of existing long-term incentive awards,individual performance history, prior contributions to the Company, the size ofprior grants and competitive market data. Based upon these factors, the Compensation Committee determines the sizeof the long-term equity incentives at levels it considers appropriate to createa meaningful opportunity for reward predicated on the creation of long-termstockholder value.

 

To reward and retain our Named Executive Officers in amanner that best aligns employees’ interests with stockholders’ interests, weuse stock options as the primary incentive vehicle for long-term compensationopportunities.  We believe that issuingstock options is an effective tool to meet one of the objectives of ourcompensation program by increasing long-term stockholder value through thetying of the value of the stock options to our future financial performance.  Because stock option recipients are only ableto profit from stock options if our stock price increases relative to the stockoption’s exercise price, we believe that stock options provide meaningfulincentives to achieve an increase in the overall value of our stock over time.

 

Consistent with the process in place in prior years,annual grants of options to the Named Executive Officers are typically approvedby the Compensation Committee during the fourth quarter of the year.  While the vast majority of stock option awardsto our Named Executive Officers have been made pursuant to this annual process,the Compensation Committee retains the discretion to make stock option awardsto Named Executive Officers at other times, including in connection with thehiring of a Named Executive Officer, for retention purposes or for othercircumstances recommended by management or the Compensation Committee.

 

Consistent with the practice for all of our employees,the exercise price of each stock option grant made to a Named Executive Officeris the fair market value of the Company’s common stock on the grant date, whichour equity incentive plans determine to be the closing price of our commonstock on the NASDAQ Global Market on the date of grant.  Except as otherwise described in this Form 10-K/A,stock option awards to our Named Executive Officers typically vest over afour-year period as follows: 25% of the shares underlying the option vest onthe first anniversary of the date of grant and the remainder of the sharesunderlying the option vest in equal monthly installments over the remaining 36months thereafter.  We do not have anysecurity ownership requirements for our Named Executive Officers.

 

There were no stock option grants made to our NamedExecutive Officers in 2008.  However, inan effort to reduce the overhang of outstanding stock options and toincentivize and retain individuals providing services to the Company and itssubsidiaries, on June 10, 2008, the Company offered each holder ofoutstanding Company stock options with exercise prices equal to or greater than$10.00 per share the right to tender such stock options for cancellation inexchange for restricted stock rights granted under the Company’s 2001 StockPlan based upon a 4.2 stock option shares to 1.0 restricted stock rightexchange ratio. The offer included our Named Executive Officers.  Pursuantto the tender offer, restricted stock rights received in exchange for cancelledoptions would be subject to vesting schedules ranging from 15 months to 51months from the date of grant of the restricted stock rights (which scheduleapplied would depend on when the stock options that would be cancelled inexchange for the restricted stock rights were originally granted). All of ourNamed Executive Officers elected to participate in the offer.  In 

 

10

----

Tableof Contents

 

decidingwhether to make the offer, our Board considered a variety of alternatives to addressthe issues of the stock option overhang and the significant number ofout-of-the-money options. Ultimately, our Board determined that, by exchangingstock options according to the terms of the offer, the Company wouldreduce the number of shares of stock subject to equity awards, thereby reducingpotential dilution to our stockholders. Additionally, the Board determined thatsome option holders could benefit from the opportunity to choose between whatwe believe is the more certain benefit associated with restricted stock rightsand the potentially more valuable, though less certain, benefit those holdersmay realize by retaining their stock options. By providing for the grant ofreplacement awards consisting of restricted stock rights rather than newat-the-money stock options, the Board also sought to strengthen the Company’sequity-based retention incentives while further aligning our existing equitycompensation programs with our overall compensation philosophy.

 

***Perquisites,Health and Welfare Benefits and Other Compensation***

*** ***

The establishment of competitive benefit packages forour Named Executive Officers is an important factor in attracting and retaininghighly qualified personnel.  Our NamedExecutive Officers are eligible to participate in all of our employee benefitplans, including medical, dental, vision, group life and disability insurance,in each case on the same basis as other employees.  We believe that these health and welfarebenefits help ensure that the company has a productive and focused workforcethrough reliable and competitive health and other benefits.

 

We do not generally provide significant perquisites orpersonal benefits to our Named Executive Officers.

 

***Tax Deductibilityof Executive Compensation and Accounting Policies***

*** ***

The Compensation Committee and our Board have considered the potentialfuture effects of Section 162(m) of the Internal Revenue Code on thecompensation paid to our executive officers. Section 162(m) disallows a tax deduction for any publicly heldcorporation for individual compensation exceeding $1.0 million in any taxableyear for any of our Named Executive Officers, unless compensation is qualifiedperformance based compensation within the meaning of Section 162(m).  We have adopted a policy that, wherereasonably practicable, we will seek to qualify the variable compensation paidto our Named Executive Officers for an exemption from the deductibilitylimitations of Section 162(m).

 

In approving the amount and form of compensation for our Named ExecutiveOfficers, the Compensation Committee will continue to consider all elements ofthe cost to our company of providing such compensation, including the potentialimpact of Section 162(m).

 

We account for equity compensation paid to our Named Executive Officersunder the rules of Statement of Financial Standards (“SFAS”) No. 123R,“Share-Based Payments” (“SFAS 123R”), which requires us to estimate and recordan expense for each award of equity compensation over the service period of theaward. Accounting rules also require us to record cash compensation as anexpense at the time the obligation is accrued. We have not tailored ourexecutive compensation program to achieve particular accounting results.

 

# **COMPENSATION COMMITTEE REPORT**

# ** **

The Compensation Committee reviewed and discussed theCompany’s Compensation Discussion and Analysis, or the CD&A, withmanagement for the fiscal year ended December 31, 2008.  Based on the review and discussions referredto above, the Compensation Committee recommended to the Board that the CD&Abe included in the Company’s Form 10-K/A for the year ended December 31,2008.

 

11

----

Tableof Contents

 
|   | THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS  OF PDF SOLUTIONS, INC. |
|--------|------------------------------------------------------------------------------|
|   |                                                                         |
|   | Albert Y.C. Yu, Ph.D.,  Chair                                                |
|   | R. Stephen Heinrichs                                                         |
|   | Thomas Caulfield, Ph.D.                                                 |

 

***Compensation Committee Interlocks andInsider Participation***

*** ***

The Compensation Committee of the Board of Directorscurrently consists of R. Stephen Heinrichs, Albert Y.C. Yu, Ph.D. and ThomasCaulfield, Ph.D.  No member of theCompensation Committee or executive officer of the Company has a relationshipthat would constitute an interlocking relationship with executive officers ordirectors of another entity.   

 

## ***DIRECTORCOMPENSATION***

## *** ***

Directors who are also our employees are not paid anannual retainer, nor are they compensated for serving on the Board.  Information regarding compensation otherwisereceived by our directors, who are also executive officers, is provided inother sections of this Item 11.

 

Effective July 20,2007, the Board authorized an increase to the directors’ compensation basedupon the recommendations of the Compensation Committee after the CompensationCommittee reviewed the compensation received by members of the board ofdirectors at comparable peer companies. Pursuant to the increase, our non-employee directors receive the following cash compensation for theirservices to the Board:

 

·                  an annual cash retainer fee in the amountof $25,000;

 

·                  per meeting fees of $1,500 per boardmeeting ($500 for telephone participation); and

 

·                  per meeting fees of $1,000 per committeemeeting ($500 for telephone participation).

 

The Chairman of the Board receives additional feesconsisting of an annual cash retainer in the amount of $30,000 plus an optionto purchase 30,000 shares a year.  TheLead Independent Director receives additional fees consisting of an annual cashretainer in the amount of $10,000 plus an option to purchase 10,000 shares peryear.  Committee chairpersons receiveadditional fees, pro-rated where appropriate, as follows: the Audit andCorporate Governance Committee Chair receives an annual cash retainer in theamount of $10,000 plus an option to purchase 10,000 shares per year; theCompensation Committee Chair receives an annual cash retainer in the amount of$5,000 plus an option to purchase 7,500 shares per year; and the NominatingCommittee Chair receives an annual cash retainer in the amount of $5,000 plusan option to purchase 5,000 shares per year. All directors are reimbursed for reasonable travel expenses incurred inconnection with attending Board and committee meetings.  Our 2001 Stock Plan provides for theautomatic grant of non-statutory options to non-employee directors.  Each director that is new to the Board willbe granted an option to purchase 30,000 shares at the time they join theBoard.  In addition, each non-employeedirector receives an option to purchase 15,000 shares each year followingthe conclusion of the annual meeting of stockholders for such year.  These annual option grants vest with respectto 25% of the shares subject to the option on the one-year anniversary of thedate of grant, and with respect to 1/48 of the shares subject to the optioneach month thereafter.

 

12

----

Table of Contents

 

The non-employee directors received the followingcompensation during the fiscal year ended December 31, 2008:

 
| **Name**                | ** ** | **Fees Earned or  Paid in Cash ($)** | ** ** | **Stock Awards  ($) (1)** | ** ** | **Option Awards  ($) (1)** | ** ** | **All Other  Compensation** | ** ** | **Total($)** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|--------------|------------|
| Susan H. Billat(2)      |       | $                                                             | 37,500     |                                | $          | —                               |       | $                                | 63,900     |         | —     |   | $ | 101,400 |   |
| Thomas Caulfield, Ph.D. |       | 43,500                                                        |       | 11,200                              |       | 53,800                               |       | —                           |       | 108,500      |       |
| R. Stephen Heinrichs    |       | 64,500                                                        |       | —                              |       | 139,900                              |       | —                           |       | 204,400      |       |
| Lucio Lanza             |       | 69,500                                                        |       | —                              |       | 215,800                              |       | —                           |       | 285,300      |       |
| Albert Y.C. Yu, Ph.D.   |       | 45,000                                                        |       | 13,800                              |       | 78,300                               |       | —                           |       | 137,100      |       |
|                         |            |                                                               |            |                                     |            |                                      |            |                                  |            |              |            |  |  |  |  |

 

----

(1)  The amountsin these columns reflect amounts recognized for financial statement reportingpurposes for stock options and restricted stock awards granted during thefiscal year ended December 31, 2008 and in prior fiscal years, inaccordance with SFAS 123R. The restricted stock and option awards included inthis expense amount were granted from May 2004 through August 2008.These amounts reflect our accounting expense for these awards and do notrepresent the actual value that may be realized by our directors. There can beno assurance that these amounts will ever be realized.  For information on the valuation assumptionsused in valuing stock option awards, refer to the Note to the consolidatedfinancial statements contained in the Company’s Annual Report on Form 10-Kfor the fiscal year in which the stock option was granted titled “Stockholder’sEquity”.  The outstanding options held byeach director at 2008 fiscal year end were: Dr. Caulfield (15,000); Mr. Heinrichs (122,945); Mr. Lanza(257,500); and Dr. Yu (22,500).  Theoutstanding and unvested restricted stock awards held by each director at 2008fiscal year end were: Dr. Caulfield (10,715) and Dr. Yu (17,183). 

 

(2)   Susan H.Billat resigned from the Board of Directors of the Company on August 4,2008.

 

On November 17, 2005, we entered intoacceleration agreements (each, an “Acceleration Agreement”) with each of LucioL. Lanza, Albert Y.C. Yu, Ph.D. and R. Stephen Heinrichs pursuant to which allof the options to purchase shares of our stock that have been granted or willbe granted to each of the aforementioned directors will become vested andexercisable in full in the event of a change in control of the Company. Each ofthe acceleration agreements will generally remain in effect until terminated bythe Company or, if earlier, the date the director in question ceases to provideservices to the Company. For purposes of these agreements, a “change of control”is defined as an event whereby a party or group of parties, different fromthose maintaining control at the time of the acceleration agreement, attains amajority voting right in the Company. Also on November 17, 2005, weentered into an Acceleration Agreement with Susan H. Billat, but such agreementterminated on its terms upon Ms. Billat’s resignation from the Board on August 4,2008. 

 

13

----

Table of Contents

 

# **SUMMARYCOMPENSATION TABLE**

# ** **

The table that follows shows the compensation earnedby (a) the person who served as our Chief Executive Officer during thefiscal year ended December 31, 2008; (b) the person who served as ourChief Financial Officer during the fiscal year ended December 31, 2008;and (c) the three other most highly compensated executive officers whowere serving as executive officers on December 31, 2008, or the NamedExecutive Officers.

 
| **Name & Principal Position**           | ** ** | **Year** | ** ** | **Salary ($)** | ** ** | **Bonus ($)** | ** ** | **Stock  Awards  ($)(1)** | ** ** | **Option  Awards ($) (1)** | ** ** | **All Other  Compensation ($) (2)** | ** ** | **Total ($)** | ** ** |
|------------------------------------------------------------|------------|----------|------------|---------------------|------------|--------------------|------------|---------------------------|------------|--------------------------------------|------------|----------------------------------------------------|------------|--------------------|------------|
|                                                       |       |     |       |                |       |               |       |                      |       |                                 |       |                                               |       |               |       |
| **John K. Kibarian******                                   |       | 2008     |       | 250,000             |       | —             |       | 14,600                    |       | —                               |       | 200                                                |       | 264,800            |       |
| Chief Executive Officer, President and  Director           |       | 2007     |       | 250,000             |       | —             |       | —                    |       | 3,700                                |       | 200                                                |       | 253,900            |       |
|                                                       |       | 2006     |       | 250,000             |       | —             |       | 20,700                    |       | —                               |       | 600                                                |       | 271,300            |       |
|                                                       |       |     |       |                |       |               |       |                      |       |                                 |       |                                               |       |               |       |
| **Keith A. Jones******                                     |       | 2008     |       | 200,000             |       | 10,000             |       | 21,100                    |       | 160,200                              |       | 200                                                |       | 391,500            |       |
| Vice President of Finance and Chief Financial  Officer     |       | 2007     |       | 200,000             |       | —             |       | —                    |       | 254,800                              |       | 7,900                                              | (3)        | 462,700            |       |
|                                                       |       | 2006     |       | 200,000             |       | —             |       | —                    |       | 347,400                              |       | 600                                                |       | 548,000            |       |
|                                                       |       |     |       |                |       |               |       |                      |       |                                 |       |                                               |       |               |       |
| **David A. Joseph******                                    |       | 2008     |       | 246,000             |       | 12,000             |       | 24,700                    |       | 129,800                              |       | 800                                                |       | 413,300            |       |
| Chief Strategy Officer                                     |       | 2007     |       | 246,000             |       | —             |       | —                    |       | 147,700                              |       | 400                                                |       | 394,100            |       |
|                                                       |       | 2006     |       | 246,000             |       | —             |       | —                    |       | 111,600                              |       | 600                                                |       | 358200             |       |
|                                                       |       |     |       |                |       |               |       |                      |       |                                 |       |                                               |       |               |       |
| **Cornelius (Cees) Hartgring******                         |       | 2008     |       | 237,300             |       | 17,000             |       | 17,100                    |       | 194,600                              |       | 800                                                |       | 466,800            |       |
| Vice President, Client Services and Sales                  |       | 2007     |       | 210,000             |       | —             |       | —                    |       | 180,200                              |       | 400                                                |       | 390,600            |       |
|                                                       |       | 2006     |       | 210,000             |       | —             |       | —                    |       | 151,700                              |       | 600                                                |       | 362,300            |       |
|                                                       |       |     |       |                |       |               |       |                      |       |                                 |       |                                               |       |               |       |
| **Kimon Michaels******                                     |       | 2008     |       | 210,000             |       | 10,000             |       | 30,300                    |       | 110,000                              |       | 200                                                |       | 360,500            |       |
| Vice President, Design for Manufacturability  and Director |       | 2007     |       | 210,000             |       | —             |       | —                    |       | 160,400                              |       | 200                                                |       | 370,600            |       |
|                                                       |       | 2006     |       | 210,000             |       | —             |       | —                    |       | 175,500                              |       | 4,700                                              | (3)        | 390,200            |       |

 

----

(1)          Theamounts in these columns reflect amounts recognized for financial statementreporting purposes for the stated fiscal years for stock options and restrictedstock awards granted in that fiscal year and in prior fiscal years, inaccordance with SFAS 123R. The restricted stock and option awards included inthis expense amount were granted from May 2004 through August 2008.These amounts reflect our accounting expense for these awards and do notrepresent the actual value that may be realized by the Named ExecutiveOfficers. There can be no assurance that these amounts will ever berealized.  For information on thevaluation assumptions used in valuing stock option awards, refer to the Note tothe consolidated financial statements contained in the Company’s Annual Reporton Form 10-K for the fiscal year in which the stock option was grantedtitled “Stockholder’s Equity”. Please also refer to the Grants of Plan-BasedAwards Table for information on awards made in fiscal year 2008. 

 

(2)          Unlessindicated otherwise, amounts listed under “All Other Compensation” representthe dollar value of premiums for term life insurance paid by us on behalf ofeach Named Executive Officer during the fiscal year ended December 31,2008.  There is no cash surrender valueunder these life insurance policies. 

 

(3)          Theamounts represented primarily reflect payments received by the executiveofficers for earned sabbatical, but also include the dollar value of premiumsfor term life insurance paid by us on behalf of the executive officers. 

 

14

----

Table of Contents

 

# **GRANTS OF PLAN-BASED AWARDS FOR FISCAL YEAR 2008**

# ** **

The following table shows grants of restricted stockand stock option awards made to our Named Executive Officers during the fiscalyear ended December 31, 2008.

 
| **Name**                                                   | ** ** | **Grant  Date** | ** ** | **All Other  Stock  Awards:  Number of  Shares of  Stock or  Units  (#)** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying  Options  (#)** | ** ** | **Exercise or  Base Price  of Option  Awards  ($/Sh)** | ** ** | **Grant Date  Fair Value  of Stock  and Option  Awards ($)** | ** ** |
|------------------------------------------------------------|------------|-----------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **John K. Kibarian**                                       |       | 08/18/08        |       | 23,810                                                                                        |       | —                                                                                    |       | —                                                                |       | $                                                                                     | 56,800     |   |
| Chief Executive Officer, President and  Director           |       |            |       |                                                                                          |       |                                                                                      |       |                                                                  |       |                                                                                  |       |
| **Keith A. Jones**                                         |       | 08/18/08        |       | 40,716                                                                                        |       | —                                                                                    |       | —                                                                |       | $                                                                                     | 272,600    |   |
| Vice President of Finance and Chief Financial  Officer     |       |            |       |                                                                                          |       |                                                                                      |       |                                                                  |       |                                                                                  |       |
| **David A. Joseph**                                        |       | 08/18/08        |       | 35,719                                                                                        |       | —                                                                                    |       | —                                                                |       | $                                                                                     | 273,400    |   |
| Chief Strategy Officer                                     |       |            |       |                                                                                          |       |                                                                                      |       |                                                                  |       |                                                                                  |       |
| **Cornelius (Cees) Hartgring**                             |       | 08/18/08        |       | 20,239                                                                                        |       | —                                                                                    |       | —                                                                |       | $                                                                                     | 266,700    |   |
| Vice President, Client Services and Sales                  |       |            |       |                                                                                          |       |                                                                                      |       |                                                                  |       |                                                                                  |       |
| **Kimon Michaels**                                         |       | 08/18/08        |       | 50,955                                                                                        |       | —                                                                                    |       | —                                                                |       | $                                                                                     | 277,700    |   |
| Vice President, Design for Manufacturability  and Director |       |            |       |                                                                                          |       |                                                                                      |       |                                                                  |       |                                                                                  |       |

 

On June 10, 2008, the Company offered each holderof outstanding Company stock options with exercise prices equal to or greaterthan $10.00 per share the right to tender such stock options for cancellationin exchange for restricted stock rights granted under the Company’s 2001 StockPlan based upon a 4.2 stock option shares to 1.0 restricted stock rightexchange ratio. Pursuant to the tender offer, restricted stock rights receivedin exchange for cancelled options would be subject to vesting schedules rangingfrom 15 months to 51 months from the date of grant of the restricted stockrights (which schedule applied would depend on when the stock options thatwould be cancelled in exchange for the restricted stock rights were originallygranted).  On August 18, 2008 andpursuant to the offer, the Company accepted for exchange stock options topurchase an aggregate of 3.3 million shares of the Company’s common stock from210 eligible participants, representing 73% of the shares subject to stockoptions that were eligible to be exchanged in connection with the tender offeras of August 18, 2008. Upon the terms and subject to the conditions setforth in the offer, the Company issued restricted stock rights covering anaggregate of 793,000 shares of the Company’s common stock in exchange for theoptions surrendered pursuant to the Offer.

 

15

----

Table of Contents

 

# **OUTSTANDINGEQUITY AWARDS AS OF DECEMBER 31, 2008**

# ** **

The following table showsthe outstanding equity awards of each of our Named Executive Officers as of December 31,2008.

 
| **Name**                                                    | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock  That  Have Not  Vested  ($)** | ** ** | **Equity  Incentive  Plan  Awards:  Number  of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested  (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Market  or Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested  ($)** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                   |       |                                                                                     |       |                                 |       |                         |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| **John K.  Kibarian**                                       |       | 80,000                                                                                 |       | —                                                                                   |       | 6.39                                 |       | 04/21/2013                   |       | 23,810                                                                                             | (1)        | 34,286                                                                                            |       | —                                                                                                                              |       | —                                                                                                                                                         |       |
| Chief Executive Officer, President and Director             |       |                                                                                   |       |                                                                                     |       |                                 |       |                         |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
|                                                        |       |                                                                                   |       |                                                                                     |       |                                 |       |                         |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| **Keith A.  Jones**                                         |       | 3,500                                                                                  |       | —                                                                                   |       | 9.59                                 |       | 05/03/2014                   |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| Vice President of Finance and Chief Financial Officer       |       | 9,479                                                                                  |       | 25,521                                                                                   | (2)        | 8.92                                 |       | 11/07/2017                   |       | 40,716                                                                                             | (3)        | 58,631                                                                                            |       | —                                                                                                                              |       | —                                                                                                                                                         |       |
|                                                        |       |                                                                                   |       |                                                                                     |       |                                 |       |                         |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| **David A.  Joseph**                                        |       | 40,000                                                                                 |       | —                                                                                   |       | 6.39                                 |       | 04/21/2013                   |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| Chief Strategy Officer                                      |       | 10,833                                                                                 |       | 29,167                                                                                   | (2)        | 8.92                                 |       | 11/07/2017                   |       | 35,719                                                                                             | (4)        | 51,435                                                                                            |       | —                                                                                                                              |       | —                                                                                                                                                         |       |
|                                                        |       |                                                                                   |       |                                                                                     |       |                                 |       |                         |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| **Cornelius  (Cees) Hartgring**                             |       | 134,939                                                                                |       | —                                                                                   |       | 5.40                                 |       | 09/03/2012                   |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| Vice President, Client Services and Sales                   |       | 21,666                                                                                 |       | 58,334                                                                                   | (2)        | 8.92                                 |       | 11/07/2017                   |       | 20,239                                                                                             | (5)        | 29,144                                                                                            |       | —                                                                                                                              |       | —                                                                                                                                                         |       |
|                                                        |       |                                                                                   |       |                                                                                     |       |                                 |       |                         |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| **Kimon  Michaels**                                         |       | 80,000                                                                                 |       | —                                                                                   |       | 6.39                                 |       | 04/21/2013                   |       |                                                                                               |       |                                                                                              |       |                                                                                                                                |       |                                                                                                                                                           |       |
| Vice President, Design For  Manufacturability, and Director |       | 8,124                                                                                  |       | 21,876                                                                                   | (2)        | 8.92                                 |       | 11/07/2017                   |       | 50,955                                                                                             | (6)        | 73,375                                                                                            |       | —                                                                                                                              |       | —                                                                                                                                                         |       |

 

----

(1)                                  Mr. Kibarian’s23,810 restricted stock vests as follows: 50% on 5/15/2009 and 50% six (6) monthsthereafter.

(2)                                  1/4thof these shares vested and became exercisable on November 7, 2008 and1/48th of the total shares continue to vest and become exercisable on a monthlybasis thereafter.

(3)                                  Mr. Jones’40,716 shares of restricted stock vest as follows:

(a)  As to 3,810shares:  50% of the total number ofrights will vest on May 15, 2009 and 50% will vest six (6) monthsthereafter.

(b)  As to 29,763shares:  16.7% of the total number ofrights will vest on May 15, 2009 and 16.66% will vest every six (6) monthsthereafter.

(c)  As to 7,143shares:  12.5% of the total number ofrights will vest on May 15, 2009 and 12.5% will vest every six (6) monthsthereafter. 

(4)                                  Mr. Joseph’s35,719 shares of restricted stock vest as follows: 

(a)  As to 19,050shares:  50% of the total number of rightswill vest on May 15, 2009 and 50% will vest six (6) monthsthereafter.

 

16

----

Table of Contents

 

(b)  As to 5,954shares:  16.7% of the total number ofrights will vest on May 15, 2009 and 16.66% will vest every six (6) monthsthereafter.

(c)  As to  10,715 shares: 12.5% of the total number ofrights will vest on May 15, 2009 and 12.5% will vest every six (6) monthsthereafter.

(5)                                  Mr. Hartgring’s20,239 shares of restricted stock vest as follows:  

(a)  As to 8,334shares: 16.7% of the total number of rights will vest on May 15, 2009 and16.66% will vest every six (6) months thereafter.

(b)  As to 11,905shares: 12.5% of the total number of rights will vest on May 15, 2009 and12.5% will vest every six (6) months thereafter.

(6)                                  Mr. Michaels’50,955 shares of restricted stock vest as follows: 

(a)  As to 35,716shares: 50% of the total number of rights will vest on May 15, 2009 and50% will vest six (6) months thereafter.

(b)  As to 5,715shares:  16.7% of the total number ofrights will vest on May 15, 2009 and 16.66% will vest every six (6) monthsthereafter.

(c)  As to 9,524shares:  12.5% of the total number ofrights will vest on May 15, 2009 and 12.5% will vest every six (6) monthsthereafter.

 

# **OPTIONEXERCISES AND STOCK VESTED IN THE FISCAL YEAR 2008**

# ** **

None.

 

## ***Potential Payments Upon Termination orChange-in-Control***

## *** ***

On August 19, 2008, the Company grantedrestricted stock rights to each of the Named Executive Officers, each of whichprovided that, in the event of a “change in control” (as defined in the Company’s2001 Stock Plan) an unvested portion of the stock purchase right will fullyvest.

 

The table below shows the value of the potentialacceleration of vesting that would have been made to a Named Executive Officerhad a change in control hypothetically occurred on the last business day offiscal year 2008 (i.e. December 31, 2008). The value below was determinedby multiplying the number of unvested shares subject to restricted stock rightsas of December 31, 2008 by the closing price of the Company’s common stockon December 31, 2008 ($1.44). Because the payments to be made to a namedexecutive officer depend on several factors, the actual amounts to be paid outupon a change in control can only be determined at the time of a change incontrol.

 
| **Name**                   | ** ** | **Value of Accelerated Restricted Stock Rights ($)** | ** ** |
|----------------------------|------------|------------------------------------------------------------------------------------|------------|
| John K. Kibarian           |       | 34,286                                                                             |       |
| Keith A. Jones             |       | 58,631                                                                             |       |
| David A. Joseph            |       | 51,435                                                                             |       |
| Cornelius (Cees) Hartgring |       | 29,144                                                                             |       |
| Kimon Michaels             |       | 73,375                                                                             |       |

 

We entered into a letter agreement with Mr. KeithA. Jones dated December 29, 2008, which amends Mr. Jones offer letterdated October 10, 2005.  This letteragreement provides that, in the event that Mr. Jones experiences aninvoluntarily separation for any reason other than cause, death or permanentdisability, and provided certain other conditions are met, Mr. Jones willbe entitled to 6 months base salary, monthly premiums to continue healthcoverage under COBRA for Mr, Jones, his eligible spouse and dependents, for 6months and 6 months accelerated vesting of any stock options outstanding at thetime of Mr. Jones termination.  Tothe extent permitted by the letter agreement and Code Section 409A, the 6months base salary will be paid out in accordance with the Company’s regularlyscheduled payroll, commencing with the first regular payroll date that is atleast 5 days after the conditions have been satisfied.

 

17

----

Table of Contents

 

The table below shows the value of the potentialpayments that would have been made to Mr. Jones  had he experienced an involuntary separationon the last business day of fiscal year 2008, December 31, 2008. Inaccordance with SEC rules, the potential payments were determined under theterms of our plans and arrangements as in effect on December 31, 2008. Thefootnotes to the table describe the assumptions used in estimating the amountsset forth in the table. Because the potential payments to be made to Mr. Jonesdepend on several factors, the actual amounts to be paid out upon Mr. Jonesinvoluntary separation can only be determined at the time of such involuntary separationfrom the Company.

 
| **Name**       | ** ** | **Cash Severance ($)** | ** ** | **Health Benefits  ($)** | ** ** | **Intrinsic Value of Accelerated Stock Options  ($)** | ** ** | **Total  ($)** | ** ** |
|----------------|------------|------------------------|------------|--------------------------|------------|-------------------------------------------------------|------------|----------------|------------|
| Keith A. Jones |       | 100,000                | (1)        | 6,800                    | (2)        | —                                                | (3)        | 106,800        |       |

 

----

(1) Equal to (x) thenamed executive officer’s monthly base salary in effect as of December 31,2008 multiplied by (y) 6.

(2) Equal to the6-month continuation of health benefits for the named executive officer and hiseligible spouse and dependents following December 31, 2008.

(3) The value ofthis benefit is equal to (x) the total number of shares subject tounvested stock options that were outstanding on December 31, 2008multiplied by (y) ($7.48) which represents the closing price of theCompany’s common stock on December 31, 2008 ($1.44) minus $8.92 (the exerciseprice of Mr. Jones unvested options). Since this amount results in a negative value, this potential benefitwould have provided $0 value to Mr. Jones if he experienced an involuntaryseparation on December 31, 2008.

 

**ITEM 12.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.**

 

# **EQUITYCOMPENSATION PLAN INFORMATION**

# ** **

The following table provides information as of December 31,2008 about our common stock that may be issued upon the exercise of options,warrants and rights under all of our existing equity compensation plans,including the 1996 Stock Option Plan, the 1997 Stock Plan, 2001 Stock Plan, theStock Option/Stock Issuance Plan and our 2001 Employee Stock Purchase Plan (the“ESPP”).

 
| **Plan Category**                                       | ** ** | **Number of Securities to be issued  Upon Exercise of Outstanding  Options, Warrants and Rights** | ** ** | **Weighted-Average Exercise Price  of Outstanding Options, Warrants  and Rights** | ** ** | **Number of Securities Remaining  Available for Future Issuance  Under Equity Compensation  Plans** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| Equity Compensation Plans Approved by  Stockholders (1) |       | 4,144,776                                                                                         |       | $                                                                                 | 8.97       |                                                                                                | 6,186,491  | (2)(3)(4) |
| Equity Compensation Plans Not Approved by  Stockholders |       | 267,224                                                                                           | (5)        | $                                                                                 | 8.27       |                                                                                                | 331,390    | (5) |
| **Total**                                               |       | 4,412,000                                                                                         |       | $                                                                                 | 8.91       |                                                                                                | 6,517,881  |   |

 

----

(1)          For a description ofthese plans, see Note 8 to our Consolidated Financial Statements in our AnnualReport on Form 10-K for the year ended December 31, 2008 filed withthe Securities and Exchange Commission on March 16, 2009.

(2)          Includes 5,141,779shares available for issuance pursuant to options, stock purchase rights andlong-term performance awards under the 2001 Stock Plan.  The 2001 Stock Plan includes an “evergreen”feature, which provides for an automatic annual increase in the number ofshares available under the plan on the first day of each of our fiscal yearsthrough 2011, equal to the lesser of 3,000,000 shares, 5% of our outstandingcommon stock on the last day of the immediately preceding fiscal year or suchamount as is determined by the Board.

(3)          Includes 1,485,880shares available for issuance under the ESPP. The ESPP, designed to comply with Internal Revenue Code Section 423,includes an “evergreen” feature, which provides for an automatic annualincrease in the number of shares available

 

18

----

Table of Contents

 

under the plan on thefirst day of each of our fiscal years through 2011, equal to the lesser of675,000 shares, 2% of our outstanding common stock on the last day of theimmediately preceding fiscal year or such amount as is determined by our Board.

(4)          Other than in connectionwith outstanding awards, no shares remain available for issuance pursuant toeither of the 1996 Stock Option Plan or the 1997 Stock Plan.

(5)          Consists of the StockOption/Stock Issuance Plan which was assumed by us upon the acquisition of IDSSoftware Systems, Inc.  Stockoptions granted under the plan generally vest with respect to 25% of the sharessubject to the option one year after the date of grant and then 1/48 of theshares subject to the option each month thereafter.  Options generally expire 10 years after thegrant date.  The vesting for certainoptions is accelerated upon a change in control.

 

**SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Thefollowing table shows how much common stock is beneficially owned by owners ofmore than 5% of our outstanding common stock and by the directors, the NamedExecutive Officers identified in the Summary Compensation Table on page 15of this Form 10-K/A, and all executive officers and directors as a group,as of March 31, 2009.  Except asotherwise indicated, the address for each person listed as a director orofficer is c/o PDF Solutions, Inc., 333 West San Carlos Street, Suite 700,San Jose, California 95110.  Unlessotherwise indicated in the footnotes, each person or entity has sole voting andinvestment power, or shares such powers with his spouse, with respect to theshares shown as beneficially owned.

 
| **Name and Address of Beneficial Owner**                           | ** ** | **Amount and Nature of  Beneficial Ownership (1)** | ** ** | **Percent of Common Stock  (1)(2)** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------|------------|
| **5% Stockholders:**                                               | ** ** | ** **                                         | ** ** | ** **                          | ** ** |
| **T. Rowe Price Associates, Inc.**                            |       | 2,750,101                                          |       | 10.47                               | %          |
| 100 E. Pratt Street                                                |       |                                               |       |                                |       |
| Baltimore, Maryland 21202 (3)                                      |       |                                               |       |                                |       |
| **FMR LLC (fka FMR Corp.)**                                        |       | 2,815,641                                          |       | 10.72                               |       |
| 82 Devonshire Street                                               |       |                                               |       |                                |       |
| Boston, Massachusetts 02109 (4)                                    |       |                                               |       |                                |       |
| **Wellington Management Company, LLP**                             |       | 1,731,500                                          |       | 6.59                                |       |
| 75 State Street   Boston, MA 02109 (5)                             | ** ** | ** **                                         | ** ** | ** **                          | ** ** |
| **Artis  Capital Management, L.P.**                                |       | 1,734,834                                          |       | 6.61                                |       |
| One Market Plaza   Steuart St. Tower, Suite 2700              |       |                                               |       |                                |       |
| San Francisco, CA 94105 (6)                                        |       |                                               |       |                                |       |
| **Royce & Associates, LLC**                               |       | 1,669,824                                          |       | 6.36                                |       |
| 1414 Avenue of the Americas                                        |       |                                               |       |                                |       |
| New York, New York 10019 (7)                                       |       |                                               |       |                                |       |
| ** **                                                         | ** ** | ** **                                         | ** ** | ** **                          | ** ** |
| **Directors and Named Executive Officers:**                        | ** ** | ** **                                         | ** ** | ** **                          | ** ** |
| John K. Kibarian (8)                                               |       | 2,564,661                                          |       | 9.73                                |       |
| Keith A. Jones (9)                                                 |       | 34,682                                             |       | *                                   |       |
| Kimon W. Michaels (10)                                             |       | 1,567,552                                          |       | 5.93                                |       |
| Lucio L. Lanza (11)                                                |       | 420,838                                            |       | 1.59                                |       |
| David A. Joseph (12)                                               |       | 272,655                                            |       | 1.04                                |       |
| Cornelius (Cees) Hartgring (13)                                    |       | 181,729                                            |       | *                                   |       |
| R. Stephen Heinrichs (14)                                          |       | 72,385                                             |       | *                                   |       |
| Albert Y.C. Yu (15)                                                |       | 8,072                                              |       | *                                   |       |
| Thomas Caulfield (16)                                              |       | 5,089                                              |       | *                                   |       |
| All directors and executive officers as a  group (13 persons) (17) |       | 5,388,009                                          |       | 19.95                               | %          |

 

----

* Less than 1%.

 

19

----

Table of Contents

 

(1)                                Beneficialownership is determined in accordance with SEC rules.  Beneficial ownership calculations for 5%stockholders are based primarily on publicly-filed Schedule 13Ds or 13Gs, which5% stockholders are required to file with the SEC, and which generally setforth ownership interests as of December 31, 2008.  In computing the number of sharesbeneficially owned by a person, we have included shares for which the namedperson has sole or shared power over voting or investment decisions.  The number of shares beneficially ownedincludes common stock which the named person has the right to acquire, throughconversion, option and warrant exercise or otherwise, within 60 days after March 31,2009.

(2)                                Percentageof beneficial ownership is based on 26,261,010 shares outstanding as of March 31,2009.  For each named person, thepercentage ownership includes stock which the person has the right to acquirewithin 60 days after March 31, 2009, as described in Footnote 1.  However, such shares shall not be deemedoutstanding with respect to the calculation of ownership percentage for anyother person.

(3)                                TheSchedule 13G Amendment filed on February 13, 2009 by T. Rowe PriceAssociates, Inc. (“Price Associates”), an Investment Adviser registeredunder Section 203 of the Investment Advisers Act of 1940, indicates thatPrice Associates has sole dispositive power of 2,750,101 shares and sole votingpower of 242,100 shares.

(4)                                TheSchedule 13G Amendment filed on February 14, 2008 by FMR LLC (“FMR”)states that FMR is a parent holding company in accordance with Section 240.13d-1(b)(ii)(G) forFidelity Management & Research Company (“Fidelity”), an investmentadviser registered under Section 203 of the Investment Advisers Act of1940 and indicates that Fidelity Small Cap Stock Fund, an investment company ofFidelity, is the entity which has sole dispositive power of the 2,815,641shares.

(5)                                TheSchedule 13G Amendment filed on February 17, 2009 by Wellington ManagementCompany, LLP, (“Wellington”), an Investment Adviser in accordance with Section 240.13d-1(b)(ii)(E),indicates that Wellington beneficially owns the 1,731,500 shares of Companystock which are held of record by Wellington clients.  Wellington shares dispositive power of1,731,500 shares and shares voting power of 1,052,500 shares.

(6)                                ASchedule 13G was jointly filed on February 17, 2009 by Artis CapitalManagement, L.P. (“Artis”), Artis Capital Management, Inc. (“Artis Inc.”)and Stuart L. Peterson   Artis is aregistered investment adviser in accordance with section240.13d-1(b)(1)(ii)(E).  Artis Inc. isthe general partner of Artis.  Mr. Petersonis the president of Artis Inc. and the controlling owner of Artis and ArtisInc.  Artis Inc. and Mr. Petersonare each a parent holding company or control person in accordance with240.13d-1(b)(1)(ii)(G).  Artis is theinvestment adviser of investment funds that hold Company stock for the benefitof the investors in those funds.  Noindividual client holds more than 5% of the Company stock.  Artis, Artis Inc. and Mr. Peterson eachdisclaim beneficial ownership of the Company stock, except to the extent ofthat person’s pecuniary interest therein.

(7)                                TheSchedule 13G Amendment filed on January 17, 2009 by Royce &Associates, LLC (“Royce”), an Investment Adviser registered under Section 203of the Investment Advisers Act of 1940, indicates Royce holds both sole votingand dispositive power of the shares.

(8)                                Includes80,000 shares issuable upon the exercise of vested stock options and 11,905shares issuable upon vesting of restricted stock rights.

(9)                                Includes16,624 shares issuable upon the exercise of vested stock options and 7,767shares issuable upon vesting of restricted stock rights.

(10)                          Includes91,249 shares issuable to Mr. Michaels and 38,999 shares issuable to hiswife upon exercise of vested options and 20,002 shares to Mr. Michaelsand  5,026 shares issuable to his wifeupon vesting of restricted stock rights. Excludes 63,694 shares held by Mr. Michaels’ wife as to which hedisclaims beneficial ownership.

(11)                          Includes188,122 shares issuable upon the exercise of vested stock options.  Also included are 121,720 shares owned byLanza techVentures, an early stage venture capital and investment firm forwhich Mr. Lanza is the managing director.

(12)                          Includes54,999 shares issuable upon the exercise of vested stock options and 11,858shares issuable upon vesting of restricted stock rights.

(13)                          Includes164,938 shares issuable upon the exercise of vested stock options and 2,879shares issuable upon vesting of restricted stock rights.

(14)                          Sharesissuable upon the exercise of vested stock options.

(15)                          Includes5,625 shares issuable upon the exercise of vested stock options and 2,447shares issuable upon vesting of restricted stock rights.

(16)                          Includes3,750 shares issuable upon the exercise of vested stock options and 1,339shares issuable upon vesting of restricted stock rights.

(17)                          Includesan aggregate of 794,280 shares issuable upon the exercise of vested stockoptions and 89,576 shares issuable in accordance with the vesting of restrictedstock rights for all directors, Named Executive Officers and four additionalexecutive officers and 156,404 shares of stock held by those additionalexecutive officers.

 

20

----

Table of Contents

 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.**

 

## ***RELATEDPARTY TRANSACTIONS***

## *** ***

## ***Acquisition of Fabbrix, Inc.***

 

OnMay 23, 2007, the Company entered into an Agreement and Plan ofReorganization (the “Merger Agreement”) with Fabbrix, Inc., (“Fabbrix”)and PDF Acquisition Corp., a wholly-owned subsidiary of the Company, pursuantto which the Company acquired all of the outstanding capital stock of Fabbrix,(the “Merger”).  The Merger was completedon May 24, 2007 (the “Merger Closing”), and the escrow was distributed tothe Fabbrix stockholders pursuant the Merger Agreement on November 24,2008, including to Mr. Lucio Lanza, a director and Chairman of the Board,and an entity affiliated with Mr. Lanza, Lanza techVentures.  Under the terms of the Merger Agreement, theCompany paid a total of $2.7 million in cash and 271,531 shares of the Company’scommon stock at the Merger Closing.

 

Immediatelyprior to the Merger, Mr. Lanza served as President, Chief ExecutiveOfficer and Chairman of the Board of Fabbrix. Mr. Lanza also held shares of capital stock of Fabbrix, bothindividually and through his venture capital firm, Lanza techVentures.  In connection with the Merger, Mr. Lanzareceived $353,000 in cash and 35,722 shares of the Company’s common stock atthe Merger Closing.  In connection withthe Merger, Lanza techVentures received $1.2 million in cash and 121,720shares of the Company’s common stock at the Merger Closing.  In addition, out of the merger consideration,Lanza techVentures received from Fabbrix $416,000 in cash as repayment ofcertain bridge loans previously made to Fabbrix.

 

Toevaluate a transaction with Fabbrix, the Board established a special committeeconsisting exclusively of independent directors (the “Special Committee”).  The Special Committee reviewed, evaluated anddirected the negotiation of the Merger and the Merger Agreement and recommendedto the Board that the Company enter into the Merger Agreement.  Mr. Lanza did not participate on behalfof the Company in any actions with respect to the transaction and the MergerAgreement, and did not participate in any deliberations or other activities ofthe Special Committee.

 

Inconnection with the Merger, and in light of NASDAQ Marketplace Rules andother applicable standards, the Board made a determination in May 2007that upon the consummation of the Merger, Mr. Lanza was no longerindependent and the decision was made for Mr. Lanza to resign from theAudit and Corporate Governance, Compensation, and Nominating Committees of theBoard effective at the closing of the Merger. Please see “Director Independence” in this Form 10-K/A for adiscussion of the Board’s decision. Following the consummation of the Mergerand the expiration of the escrow period in connection with the Merger, theBoard made the determination in April 2009 that Mr. Lanza may againserve as an “independent director” on the Board.  Mr. Lanza was appointed to the Audit andCorporate Governance Committee of the Board effective as of April 24,2009.

 

### ***Limitation of Liabilityand Indemnification Matters***

### *** ***

As permitted by the Delaware general corporation law,we have included a provision in our amended and restated certificate ofincorporation to eliminate the personal liability of our officers and directorsfor monetary damages for breach or alleged breach of their fiduciary duties asofficers or directors, other than in cases of fraud or other willfulmisconduct.

 

In addition, our Bylaws provide that we are requiredto indemnify our officers and directors even when indemnification wouldotherwise be discretionary, and we are required to advance expenses to ourofficers and directors as incurred in connection with proceedings against themfor which they may be indemnified. We have entered into indemnificationagreements with our officers and directors containing provisions that are insome respects broader than the specific indemnification provisions contained inthe Delaware general corporation law. The indemnification agreements require usto indemnify our officers and directors against liabilities that may arise byreason of their status or service as officers and directors other than forliabilities arising from willful misconduct of a culpable nature, to advancetheir expenses incurred as a result of any proceeding against them as to whichthey could be indemnified, and to obtain our directors’ and officers’ insuranceif available on reasonable terms. We have filed our forms of indemnification agreementon the SEC’s website at *www.sec.gov.* Wehave obtained directors’ and officers’ liability insurance in amountscomparable to other companies of our size and in our industry.

## *** ***

## ***Other Transactions***

## *** ***

We have granted options to some of our officers anddirectors.  Please see “Compensation ofExecutive Officers and Other Matters” in this Form 10-K/A.  We have also entered into accelerationagreements with certain of our officers and directors.  Please see “Potential Payments UponTermination or Change-in-Control” in this Form 10-K/A.

 

## ***Review, Approval or  Ratification of Transaction with RelatedPersons***

## *** ***

Relatedparty transactions have the potential to create actual or perceived conflictsof interest between the Company and its directors, its officers, its employees,and members of their respective families. While we do not maintain a written policy with respect to theidentification, review, approval or ratification of transactions with relatedpersons, the Company’s Code of Ethics prohibits conflicts of interest betweenan employee and the Company and requires an employee to report any suchpotential conflict to our Compliance Officer. In addition, each officer and director is expected to identify to theSecretary, by means of an annual director questionnaire, any transactionsbetween the Company and any person or entity with which the director may have arelationship that is engaged or about to be engaged in a transaction with theCompany.

 

21

----

Table of Contents

 

## ***DIRECTORINDEPENDENCE***

## *** ***

The Company has adopted standards for directorindependence in accordance with NASDAQ Marketplace Rules and SECrules.  An “independent director” means aperson, other than an officer or employee of the Company or its subsidiaries,or any other individual having a relationship that, in the opinion of theBoard, would interfere with the exercise of independent judgment in carryingout the responsibilities of a director. To be considered independent, the Board must affirmatively determinethat neither the director nor an immediate family member has had any direct orindirect material relationship with the Company within the last three years.

 

The Board considered relationships, transactions orarrangements with each of the directors, including relationships andtransactions discussed previously in “Certain Relationships and RelatedTransactions, and Director Independence” in this Form 10-K/A and concludedthat none of the current non-employee directors has any relationships with theCompany that would impair his or her independence.  The Board has determined that each member ofthe Board, other than Dr. Kibarian and Dr. Michaels, is anindependent director under applicable NASDAQ Marketplace Rules and SECrules.  Dr. Kibarian and Dr. Michaelsdid not meet the independence standards because they are employees of theCompany.

 

In May 2007, the Board determined that upon theconsummation of the Company’s acquisition of Fabbrix, Mr. Lanza would nolonger be considered an “independent director” under the NASDAQ Marketplace Rules andother applicable standards, and could therefore no longer serve on the Board’sAudit and Corporate Governance, Compensation, and Nominating Committees.  Please see additional detail regarding theCompany’s acquisition of Fabbrix above in “Related Party Transactions.” Followingthe consummation of the Merger and the expiration of the escrow period inconnection with the Merger, the Board concluded in April 2009 that Mr. Lanzamay again serve on the Board as an “independent director.” Mr. Lanza wasappointed to the Audit and Corporate Governance Committee of the Boardeffective as of April 24, 2009.

 

The Board has determined that:

 

·                  all directors who serve on the Audit andCorporate Governance, Compensation, and Nominating Committees are independentunder the NASDAQ Marketplace Rules and SEC rules; and

 

·                  all members of the Audit and CorporateGovernance Committee meet the additional independence requirement and they donot directly or indirectly receive compensation from the Company other thantheir compensation as directors.

 

The independent directors meet regularly in executivesessions without the presence of the non-independent directors or members ofthe Company’s management at least twice per year during regularly scheduledBoard meeting days and from time to time as they deem necessary or appropriate.

 

In addition, in June 2007,the Board approved, on the recommendation of the Nominating Committee, theestablishment of the position of Lead Independent Director, a position thatwould: coordinate certain activities of the Board and its committees; workdirectly with the Chairman of the Board and the Company’s Chief Executive Officer;assist in establishing the agenda for the meetings of the Board and Boardcommittees; and address other matters as the Nominating Committee seesbeneficial to the Company and our stockholders. Mr. Heinrichs wasappointed our Lead Independent Director in June 2007.

 

22

----

Table of Contents

 

**ITEM 14.  PRINCIPALACCOUNTANT FEES AND SERVICES.**

 

The following is a summary of the fees billed orexpected to be billed to the Company by Deloitte & Touche LLP forprofessional services rendered for the fiscal years ended December 31,2008 and December 31, 2007:

 
| **Fee Category**           | ** ** | **Fiscal 2008 Fees** | ** ** | **Fiscal 2007 Fees** | ** ** |
|----------------------------|------------|----------------------|------------|----------------------|------------|
| Audit Fees                 |       | $                    | 702,400    |                 | $          | 822,800 |   |
| Audit-Related Fees         |       | —               |       | 136,200              |       |
| Tax Fees:                  |       |                 |       |                 |       |
| Tax Compliance/Preparation |       | 116,600              |       | 108,500              |       |
| Other Tax Fees             |       | 86,400               |       | 92,300               |       |
| Total Tax Fees             |       | 203,000              |       | 200,800              |       |
| All Other Fees             |       | —               |       | —               |       |
| Total Fees                 |       | $                    | 905,400    |                 | $          | 1,159,800 |   |

 

*Audit Fees*.  The aggregatefees billed or expected to be billed by Deloitte & Touche LLP forprofessional services rendered for the audit of the Company’s annualconsolidated financial statements for the fiscal years ended December 31,2008 and December 31, 2007, and for the reviews of the condensedconsolidated financial statements included in the Company’s Quarterly Reportson Form 10-Q for the fiscal years 2008 and 2007 totaled approximately $702,400and $822,800, respectively.

 

*Audit-Related Fees*.  The feesbilled by Deloitte & Touche LLP for assurance and related services forthe fiscal year ended December 31, 2007 totaled $136,200, which includedfees for the review of US Securities and Exchange Commission (“SEC”) filingsrelated to the issuance of additional shares in connection with the acquisitionof Fabbrix, Inc., and for the consultations related to SECcorrespondence.  There were noaudit-related fees for the fiscal year ended December 31, 2008.

 

*Tax Fees*.  The aggregatefees billed or expected to be billed by Deloitte & Touche LLP for taxcompliance/preparation services for the fiscal years ended December 31,2008 and 2007 totaled $116,600 and $108,500, respectively.  Tax compliance/preparation services consistedof fees billed for assistance in preparation of the Company’s U.S. federal,state and local tax returns.  The taxcompliance/preparation services for fiscal year ended December 31, 2008included a short-year tax return for the period ended May 2007 inconnection with the acquisition of Fabbrix, Inc.  The aggregate fees billed by Deloitte &Touche LLP for other tax services for the fiscal years ended December 31,2008 and 2007 totaled $86,400 and $92,300, respectively.  Other tax services consisted of fees billedfor tax advice related to international and domestic tax consulting andplanning.  Other tax services for thefiscal year ended December 31, 2007 included fees for due diligenceservices in connection with the acquisition of Si Automation S.A.

 

*All Other Fees. *There wereno fees billed or expected to be billed by Deloitte & Touche LLP forall other services rendered to the Company during the fiscal years ended December 31,2008 and 2007, other than those disclosed above.

 

**Policy on Audit and Corporate Governance CommitteePre-Approval of Audit and Permissible Non-Audit Services of IndependentRegistered Public Accounting Firm**

 

The Audit and Corporate Governance Committee’s policyis to pre-approve all audit and permissible non-audit services provided byDeloitte & Touche LLP. These services may include audit services,audit-related services, tax services and other services. Pre-approval isgenerally provided for up to one year and any pre-approval is detailed as tothe particular service or category of services and is generally subject to aninitial estimated budget. Deloitte & Touche LLP and management arerequired to periodically report to the Audit and Corporate Governance Committeeregarding the extent of services provided by Deloitte & Touche LLP inaccordance with this pre-approval, and the fees performed to date. The Auditand Corporate Governance Committee may also pre-approve particular services ona case-by-case basis.

 

All services provided by Deloitte & ToucheLLP during the fiscal years ended December 31, 2008 and 2007 werepre-approved by the Audit and Corporate Governance Committee.

 

23

----

Table of Contents

 

**PART IV**

 

**ITEM 15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES.**

 

(a) Thefollowing documents are filed as part of this report:

 

(3) Exhibits

 

Exhibits are incorporatedherein by reference or are filed with this Annual Report on Form 10-K/A asindicated below (numbered in accordance with Item 601 of Regulation S-K):

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                                       |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.01                     |       | Certifications  of Chief Executive Officer Pursuant to Exchange Act  Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                             |
| 31.02                     |       | Certifications  of Chief Financial Officer and Vice President, Finance Pursuant to Exchange  Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |

 

24

----

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this Annual Report on Form 10-K/Ato be signed on its behalf by the undersigned, thereunto duly authorized, onthe 30th day of April.

 
|   | PDF SOLUTIONS, INC. |
|--------|---------------------|
|   |                |   |
|   | By:                 | /s/  John K.  Kibarian |
|   |                | John K. Kibarian |
|   |                | President and Chief  Executive Officer |
|   |                |   |
|   | By:                 | /s/  Keith A.  Jones |
|   |                | Keith A. Jones |
|   |                | Chief Financial Officer  and Vice President, Finance |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Annual Reporton Form 10-K/A has been signed below by the following persons on behalf ofthe registrant and in the capacities indicated, as of April 30, 2009.

 
| **Signature**                   | ** **                          | **Title**                                              |
|---------------------------------|-------------------------------------|--------------------------------------------------------|
|                            |                                |                                                   |
| /s/  JOHN K. KIBARIAN |                                | Director, President and Chief Executive Officer        |
| John K. Kibarian                |                                | (Principal Executive Officer)                          |
|                            |                                |                                                   |
| /s/  KEITH A. JONES   |                                | Chief Financial Officer and Vice President, Finance    |
| Keith A. Jones                  |                                | (Principal Financial and Accounting Officer)           |
|                            |                                |                                                   |
| *                               |                                | Director, Vice President, Design for Manufacturability |
| Kimon Michaels                  |                                |                                                   |
|                            |                                |                                                   |
| *                               |                                | Chairman of the Board of Directors                     |
| Lucio L. Lanza                  |                                |                                                   |
|                            |                                |                                                   |
| *                               |                                | Director, Lead Independent Director                    |
| R. Stephen Heinrichs            |                                |                                                   |
|                            |                                |                                                   |
| *                               |                                | Director                                               |
| Thomas M. Caulfield             |                                |                                                   |
|                            |                                |                                                   |
| *                               |                                | Director                                               |
| Albert Y.C. Yu                  |                                |                                                   |
|                            |                                |                                                   |
| *By:                            | /s/  JOHN K. KIBARIAN          |                                                   |   |
|                            | John  K. Kibarian, Attorney-in-Fact |                                                   |   |

 

25

----

**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                        |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.01               |       | Certifications of Chief  Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                              |
|                |       |                                                                                                                                                                                                   |
| 31.02               |       | Certifications of Chief  Financial Officer and Vice President, Finance Pursuant to Exchange Act Rules  13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |

 

26

----